新思科技 (SNPS) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Synopsys Inc.'s earning conference call for the third 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, we would like to turn the conference 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 discuss forecasts and targets and will make 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 April 30, 2010 and in our earnings release for the third quarter of fiscal year 2010 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 third quarter earnings release and our financial supplement.

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

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

Good afternoon.

Q3 was a strong quarter, and I am happy to report that we met or exceeded virtually all of our targets.

We delivered non-GAAP earnings per share of $0.39 with revenue of $337 million.

We again carefully managed expenses and are on track to meet our ops margin target of 24% for the year.

Our business outlook improved, and we're raising our full year revenue and operating cash flow targets.

We also announced a further expansion of our total addressable market with the pending acquisition of Virage Logic.

Let me start by addressing the customer environment and its effects on the demand for our EDA systems and IP products.

For 2010, industry analysts are now predicting semiconductor revenue growth of 25% to 30% after a 10% decline in 2009.

Note that the 10% drop in semi revenue was much less than predicted through most of last year.

The slower than expected drop during the recession and the rapid bounce back illustrates the resilience in demand for electronics in a rapidly globalizing and tech dependent society.

In fact, a new electronics wave is upon us with global demand for connected and smart everything, Smartphones, pads, net books, grids and even smart toys.

Management teams remain somewhat cautious in terms of the magnitude and sustainability of post recovery growth.

However, today's semiconductor capacity is effectively fully utilized and most semi executives are increasingly positive about the long-term prospects for their products.

With this new electronics wave, EDA is essential, especially as we now touch both hardware and software and provide the design infrastructure to reach all the way from end user functionality to chip manufacturing.

Synopsys is the leader in providing that very infrastructure, and our focus is now clearly aimed at growing our business.

Although we will provide specific 2011 guidance in our fourth quarter earnings report, I would like to share with you our long-term financial thinking.

Our top objective is to grow earnings per share on a sustainable basis by one, growing revenue, both organically and through M&A.

Two, focusing resources increasingly towards growth businesses, three, maintaining emphasis on corporate efficiency, expense management and resulting ops margin, four, accentuating our differentiations through advanced R&D and highly skilled global support and five, keeping share count roughly flat.

We have used the last two years of the recession to put us on this trajectory and view our opportunity space primarily as gaining market share and technology strength in traditional EDA and broadening our offerings in our growth adjacencies, IP and systems.

Let me expand on each.

First traditional EDA whereby virtually any measure you consider, revenue, seats, customer budgets, we substantially gained share during the downturn.

This has been accomplished with head to head competitive wins and customers choosing to consolidate largely on Synopsys.

We're doing well for four key reasons, state of the art technology, scale and expertise of our global support, breadth of our integrated product portfolio and the financial strength to invest and maintain customer confidence.

Let me provide some color around our technology differentiation, first in verification.

In digital, our solution is the backbone to the vast majority of advanced designs including 60% of 45-nanometer and 90% of 32-nanometer chips.

We're especially strong in very demanding applications such as processors, graphics and networking SOCs.

In our mixed signal, our advanced solution is deployed at 19 of the world's top 20 semiconductor companies.

In digital implementation in Q3, we saw a notable increase in penetration in a number of accounts ,as well as a large important competitive win that enabled significant further expansion over time.

We also continue to substantially streamline the way in which design is done.

Most recently with an innovative and extremely effective integration of place and route and physical verification.

Customers are quickly moving to adoption, and endorsements already include five of the top ten semiconductor companies.

In addition, we expanded our addressable market by about $250 million in traditional EDA by delivering an internally developed solution for custom design, an area that has been dominated by a single vendor for years.

Our new product is demonstrating increasingly strong technical results, and customer interest is converting to business.

Foveon, for example, which makes image sensors for the consumer market, switched to Synopsys from its existing vendor and importantly, was able to do so in less than two months.

