新思科技 (SNPS) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Synopsys Incorporated earnings conference call for the first quarter of fiscal year 2010.

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 call over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you, Tony.

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 additional to any risks that we highlight during this call, important factors that may affect our future results are described in our annual report in form 10K for the fiscal year ended October 31, 2009, and in our earnings release for the first quarter of fiscal year 2010 issued earlier today.

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

All of these items are currently available on our website at synopsys.com.

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

Good afternoon.

I am happy to report that we started the year with great energy and momentum and obtained excellent results in Q1.

We delivered revenue in line with expectations, solid expense management, and earnings slightly above target.

In addition, we've made a number of strategic moves that we believe we'll increase our total available market substantially in the long term.

We feel that 2010 will be a year of positive evolution for Synopsys.

Before I share some of our strategic perspectives with you, let me briefly summarize last quarter's financial results where we met or exceeded all of our Q1 targets.

Specifically, we delivered non-GAAP earnings per share up $0.41 with revenue of $330 million.

Through disciplined expense control and focus on efficiency we are on track to meet our ops margin target of 24% for the year.

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

With yet another strong set of technology delivery and continued excellent field execution, we are solidly on track to meet our targets for the year.

Now to our strategic direction.

As we introduced to you in our last earnings call, we see 2010 and 2011 as the time to benefit from the economic recovery while actively broadening our opportunity space.

We are pursuing three fundamental strategies.

One, accelerate our execution momentum and expand our core EDA leadership.

Two, broaden our EDA TAM by aggressively fielding adjacent products and capabilities.

Three, expand our TAM outside of core EDA by aggressively driving the emerging system space.

Before elaborating our strategy, let me briefly describe the customer environment that is the backup to our actions.

Whereas the macro economy is still somewhat mixed and most objectives continue to be focused on risk and cost management, the plethora of new electronics applications will help semiconductors be one of the key growth segments in the economy going forward.

Just looking at new products shown at the consumer electronics show, one finds massive growth in mobile Internet devices, ranging from smart or I should say, very smart phones to notebooks, netbooks, tablets, and e-book readers, all featuring the convergence of what used to be simpler stand-alone applications.

There are immense bandwidth and complexity drivers in high-definition, 3-D video, and Internet protocol TVs.

There are new growth opportunities in low par management, smart grids, and automotive.

And bringing it all together, we see mobility and Internet connectivity on a scale that dwarfs anything seen so far.

With China and India consumer base is simultaneously expanding at a rapid clip, the growth opportunities for electronics appear very robust.

For semiconductor executives, this landscape presents growth opportunities requiring redeployment of existing resources even while the short-term economic situation forces a focus on cost management.

This widely opens the doors for Synopsys.

Designing and verifying all of these complex new products requires great technological sophistication in chip design, but increasingly also in the crucial interaction between hardware and software.

Which brings me to our latest strategy acceleration, expanding our TAM outside of core EDA up into systems.

Over the past several quarters, we have made great progress into this space.

Specifically we added major new capabilities in the automotive and consumer segments to augment our ability to model and verify complex systems.

With the acquisition of that, we are not only adding a number of key connections to customers, we also added some important processor models and are already engaged with one of our primary EDA partners in this area.

The addition of CoWare, which we announced last week, would grow our capabilities in the consumer space, most notably the strong relationships in Japan and with technology aimed at verifying hardware and software simultaneously.

Our methods to accomplish this is the virtual prototyping.

This capability is promising as most system companies now perform these tasks internally in an ad hoc fashion.

Yet, our increasingly interested in outsourcing to a well structured and complete commercial solution.

Complimented by our STG base rapid prototyping, our solution will compete well with more expensive and unwieldy emulation products.

Enabling system validation on a much broader scale than before, and allowing customers to accelerate embedded software development.

Finally in the systems area, I would like to highlight our silicon IP business, which is growing very nicely as the outsourcing of non-differentiating IP accelerates amid the conversions of cost pressures and the availability of high-quality products.

We see high demand for almost all of our titles, from analog IP to connectivity standards such as HDMI.

What is exciting at Apple is the new USB 3.0 standard, which was highly visible at last month's consumer electronics show.

Synopsys has been the leading provider of USB interfaces for a awhile, and was the first to bring to market a complete IT solution of this latest incarnation.

