新思科技 (SNPS) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Synopsys earnings conference call for the fourth quarter and 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 conference over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you, Karen.

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 July 31, 2010, and in our earnings release for the fourth 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 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 website at www.synopsys.com.

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

Good afternoon.

I am happy to report that we had a very strong end to the year and enter fiscal '11 with an excellent outlook.

In Q4 and in fiscal '10 we delivered better than expected revenue growth, continued strong operating margin, very strong cash flow, and significant technical and customer momentum.

Just as importantly, in 2010 we transformed Synopsys' opportunity space.

We extended our technical lead in the core business while simultaneously expanding our total addressable markets in several key adjacencies.

Given this strong backdrop and an improved economic outlook, we currently foresee good growth for both the top and bottom line in 2011 and beyond.

Summarizing our financial results for the quarter and year, we met or exceeded virtually every goal we set at the beginning of the year, even with the initially dilutive impact of a number of acquisitions.

With non-GAAP earnings per share of $0.39 in Q4, we delivered $1.60 for the year which is at the high end of the target range we communicated at the beginning of 2010.

With Q4 revenue of $375 million we grew our business 1.5% to $1.38 billion for the year, well above the 2% decline we expected entering the year.

Our business in the second half was excellent.

Our book-to-bill for the year was slightly above 1, and we have more than 80% of next year's revenue in hand.

With continued focus on expense control and strong cash collection, we're entering the next fiscal year with $939 million in cash.

Our strong outlook for 2011 is further supported by a customer landscape that, while changing, has improved and stabilized.

For 2011 industry analysts are predicting semiconductor revenue growth to migrate towards its long-term trend line in the upper single digits.

As global demand for electronics continues to expand, we see large customers design mostly in the demanding 40-nanometer node and drive their advanced products towards the ambitious 32 and 28-nanometer technologies.

Meanwhile, leading IDMs and the foundries are investing substantially in preparing for 22 and 20-nanometer.

This continued quest will require both sophisticated EDA and new IP investments and we feel a market pool that is refreshing after the last few years of extreme caution.

Based on this outlook, for the next few years we're aiming at a business model with annual high single digit earnings per share expansion.

We plan to achieve our objective by, one, a renewed focus on organic revenue growth in the low to mid-single digits for our traditional EDA products.

Two, double-digit organic growth in our IP and systems adjacencies.

Three, continued exploration of M&A opportunities that broaden our total available markets.

Four, continued focus on corporate efficiency and allocation of resources towards the growing segments in our market.

And, fifth, maintenance of a roughly flat diluted share count around 151 million shares.

For 2011 we're aiming for non-GAAP EPS of $1.67 to $1.77 with solid revenue and cash flow.

Brian will provide more details on the past and upcoming year, but closing the chapter of a two and-a-half year economic downturn we succeeded in increasing our market share, navigating the recession with slight revenue growth and continued strong investments in R&D, bringing to market a set of brand new products, and expanding our TAM through adjacent M&A.

All in all this is an excellent outcome resulting in forward momentum and a good outlook.

Let me now highlight some of the product areas in which we made visible progress during the quarter starting with traditional EDA.

While our financial objectives in traditional EDA are to increase our market segment share while introducing new products that also grow the overall market, we follow three technology principles.

First, maintain leadership and accelerate individual product evolution to tackle ever-increasing complexity.

Second, deliver the most productive and predictable design flow through systematic tool integration.

And, third, broaden our offering with new products ranging from yield to custom design to verification, thus opening doors to upsell around existing contracts and penetrate competitive opportunities.

Let me highlight three products that have clearly built momentum in 2010.

The first is IC Validator and Physical Verification, integrated into IC Compiler which, incidentally, is doing extremely well in both technology and market penetration.

IC Validator flags layout errors that can be automatically repaired by IC Compiler.

This is a major productivity improvement as it dramatically reduces the painstaking manual fix of errors just before chip tapeout.

Indeed, the initial adoption of IC Validator has been extremely fast.

In fewer than 12 months IC Validator has crossed the 100 tapeout mark.

Moving to the custom area, Custom Designer is gaining traction both as a standalone product and as a key contributor towards customers adopting our entire portfolio of solutions.

Its effective interaction with IC Compiler and easy to adopt features are driving progress.

In Q4 a major design house selected Synopsys for custom design which was a decisive factor towards winning the entire flow.

In addition, hundreds of our own Synopsys engineers are developing extremely advanced custom designs solely with Custom Designer, and we have already migrated the Virage design teams to our solution as well.