This win is a good indication that the barriers to switching and custom design are slowly but steadily coming down.

Let me move to the IP and systems space where we have substantially augmented years of internal development with several exciting acquisitions.

The resulting business is now 13% of our revenue prior to closing the Virage acquisition and growing well.

In IP, customer dynamics are dovetailing nicely with our product portfolio.

The reputation in trust and quality we built over the years is proving essential in repeat and growing customer engagements.

In Q3, our IP cores business was very strong with several large companies accelerating their migration to more outsourced IP.

A few statistics.

On today's chips, more than half of the content is reused from previous customer blocks or commercial IP.

On many chips, we're seeing the cost of third party IP rise to the level of spending on EDA tools.

Today, less than one third of IP is outsourced.

The rest is developed internally, but customers are actively looking for preferred partners to outsource more of these activities.

This provides substantial upside potential for Synopsys.

We're the number one supplier of interface IP, which is a rich portfolio including all the popular standards such as USB, DDR, PCI Express and HDMI.

The resulting business is strong across the board.

Synopsys also leads in the analog IP segment where we have multiple engagements with top tier communications and multi-media customers.

The acquisition of Virage, which we expect to close next month, will further expand our portfolio and enable us to add several hundred million dollars of addressable market.

If you view IP as the building blocks to modern chip design, our system strategy, facilitates bringing it all together, most notably with a strong emphasis on the intersection of hardware and software.

With the awesome computational power embedded in most chips, the amount of software content is exploding and with it, the challenges of design and verification.

We've systematically developed and gathered cornerstone pieces towards delivering a complete hardware/software design solution.

While connecting downstream in an efficient and predictable fashion to our traditional EDA flows, a key value to our customers is to use our system solution to accelerate earlier software development and thus, time to market.

Central to this ability is the notion of prototyping.

A prototype is a software or FPG based model of a chip that can be used to develop embedded and application software many months before the actual chip or chips are available.

For our customers, this can get products to market month earlier than previously possible.

A huge competitive advantage in all fast-moving markets.

Today, most chips are prototyped in some form, but this is mostly done in house.

Similar to the shift towards outsourcing IP reuse, we see considerable long-term potential in providing commercial solutions in this area.

In terms of both R&D investments and acquisitions, we have been extremely active, expanding our systems stand by about 250 million in what is likely a high growth adjacency.

Our IP and systems position clearly broaden us beyond traditional EDA, and we have a multi-year lead over our competitors towards solving some of our customer's most pressing challenges.

With the Virage acquisition, we expect the space to grow to about 20% of our revenue, and we're targeting double-digit growth in this area going forward.

In summary, during the past several years, we have invested to broaden our portfolio and address our customer's toughest challenges, and our financial strength and execution has enabled us to significantly expand our TAM on several fronts.

Looking towards the future, we're focused on sustainability growing earnings per share with revenue strength in traditional EDA and high growth in our IP and systems business.

With that, I will 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 provide with you our Q4 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 the financial supplement which are posted on our website.

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

Now Synopsys delivered a strong quarter which was highlighted by strong business levels, and we met or exceeded virtually all of the quarterly financial targets we provided in May.

Additionally, we continued our stock repurchase program and generated considerable free cash flow.

Now let me provide some additional detail on our financials.

Total revenue was $336.9 million, at the high-end of our target range.

Our IP and systems business continues to perform well and achieved double-digit revenue growth for the trailing four quarters.

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

Turning to expenses, total GAAP, costs and expenses were $286.1 million which included $14.5 million of stock-based compensation, $10.6 million of amortization of intangible assets and $2.7 million of acquisition related costs.

Total non-GAAP costs and expenses were $259.4 million, an expected year-over-year increase due mainly to timing of quarterly expenses such as variable compensation as well as expenses associated with our acquisitions.

As a result, non-GAAP operating margin was 23% for the quarter and 24.3% for the first three quarters of the year.

