新思科技 (SNPS) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Synopsys, Inc.'s earnings conference call for the fourth quarter and fiscal year 2009.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

Today's call will last one hour.

Five minutes prior to the end of the call I will announce the amount of time remaining in the conference.

As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you, Doug.

Good afternoon, everyone.

With us today are Aart de Geus, Chairman and CEO of Synopsys, and Brian Beattie, Chief Financial Officer.

During the course of this conference call, Synopsys will make forecasts, targets, and other forward-looking statements regarding the Company and its financial results.

While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our quarterly report on Form 10-Q for the fiscal quarter ended July 31, 2009, and in our earnings release for the fourth quarter and fiscal year 2009 issued earlier today.

In addition, all financial information to be discussed on this call, as well as the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures, and supplemental financial information, can be found in the current report on Form 8-K that we filed today, our fourth quarter earnings release, and our financial supplement.

All of these items are currently available on our Web site at Synopsys.com.

With that, I will turn the call over to Aart de Geus.

Good afternoon.

I'm happy to report that we executed well in Q4, and in fiscal 2009 we delivered revenue growth, margin expansion, strong cash flow, significant customer momentum, and numerous new technology roll-outs.

Given the extraordinary nature of the year for the overall economy, let me comment on our financials, mostly from a fiscal 2009 perspective.

The bottom line is simple.

We met or exceeded almost every goal we set at the beginning of the year, and most importantly we entered 2010 with a great deal of strength.

Specifically, with $0.33 in the quarter we delivered non-GAAP earnings per share of $1.75 for the year.

That's 5% or $0.09 above the mid point target we communicated at the beginning of '09.

With Q4 revenue of $338 million, we grew our business 2% to $1.36 billion for the year.

Through disciplined control and focus on efficiency, we improved non-GAAP ops margins over last year from 23% to 24%.

These results were achieved under our predictable business model with more than 90% time-based revenue.

We exited the year with $2.2 billion in backlog and $1.17 billion in cash.

In summary, over the past 18 months, Synopsys has undergone a remarkable transformation with 2009 representing a turning point for our business.

Our many years of technology development are now clearly making a difference with customers.

Turning to our customers, the recession sped up their alignment with fewer key suppliers.

What began as a technological necessity, the integration of flows and platforms for better and faster design, accelerated for intense cost reasons, as customers were driven to re-think their expense structures and make meaningful changes.

These changes are still ongoing so let me briefly address the economic environment.

Semiconductor markets are rebounding from a very tough first half with semi revenue now expected to be down 10% to 15% from last year.

A welcome improvement over previous expectations.

Looking forward, there is still a good amount of uncertainty regarding holiday sales and stable business levels for next year.

While rush orders are driving up volume and prices, the lack of visibility causes continued frugality and streamlining of operations.

As some of you know, in an ad hoc fashion I have been polling associates around the world about their outlook on recovery.

Their perception of the economy is remarkably uniform.

They all expressed some optimism regarding a gradual return to growth.

But they also think there's almost a 50/50 chance of a more challenging outlook or even potential W pattern that is another downturn before a sustained recovery.

What this tells me is that although our customers are orienting their company towards returning growth, they will remain quite careful in terms of their expenses.

Looking forward, into fiscal 2010, we are therefore setting conservative expectations, as we account for the uncertainty around us.

From a planning perspective we entered the year with an overall business run rate that is roughly flat.

A testament to our strength in the face of considerable customer stress in the first half of the year.

Our backlog is strong, we have over 80% of targeted 2010 revenue and more than 90% of Q1 already in hand.

Without factoring in any future acquisitions or stock buybacks, we expect non-GAAP ops margin to remain steady on slightly lower revenue and non-GAAP earnings to be slightly down due to, in part, tough year to year comparisons of tax rate and OI&E.

We also expect cash flow to be strong, orders to increase, and several new technology roll outs to extend our innovation leads.

Brian will give you more specifics about the past and coming year, but looking back, Synopsys executed extremely well in '09 and is poised for 2010 with momentum and strength.

From a technology perspective, we drive three objectives.

First, deliver best in class technology across all our products to enable customers to create differentiation in their chips.

Second, deliver solutions integrated across tools, IP, design flows and methodology to enable our customers to achieve higher productivity and predictability.

Third, provide top notch global engineering services and support to help our customers reduce their overall design costs and risks.

To that end, in '09 we invested assertively in R&D and in our technical support, resulting in a strong product road map, and broadened customer relationships.

Key semiconductor companies such as Juniper, Sunplus, Intel, Marvell, Panasonic, Renesas and more than a dozen others, are counting on us as their primary EDA partner.

During '09, a number of companies successfully migrated to Synopsys, and are achieving the increased and effectiveness they had hoped for.

Let me provide some technical highlights from the year, starting with our Galaxy implementation platform.

IC Compiler, our place-and-route product, is the cornerstone to designing the most advanced chips in the world.

This year, in addition to an advanced router that delivers 10X performance and better quality of results, IC Compiler has been significantly enhanced with multicore and low power features.