Moving to the connection with manufacturing, demand for our new yield management product, Yield Explorer, is increasing, as well.

We already saw the first renewal by a top 20 IC company in Q4.

One customer reported that in a matter of days Yield Explorer helped them improve yields by 1.5X on a 45-nanometer communications chip.

Accelerating yield ramp in early production has massive impact on the profitability of chips and is often measured in millions of dollars.

Given these significant benefits we expect this product to continue to ramp in 2011.

While we expect customer budgets for traditional EDA tools to remain somewhat constrained, we are seeing some signs of growth as customers are intensifying their own race for differentiation.

This brings me to IP and systems in which we have significantly broadened our footprint through both internal investments and a number of crucial acquisitions.

This area will represent about 20% of our revenue in 2011, and has excellent potential as more and more customers are actively making build versus buy decisions.

Only a fraction of chip IP blocks is outsourced today and analysts forecast double digit growth in this area.

The completeness and quality of our IP portfolio is a key differentiator for Synopsis.

In fact, 2010 was an excellent year for our IP products across the board.

We are the number one supplier of interface IP which includes both standards such as USB, DDR, PCI Express and HDMI.

We are the leader in analog IP and are engaged with many of the top communications and multi-media companies in the world.

With the acquisition of Virage we're also now the leader in memory IP .

The integration of Virage is progressing rapidly and the customer reaction has been overwhelmingly positive.

With the rapidly increasing adoption of more and more complex IP blocks comes an increase in challenges at the system level.

Over the last few years we have substantially increased our investments in acquisitions in this area.

Our goal is to facilitate system level optimization and validation and accelerate embedded software design to support faster time to market for both semiconductor and systems customers .

The sweet spot for Synopsys is at the intersection of hardware and software.

By creating a software or FPGA based model or prototype of the hardware, teams can start software design and system validation six to nine months earlier than using traditional methods.

That is, before the actual chips have been manufactured.

With most chips now being de facto complex, multi-core computers, the increase in software is a major challenge for our customers and thus an expansion for us.

We also see an opportunity to enter adjacencies such as optical which addresses rapidly growing markets associated with the displays and solid state lighting using light imaging diodes, or LEDs for short.

During the quarter we announced the acquisition of Optical Research Associates, a leading provider of optical design software and engineering services.

It is our initial foray into this space and we're encouraged by the long-term possibilities.

In summary, we finished 2010 with the results above expectations and are entering 2011 with strength and momentum.

We expect growth in both traditional EDA and the adjacencies in which we've been steadily investing over the past several years.

Our focus for the coming years is on delivering sustained earnings growth.

With that I will turn the call

Well, thank you, Aart, and good afternoon, everyone.

In my comments today, I will summarize our financial results for the quarter and the fiscal year, and provide you with our 2011 guidance for the first quarter and the full year.

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 is posted on our website.

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

Synopsys delivered excellent fourth quarter and full fiscal year results highlighted by very strong business levels and a slightly up run rate.

Additionally, our consistent execution throughout the year enabled us to meet or exceed almost all of our original 2010 targets, including revenue, EPS, and operating cash flow.

Let me now provide some additional detail on our financials.

Q4 total revenue was $375 million, an increase of 11% compared to a year ago and well above our target range.

This, of course, includes the revenue contribution from our 2010 acquisitions, but even excluding these transactions business was robust.

Annual revenue was $1.381 billion, a 1.5% increase over our revenues for all of 2009.

Revenue from our IP and systems products continues to increase and we achieved double-digit growth for the quarter and for the year.

Virage Logic revenue contribution was fairly modest, primarily reflecting the purchase accounting haircut that is applied to the deferred revenue, and one customer accounted for slightly more than 10% of Q4 and fiscal year revenue.

Turning to expenses, Q4 GAAP costs and expenses were $342 million, which included $15 million of amortization of intangible assets, $15 million of stock-based compensation, and $11 million of acquisition related costs.

For the year, GAAP costs and expenses were $1.197 billion which included $48 million of amortization of intangible assets, $60 million of stock-based compensation, and $21 million of acquisition related costs.

Total non-GAAP costs and expenses were $297 million in Q4, above our planned target range due to costs associated with acquisitions, as well as timing of expenses such as variable compensation, reflecting higher Q4 and annual business levels.

For all of fiscal 2010, expenses were $1.058 billion, up slightly due primarily to our acquisitions.

As expected, Q4 non-GAAP operating margin declined sequentially to 21% due primarily to traditionally higher Q4 expenses and acquisitions.

However, margins increased more than 300 basis points versus year ago levels.