USB 3.0 is more than 10 X faster than previous versions, and capable of transmitting live high-definition video.

For example, a movie that used to take hours to load can now take just minutes.

This opens the door to many exciting new products in indeed the standard is rapidly gaining momentum.

Super speed USB 3.0 is a complex piece of IT with very sophisticated analog mixed signal capabilities.

Which brings us to our second strategy, broadening the Synopsys EDA TAM.

In this area, custom designer is a great example of how we build a very competitive capability from scratch in a market segment that has seen limited innovation for a long time.

In the summer we released a greatly enhanced version, and with Synopsys having over 450 analog mixed signal designers, all of our new analog IP products are being designed using our own custom designer.

In Q1 we also acquired a small company with excellent shape based router technology that we believe will accelerate and expand our product differentiation.

We've already seen a number of customer [take outs] including most recently a chip used in digital imaging systems high performance camera modules.

Another promising product is Yield Explorer, a recent addition that is finding traction with customers focused on improving there chip counts by diagnosing yield issues and thereby accelerating yield RAM.

It's another good example of growing our adjacent EDA capabilities by effectively straddling design and manufacturing.

This brings me to the center of gravity of the Company.

Our strong core EDA solution and our opportunity to further strengthen its category leadership.

Our primary partner program continues to make excellent progress as we help our customers reduce or at least stabilized their total cost of design while providing increasingly integrated solutions with steadily improving productivity metrics.

There are many examples of where this is happening.

We continue to see migration to Synopsys and away from competitor tools.

At one large customer, use of Synopsys and limitation of verification solutions increased from about 40% of total to about 90%.

In another case, the customer was able to reduce the number of vendor tools from four to one.

It's important to note that these transitions are not easily done, and they occur over time.

So the very fact that we can see tangible progress is very positive.

As we help our customers become more efficient and automated, they can increasingly repurpose there most precious engineering talent towards more differentiating activities.

In Q1, Synopsys again released a broad set of technology enhancements ranging from substantial multithreaded multi-core speed increases to major advances in integrating complete design flaws.

Our ability, for example, to do physical verification directly in the design flow with IC Validator saves substantial design time.

At yet another launch, international customer were displacing our competition as they standardized an IC Validator for their 32-nanometer design flows.

The strength of IC Compiler and the integration with IC Validator combined to provide a truly state-of-the-art physical implementation flow.

The integration of VCS space simulation and low power verification is another example of great innovation, rapidly increasing customer impact.

[Perceiving] information systems for example, was successful in verifying the low power functionality of a mobile multimedia application and they can now use the verification infrastructure for additional designs.

In analog, TSMC has adopted CustomSim, which brings together multiple transistor level simulations in an integrated solution for its sub 40-nanometer memory IP characterization.

We also made a small acquisition in the simulation acceleration space as we continue to invest in technology enhancements.

Bring this all together, our Lynx design system helps customers who want to shift internal TAM management resources to more differentiating projects.

For 65-nanometer and below, Lynx provides a comprehensive design system with built-in methodology, foundry ready checks, and an advanced management concept.

The complete low-power flow can be up and running in just a couple of weeks.

In summary, Synopsys is executing very well and we are on the move to expanding our total available market.

Our technology and support engines are providing our customers the best guarantee for success and many of them now want to also engage more closely with us to help them differentiate with their customers.

That means an expanded role that requires expertise beyond traditional EDA, down to manufacturing and increasingly at the intersection of hardware and software.

Our internal investments and recent acquisitions are all aimed at driving our strategy and growth in that direction.

And 2010 promises to be an exciting year for Synopsys.

With that, I will turn the call over to Brian Beattie.

Thanks, Aart, and good afternoon everyone.

In my comments today I will summarize our financial results for the quarter and provide you with our Q2 and 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 which is posted on our website.

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

Now, as Aart highlighted, we continue to execute very well, meeting or exceeding all of the quarterly financial targets that we provided in December.

Total revenue was $330.2 million, well within our target range with greater than 90% of Q1 revenue coming from beginning of quarter backlog.

Our IP and systems business again performed very well, achieving double-digit growth in Q1 and the trailing four quarters.

One customer accounted for slightly more than 10% of first quarter revenue.

Turning to expenses, total GAAP costs and expenses were $275 million, which included $17 million of stock based compensation, $10.7 million of amortization of intangible assets, and $1 million of acquisition related costs.