Multicore capabilities were also expanded to our entire sign-off solution thus completing the migration of Galaxy to the most modern compute infrastructure.

With IC Validator we then introduced a new physical verification solution that took both technology and integration a significant step forward.

What is unique about IC Validator is that physical verification can now be accomplished within the implementation flow, long before signoff, thus considerably reducing turnaround time, and the number of iterations.

This is a meaningful productivity advance, as customers such as Toshiba, NVIDIA, and the Common Platform alliance are already recognizing the power of IC Validator in their advanced application.

We also made excellent progress in bringing together tools and flows with the introduction of our Lynx Design System.

The result of many years of internal development and testing, Lynx is a differentiator for Synopsys.

Developed for 65-nanometer and below, Lynx features a complete open production proven digital design flow, with built-in methodology, foundry ready checks and an advanced management cockpit.

Lynx has direct impact on total cost of design, and gives customers instantaneous entry into a proven low power design flow.

Another major accomplishment in '09 was the introduction of Custom Designer for analog mixed signal design.

Not only did we deliver a very strong first product in an area previously dominated by another vendor, but customers have already completed a number of production tapeouts, included the latest by Digital Imaging Systems.

An expert in analog system design for the mobile market, Digital Imagining completely replaced its old flow and was able to tape out this Custom Designer in less than a month.

While newer companies with little legacy infrastructure were the natural initial targets, we are now seeing incremental acceptance at a number of larger customers.

At one we have seen a substantial leap in terms of acceptance.

As a result of one group's success, this company's CAD group is now willing to provide Custom Designer across their company.

Another very large customer has made Custom Designer plan of record for its latest advanced chip.

Turning to verification, our Discovery platform continues to perform very well in both digital and analog mixed signal.

In digital, in '09 we extended our multicore capabilities to VCS resulting in a 2X improvement in speed.

Given the increasing costs of verification, speed improvements of this magnitude significantly impact overall design time, and reduced the compute infrastructure cost as well.

In fact, our tracking clearly shows that the majority of the advanced designs in the world use VCS as their main simulator.

In analog verification, our key introduction in '09 was CustomSim, a single multicore solution for analog mixed signal simulation.

By combining the speed and accuracy of what used to be three separate tools, we developed a flexible, easy to deploy solution that has strengthened our offering.

Moving up into systems, we delivered several key enhancements to our Confirma rapid prototyping platform, including the acquired technology from CHIPit.

Most chips today are in fact complex hardware/software systems, thus the breadth of our solution ranging from high level system simulation to virtual platforms to FPGA based prototyping, all the way to broad functional and analog mixed signal simulation puts Synopsys at the forefront in dealing with one of the most pressing issues, system level design.

Closing off with our IP business, we made excellent progress in '09 here, as well.

IP is a powerful component of our portfolio, especially as an intense focus on reducing costs, drives companies to accelerate the outsourcing of non differentiating projects.

For example, we estimate that every other day, a chip is taped out using a Synopsys USB core.

In addition we have substantially grown our collection of cores into many new technology nodes, spanning protocols beyond USB such as BCI Express, SATA, and HDMI.

In '09 our portfolio was further broadened into the analog mixed signal space through the acquisition of the Analog Business Group from MIPS.

The integration has gone very well, and the customer reaction has been especially positive.

All of this adds up to a very strong year in a difficult economy.

A number of customers are putting their trust in Synopsys for their future and are in the process of migrating to our solution.

Financially the impact will occur gradually but we can feel that Synopsys has excellent momentum entering fiscal 2010.

With that let me turn the call over to Brian Beattie.

Thank you, Aart, and good afternoon, everyone.

In my comments today I will summarize our financial results for the quarter, and fiscal year 2009, and provide you with our 2010 guidance.

As a reminder, I will be discussing certain GAAP and non-GAAP measures of our financial performance.

We have provided reconciliations, in the press release and financial supplement posted on our Web site.

In my discussions all of my comparisons will be year-over-year unless I specify otherwise.

Now as Aart mentioned, we executed well against our targets and wrapping up an outstanding year.

In a challenging environment, we achieved growth in both revenue, and non-GAAP earnings, generated considerable operating cash flow, and expanded our non-GAAP operating margins, which positions Synopsys very well for 2010 and beyond.

Let me now provide some additional details on our financials.

Q4 revenue was $338.3 million, a decline of 4%, compared to a year ago, but well within our target range.

Annual revenue was $1.36 billion, a 2% increase over our revenues for all of 2008.

The IT system space did very well for the year while consulting services declined as customers focused on reducing costs by delaying some engagements especially in the first half of the year.

One customer accounted for slightly more than 10% of Q4 and fiscal year revenue.

Turning to expenses, Q4 GAAP costs and expenses were $313.4 million, which included $11.6 million of amortization of intangible assets, $14.1 million of stock-based compensation, $4.5 million of facility restructuring charges, and $1.2 million of in process R&D.