For the year we delivered a non-GAAP operating margin of 23.4% as we offset increased expenses associated with acquisitions, with higher revenue, and by cutting costs elsewhere in the businesses.

Turning now to earnings, GAAP earnings per share were $0.17 for the quarter and $1.56 for the year, both up substantially from a year ago.

As you recall, FY '10 earnings included the Q1 one-time impact of $94.3 million or $0.62 per share GAAP only tax benefit associated with the IRS settlement for fiscal years 2002 through 2004.

Non-GAAP earnings per share were $0.39 for the quarter, up 18% from a year ago and at the high end of our target range.

Earnings were $1.60 for the year, also at the high end of our original target range as we were able to offset the slight dilution from our recent acquisitions with savings in other areas.

Our non-GAAP tax rate was 25% in Q4 and 26% for the full year, lower than expected due primarily to a true-up of our FY '09 R&D tax credit.

For modeling purposes we think that a 27% non-GAAP tax rate is a reasonable estimate for 2011 and it assumes no renewal of the R&D tax credit.

Excluding our Q4 acquisitions, greater than 90% of Q4 revenue came from beginning of quarter backlog while upfront revenue was approximately 5% of the total for Q4 and all of FY '10.

This is well within our target range of less than 10% up front.

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

Year end 2010 backlog increased to $2.4 billion from $2.2 billion, which of course includes the benefit of our 2010 acquisitions, along with a modest positive impact from currency movements of the Japanese yen.

However, even excluding these benefits, business was greater than expected and we delivered a book-to-bill slightly higher than 1.

Finally, we have greater than 80% of our target revenue in hand for the coming year and more than 90% for the coming quarter.

Now, turning to our cash and our balance sheet items, our balance sheet remains strong with $939 million in cash and short-term investments.

Of our total cash balance, 73% is offshore, and 27% is onshore.

As expected, our domestic cash declined in Q4 as a result of our acquisitions.

We generated $97 million in cash from operations operations in Q4 and $341 million for all of 2010.

2010 operating cash flow exceeded our original expectations by about $130 million due primarily to very strong business levels and an improved customer collections environment, along with some one time cash tax savings during the year.

At this time we're targeting operating cash flow of approximately $220 million to $240 million in FY '11.

Now, while revenue is quite predictable, operating cash flow can be lumpy from year to year which is why we believe it is important to focus on multi-year averages.

For the three year period ended in FY '10, annual operating cash flow was on an average about $300 million.

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 2011 due primarily to the timing of our annual incentive compensation payments.

Now continuing on with cash and our other balance sheet items, capital expenditures were $12 million for the quarter, and $39 million for the year, resulting in free cash flow of $302 million.

Due in large part to our 2010 acquisitions, we are projecting an increase in our IT capital budgets to increase our computing and network capabilities which will result in 2011 capital spending of approximately $50 million to $55 million.

During the quarter we purchased 2.5 million shares of Synopsys stock for $59 million.

For all of 2010 we spent $185 million repurchasing 8.2 million shares, buying back nearly twice as many shares as we granted during the year.

We have approximately [$350] million remaining on our current Board authorization.

We also closed two acquisitions during the quarter and eight for the entire fiscal year, delivering on our commitment to aggressively put our balance sheet to work in 2010.

Continuing on with our balance sheet items, Q4 net accounts receivable totaled $181 million, and DSO was 44 days, reflecting the high quality of our accounts receivable portfolio.

Deferred revenue at the end of the quarter was $635 million.

And we ended Q4 with approximately 6,700 employees.

While we have selectively grown our headcount, primarily through acquisitions, we continue to have more than a third of our total employees in lower cost geographies.

Before moving on to guidance, let me provide some additional commentary around our recent acquisitions.

Due to the integration efforts and to the deferred revenues subject to a haircut under purchase accounting, it typically takes about four quarters for our acquisitions to be accretive to non-GAAP earnings.

Specific to Virage let me also address the deferred revenue haircut and what the impact is, to help you with your modeling.

At closing Virage had $28 million of deferred revenue, of which $11 million will not be recognized due to purchase accounting.

The majority of the deferred revenue haircut occurs over the first four quarters following the close.

Now let's address our first quarter and fiscal 2011 guidance.

Our GAAP targets exclude any future acquisition related expenses that may be incurred in Q1 and beyond.

For the first quarter of FY '11 our targets are revenue between $360 million and $368 million, total GAAP costs and expenses between $305 million and $323 million, which includes approximately $13 million of stock-based compensation expense.

Total non-GAAP costs and expenses between $278 million and $288 million, down from $297 million in Q4.