For all of 2010, we're on track to achieving our non-GAAP operating margin target of approximately 24%.

Turning now to earnings, GAAP earnings were $0.26 per share.

Non-GAAP earnings were $0.39 per share, slightly above our target range and includes the slight dilution from our recent acquisitions.

Our non-GAAP tax rate was 24% for the quarter, lower than expected due to some nonrecurring prior year R&D tax credit true ups.

For modeling purposes, we think that a 27% non-GAAP tax rate remains a reasonable estimate for the full year.

Greater than 90% of Q3 revenue came from beginning of quarter backlog while up front revenue was 4% of total, well within our target range of less than 10%.

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

Now, turning to our cash and balance sheet items, our balance sheet remains strong with $1.2 billion in cash and short-term investments.

Of our total cash balance, about 50% is currently held within the United States.

We expect domestic cash to decline in Q4 reflecting the anticipated closing date of our pending acquisition of Virage Logic.

As a reminder, the total value of the traction is approximately $315 million, or $12 per share.

Net of cash acquired, the total value is approximately $289 million.

Now in the quarter, we generated $208 million in cash from operations, including an expected annual payment from a large customer in the quarter.

Driven primarily by very strong business levels and an improved customer collections environment, we are raising our operating cash flow target from $205 million to $225 million for the year to approximately $300 million.

Capital expenditures were $13.8 million, resulting in free cash flow of $194 million.

For all of 2010, we expect capital spending to be in the range of $40 million to $45 million.

During the quarter, we purchased 3.5 million shares of Synopsys stock for $75 million.

During the first three quarters of the fiscal year, we spent $125 million repurchasing 5.8 million shares and have $375 million remaining on our current authorization.

I would like to reiterate that our current approach is to use stock repurchases to keep our share count roughly flat with first quarter 2010 levels.

We also completed two small acquisitions during the quarter funded from our US cash balance and over the past three quarters, we spent $138 million on M&A and closed six acquisitions in addition to the pending acquisition of Virage.

We've continued to deliver on our commitment to more aggressively put our balance sheet to work in 2010.

Through diligent expense management, we maintained our beginning of the year FY 2010 non-GAAP operating margin and EPS targets, despite the slight dilutive impact of these closed acquisitions.

Continuing on with the balance sheet items, Q3 net accounts receivable totaled $148.6 million, and we maintained industry leading DSOs of 40 days, reflecting the high quality of our current AR portfolio.

Deferred revenue at the end of the quarter was $627.9 million, and we ended Q3 with approximately 6,050 employees.

Before moving on to guidance, let me provide some additional commentary around our pending acquisition of Virage Logic.

As you know, the 30 day waiting period, under the HSR Act, expired on July 19, satisfying one of the conditions for completion of the transaction.

The transaction remains subject to other customary closing conditions along with approval by Virage shareholders who are scheduled to vote on September 2.

We expect the deal to close shortly there after.

As a result, we currently expect the acquisition to be roughly neutral to 2010 non-GAAP earnings per share and accretive in 2011.

Until the transaction is closed, we have limited ability to comment on our specific plans going forward.

However, let me remind you that the deferred revenues will be subject to a hair cut under purchase accounting and this is typical of software company acquisitions and it will impact reported revenues for the first twelve months.

We will be providing 2011 guidance when we report Q4 results.

Now, let me address our fourth quarter and fiscal 2010 guidance, which excludes the pending Virage acquisition.

Our GAAP forecast also excludes any future acquisition related expenses that may be incurred in Q4.

Now, for the fourth quarter of FY 2010 our targets are revenue between $349 million and $357 million, total GAAP, costs and expenses between $291 million and $310 million which includes approximately 14 million of stock-based compensation expense.

Total non-GAAP costs and expenses between $267 million and $277 million and expect a sequential increase due to traditionally higher Q4 expenses.