For the year, GAAP costs and expenses were $1.152 billion which included $45.5 million of amortization of intangible assets, $56.9 million of stock-based compensation, $4.5 million of facility restructuring charges, and $2.2 million of IT R&D.

Total non-GAAP costs and expenses were $279 million in Q4 and $1.034 billion for fiscal 2009, up very slightly from $1.026 billion in 2008 but below our original 2009 expense budget, even with our recent acquisitions.

As expected, Q4 non-GAAP operating margin declined sequentially to 17.5% due primarily to traditionally higher Q4 expenses.

For the entire year, we exceeded our non-GAAP operating margin commitment by achieving 24%, an increase of approximately 100 basis points over 2008.

Entering 2009, our management team was fully prepared to react quickly on expenses should the environment materially change.

As a result, when the EDA and semiconductor industries became increasingly turbulent we proactively aligned expenses with moderating revenue growth.

By diligently managing vendor and contractor costs, compensation and head count related expenses, and discretionary spending, total expense growth was less than the revenue growth for the entire year.

With a continued focus on operational efficiency, we currently expect to maintain our 2009 non-GAAP operating margin as well as operating income for all of 2010 even with slightly lower revenues.

Turning now to earnings, GAAP earnings per share were $0.13 for the quarter and $1.15 for the year, down from $0.32 for Q4 of last year and $1.29 for all of 2008.

As you will recall, FY '08 earnings included a one-time $17.3 million tax benefit or $0.12 per share associated with the IRS settlement for fiscal years 2001 and 2001.

Non-GAAP earnings per share were $0.33 for the quarter and $1.75 for the year.

As Aart mentioned, our yearly achievement is considerably above the midpoint, of our original targets primarily as a result of our lower than expected tax rate and higher than expected OI&E.

Our non-GAAP tax rate was 21.8% in Q4 reflecting a more favorable geographic mix and 25.4% for the full year.

For modeling purposes, we think that a 27% non-GAAP tax rate is a reasonable estimate for 2010.

Our revenue visibility remains strong, with 95% of Q4 revenues coming from beginning of quarter backlog.

Upfront revenue was approximately 5% of total for Q4 and all of FY '09, well within our target range of less than 10%, even with the inclusion of hardware sales.

The average length of our renewable customer license commitments for the quarter and fiscal year was about three years, as customers continue to have a high degree of confidence in the strength of our technology position over the long term.

As expected, backlog declined due primarily to the timing of large contract renewals.

Recall that 2008 ending backlog included a notable positive impact from currency benefits that did not recur in 2009.

While not material, we also saw several customer bankruptcies during the year, resulting in the removal of less than $50 million in backlog.

With bookings of about $1 billion in 2009, our total backlog at the end of year was $2.2 billion as customers continue to wait until closer to their contract expiration to renew.

Our model affords us the ability to be flexible in the timing of contract renewals so that they make sense for both parties.

Our solid run rate at the end of the year is a testament to the effectiveness of that flexibility.

And finally, as Aart mentioned, we have greater than 80% of our target revenue in hand for the coming year and more than 90% for the coming quarter.

So turning to our cash and balance sheet items we ended with year with $1.17 billion in cash and short term investments.

Of this balance, 52% is held within the United States.

We generated $61.5 million in cash from operations in the quarter, which included a one-time $19 million tax prepayment to the IRS as part of our tentative settlement for years 2002 and 2004, resulting in $236.7 million in operating cash flow for the full year.

While we are still awaiting final approval of our IRS settlement, I would like to reiterate that if the tentative settlement becomes final, there will be no material non-GAAP P&L impact.

It is expected to result in a decrease in GAAP income tax expense, as a result of the new FAS 141 accounting rules which take effect in 2010.

2009 operating cash flow exceeded our original expectations due primarily to expense management and improved customer collections environment in the second half of the year, and lower tax disbursements due to some one-time benefits.

At this time, we are targeting operating cash flow of approximately $200 million to $220 million in FY 2010.

We also expect our operating cash flow quarterly profile to be similar to last year, with a net operating cash outflow during the first quarter of 2010 due primarily to the timing of our annual incentive compensation payments.

Continuing on with our cash and balance sheet items, our capital expenditures were $12.1 million for the quarter, and $36.7 million for the year, down from $38.9 million last year.

For 2010, we expect capital spending to increase to approximately $45 million to $50 million due primarily to some additional expenditures as we consolidate our Bay Area facilities to reduce some long-term expenses.

We did not repurchase stock in the quarter and have approximately $500 million remaining on our current authorization.

Our intent is to continually evaluate the best uses of cash each quarter including Company operations, investments, and stock repurchases.

We believe, again, here we were disciplined in our deployment of cash in 2009, while retaining maximum flexibility in a tough economy.

We are well positioned in 2010 to increase our strategic uses of cash, as the economy begins to improve.

Q4 net accounts receivable totaled $127 million and our industry leading DSO declined two days sequentially to 34 days reflecting the high quality of our AR portfolio and the timing of invoices.