Other income and expense between 0 and $2 million A non-GAAP tax rate of approximately 27%.

Outstanding shares between 149 million and 154 million.

GAAP earnings of $0.21 to $0.28 per share, and non-GAAP earnings of $0.38 to $0.41 per share.

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

Now our fiscal 2011 outlook.

Based on what we now know we expect revenue between $1.5 billion and $1.525 billion, a growth rate of approximately 8.5% to 10.5%.

Other income and expenses between $2 million and $6 million.

A non-GAAP tax rate of approximately 27%.

Outstanding shares between 149 million and 154 million.

GAAP earnings per share between $1.06 and $1.24 which includes the impact of approximately $50 million in stock-based compensation expense.

Non-GAAP earnings per share of $1.67 to $1.77.

And cash flow from operations, approximately $220 million to $240 million.

Finally, to help you with your modeling, let me provide some additional 2011 expense commentary.

For all of FY '11 we expect total non-GAAP costs and expenses to increase generally in line with our targeted revenue growth as we aim to offset additional acquisition related costs with targeted efficiency programs.

This expense discipline enables us to make robust, targeted investments in areas such as custom design, systems and IP, and our new optical arena, and position ourselves for sustainable bottom line growth.

Let me also comment on our 2011 non-GAAP quarterly expense profile.

Similar to last year, we expect Q1 expenses to be lower than the rest of the year, a sequential increase in Q2 and Q3, moderately below a traditionally higher Q4.

In summary, we're very pleased with our exceptional fourth quarter and fiscal 2010 results.

We're committed to delivering revenue and earnings growth in 2011 and we look forward to another year of solid business execution.

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

(Operator Instructions) Our first question comes from the line of Rich Valera with Needham & Company.

Thank you.

Good afternoon, gentlemen.

Question on your adjacent businesses, Aart.

That'll be about a $250 million business for you on a run rate basis entering this next year.

And I think you're on record as saying you would like to see that reach $1 billion at some point in the future.

I am presuming that includes a significant amount of acquisition revenue in there.

I'm just wondering how you would characterize your opportunity pipeline in the acquisition space for that adjacent area at this point.

Sure.

The definition of $1 billion in future, obviously the variable future is left open somewhat.

But it is given that we will continue, first, to invest in organic growth in that business because there are a number of areas where we have learned how to do it well, specifically the IP, and so we see great opportunities there.

From an M&A point of view, obviously we're not foreign to that, and over our lifetime have done probably more than 50, maybe even 60 or so acquisitions.

And so we are always on the lookout for great opportunities.

It is also clear, though, that we also are always on the lookout for opportunities that are financially healthy because a lot of things for sale are either not very good or way too expensive.

So that is one of the reasons why M&A tends to come in waves, it's not always very predictable, but we're certainly very open to it.

On a little side note, as you probably noticed, we opened up yet another small adjacency at this point in time, and I characterize that as small because that's what it is.

But it is a good example of an adjacency where we are technically very much aligned.

What I am talking about is optical here.

They were working in an area where we also were active already.

It is sophisticated algorithms, sophisticated software, so it fits very well with what we do and yet it is clearly adjacent.

There are many more of these that we want to keep looking at, and we're in a hurry while not being in a hurry to do a bad deal so we want to be careful.

That's helpful.

Just a question on both emulation and acceleration areas.

It seems like your two competitors that have emulation boxes are seeing very strong business levels there.

I am just wondering, one, what you were seeing in the acceleration based products that you got from Verisity that are more hardware based.

Have you seen them pick up materially as we have come through this recovery?

And are you comfortable with where you are in that space, not really having an emulation box per se at this point?

That whole emulation space is really, in a broader term, a prototyping space.

Emulation boxes are very sophisticated, very expensive, and tends to be a market where when one of the players is up the other is down and vice versa.

And it has only a good place.

At the same time, the space that we cover tends to be at a very different price point, and efficiency point, which is we do de facto emulation, or we call it prototyping, in both software and FPGA based boards.

And it has the benefit of being able to reach much higher speeds at much lower price point.

And the price point is very important because when people do prototyping of a hardware system, they ideally would like to distribute multiple copies of those prototypes to the software development group or customer, and that is the space that we're in.

And so in that sense I think we're complementary to what the other guys are doing and we all have our own differentiation.

Great.

Brian, one for you on the cash flow.

Could you remind us what the contribution was from the tax settlement?

And can you say if you think some collections maybe were pulled forward into 2010 from 2011 and hence what looks like a slightly down year projected in cash flow?

Absolutely, Rich.