Other income and expense between zero and $3 million, a non-GAAP tax rate of approximately 27%, outstanding shares between $149 million and $153 million, GAAP earnings of $0.21 to $0.27 per share and non-GAAP earnings of $0.37 to $0.39 per share.

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

Now, our current fiscal 2010 outlook.

We are raising our revenue range with our new target between $1.354 billion and $1.362 billion, primarily reflecting higher than expected business levels.

Other income and expense between $4 million and $7 million, a non-GAAP tax rate of approximately 27%, outstanding shares between 149 million and 153 million, GAAP earnings between $1.61 and $1.67 per share, which includes the impact of approximately $58 million in stock-based compensation expense, non-GAAP earnings of $1.58 to $1.60 per share, and as I mentioned earlier, we're targeting cash flow from operations of approximately $300 million.

To conclude, we're pleased with our strong Q3 financial performance.

Our business continues to benefit from technology leadership, customer momentum and our expansion efforts into new products and growth adjacencies.

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

Thank you.

(Operator Instructions) And our first question will come from Todd Diffely with D.A.

Davidson.

Please go ahead.

Yes, good afternoon.

A couple quick questions here.

The first one, you mentioned that you have traditionally higher Q4 expenses.

I was wondering if you could provide a little more detail on that, and I guess I am surprised with that nice revenue jump, you don't see a little bit on the earnings line.

Okay.

Well, first up, when we look at the earnings impact with revenues that continuing to grow, what we're seeing is also an impact in the acquisitions that we have acquired during the year.

So, as I mentioned, those are slightly dilutive, and we're working through to optimize on the tax rate and also the share count to try to hold that flat.

In terms of the growth in spending, it really relates to -- pretty typical for us related to both the volume of business related to variable compensation true ups at the end of the year based on the Company's achievement to its original targets, and we have seen that in the last few -- fourth quarters.

Okay, and so you have said earlier that the fourth quarter does not include Virage, but does include several other acquisitions from earlier in the year?

It does, that's correct.

Alright .

And what are you seeing right now as far as the pricing environment in the core EDA

Well, fundamentally I don't think much has changed.

Customers will continue to be very cost sensitive and therefore, induce all of us to be very competitive on that basis.

At the same time, it is also clear that a number of customers have been quite frugal for a couple of years and are looking at the new tools that they need and the investments they can make as their own outlook has improved.

So, I don't think that the pricing environment is changing much one way or another.

It is always a challenging battle, but we're doing quite well in that.

Okay.

So you're seeing a little expansion in the R&D budgets then for EDA?

Yes, I think that's the interesting thing about the R&D budget is that on one hand, on the traditional things, it is very much sort of business as usual.

But anything that touches their future differentiation which is very much systems, IP and so on, those tend to be different budgets in the first place.

And so it is always easier to grow in something that didn't exist before because there is also no COO who sort of keeps the bar down, right?

Yes, makes sense.

You talked about keeping the share count flat with share repurchases.

There is no plan to get a little more aggressive on repurchasing and maybe drive the share count down a little?

Well, we look each quarter at the average balance as you can see from where we have been using our cash this year, and we did make a commitment to be far more aggressive in use of the cash balance and our capital structure.

So, buybacks are an important part of it.

We spent about $125 million so far in working to keep our share count roughly flat.

Our M&A spending being $138 million, and so that's $263 million on the outflows for the first nine months.

And we add Virage to that, another $289 million roughly, that's $552 million, all of US based cash.

So, that's where, again, we can only do the buyback through US cash, the majority of the M&A is US cash, so we're putting it there.

So again, we continue to see good long-term opportunities for us from an M&A perspective and that tends to be the priority, as well as balancing the use of that capital by trying to keep the share count flat so you can optimized on EPS from both ways.

Okay.

And then finally, it sounds like you're making a few waves in the analog custom space.

Do you think we'll see any meaningful share shift there?

Is it going to be a couple years to really develop it?

Well, I think it is all a question of meaningful.