Deferred revenue at the end of the quarter was $588.7 million.

We ended the quarter with approximately 5,930 employees.

This was an expected year over year increase due primarily to the acquisition of the Analog Business Group from MIPS Technologies, but down slightly from our Q3 head count.

Let me address our first quarter and fiscal 2010 guidance, which as Aart mentioned is a base case that does not assume any future acquisitions or stock buy backs.

For the first quarter of FY 10 our targets are revenue between $325 million and $333 million.

Total GAAP costs and expenses between $269 million and $286 million which includes approximately $15 million of stock-based compensation expense but does not include any impact of the IRS tentative settlement.

Total non-GAAP costs and expenses between $245 million and $255 million, down from $279 million in Q4.

Non-GAAP other income and expenses between zero and $3 million, a non-GAAP tax rate of approximately 27%, and outstanding shares between 148 million and 153 million, GAAP earnings of $0.23 to $0.28 per share, and non-GAAP earnings of $0.38 to $0.40 per share.

We expect greater than 90% of the quarter's revenue to come from backlog.

Now, our fiscal 1010 outlook.

Based on what we know now, we expect revenue between $1.33 billion and $1.35 billion.

Non-GAAP other income and expense between $4 million and $8 million.

A non-GAAP tax rate of approximately 27%.

Outstanding shares between 150 million and 155 million.

GAAP earnings per share between $1.01 to $1.20 which includes the impact of approximately $60 million in stock-based compensation expense but does not include any impact of the IRS tentative settlement.

Non-GAAP earnings per share of $1.52 to $1.62, slightly down from 2009 earnings driven primarily by a higher tax rate, lower OI&E and higher share count.

Again cash flow from operations of approximately $200 million to $220 million.

Now finally, to help you with your modeling, let me provide some brief 2010 expense commentary.

At this time we're expecting a fairly linear, non-GAAP quarterly expense profile throughout the year, with Q4 showing a slightly sharper sequential increase which is very typical of our business.

So in summary, Synopsys had a very successful year, despite the many challenges in the global marketplace.

We entered 2010 in a stronger competitive position from a financial, technology and customer standpoint by being fiscally conservative and investing responsibly.

As a result, we were able to deliver strong profitability while expanding our technology leadership.

With that, I'll turn it over to the operator for questions.

Thank you.

(Operator Instructions).

Our first question then today will come from the line of Raj Seth with Cowen and Company.

Please go ahead.

Thanks very much.

Brian, in Aart's prepared remarks he suggested that your outlook, your guidance was a bit conservative given the environment.

I am curious if you can talk a little bit about what assumptions you have made on run rate renewals which I guess this year were slightly less than par.

In your guidance, what sort of assumption are you making because Aart also talked about orders increasing, and I am just trying to figure out what exactly that means.

You are right.

As we looked at our 2009 rates, and we were signaling during the year, if you recall, that we saw a slightly down run rate coming in terms of our revenue profile, as we went through the year.

Then as we looked at the 2010 profile itself, we did modify the revenue outlook very slightly, just taking into account the profile of the transactions we had, the fact that we anticipated our services business to come down, one of those areas, that in 2009, we saw our customers preferring to reduce rather than invest in third party outside services.

So effectively we've seen the flat run rate in 2009 and then built our plan on top of that for 2010.

So just so I'm clear, your 2010 plan assumes flattish run rates or does it assume growth in those renewals?

I wasn't quite clear.

As you know, we have already got 80% of the revenues booked for 2010, so a very significant part of that is already factored into the guidance that we built in.

Apart from that we will have to see how it goes with the new deals as we approach the contracts.

We do anticipate, we noted we do expect orders to increase this year and we factored that into our revenue guidance.

Brian, one more, and then one for Aart.

You mentioned backlog which came down $400 million.

Obviously some of that is large contracts like Intel that roll off before they get renewed.

You mentioned a currency impact last year, some bankruptcies, et cetera, accounting for maybe $50 million, or less than $50 million.

How much was that currency impact that you talked about, how big of an impact was that?

It is fairly significant, it was about $80 million at the end of '08 that was factored in our backlog.

As you know, our one currency that is not US dollar based for revenue is the yen, and that's a pretty significant ramp up during 2008, of course.

So, you are right.

As we look at the backlog for this year, we did indicate right up-front that we anticipated this moderately lower book to bill ratio.

And then, of course, we did have a number of deals that we saw bankruptcies occurring.

We took all of that out of our backlog.

The last point as well, is there were a couple of deals we had scheduled up for the end of '09 that moved into 2010.

And in fact, one of those has already been signed for the year.

And that's pretty typical where you see deals.

And that's the beauty of our business model, where deals will come up for renewal.

We've already had one of those significant deals that wasn't closed by the end of '09 but closed already this quarter.

Okay, thanks.

Aart, can you talk a little bit about growth here?

The big question people always ask is does EDA really grow?