Our performance, as you noted, did come in extremely strong.

We're up about $130 million from our original forecast for FY '10.

And part of that came from taxes.

That was about $45 million or so of the one-time tax benefits we saw in the year.

And the rest came from just the net collections of both business being much stronger than anticipated and overall it worked out very, very well for us.

Of course, the operating cash flow could be lumpy on a year-over-year basis, and as you know it ranges around our EBITDA less the tax payments that we make.

Over time it ranges there.

As you can see it was a very, very strong year in FY '10.

We expect FY '11 to be strong, as well.

It just gets a little bit lumpy based on the tax situations and the collections and the expenses associated with our additional acquisitions.

That's helpful.

Thank you.

Next we go to to Tom Diffely with DA Davidson.

Good afternoon.

First, going back to the non-GAAP margins, is there some way you can give us the relative impact on the normal seasonality versus the acquisitions?

I am not quite sure, if I --

The drop in margins in the fourth quarter quarter, the operating margins, I'm wondering how much is normal seasonality versus the Virage and other acquisitions.

Absolutely.

As we mentioned, the business was very, very strong in the fourth quarter.

And we do accrue additional compensation expense associated with that over achievement in the fourth quarter.

It is very seasonal, as it always is, but we noted as well that our operating margins were up by 300 basis points compared to a year ago at the same timeframe, so that's the impact there.

We also had a slight impact from the M&A.

We mentioned that was slightly dilutive in the quarter for the recent acquisitions, but we offset that by both the additional revenues and by managing expenses appropriately in the other areas.

Between the two, any sense on the impact from just the acquisition portion on a quantitative basis?

Just slightly dilutive.

We aim, of course, to try to make it a break even in the first time.

You just have to work through the details, work through the deferred revenue haircuts with the accounting teams and that's why we say it is just slightly dilutive now as we've gone through the first quarter.

And then you also talked about having 80% of the revenues in hand for next year.

What is it typically this time of year?

It is that -- more than 80%.

Based on our three year revenue model everything is very consistent.

Average of three years of average deal duration in years.

And we typically will come into each year with 80%, more than 80% of the year done, and of course more than 90% of the quarter booked in advance, all of that revenue coming from our backlog.

Okay.

It sounds like you were a little bit more positive on your outlook versus a year ago, and it sounded like I thought maybe you had slightly more in hand at this point than you normally do .

If you look at the backlog numbers, that stronger year-over-year, based on how well we have done in the year, the acquisitions, both the positive book-to-bills, and the slight impact from the yen on the top line.

So we have a much stronger start going into the year, but we are also setting higher targets for ourselves in '11 than what we had originally in FY '10, so that just reflects the growth in the business.

If I may comment to that.

As Brian said, we obviously raised the target for the year, and therefore the 80% is higher, too.

As much as Brian makes it sound like, yes, every year we do the 80%, this is actually a very crucial number.

This should not be taken for granted.

I think there are very few companies that can articulate a position where they come into a year with 80% of revenue in hand, and by the way into the next quarter with 90% of revenue in hand.

And so I think this illustrates that we have a very strong business model while at the same time now have an outlook for growth on top of that.

Thanks.

Looking at the potential acquisition targets, is there some way to characterize how much of that is US based versus overseas where you have a little more cash?

We tend to refrain from characterizing because a lot of people want to guess what's the next thing we're interested in, and that tends to not be particularly helpful in negotiations, so no, we don't want to do that.

But obviously you can see that about two-thirds or so of our cash is international.

There is all kinds of discussions right now in Washington about repatriation.

That is always possible, unclear if it is likely.

And so these are all variables that play into how we do things.

The very fact that we have a very strong cash position, that we can incur debt if so desirable, gives us a lot of degrees of freedom in looking at whatever are the right buys.

In looking at your growth projections for next year, any way to characterize which end markets are the strongest for you, be it consumer, telecommunications or PC?

I think there is no question that consumer is driving electronics in many ways, and the very simple reason is twofold.

A, all of the portable products are becoming smarter at a rapid pace, meaning there's enormous amounts of computation going into portable products.

Secondly, that these products are generating an immense amount of data and all you have to think of is video to put that in perspective.

And that drives the entire backbone of capture of the data, transportation, manipulation, storage, and display.

And so I think it is the generation of data that for the next decade will really keep driving the entire semiconductor market forward.

A significant portion of that is gradually now growing in the Far East as the end markets, and so I think it is interesting in that context that these consumer markets are now becoming significant in the rollout of new products.

Okay.

What about the relative demand on a product basis when you go from the 4X node to the 3X node?