Total non-GAAP costs and expenses were $244 million, which was slightly below our planned range, and declined two percentage points compared to a year ago, even with the addition of the analog business groups from MIPS Technology.

The decrease was driven primarily by timing of quarterly expenses, including external professional services, some hiring, and other one-time expenses that shifted out of the quarter, along with company wide cost control.

As a result, non-GAAP operating margin was 26.1% for the quarter.

A very good start towards achieving our goal of approximately 24% for the entire year.

Turning now to earnings, GAAP earnings were $0.88 per share, substantially above our target range, and up from $0.37 a year ago.

This was due to the one-time impact of a $91.6 million or $0.61 per share GAAP only tax benefit associated with the IRS settlement for fiscal years 2002 through 2004.

There was no non- GAAP P&L impact of the settlement.

Continuing on earnings, non-GAAP earnings of $0.41 per share slightly exceeded our target range, due primarily to timing of our quarterly expenses.

Our non-GAAP tax rate was 27.6% for the quarter and for modeling purposes, we think that a 27% non-GAAP tax rate is a reasonable estimate for the full year.

Our revenue visibility remains strong with greater than 90% coming from beginning of quarter backlog.

Upfront revenue was 6% of total, well within our target range of less than 10%.

The average length of our renewable customer license commitments for the quarter was 3.2 years.

Now, turning to our cash and balance sheet items.

We ended the quarter with approximately $1.1 billion in cash and short-term investments, which, of course was prior to the VaST Systems acquisition we closed earlier this month.

It also does not include the expected impact of the recently announced definitive agreement to purchase CoWare.

Of our total cash balance, 49% is held within the United States.

As expected, there was an operating cash outflow of $45.4 million in the quarter.

This is due primarily to the typical Q1 payments of annual incentive compensation to our employees, related to FY 2009 performance.

Now continuing on with cash and other balance sheet items.

Capital expenditures were $8 million in the quarter and for 2010 we now expect capital spending to be in the range of $40 million to $45 million, which includes planned expenditures to consolidate our Bay Area facilities to reduce long-term expenses.

During the quarter, we purchased approximately 1.2 million shares of Synopsys stock $25.3 million and have approximately $475 million remaining from our current authorization.

Now, as Aart highlighted, we are excited that we closed the acquisition of VaST Systems Technologies as well as signed a definitive agreement to acquire CoWare.

The terms of these deals are not being disclosed, but we did not expect this transactions to have a material impact on 2010 revenue or on non-GAAP earnings for 2010.

Over the past six quarters we have closed five acquisitions in addition to the definitive agreement to acquire CoWare, and we have recently highlighted, we are well-positioned in 2010 to more aggressively put our balance sheet to work.

Q1 net accounts receivable totaled $142 million and DSOs were 39 days reflecting the high quality of our current AR portfolio and the timing of invoices.

Deferred revenue at the end of the quarter was $547 million.

We ended the quarter with 5,875 employees.

This was an expected year over year increase due to primarily to the acquisition of the analog business group, but down slightly from our Q4 headcount.

Now let me address our second quarter and fiscal 2010 guidance, which is a base case that naturally does not assume any future acquisitions or stock buy backs.

For the second quarter of FY 2010, our targets are revenue between $331 million and $339 million, total GAAP costs and expenses between $278 million and $295 million which includes approximately $17 million of stock based compensation expense.

Total non-GAAP costs and expenses between $252 million and $262 million, other income and expense between zero and $3 million, a non-GAAP tax rate of approximately 27%, outstanding shares between 148 million and 153 million, GAAP earnings of $0.22 to $0.28 per share and non-GAAP earnings of $0.38 to $0.40 per share.

We expect greater than 90% of the quarters revenue to come from backlog.

As a result, our current fiscal 2010 outlook is revenues of approximate $1.33 billion to $1.35 billion.

Other income and expenses between $4 million and $8 million dollars.

A non-GAAP tax rate of approximately 27%.

Outstanding shares between 149 million and 154 million.

GAAP earnings per share between $1.55 and $1.74, which reflects the one-time tax benefit I highlighted earlier, and includes the impact of approximately $68 million of stock based compensation expense.

Non-GAAP earnings per share of $1.52 to $1.62 and we're targeting cash flow from operations of $200 million to $220 million.