If you assume that the semiconductor industry -- and I think this is consistent with our last conversation -- grows, I don't know, 6%, whatever your number is, does EDA grow more or less than that, and why?

What's your view on what growth is.

It is hard year to year to tell given the model shifts, et cetera, but perhaps you can talk a little bit about that.

It's a good point that it's hard to tell largely because semiconductors fluctuate greatly up and down.

And certainly at least part of the EDA industry has a high degree of stability by virtue of having multi year models.

If you look at our numbers, for example, between '08, '09 and '10, you essentially see that during this massive fluctuation we're essentially flat.

That's the way to look at those 2.5 years.

And after that I think we will be right in tune with the average of the semiconductor industry.

If you look at the semiconductor projections, obviously the year is not quite finished, but people would say probably minus 10% to minus 15% down this year, probably up some next year, and so in aggregate over that same period of time, the semiconductor industry will be down.

So relatively speaking, we're actually doing well compared to the industry that feeds us.

Having said that, I think the thing that is not visible in all of these numbers is that during this very difficult time around us, we have been able to maintain an extremely high degree of stability of our financial model and continue to invest and invest and invest in many technologies and position, and because of that, we are entering 2010 in a landscape that I think, in my opinion, is still very questionable around us with an ability to take quite a number of actions.

And so in that sense I think we will come out of the overall recession a very strong company.

And I think that is actually the interesting story under the story here.

Last quick one, would you consider a dividend given the stability of the business cash flow generation, et cetera?

Not at this point in time.

I am of the school never say never but we have a large number of opportunities in the coming year, and there's a good reason why we have been sitting on our cash, all of '09, we are happy that we did that.

We think that the landscape is changing in '10, and we want to look at now substantial opportunities to invest in growth.

And so I think a dividend does not accomplish that.

There are other ways of course to return cash to the shareholders.

But one of them is clearly to drive for substantial additional growth.

I know you can't be very detailed, and I promise this is my last one, but you're implying you're obviously looking at M&A increasingly this year.

Are there any particular adjacencies that are interesting or is there anything you can give us around the kinds of areas where you might look?

You're opening sentence was correct, I can't give you much detail here.

I think what one should think about is that as a company, we have been able to position ourselves very strongly in what we do.

I think that the opportunity for us is to start looking at things that are on the adjacency, as you said, meaning in areas that grow our TAM, not just a stronger penetration of the SAM.

So, there are many opportunities because we are a company that has connections to many customers that need a lot of technology.

I won't go into too much detail now but I want to look at 2010 as certainly a year where we should reap some of the benefits of the careful management we've had in past years.

Just to make sure I am complete, there are a number of people that have also asked about buy backs.

That is also a possibility, and we are very careful in looking at what are the financial ramifications on any one of these approaches.

And there's a reason why we were very cautious in '09, and you only have to open the Wall Street Journal to see what the reasons were.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Matt Petkun with DA Davidson & Co.

Hi, good afternoon.

A couple of questions.

First Aart just continuing down the same path, I think we all understand how you have used your technology position and product portfolio to improve your market position with your customers through this downturn.

But do you believe that you've used your balance sheet at all to improve your position with your customers over this last 12 month period?

Because that was one of the things I think we were really focused on relative to your peers, as a competitive advantage, and I am not sure how that has helped.

I think fundamentally we have not used our balance sheet.

On the contrary we have built up our balance sheet.

There are a couple of small exceptions.

Maybe the one exception that stands out, as having been very valuable is the acquisition of the analog mixed signal business from MIPS.

That has really been a very, very good move.

But in general, we have very purposely built our balance sheet, precisely because in the midst of a storm you are very careful, and at some point in time the opportunities will show up.

Secondly, I would want to highlight that we have spent substantially in R&D so that's in the P&L, and we have been able to maintain 30% or so expenditure there.

And one of the reasons we feel very confident in the technology road map and the technology being prepared for 2010 is because of those investments.

So you put all of those things together and you say what we have really done is strengthened and solidified our position, our traditional position, I would almost say, and prepared the Company for taking advantage of that in a landscape that has changed a lot.

Last but not least, a number of customers have taken solace in the very fact that we are financially solid, as they have decided to team up with us for the long term.

And so I think all of these puzzle pieces have the potential to really come together in 2010 assuming there's no major additional economic disruption.

If you take a look back over the last 12 months, what do you think has happened to the total available engineering seat count you sell into.

Fundamentally I think the seat count has not changed because the number of engineers has not really changed all that much.

However, the word seat count is a little bit misleading because there are a number of seats that are perfectly capable of triggering a lot of tools.

As you take maybe the extreme example of verification, where engineers literally have spun off dozens of projects or of runs simultaneously, the utilization of software overall is massively up.

And so, from that perspective, there's no doubt in my mind whatsoever that our technology is smack dab in the middle of what is needed in semiconductor land.

It's also clear that our customers are facing quite a bit of pain and so during '09 is not the time to go ask them for a lot more money.

But those things will rectify themselves in the not too distant future.

Just one final question for Brian.