Does the EDA tool set change dramatically?

We're on record to say that on one hand it doesn't change dramatically.

On the other hand it is dramatically more difficult every time.

Let me give some profile to that, which is that we're in a unique situation where pretty much everything we do is literally backward compatible for twenty years.

And the reason is simple which is so much goes into chips that was designed over many, many years.

Most chips are not designed from scratch.

At the same time, it is absolutely true that with the smaller geometries we see more and more physics bubbling up and that the amount of verification is growing more rapidly than one would predict just on the basis of Moore's law.

And so the necessity sophistication and amount of EDA is still growing at a very rapid pace, and so from that perspective there are a lot of opportunities.

There is one other angle which is the very fact that we see now the IP we use systematically being looked at as a build versus buy opportunity is very important for us.

And as you well know we have invested substantially in that.

We passed a $250 million of business in that general area.

And so this is now material and growing for us.

And as much as we are proud of the size of the business, I think we are even more proud of the fact that we provide very high quality of IP and that took many, many years to hone, and so in that sense I think it is another very stable long-term growing business for.

Finally, when you look at your outlook for 2011 does that include projected share gains or is that additional upside?

We commented about the fact that our strategy right now is to buy back shares inasmuch as necessary for maintaining about a flat share count.

Now, somebody is flagging me here that maybe your question was not share count.

No, market share.

I apologize.

It is hard to predict share gains when the entire market is potentially looking up.

Our sense is that competitively we're doing extremely well, largely because in the last two and-a-half years we have been able to continually invest very strongly in R&D, and moreover we have made a number of I would say fairly good breakthroughs technically speaking.

And so all of these things over time help in the share battles in our industry, but it is also good to see that our industry appears to be doing better on its own.

Thank you very much .

Next we go to Raj Seth with Cowen and Company.

Thank you.

Thank you for taking my question.

Aart, I am curious, a follow-up on the 2X node transition.

When in the core digital platforms are most decisions being made for 2X?

I wonder if you can talk a little bit about how you see the competitive environment.

You have one large competitor who's playing catch-up and suggests optimism around gaining some share at the 2X node.

You have another smaller competitor who suggests share gains maybe even in the short-term.

Can you talk a little bit about what's happening in that space?

Thanks.

In short form the answer is now, meaning that for all of the important advanced customers they're well into the design of the 28, although sometimes called 32-nanometer design field.

A number of them are already at 20 and 22.

And so that doesn't mean that the majority of the chips are being designed there.

I would say that the bulk of the sophisticated chips is now in the 40, 45 node, but we are seeing a number of tapeouts at these lower geometries now grow very rapidly.

I also am of the belief that the 32/28 node is another watershed into the battles among the semiconductor providers, meaning that they are really racing forward to try to not be left behind.

And I think the good news is that in general that generation is in the same family as the 40/45 and so is an extension, maybe a difficult extension, but is an extension of what people know how to do.

By the time you get to 22/20 it becomes a lot trickier, and below that, now much harder.

From a physical design point of view, we do the vast majority of these designs and we're already proficient at the smallest geometries, and those investments I think are really paying off well.

And when does the 22, is that still a couple of years out?

When do people start making decisions around this harder node 22?

And are you tracking like you used to tapeouts at some of the advanced nodes?

And I am curious what you think, maybe ex Intel because you obviously own Intel, what you think your share is of the, I don't know, 32/28 tapeouts that you have seen?

Thanks.

I think when you talk about the 20/22 node, for the majority of the not super super super advanced people, there the investments are ongoing now to put the technology in place.

So there, again, we have been involved with them for quite a while because it starts deep with TCAD almost at the molecular level.

And then there is a lot of work in the initial development characterization of the technology and so on.

So I would say 20/22 is where 28/32 was about two years ago, maybe two-and-a-half years ago.

I think that machine is still running forward pretty fast.

One last one, if I might.

There are a number of system companies that talk now more and more about doing IT design.

Apple obviously is one, and Oracle talks potentially about doing the same thing over time .

Are you seeing incremental business from this customer type?

Do you think that some of these customers return to a COT flow?

Is this incremental opportunity for EDA or is this just shifting stuff from a semiconductor supplier to what used to be maybe a customer of a semiconductor

Obviously we can't talk about individual companies here, but I can absolutely confirm that we're seeing an increase in the type of companies you are mentioning towards advanced design and high degree of control of the design flows, while they are still simultaneously teaming up quite strongly with some of their semiconductor partners, and with ourselves.

And I think these are interesting configurations because they illustrate something that, as you probably know, I have been preaching for a long time which is that systemic complexity is increasingly one of the big challenges.