Finally to help you with your modeling, let me provide some additional 2010 commentary for revenue and expenses.

For the balance of the year, both total revenue and total expenses, we expect a sequential increase in Q2 followed by a moderate decline in Q3 with Q4 then showing a sharper sequential increase.

For all of 2010, we currently expect to maintain our 2009 non-GAAP operating margin as well as operating income.

In summary, we are pleased with our Q1 financial performance and are very will positioned for 2010 and beyond.

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

Think you, sir.

(Operator Instructions).

Our first question comes from Richard Valera with Needham & Company.

Please go ahead, sir.

Thank you.

Good afternoon.

Aart I was wondering if you could give any qualitative commentary on bookings in the quarter including any progress on the few slip deals you mentioned last quarter that slipped from 2009 into 2010?

Sure.

As you know, we don't give any specific color to the bookings except for the fact that we have the fact that we reiterated that we are on track for this year.

And the bookings support that.

So fundamentally, it's as expected.

And my own sense is that business has returned to be a little more normal than the equivalent Q1 of last year, which of course, was a very radical quarter in every aspect.

So fundamentally we are in good shape.

Great.

I don't expect much of a change here, but in terms of renewal run rates, are you maintaining the flattish run rate that we have been seeing for the past couple of quarters?

Yes.

I think flat to up is the way we would characterize it right now.

Great.

And then, with respect to CoWare, this technology has been around for a while, and I guess for a long time it's sort of missionary sale, they seem to be getting some progress there in terms of accelerating the deployment into the market.

Do you have any specific ideas of how you can accelerate the deployment of the CoWare tools in terms of both using your larger sales force and/or tying it together with some of your existing products?

Well, at this point in time, this deal is not closed.

So it's a little early to give specific details on what we would do.

But as you look at the systems area, it's a very broad space.

And I think even in my intro comments, I made a couple of comments on the fact that in the core implementation verification, people are really focusing on the productivity.

In the system space, they are really focusing on how do they get the attention of their customers.

And that increasingly means how can they best support the development of applications that are exciting, and therefore the whole interaction of this boundary between the hardware and the application software is growing in importance.

So I think you are correct in stating that the whole systems area has been a missionary arena for a long time.

But it is starting to come here.

Okay.

That's helpful.

And then finally, Asia Pac looked like it was pretty strong from a revenue perspective this quarter.

Is their anything beyond normal quarterly noise in there or should we -- is their anything more that we can read into that as far as the strength of Asia-Pac?

No, don't they can read anything into the specific number for the quarter because these tend to fluctuate.

I've always been saying you have to look at a longer period of time, and there you would see that Asia-Pac of course has been doing well, which is not a surprise given the sharp evolution of the economies that are involved there.

And I expect that to gradually continue in the coming years.

Okay.

Thank you.

You're welcome.

Thank you.

Our next question in queue that will come from the line of Ryan Goodman with Banc of America.

Please go ahead.

Thanks.

I have a question on the OpEx.

I think I understand that there's going to be a bit of an uptick in the guidance for the next quarter, and that sounds like more of a timing issue.

Maybe I'm reading too much into it, but you lowered the share count a little bit in the FY 2010 forecast, but there was no change at the EPS level.

Any a chance you could add some color on what's going on there?

Yes, Ryan.

What we looked at is a lot at the expense savings that we saw in the year, as I said, related to primary some of the external professional services, some of the hiring and other costs and anticipation as most of that shifts into Q2 and beyond in the quarter.

From our other areas, we are just continuing, of course we have to acquire the assets and the people from the VaST Technology stream that is built into our guidance as well, starting this quarter and moving through the rest of the year.

And other than that, our share count is down slightly.

We did a small buyback in the first quarter, just over 1 million shares.

And I think we will start seeing the impact of that and of course, that ties to the price of stock as well that is in guidance.

Okay.

Thanks.

And on the cash flow, I noticed that didn't move as well.

It was a little better than I had modeled and it seems to be that offered better start for the year.

I know this came up last quarter too, but can you talk a little bit about why your taking, what I would think is a bit of a conservative bias there?

It seems like revenue is doing fine, the bookings in particular are looking to be a good year.

So why guide where you are on the cash flow now?

Well, I'd say first off, we have a very good forecast.

Our history has come very close to those cash forecasts because of the way the profile out planned collections by customer by quarter over the next three years.