When you start with zero, everything is meaningful, of course.

But it is also clear that we are going against a very strong incumbent with a long history, but we also are bringing very fresh technology and a new approach to things that is very welcome by many customers.

So, all in all, we are encouraged by what we see.

We're patient, and we know that there is a lot of value in being able to provide a very complete solution to many customers.

And by the way, does also bring about very good dialogs on the digital side and on the IP side.

So, all of these things actually play together for us quite nicely.

Okay.

Thanks for your time.

You're most welcome.

Thank you.

The next question in queue, that will come from the line of Raj Seth with Cowen and Company.

Please go ahead.

Hi, thanks for taking the question.

Aart, you talked a lot about growth, growth from the core EDA, M&A, to bolster the revenue line.

I think you mentioned that you saw IP at about 20% of your mix, growing double-digits.

Can you just expand a little bit on that, and I am not really asking for 2011 guidance but generally, how do you think about core EDA growth to start on the other major segments?

If you could break it down beyond just the IP growing at double-digits, that would be helpful.

Thanks.

Sure.

And you know me well enough that I am always pretty cautious with that word.

One of the reasons that I think we feel a little bit more positive than in the last four to eight quarters where we saw the landscape be very tight is that we saw our run rates be slightly up, and there were a number of very interesting, literally core EDA transactions that came out better than what we had not only forecast, but had incentivized our sales team for.

So, good for them, they were able to grow our business there, and those upsides we hope will continue going forward.

And the reason we think that is because we see a number of companies actually do substantially more complex design and adopting our tools quite rapidly, and so it is one big piece, of course, of the puzzle.

The other one, the IP and systems business, the two are not identical.

IP is well established at Synopsys.

We have a long history of knowing how to do it well and of step by step by step broadening the portfolio and in that context, the Virage acquisition gives us essentially more space and more TAM to cover.

The systems area is a new one where we essentially have established very quickly very broad and very strong technical position, and now our opportunity is to engage with customers earlier in their cycle as they make decisions for a long time to come.

So, all of these are outlooks that are quite positive.

So, just so I am clear, in core EDA, do you think of that, if IP is double-digit, as a 5% grower, a 10% grower?

And am I correct in understanding that you previously, maybe a couple quarters ago, were seeing flat to slightly up run rates, and the annualized run rate of the business that relates to renewals has increased in the last quarter or so, so it is up?

If we look back at really, once you look at almost the last two years because there have been so many moving parts, it started with not so much run rates going down as customers literally disappearing, which obviously has impact on the run rate.

And then there was sort of a phase where people were just extremely tied or tried to reduce the run rates just to save on expenses, and that unleashed, clearly, a number of tug of wars between EDA companies in terms of the share.

And so we see very much that traditional EDA is quite stable and it is a gain share type push for us, but in that, our technology is quite strong.

These other areas literally have their own growth dynamics and their own opportunity spaces in terms of budgets, so we'll give more specific numbers coming out.

We're using the word growth for both categories now, and that's clearly an improvement from what we saw literally over the last twelve months.

Great.

One last one if I might.

Brian, can you just comment on the increased cash flow guidance?

What was the principle delta in your view there?

Was it just better collections, or were you not -- were you conservative with regard to the timing of the annualized payment that you got, the annual payment, not thinking that would happen?

What's the delta?

Because that was a pretty big increase.

Yes, absolutely.

On your last point, the timing of that last large increase was exactly as per plan, so no change from there.

The increase from that $205 million to $225 million up to $300 million is associated with improvements in two areas, the collection environment overall, as well as our achievements through Q2 and Q3, specifically on the accounts.

It is a very dramatic increase compared to the 2009 collections environment, credit environments and challenges that were under way.

And it was nice, really, to see that come through, that Q1 came in a little better, Q2 was positive, Q3 was very significant.

And looking at our current cash position, that was very, very helpful to be able to take it up to the $300 million mark.