And therefore being able to work together with the system people, the people that provide the silicon, the IP, and EDA, it is one team that makes that very successful.

And, yes, we're seeing some incremental, significant business actually, from some of these players.

Great.

Thank you.

Next we go to Sterling Auty with JPMorgan.

Hi, guys.

A couple questions.

First, Aart, you made the comment about the second half business being very strong.

Can you just give us a little bit more color there?

Did you see a significant skew in the strength of the bookings into the second half versus the first half?

In many ways what we saw, obviously, is a direct reflection of how the semiconductor industry felt about itself.

I don't have to remind you how surprisingly bad '09 was and then how confidence started to come back, really, I would say November, December last year, then build up very substantially into the summer all the way with shortages of manufacturing capacity which helped the pricing.

And in the process the semiconductor industry had essentially the sharpest V, meaning down and up in the history of that industry, and is now roughly 15%, 20% above its previous high point.

As it reached that, it is not only that people had again money to spend, it is that they looked at how to differentiate again.

And as much as some of that money will come back to traditional EDA, I think the expenditures are going to go mostly where they think they can either accelerate development or find new differentiation and to some of the new needs.

And so IP reuse, the hardware, software, some yield accelerations.

Those are the types of things where new spending I think will manifest itself.

And so we absolutely saw that coming.

And, as you know, we have a very well tempered business model, and in many ways the reason that results were even better than what we dared hope for was that we saw a number of incremental buys.

Okay.

Maybe a couple of questions for Brian.

I think you mentioned that the book to bill ex the acquisitions was still slightly above 1.

That leaves a pretty wide range of maybe $100 million or $200 million contribution into backlog.

Looking at the size of Virage and the other stuff you have done it wouldn't seem like it would be heavily.

Can you give us a little bit more detail to give us some sense of the contribution to backlog from acquisition?

Yes.

As I said, there was three categories that came in, both the acquisitions that came into the backlog, a very strong book-to-bill, very strong bookings that came through in FY '10, and also the favorable yen impact.

And I would say probably the largest contributor of those would have been from the acquisitions on their own.

When you look again, it was record levels of revenues, record fourth quarter revenues.

So while bookings were very strong, revenues were also strong, and so again contributed to the backlog, but I would say the majority of it was coming from the acquisitions, and we brought that into the backlog.

And that's after we go through the deferred revenue haircuts, as well.

So that's what's been able to be brought in.

Right.

So you're saying the majority above the book-to-bill to get you to the backlog where it comes in.

Ex, you're still book-to-bill above 1, so that shows the strength of the bookings.

Absolutely.

On the cash flow front, did you see an inordinate amount of customers in the year or in the last quarter or two that prepaid multiple years?

No.

No.

The element of why cash collections is tied to bookings is that we typically get either a quarter in advance or there is a few select customers where it would be one year in advance.

We work with each of those depending on their profiles of cash payments and collections.

But as you know, that cash flow coming in can be lumpy on a year-over-year basis and ties into the level of very strong operating cash flow we saw in FY '10.

You have a large customer that makes an annual payment the last several years.

Can you comment, would that pattern continue?

In other words are you expecting that one large payment again this year?

Typically, yes.

Okay.

And on the tax front you talk about the tax benefit.

Are you expecting a reversal where you would expect a large tax payment to possibly hit in fiscal '11?

Not necessarily a tax payment.

As you do in optimizing your tax cash payments is to defer as much as you can based on net operating losses and so on.

So what we saw in FY '10 is again an opportunity of deferring expenses, deferring the cash outflows.

We saw that come through the IRS settlement.

We saw that in dealing with various international locations we have.

And we see FY '11 coming back to a more normal tax paying environment for us.

And on the acquisition front I would imagine the cash payment that you might be alluding to would be severance or other.

Is there a large cash outflow that wouldn't flow through the income statement that you would expect to hit cash flow from acquisitions in fiscal '11?

Not very much, no.

We've been through, our last acquisition was about three weeks before the end of the quarter.

That wasn't the largest one.

The Virage closed about two months earlier.

So there may be some element of downsizing expenses and so on that may flow through but, again, not material to the cash flow for FY '11.

Okay.

So if I summarize, if I look at the differences, you expect tax cash payments to go back to normal, so maybe that was somewhere in the $40 million range, nothing major from acquisitions, there was no major prepayments from customers.

Your renewal run rates have been slightly above what they have been which is consistent with the industry.

It sounds like the environment is getting better.