So it is fairly close to the actual profile and that gives you most of the collection item.

And then you also have your expenses, which we have to manage.

So again, the fact that we are reiterating a positive cash flow of $200 million to $220 million is a strong signal.

We started at negative 48, which is pretty typical, which is even better than last years numbers, but as you will see, it really ties into the net income flow, and it does over time match up with the EBITDA less the taxes paid and a long-term profile.

So we think it is very appropriate.

We still have three quarters of the year to go, and we will get tighter as we get through.

But we are fairly confident with the $200 million to $220 million range for 2010.

I have a high-level question for what you're seeing out there.

In terms of the semiconductor market itself, it's been off to a nice start for the year, R&D spending looks to be fairly well, but there is already starting to be some chatter that there is going to be inventory build, which could catch up with the semiconductor market, at least by the back half of the year.

Could you talk a little bit about implications you see for that just to the EDA market in general?

Sure.

Fundamentally we see that there are very few implications because what you're describing, we have already seen for the last quarter as we talked to the semiconductor executives because they knew that they were replenishing inventory.

They knew that the first half was probably going to look pretty solid and by the second half, ultimately, the market needed to find a natural balance.

For EDA, we are a relatively stable industry, and for Synopsys specifically, I think we are in very good shape because if there's one thing that the semiconductor execs will continue to do, they will stay careful in their expenses.

Therefore, there is going to be a continued attention to how productive can they be with their tools.

And that is going to be the core tenant of our main strategy for a while.

And thus, I think we can help them be successful.

Okay, great.

Thank you.

You're welcome.

Thank you.

Our next question in queue that will come from the line of Sterling Auty with JPMorgan.

Please go ahead.

Thanks.

I have three questions.

The first one is for the comment about the run rate being at (Inaudible).

Can you characterize whats driving that contract run rate value?

Is that you are actually getting more licenses per engineer or more product?

What constitutes the value of that run rate being flat to up?

How many ways can I say yes?

It is absolutely that we are rolling out more technology, the utilization is up.

And fundamentally we have the benefit of a number of customers that are gradually migrating towards us.

And so it's fundamentally yes to your question.

But, Aart, I guess the push back is I wasn't looking for a yes or a no, we're in an economy where unemployment is 10%.

There's also the argument as to how much that hits the R&D engineer markets of your core customer base.

I think its great that it is flat to up.

I think it's a positive sign, and I was hoping that's what I would hear.

I often get questions from clients same is it just that you have better utilization with more licenses per engineer or is it that because at the smaller design nodes it is all about more products per -- that are needed to design?

So I think I need to connect the dots and understanding that's needed by the investors to understand how the run rates can grow from here.

Sure, I apologize.

I didn't mean to be [flip] at all.

Let me take it in layers.

The first layer is with the exception of last year, seeing a few companies disappear, were a number of the top engineers that got rehired.

I am sure there are some people that are unemployed, but in general I would say in the engineering ranks with chip design, we have not seen massive layoffs.

We see people really trying to tune their countries and reduce their out-of-pocket expenses, but they all know very well that the engineering resources are very precious.

So no major change their.

Secondly, we do see that a number of engineers are using more copies of a given software per engineer, and this is especially true in areas such as verification, where the simulations of some of the other tools, the more you do the better the products get.

Third, we do see that people are still moving forward toward the more advanced nodes.

And the more advanced nodes do have a number of capability requirements that do stress the extremes of the tools.

So people will try to buy the best possible tools they can get and we are often in that class.

So all of these have moved together, and I cannot say that I see a sharp downturn economically in terms of engineering utilization or engineering, period at this point in time for the last 15 months.

Similarly, I don't think there's going to be a sharp upturn because people will remain focused on costs.

But that is actually not bad for Synopsys, as we are very much focused on their productivity per engineer.

Got it.

Next question is for Brian.

In terms of the expense timing, as you mentioned contractors, can you give us a little more detail in terms of was there anything in terms of sales commission on timing of deals or do you have maybe more accruals?

Because the G&A line seems to be an area that came in much lower than I would have expected in the quarter.

You're right.

It was all the areas other than the commissions.

They basically came in per the plan.

But it was really under spending of some of our legal costs, some of the other G&A type expenses that we had for the quarter.