Brian, so you can avoid having to put out an 8-K maybe tomorrow morning, you guys commented that orders would be up next year.

Do you expect orders could grow more than 10%?

Yes, we just want to indicate that the growth in orders is going to go up from the 2009 levels.

You saw our performance during the year.

I think we indicated leading into '09 that we came in at about $1 billion of orders.

And anticipate that to grow.

That's really all we can say.

It is going to go up.

Thank you.

Thank you.

Our next question is from the line of Rich Valera with Needham & Company.

Thank you.

Following up on that, last year you were good enough to talk about the book to bill you expected, specifically that you expected less than 1 for the year, and that proved out.

Can you talk about whether you expect the book to bill to be less than 1, 1 or greater than 1 this year.

No, I don't think we want to comment on that, and probably shouldn't have commented.

But in all fairness, last year, the year was radically different than anything could have expected from the outside.

Let me give you maybe some other insight which is clearly if there's one thing that has changed in 2009 on bookings, it is the approximate time line when things get closed.

What has not changed for us, it may have changed for others but it has not changed for us, is the length of the deals.

It tends to be three years and our run rate was flat.

What has changed is that the time to closure tends to be much closer to the end of the contract.

And that makes complete sense because in a massive disruption the first thing people do is do nothing, and that's what we saw in the first couple quarters of the year, and then they remain cautious unless they see that the future is more assured.

That is not a bad thing for us.

That is precisely why we have a good backlog and why that is useful.

In 2010, the situation may change and therefore actually knowing exactly what the book to bill is is hard to predict.

The reason we can still say we expect orders to be higher than this year is because we obviously have put a number of targets for our sales team on the basis of things that are in the reasonable time frame on what should be renewed.

But aside from that, we are managing in an environment that is much more turbulent and precisely because we have both the mechanism and the controls, we can be very comfortable in managing efficient environment.

Okay.

Just to follow up a little bit.

It sounds like if your orders are just up a little bit relative to last year, and I forget, Brian, did you say roughly $1 billion or $1.1 billion, I'm not sure, that would imply a significantly less than 1 to 1 book to bill, you'd eat more backlog.

I am just wondering at what point, that would tend to imply, I would think, a lower revenue run rate than exiting the year in 2010 than you started the year with.

Just trying to get my hands around how we should think about it because most people at this point really want to think about you guys in terms of 2011 really.

I know that's a long way away but this year is a down year based on a tough 2009.

We understand that but I think people want to try to get their hands around whether 2011 there's a reasonable chance of seeing some growth, not perhaps a lot but not another down year.

Let me take that.

First, just for terminology, Brian said quite a bit up in terms of orders.

But that's actually not the relevant thing.

It was another part of your question which was the run rate.

We do not see the run rates go substantially down.

The only question mark on that, really, would be, if, if there was another wave of companies going either bankrupt, which we don't expect, or a number of companies recombining or being acquired, disappearing.

And so all in all, we actually think that 2010 will be a strong year for us, and we have been able to replace revenue from those companies that have disappeared quite well in 2009.

I'm actually amazed at the fact that even after a number of substantial bankruptcies we were able to manage a flat run rate.

So I don't think that that is going to get much worse in 2010.

Again, I don't want to keep repeating this caveat of, well, what if there's a major downturn in 2010.

I don't think it is super likely but it is not impossible.

Sure.

Brian, I was wondering if you could talk about the longer term cash flow from ops trends.

You have talked in the past about how that should trend towards your operating income or higher than the current levels.

Is there anything you can talk about to give us a sense of where we should see cash flow from ops trending over time, in a more normalized environment?

Yes, absolutely.

We are really proud of the achievements this year, of course, driving $237 million of operating cash flow in the year.

And the model is mature enough that we see ourselves continuing to generate in that kind of level.

Specifically for 2010, we put in $200 million to $220 million, and it really lines up with the operating income.

But it takes into account that we do have an increase in our tax rate factored in for next year.

We have done all we can on the net income.

If you go back to the operating level, we've kept that operating income flat year-over-year even with a slight reduction in the revenue.

So, we have got expenses coming down year-over-year.

And then, if you look at other elements below the operating line such as OI&E which is coming down in the year just based on some of the F X gains we got in '09, based on reduced interest rates, of course, in the market.

So from an operating perspective we are in good shape, that's flowing through in the cash flow.

There's a couple of one-time below the line items which aren't as good at this point as we outlook to 2010.

And all of that flows through very close for us in terms of the operating cash flow, which we'd anticipate, again, being over $200 million in 2010 as we approach it.

Moving beyond that it does track very closely to an EBITDA metric, less our taxes, our cash taxes that we pay, and that'll tend to track along with EBITDA over the next few years.

That's helpful color, thank you.

Our next question is from the line of Ryan Goodman with Bank of America/Merrill Lynch.

Please go ahead, your line is open.

Mr.

Goodman, do we have you?

Yes, sorry about that, I had it on mute.

I had a question on the FY 10 guidance.