The other area was significant improvements in terms of tax cash paid in 2010, and those were savings, both associated with the original IRS agreements that came through, as well as some foreign savings on taxes that would be owed that are being deferred further through some good tax planning and other things that are there.

But half the highlight is mostly around the collections front and the improved environment.

Thanks for that.

That's helpful.

Thank you.

Thank you.

Thank you.

(Operator Instructions) Our next question in queue will come from Rich Valera with Needham & Company.

Please go ahead.

Thanks.

Good evening.

With respect to the run rate, Aart, I just wanted to follow up on Raj's question.

It does sound like incrementally relative to a quarter ago, you were a little more optimistic about, or suggesting that run rates were improved relative to the sort of flattish run rates from a quarter ago and probably the last several quarters.

Is that a fair characterization?

That's a completely fair characterization.

And what do you attribute the -- it sounds like there were several large deals that came in a little better than expected, in general, some run rates were better.

How much of that do you attribute to the environment versus maybe some acquisitions you've made where you have bolstered out -- you bolstered your tool suite and your TAM.

Can you give us any color on what you think is driving the upside in the bookings this quarter?

Sure.

Just to be clear, they're not due to acquisitions, meaning what I am referring to here is really in our core established business.

And there, I think it is a combination of, on one hand, the overall landscape, all the way down from economic field, but most importantly, really how the semiconductor industry feels to our own execution.

And so I would say it is probably 50/50 executing particularly well from a competitive point of view and technical point of view, and another half of that is due to the semiconductor industry being back into wanting or needing to spend some money to move forward.

So, that's encouraging, because whenever you are in a major downturn, what people always do is immediately cap all the things they're doing already and only spend money for things that are a very clear differentiator going forward.

Now, I do think that what we provide can differentiate them substantially, but it is also against established budgets.

And so as these loosen up a little bit, that is a good sign and then on top of that, the other things have their own good growth.

Great.

And just wondering how -- you're I'm sure you're pretty close to your customers on a regular basis and what the mindset is of your customers.

Even though as you mentioned, fabs are sort of maxed out on capacity but at the same time, the stock market is suggesting we could be in for a slow down, there is a lot of skittishness in general in the tech area about potential slowdown.

What are your customers telling you and how are they thinking?

And do you think that they might pull back in the reigns, even as they have a lot of capacity, just because they're concerned about another slowdown here?

Well, I think that the super high gross that semiconductors has seen has been partially the result of a super high fall the year before.

And so if you look at semiconductors, you see the perfect V that was sharper than any V in the history of semiconductors.

Now that we're above the previous highest level of semiconductor revenue, I think it will gradually tend back to be closer to its normal traditional long-term growth rate.

But having said that, there is no question that there is great growth rate potential because of the other thing I mentioned, which is clearly the products are literally all becoming computationally so smart that there are many new applications opening up.

And that seems particularly interesting because from an investment point of view, customers are looking at how can they differentiate in the new emerging perspectives?

And so as much as on one hand, they want better routers and simulators and all of that, and we'll be glad to provide those.

On the other hand, they're very interested in the few months or weeks of head start they can get on the software of their customers on the ability to get to market, because that's where the big economic difference lies for them.

And so we can clearly see that the level of interest for those type of technologies and discussions is much higher than before.

And I think IP reuse reflects that is well because people want to go quickly to complex systems without necessarily bothering or taking the time to develop all the pieces themselves.

Okay, that's helpful.

And one final one on system level which is an area that you have clearly made a priority and you have made a number of acquisitions in the system level design area including CoWare, VaST, Verdio before that.

Can you give us a sense of how those are all going to fit together and what we should look for in the future as sort of the outcome of all that?

If there is some kind of larger plan here to get them all integrated and just any kind of color on how we take all of these pieces and turn them into kind of integrated system design platform and what we should look for there?