The hiring across the board, really just to start out of the first quarter we had a one-week shutdown, for example, which helped take down our expenses in the quarter as well.

And again that is back to business as usual in the second quarter.

So just shifting of those expenses through Q2 through Q4.

Okay.

And the last question is on the cash operations, the improvement that you saw year-over-year, can you connect the dots for me in terms of was there anything there from the tax payment?

Was there anything there in terms of whether the compensation level that you paid in the first quarter may be not be as big as you saw last year?

What were the big items that helped that improvement year-over-year?

I would characterize, again a reduction that was nice.

About $80 million in the prior year, this year came in about $40 million.

And primarily -- related to lower expenses that we saw in the 4th quarter as an out flow and primarily related to lower expenses that we saw in the fourth quarter.

The actual payments in terms of variable compensation are down year-over-year, and I think that is what contributed to the performance.

Plus again, it's very susceptible to cash collections from particular customers or cash out flows.

And I think that kind of characterizes mostly related to lower expenses on the variable compensation in 2009.

All right.

Thank you.

Thank you.

(Operator Instructions).

And we will take our next question in queue from Jay Vleeschouwer with Ticonderoga Securities.

Go ahead.

Thanks good afternoon.

Brian another cash flow question.

In terms of getting to your range for fiscal 2010, would it be fair to assume that given the net income outlook for the year, you would have to have something on the order of a $50 million to $60 million improvement in working capital versus fiscal 2009?

For example, in accounts receivable, deferred and the like, and if so, could you perhaps talk about how you achieved that level of improvement implied for fiscal 2010?

Secondly, with respect to the acquisitions of CoWare and VaST, would it be fair to assume that given how small they are, and also given the services requirements of their respective businesses, that neither is particularly profitable, and perhaps you could talk about ways that you can improve upon that profitability once you have acquired them?

Well, maybe take the second question first, Jay.

In a way, looking at the acquisition, in our guidance we have included the VaST acquisition since it has closed, and CoWare, as you know, is subject to the normal government reviews and so it will be factored into our guidance going forward.

Nonetheless, we indicated that they would not be material to the FY 2010 revenues or to the earnings impact.

With every deal we look at the expense base, we identify the synergies, we look at the key skills that are required to deliver what we build as our business case, and obviously, that's the way we have done it and we have done, I'd say, five acquisitions in the last six quarters with one more pending.

So we have gotten very good at the integration process and the flow through there.

And still are targeting on the same level of operating margins we have while we expand into additional segments to expand our TAM.

If I look at the overall cash flow for the year, I think it's very consistent on a year-over-year basis, this year the guidance of 200 to 230 compares to 237.

That matches up with some of the slight reductions we are seeing on the earnings level.

Most of those earnings, as you know, relate really to the nonoperational items that we saw coming into the year, the other income and expense, some of the foreign exchange impact, a slightly higher tax rate, as we have shifted from 2009 to 1010.

It is very consistent with that net income shift.

The rest relative to working capital is very consistent.

Industry leading DSOs in the 30s, and our collections are working very will, even stronger than what we saw in 2009, as we have now exited through the recession, our customer environments.

So we are very confident in $200 million to $220 million in FY 2009 operating cash flow.

Two follow up questions.

Aart, on the last call you mentioned a new metric, logo profitability.

I wonder if you could describe any notable trend you may be seeing there across your largest customers?

In other words, are there any significant differences among your larger customers in terms of profitability and for the ones that may not be so profitable?

What are the ways to improve upon that?

And finally, there was an enlargement of your duration where Cadence had somewhat shorter duration in their last quarter.

So a little bit more of a gap between the two of you now and duration, perhaps you could comment in on that.

Well, I will be careful to talk about logo probability given that every customer would like to know about everybody else, how well they are doing and does not stop looking at ways to improve their own outlook.

What I was probably alluding to, although I must confess I don't quite recall what I said at that time, is that we are in a phase of the industry where efficiency, productivity, profitability, actually really matters.

And therefore, many customers are focusing on how can they become more effective in the tasks that they are doing, potentially at lower costs, potentially with fewer people, in order to be able to invest more in those areas where they can differentiate more.

And in that sense, we ourselves, follow the same line of thinking, which is how can we execute as well as possible all the things that we have done so far, while investing and growing the total available market around us.

And so, we have to live up in many ways to the same profitability improvement objectives internally as our customers do.

