新思科技 (SNPS) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Synopsys Inc.'s earnings conference call for the first quarter of fiscal year 2011.

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).

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, Operator.

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 the call, important factors that may affect our future results are described in our annual report on Form 10-K for the fiscal year ended October 31, 2010, and in our earnings release for the first quarter of fiscal year 2011, 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 first quarter earnings release and our financial supplement.

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

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

Good afternoon.

I'm happy to report that we started off fiscal 2011 with a strong first quarter, putting us well on track towards meeting our objectives for the year.

This is all the more promising against the backdrop of a healthy semiconductor industry.

Because Synopsys benefits from a clear industry leadership position, we continue to drive state of the art technology in traditional EDA, and we have achieved meaningful scale in high-growth adjacencies, such as IP.

From a financial perspective we delivered revenue of $364.6 million, and non-GAAP earnings per share of $0.44.

The run rate of the underlying business grew, and the outlook for Q2 looks promising.

Brian will give you more details in a minute, but let me first make some comments on the current customer landscape.

Overall, our customers communicate a healthy outlook.

This confidence is visible in the increased capital expenditures by all the large foundries in IDM, as well as an exciting end market.

The wave of new products continues across the board, from consumers goods such as tablets and smartphones, to new offerings in the industrial, automotive, communications and networking domains.

Simply stated, we have entered the age of smart everything, and electronics will become still more pervasive, offering good growth opportunities for Synopsys.

The quest for leading edge silicon to drive advanced product is also visible in the urgency with which our leading customers are driving to new process nodes.

32/28 nanometer designs are ramping quickly and 22/20 nanometer and below, developments are in full swing.

The complexity and cost of these efforts translate into continued opportunity for Synopsys, as they require both advanced EDA and IP.

Against this backdrop, our stated growth objective for the next few years aims at achieving annual high single-digit earnings per share growth.

We plan to achieve our objective with five strategies.

One, drive organic revenue growth in the low to mid single-digits for our traditional EDA products.

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

Three, continue to explore M&A opportunities that broaden our total available market.

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

And five, maintain a roughly flat diluted share count of around 151 million shares.

In Q1 we executed well on our strategy and we are well on the way towards our EPS objective for the year.

Let me briefly share some highlights starting with the traditional EDA part of our business.

In Q1, we saw strong demand for our products.

Both our contract renewals and a number of incremental sales led to positive growth of our business run rate.

Specifically, adoption of our physical implementation solution around IC Compiler is growing, with yet another customer deciding to migrate to us after having experienced difficulty in achieving closure with competitive tools.

We also made excellent progress with a top graphics company moving to Synopsys for its next advanced chip design.

Overall, we continue to deliver very well from a technology point of view.

The summary of our physical design solution achieved a 50% run time improvement for IC Compiler, while adding a powerful new optimization technique for large (inaudible) designs.

We delivered significant advances in analog simulation, including multi-core features resulting in notable performance improvements.

The upcoming VCS simulator release is designed to deliver an amazing 2X speed-up in run time.

And in manufacturing, we shipped a new release of Yield Explorer, which achieved higher productivity by being tightly integrated with our physical design solution.

In custom design, we continued to see gradual adoption.

One European customer selected Synopsys for both simulation and design after a significant competitive evaluation, and another technology leader chose us for the development of IP for their 20-nanometer process node.

Finally, IC Validator, our indicated physical verification solution, continues its customer base expansion with qualification for TWMC 40- and 65-nanometer processes and excellent adoption by customers.

Now let me turn to our high-growth adjacencies, which continue to deliver strong business for us.

The IP and systems area will represent about 20% of our revenue in 2011, thus reaching scale that is meaningful in driving top-line growth.

IP had another excellent quarter as we continued to integrate the Virage acquisition from last year, and systematically deliver high-demand IP titles.

More and more customers are actively seeking to outsource what are, for them, non-differentiating but still very sophisticated IP blocks.

Our broad, proven portfolio ranging from libraries to memories to digital and analog interfaces, responds perfectly to this trend.

In Q1, we again saw strong demand for our cores, with USB3 and PCI Express leading the way.

Memory IP had a good quarter as well, with releases of the latest DVR digital control and analog PHY, and we received our first order for use in 20/22-nanometer designs.

In the related systems space, our primary focus is on the intersection of hardware and software design, with a powerful prototyping solution.

Prototyping is the most efficient way to accelerate embedded software development and system validation.

Engineers design with a system level model of the chip or chips long before the design is completed or manufactured.

In practice, this enables software delivery six to nine months earlier.

In Q1, our FPGA-based prototyping did particularly well, as we have evolved the product to better meet high demand.