It is an interesting question, because there are really two aspects, and we acquired these companies for both.

The first is really at the core of your question, which is a technology perspective that says, here are all of these technologies.

Some are similar, some have some different routes.

But ultimately, they all configure around the same notion, which is this notion of can you build a model or a prototype of your system?

And when I talk system, I primarily look at one or more chips and use that prototype to accelerate the verification development and interaction with the software, because it is absolutely one of the key bottlenecks.

And so that immediately brings up the second angle, which is while in principle, that is the same quest for all the participants.

In specific, each participant, each segment of the market has a little bit different needs.

And so the automotive people like to do the modeling this way, the communication people have a different way of looking at it.

And one of the additional reasons why we were very aggressive in connecting up with many of these companies was it gave us immediately some install base with customers giving us real feedback at the very moments where this market was becoming relevant.

And so the learning curve itself influences the answer to this question in many ways, but we have already made a number of decisions on how we streamline some of the products, how we take some of the capabilities and one, put them in the other.

But we are really in very, very intense interaction with many customers to constantly judge what has most value and what has most impact, and that's very encouraging because I think the timing is just perfect.

Great.

And I'm sorry, one final one if I could.

What are your thoughts currently, Aart, on behavioral synthesis and the role that would play in the system level design flaw?

What you have, what you think you might need or want there?

Well, as you probably know, we acquired a small company, mostly for its technology, called [Semphora] that has what generally falls under the high level synthesis or behavioral synthesis category.

We also learned a long time ago that one easily confuses starting with a high level with automating entirely a process, and that confusion results in the disappointment that the quality of results of the synthesized chips are not good enough.

However, what we have seen is that for a number of situations, the high level synthesis is perfectly okay if it is in context of much larger chips that have a lot of IP, or if the high level synthesis is used in conjunction with the desire to go rapidly to verification.

And so it is yet another way to introduce the word prototyping, because you essentially take a C level description and you literally quickly synthesize a prototype that you can simulate.

And so what if it is not as good as what you could do via the traditional path if you can get it the next day?

And so I would say it is another one of those baskets of technology that is we're very well equipped to leverage and at the same time, can see another decade of further development.

Great.

Thanks very much.

You're welcome.

Thank you.

(Operator Instructions) Our next question will come from [KC] Raj Kumar with RBC Capital Markets.

Please go ahead.

Hi, guys.

Thanks for taking my question.

You guys said earlier in the call that the semi execs is sounding more positive than before.

How would you translate that sentiments into a idea as to how much to expect core EDA budgets to ballpark increase next year, or is it going to be -- continue to be flat next year?

Well, we said two things.

One is that we would give precise numbers at the end of next quarter, but we also said that we did expect that, certainly for Synopsys, I can't speak for others, traditional core EDA would most likely see some growth.

And so from that perspective, that is a good sign, because in the last couple of years, there were just a lot of question marks.

One couldn't really tell, and therefore we were cautious.

Now if you take the fact that our core business can see some upside and is doing well, then on top of that, the fact that we have -- or by the time we're done closing Virage, we'll have about 20% plus in the systems IP side.

Now, suddenly one is looking at a business that has been transformed quite a bit during the recession, and that was one of the key objectives that we said as we saw how big this discontinuity in the market was.

And so this ties back to a number of other questions on the utilization of cash.

We have been quite active on the M&A front with a very key purpose, which is how do we broaden our TAM, and how do we make sure that by the time we come out of the depth of the recession we're back on a path of growth, while maintaining a strong degree of profitability so that this all translates into EPS growth?

And that is precisely the way we're doing our planning for 2011.

The planning is not quite completed yet, but we know enough to foreshadow that we're heading towards EPS growth.

Right.

On the topic of TAM expansion, can you please summarize for our benefit some of the various numbers you went through during the monologue as to how has the various pieces increased during the year, and how do you expect these pieces to continue to grow into the long-term?