And I think we're pretty much in line with that thinking.

Regarding duration, fundamentally, we said for a long time, we are very steady around the three years.

It can go up to 3.2, 3.3, it can go down 2.6, 2.7, 2.8.

It varies from one quarter to another, but in essence, our business model is remarkably stable.

So far, so good with that.

I have no indication of change whatsoever.

Thank you.

You're welcome.

Thank you.

Our next question in queue that will come from the line of Kakkean Rajkumar with RBC Capital Markets.

Please go ahead.

Hi.

How much do you have to price the EDA spend for the year?

Cadence had made an estimate of 1% to 6%.

Would you say that is the right ballpark?

We can comment only about really our numbers at this point in time.

We are extremely stable in our core businesses, as you can see, we are now investing in some of the areas that would not traditionally be called core EDA and we see great opportunities there.

I think 2010 is far from over.

Earlier, somebody mentioned that customers on one hand were optimistic about the first half because they see a lot of demand for the business and then even some short comings in manufacturing capacity, they are still very cautious for the second half.

And all of that tells me that it probably is going to be fairly steady for the year.

But we recently had a very good Q1 and I feel strong about our year.

So that's the answer and that's only when it comes to Synopsys.

When you talk to your customers do you get a sense that they are planning to increase their EDA spend on average this year compared to last year?

I think on the core EDA they will probably stay very focused on how to improve the efficiency, and I think they are going to increasingly look at where to put their R&D money to see if they can increase their differentiation when interacting with their customers.

And there are a number of areas where they can obviously do that because you can differentiate by having smaller chips and cheaper chips and that takes an enormous amount of very sophisticated engineering work, and we are well equipped to help them with that.

You can also differentiate by providing more of a systems solution and the term system-on-a-chip was actually well-chosen about 10 years ago because we are here today and we can see that more than 50% of the engineering employees and our customers are already software employees.

So I suspect that we will see more spending in that direction.

And by the way, that's one of the key reasons why we have also invested in broadening our TAM in that same arena.

You folks mentioned that you don't expect material from revenue and EPS data from VaST and Co this year.

Would you expect something along the lines of (Inaudible) next year?

Well, you know the first year in acquisition like this, there are always financial haircuts.

There is a partial year and so on.

And I think we made very clear statements that for this year, it's fairly immaterial.

Obviously, we do this with the whole purpose to grow our business.

So yes, it will have impact on next year, and moreover, we think that our system strategy will have even more momentum than it is only starting to see.

I guess looking to consolidate the various assets which you have acquired in systems into one continuous product so that it can better leverage your (Inaudible).

Well,one has to understand that the system arena is actually a huge market.

There are many different things that go under that banner.

And many things that are interacting from deep software involvement to very sophisticated hardware verification techniques all the way to touching some of the physical edges and looking at the optimization of architectures.

And I am just naming a few here.

And so what is interesting is that the focus on this area is growing as the customers are starting to see an opportunity to differentiate themselves more there.

And obviously there are different bets and earlier, one of the speakers mentioned the fact that the term, missionary endeavor, was very appropriate for the last decade or so.

Well, I think at this point in time, there are so many technical challenges in this area around verifying systems, around modeling complex IP, there are many opportunities for us.

And so certainly, from an infrastructure point of view, we will seek out immediately efficiency, but from a technology road map point of view, I think we will talk about that when we are much further along.

Lastly, into this year and next year, would you see the systems and the IP segments as going faster for you in EDA -- than core EDA?

The answer in general terms is yes and we have seen that already with IP.

These are new areas.

They are today at least in the markets that we play in, much smaller than what we do in core EDA adjacencies to that.

But the problem set is quite substantial.

So yes, we do think there will be more growth there and that's precisely the reason why we are investing there.

Thank you.

You're welcome.

Thank you.

At this time we have no more additional questions in queue.

Please continue with any closing remarks.

In that case, thank you very much for spending time of us.

We are looking back on a strong Q1 and we are looking forward actually to a year that is shaping up in very interesting terms for us.

And as usual, Brian and I will be available for any questions or comments that you have afterwards.

Have a good rest of the afternoon.

Thank you and ladies and gentlemen, that does conclude your conference call for today.

We do thank you for your participation and for using AT&T's executive teleconference.

You may now disconnect.