I understand you have done a good job of under promising and over delivering on cash flow, but it seems like the elements that would move around cash flow, doesn't seem to point to the magnitude of the lumpiness that you factored in the cash flow guidance.

Just to be clear, cash flow follows ultimately the profitability of the Company, simply put.

So I think the thing to watch out with all of these numbers, and this is especially true with things like orders and cash flow, is that from one year to another things can easily move on one side of the boundary of a year end to another.

And so when we look at things, and I think Brian alluded to it in his preamble, the best way to look at these type of numbers is over a long period of time.

And when there are exceptional events, and the taxation event early in the year was exceptional, we absolutely flagged those to you.

But aside of that, this is a very well behaved curve.

Our capital expenditures go up and down a little bit from year to year, but overall this is actually a very steady number.

Sounds good.

I think that's a good explanation.

Thanks, guys.

(Operator Instructions) Next we go to KC Raj Kumar with RBC Capital Markets.

Hi, guys.

Thanks for taking the question.

Can you talk a little bit about the growth plan for the manufacturing segment of your business?

Sure.

As we look at the smaller geometries, there are a number of physical effects that really become substantially more difficult.

And if we go at the lowest level you find TCAD which is three-dimensional simulations at almost the atomic level.

You find lithography which is now also three-dimensional.

We're going to see more opportunities there because by the time you arrive at 20-nanometer and below, a number of people are going to go change the very shape of the trend to go much more vertical.

Right there you can already predict that there is going to be more simulation necessary, and complex simulation.

If you move up from that food chain, then you go into the geometries and you have to characterize the geometries in a fashion that make sure that by the time you manufacture you get actually good yield.

And to maybe illustrate that a little bit, if the designer is driving a car at high speed, the manufacturing guy is trying to provide a street that is becoming narrower and narrower.

And so the interaction between yields, the narrowness of that street and the speed of the car, the design, is actually becoming tricky.

And so one of the reasons we are really enthused about what we have been able to accomplish in linking design and verification is that the yield equation is increasingly impacted by design.

And so as much as many years ago there was talk about designing for manufacturing, et cetera, you're now starting to see actually some of the effect of that.

And in line with providing more and more of an integrated design flow that is predictable and gets good results, the whole manufacturing angle is actually now more and more playing into what we do in design.

As a follow-up on that, and following through on your line of reasoning, is it fair to expect the annual growth rate of the segment to accelerate beyond your pattern that has been in the 4% range?

In general, we do see that the entire Corporation is going to grow better than before.

And by the way, that includes, in our opinion, traditional and core EDA, as the demand for sophistication increases, and by the way the customers do have some more R&D money to spend and we hope they spend it on us.

The only challenge with that is that the number of people, of companies that are actually moving to these advanced nodes, has shrunk in the last few years.

But those people are much more sophisticated, and so the quality of the relationships we have there is very material, and being the key provider of what they can do for the future.

And I think just as much as we are dependent on them, they are quite dependent on us in terms of making sure that our technology delivers on their ability to move to the next node.

Would you say that the total pie of EDA spend is going to remain roughly constant next year compared to this year?

No, our sense is that it has the potential to grow a bit.

You can clearly see the overall R&D spending in semiconductors has some uptick.

EDA can be part of that.

I think the question is where is the return the highest for our customer spending?

Is it in the core EDA?

Is it in the things that touch manufacturing?

Is it in the IP?

Is it in the systems side?

I think the answer is going to be a little bit of all of that.

But it is well possible that the entire industry sees an uptick as the water level rises in semiconductor, so to speak.

There is five minutes remaining in the conference.

One last question.

The cash onshore, falling below the $200 million mark, is it fair to assume that your pace of acquiring companies might take a pause until onshore cash is built up a little bit more?

I tried to allude earlier to the fact that on one hand, yes, we're obviously careful to make sure that we don't have to repatriate cash at a price that we don't want to pay for it, or at a taxation level that we don't like.

At the same time, though, given the extremely strong overall position we have, there will be no difficulty in being able to get some debt money if that was desirable.

And there has been renewed talk in the political environment about what's going to happen to potential repatriation.

We certainly don't count on that and we don't plan with that in mind.

And so we just remain watchful for the right opportunities more than anything else, and that should really drive how we do things.

We have the freedom to execute on many things.

Thank you.

I will turn the conference back to you.

We appreciate the time you spent with us today.

We also appreciate the fact that through what was initially a very difficult year you were with us as the results have obviously become better and better.

And as we are now looking at a strong 2011 we hope to see you on the next call again.

Thank you very much.

Ladies and gentlemen, that does conclude the conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.