Digging in that a bit, I think you mentioned about 80% of that is going to be coming from the backlog, which makes sense, that represents about half of backlog right now.

Maybe you can just add some color on that remaining 20% piece.

It seems a bit high if you assume it comes entirely from bookings in the year just given the 90/10 model.

What other pieces are there that I need to be thinking about there?

The first comment is we have been able to work now for a number of years with precisely this model which is coming in with 80% in hand for the year and 90% for the quarter.

Actually the numbers fluctuate a little bit above that typically, but that's what we've been able to comment on every year.

From that perspective, that is a normal model for Synopsys.

Secondly, during the year, obviously there are a number of deals that get renewed, and so for those that then go into effect that is additional revenue that is not in the backlog at the present time.

And then on top of that there tends to be one off or spot deals, things that could be delivered such as services or IP, that tend to be [renewed] fairly quickly after getting the orders.

So this is actually not only our normal model but I think, especially in the present time, incredibly healthy model, because most companies do not see this.

Notice also that a certain amount of the consulting is not in the backlog until it goes into action.

Let me add to that a little bit.

In terms of the numbers here you can see that we have got over $1 billion of revenue already built in by orders we've achieved leading up to this.

So we enter in with over $1 billion.

And the rest to be closed, what we call the turns, are very normal compared to our prior years, so we feel pretty good about the achievability of this guidance.

Okay.

One question on the expenses.

In this type of environment, you tend to see the expenses scale up a bit with the bookings but actually the outlook you gave on the expense side seems pretty good.

Can you add some color on what's going on there.

How much scalability do you have with current expense structure.

If 2010 actually does turn out to be a stronger recovery than expected, are we going to feel that in the expense side, and maybe see that more in fiscal '11 revenue?

Sure.

That's a good question.

If you look at our history, we have been steadily managing the ops margin up, and this is I think a great achievement especially that we have continued that even during extremely difficult year, 2009.

And so at the present time, we are steadily moving towards the mid-20s and we feel okay with that.

Now the economic uncertainty, as you said, is quite large, and so with the present planning horizon, it makes no sense to speculate beyond that and we want to be careful in setting expectations.

But what is clear is that obviously if things look up, then there are many ways in which we can either spend the money or keep it.

And so I don't want to close any doors, I just want to make sure that everybody understands that we are still steadily moving toward the mid-20s at this point in time.

Okay.

And then one last question, just more qualitatively.

In talking with your peers out there it seems like there's some hot beds for competition within the overall EDA sector.

Place-and-route would come to mind.

You have a competitor trying to move in a bit more with digital implementation.

But from your perspective, where are you feeling the most pressure, if any, just across the board?

Interestingly enough, the most pressure comes actually from the customer environment, which is a situation, where every customer is right now substantially down versus last year, not sure about what's going to happen next year, and therefore, aiming at reducing costs every which way they can.

The good news for us is we have been actually able to help customers do that by virtue of providing a very complete solution that can be leveraged more for them and in the process grow our business a little bit.

But I think the landscape right now, although people are absolutely planning and trying to drive toward some growth, they remain very cautious in their expenditures.

And that is really the backdrop, I think, for our entire guidance forward, is to just reflect the fact that we don't know what 2010 is going to look like.

Having said that, I want to re-emphasize again that in many ways, we've had the good fortune of preparing for many years, both technically for this complete solution, and economically for having a war chest that allows us to move when the time is right.

And so we see a number of areas where we actually have seen good growth, such as the IP area, we actually did well in the manufacturing area, we see some very interesting things in the system area.

So, there's opportunity space for us, and I think the time is upon us.

Great.

Thanks.

Thank you.

Our next question is from Sterling Auty with JPMorgan.

Please go ahead.

Thanks.

Hi guys.

I want to drill into the cash flow guidance for 2010.

I always understood that your collection policies were aimed at collecting, or frontloading the collections within the contact, trying to collect as much of the contract value in the first half of the contract life.

If that's still the case, how come cash flow wouldn't at least be flat year over year despite the higher tax rate?

As we say, we are fairly close to the number we achieved this year on the plan.

The actual cash collection projections relative to the structure of the invoice hasn't changed significantly either.

We see primarily getting cash a quarter in advance, a few customers that are semi annual in advance, and just a couple that are annual in advance.

So just based on the mix of which accounts, which customers are up for renewal, that provides the opportunity.

So we have built in a good recovery relative to the amount of receivables we had year-over-year.

We factor in the expense management against that, and there's always some small puts and takes that go through, to end up with a fairly close cash flow item.

Again our operating income, we are holding that flat year-over-year, but there are higher taxes paid which again you don't just see in the actual tax rate on the P&L, but our actual tax payments would increase in 2010.

And on top of that our operating income and expense is slightly lower year over year which is contributing to the rest of the slight decline year-over-year.

Aart, with your comment which mirrors [Mentor] and Cadence that customers are waiting until the end of the contracts to renew, based on that, can you give us some qualitative commentary about how the renewal pipeline, if you will, looks as you move into fiscal 2010, meaning is the renewals get better in the back half?