Are you asking a question about the different segments?

Yes.

For example, you said that the custom design increases the market size, opens up the $250 million market for you.

Could you sort of --

I see.

Now I understand.

Sorry, I was heading in the wrong direction here.

So you're looking really at, how were we able to grow the total available markets potential for us, and I think the exact numbers were in the script.

But on the custom side, we think that it broadens us at about $250 million that we just didn't have any access to.

On the IP side, it is several hundred million and by the way, I think that is a market that in the long-term has a lot of potential TAM as people are outsourcing things.

On the systems side, we estimated that broadening about $250 million, but in all fairness, that is such a developing and new market that these numbers are very much a function of what you're going to put into that bucket.

But nonetheless, the reason they are overall relevant is because we are very proactively looking at multiple hundreds of millions of TAM broadening,because that's the opportunity that we're seeking for growth, and I think we're well positioned in some very interesting areas.

Okay.

And lastly, (inaudible) could you talk a little bit about the share in the 28-nanometer market?

Well, the 28-nanometer market, also sometimes referred to as 32 and 28, because they are multiple camps on these geometries, is a market that is now developing very, very rapidly, meaning that a large number of people are now doing design in 40, 45.

As a matter of fact, we have stopped counting.

We passed the 500 mark, and we're seeing rapid growth in the 28, 32.

I believe that we're tracking 68 active design up from 49 just last quarter.

Actually, we already are tracking a number at even smaller geometry, that where we're not disclosing any specifics due to the privacy of the participants.

Having said that, I have always felt that 32 and 28 would be somewhat of a watershed node because there is some very large players that have firmly set their mind on getting as much share as possible, and so the technology is being driven very, very aggressively.

And the good news is in many ways, it is feasible technology with the existing manufacturing tools, so in that sense, there is not inordinately more investment needed to go there.

And many of the people doing advanced chips, especially in the communications area, are fully vested already in that.

Now, in terms of our participation in that, I think that we are by far the leader, both on the implementation side and on the verification side.

On the verification side, we actually track it very carefully, and I think I mentioned some of the numbers there.

On the implementation side, we see that a vast majority of all the most advanced designs use our implementation flow as being completely competent today on those nodes and all of our R&D development is already by far the next two nodes.

Great.

Thanks, guys.

Thank you.

Thank you.

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

Please go ahead.

Hi, guys, it's Saket here for Sterling.

Just a couple of question from our side.

So, it sounds like bookings came in better than even you expected, and I think I heard competitive displacement in the prepared remarks.

Were there any large unexpected deals of that nature in the quarter, and how much did that contribute to the upside to your bookings target for the quarter?

Well, I wouldn't say there were unexpected deals.

It is more that somewhere unexpectedly larger than hoped for.

Now, when you say even we were surprised, we're always hoping of course for that, and so it is in that sense maybe more of a positive confirmation of both the market being a little bit better, but also our technology being strong.

And the very fact that a number of these transactions where -- repeat transactions tells me that the people that were using these tools on some very advanced designs were actually duly impressed with what they can do and decided to continue to invest with us.

So, we also saw some competitive displacements, and so a number of people are making pretty big decisions in terms of who they want to side with in the long-term.

And that doesn't mean they will select a single vendor but increasingly we feel very much like the core backbone to much of the advanced design.

Okay, and then going back to a previous question, I think Brian, you noted that taxes were part of the reason for the increased cash flow guidance.

How much of the $75 million to $80 million increase, roughly, in cash flow is coming from that tax issue?

Thanks.

Yes, on the tax side, just for 2010, it is in the range of about $30 million.

Great.

Thanks.

Thank you.

And at this time, there are no additional questions in queue.

Please continue.

Well, thank you very much for your participation this afternoon.

We're closing off on a good quarter, and we're looking forward to some increased strength and as usual, we will be available later on for your questions.

Have a good rest of the day.

Thank you.

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

We do thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.