Is it more back-end loaded, is it linear, is it front end loaded?

How does the renewal pipeline look for you?

Actually, I don't know the answer, in terms of specifically how it spreads over the year, which tells you at a minimum that for us that is less relevant.

I can tell you though is that the very fact that we say that orders are quite a bit up, expected to be quite a bit up from the past year, says that there is enough set of renewals so that we have incentivized our sales team to go after those.

And the other comment is really again on the qualitative side, we are maintaining the run rates just fine.

And so that says that even in a very tough economic time, customers seem to value the value we provide sufficiently for us to achieve that result.

I expect that as the economic situation gradually betters, the pressure will lessen a little bit although it may take a while for the entire high-tech segment to start spending a lot again.

But nonetheless, I think we have probably seen -- well, we have most likely seen -- the worst in '09 by far, and right now, we are a little bit back to business as normal.

Five minutes to the top of the hour.

Thank you.

Operator, I will turn it over and let somebody else ask a question.

I'll talk to you off line.

Our next question then comes from the line of KC Rajkumar with RBC Capital Markets.

Hi guys.

You mentioned that the timing of a couple of the last contracts was one of the reasons why (inaudible) was down.

My question is, how and when these contracts close next year, do you think there is upside to your conservative top line guidance or is the closing of those contracts already afforded into your top line outlook.

I think I chose the word carefully, I think used conservative and cautious for a reason which is we think that this is plan that is very executable and this is what we are working against.

We factored out all other major actions that we could take.

And obviously, if there's an opportunity to do better on any of these contracts, that will manifest itself over time well in the top line.

So no, I think we have been very realistic against a landscape that is just very hard to predict, and we've learned some interesting lessons in '09.

Okay.

The primary EDA program, can you give us some understanding of how much do you guys typically see your business or orders on top line increase or change with a customer versus before they became a EDA partner?

It's a good question, it's a little bit all over the map.

But in general, I would say it doesn't change all that much initially for a very simple reason which many of the customers need to have time to gradually migrate to us.

During that time, they still have contracts with maybe other sources, and those contracts don't go away.

Especially in '09, that's not the time to ask them for more money.

As they do a successful conversion to our tools, they now have the opportunity to either put the savings in their pockets or come back to us for more capability.

And this is precisely an additional reason why we are feverishly investing in more technology going forward, and are looking at other investments so that when the time is right there's an opportunity to build on that very platform.

From a modeling [perspective], how should we evaluate the press release which talks about primary EDA contracts?

The bottom line is press releases are just that, and as much as we all probably take a lot of pride in having great press releases, some are extremely meaningful and some are complete -- well, let me polite in the words.

So the thing that matters is really what happens underneath and over time.

I grant you that it's more difficult for you to observe that because it is a lot of engineering work to help people gradually solidify their position.

One of the indicators that would be meaningful to you is the very fact that we say that our run rates are flat.

Flat in a year where the entire markets are collapsed at the tune of substantial percentage should tell you that our customers seem to continue to have a strong confidence in what we do.

So, time will actually show that these investments on our part and on their part will pay out for both of us, and we certainly feel very comfortable with that.

The press releases are just that.

Lastly, you mentioned a couple of times the changing landscape.

Although we can guess what it means, I would like to hear what your thoughts are on how has the landscape changed in the past 12 to 18 months.

Okay.

Well, leaving alone the very obvious massive financial changes for many customers, starting with the top line and then in various ramifications to the bottom line, in my opinion, what is really happening is that we have a major push for a substantial increase in efficiency in the entire high-tech industry.

Certainly therefore in the semiconductor industry, certainly therefore in all of the supporting industries.

And so that is accompanied by a gradual but accelerating shift towards the Far East in terms of end markets now growing, and on delivery of products, they're growing.

So all of these things spell out the same word, which is how do you become more efficient.

And part of that is you can see the consolidation of a number of customers, you have seen recently a couple of very large mergers, in semiconductors.

NEC Renesas is probably the largest one in the foundry domain.

We see global foundries and chartered.

And then there's a slew of smaller announcements that have followed.

There's one common theme, efficiency.

And so, we are catering precisely to that because we are in the business of providing efficiency tools.

This is a good time where customers are looking at how can they not only improve by virtue of scale but also improve by virtue of execution.

And one proof point for that would be the success of our IP business because there's a good example of many customers doing things that are not differentiated, where we can provide building blocks that are of high quality, and overall economically cheaper for them than if they were to do it themselves.

So we are in the middle of this massive change, and change always has some unexpected ramification, but I think we are very well positioned to not only manage well through that change but take advantage of some of the opportunities that open up because of that.

With that, I am getting the sign here to wrap it up.

It is past our one hour.

I appreciate all of the people calling in.

There may have been more questions.

As usual Brian and I will be available right after the call.

Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude our conference call for today.

We appreciate your participation.

You may now disconnect.