Good progress also was made on the software-based prototyping side, notably opening up new opportunities in automotive and industrial.

Mazda, for example, adopted our virtual prototyping solution, enabling them to save significant time and cost in verifying complex systems such as electronic control units.

Moving on to our continued focus on gradually broadening our TAM.

The integration of our recent optical acquisition is progressing well, and the results achieved in Q1 are an excellent start to a good integration into Synopsys.

In conclusion, we executed quite well in Q1.

We released strong technology, saw good growth, and we see a positive outlook for Q2 and the full year.

Overall we are solidly on track towards our objective for fiscal 2011.

With that, let me pass it on to Brian, who will give you the detailed financial perspective.

Thank you, Aart, and good afternoon, everyone.

In my comments today, I'll summarize our financial results for the quarter, and provide you with our guidance for Q2 and the full year.

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

We have provided reconciliations in the press release and the financial supplement posted on our website.

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

Synopsys delivered very solid first quarter results, meeting or exceeding all of the quarterly financial targets that we provided in December.

Additionally, we achieved solid growth in both revenue and non-GAAP earnings, repurchased $65 million worth of Synopsys shares and exited the quarter with more than $860 million in cash.

Total revenue was $365 million, an increase of 10% compared to a year ago, and well within our target range.

We delivered revenue growth across all product groups, with particular strength from our IP and systems products.

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

Turning to expenses.

Total GAAP costs and expenses were $318 million, which included $17 million of amortization of intangible assets, $15 million of stock-based compensation and $2 million of acquisition related costs.

Total non-GAAP costs and expenses were $280 million, an expected year-over-year increase due mainly to our acquisitions, but still at the low end of our target range.

As a result, non-GAAP operating margin was 23% for the quarter.

Turning now to earnings.

GAAP earnings per share were $0.31, down $0.88 from a year ago.

Recall that Q1 of FY '10 earnings included the one-time impact of a $92 million, or $0.61 per share GAAP-only tax benefit, which was associated with the IRS settlement for fiscal years 2002 to 2004.

Non-GAAP earnings per share increased 7% to $0.44, exceeding our target range, driven primarily by a lower-than-expected tax rate, and to a lesser extent, higher-than-expected other income and expense.

Our non-GAAP tax rate was 21% for the quarter, well below our target due to certain one-time tax benefits, driven primarily by the reenactment of the federal R&D tax credit during the quarter for fiscal years 2010 and 2011.

The Q1 tax rate includes a one-time benefit of $5 million for fiscal year FY '10.

As a result, we now think that a non-GAAP tax rate for 2011 of between 25% and 26%, is a reasonable estimate, reflecting the benefit of the R&D tax credit for FY '10 and '11.

Greater than 90% of Q1 revenue came from beginning-of-quarter backlog, while up-front revenue was approximately 7% of total.

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 was approximately 2.5 years.

As Aart mentioned, we had a number of incremental sales of additional technology in the quarter.

These tend to be shorter in duration than the large contract renewals, and we continue to expect average duration over time to be approximately three years.

Now, turning to our cash and balance sheet items.

Our balance sheet remains strong, with $860 million -- $867 million in cash and short-term investments.

Of our total cash balance, 33% is onshore, and 67% is offshore.

As expected, there was an operating cash outflow of $40 million in the quarter.

This was due primarily to the timing of payments of annual incentive compensation to our employees related to FY '10 performance.

We are raising our operating cash flow target for the year to $230 million to $250 million.

Now, continuing on with our cash and balance sheet items, capital expenditures were $10 million for the quarter.

For the year, we expect capital spending of approximately $50 million to $55 million, which includes planned expenditures to increase our computing and network capabilities, due in large part to our fiscal 2010 acquisitions.

During the quarter, we purchased 2.4 million shares of Synopsys stock for $65 million, and we have approximately $250 million remaining on our current authorization.

Fully diluted share count was 153.6 million for the quarter, at the high end of our target range as a result of higher stock price and increased employee stock option exercises.

However, I'd like to reiterate that our current approach is to manage our stock repurchases to keep share count roughly flat at around 151 million shares over time.

We expect to increase our buybacks from what we had originally anticipated to help us meet this goal.

Continuing on with the balance sheet items, Q1 net accounts receivable totaled $169 million, and DSO was 42 days, reflecting the high quality of our AR portfolio.

Deferred revenue at the end of the quarter was $602 million, and we ended Q1 with approximately 6575 employees.

This was down from fourth quarter head count of 6700, due primarily to the completion of the projects by our transition employees from last year's acquisitions.

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

Our GAAP targets exclude any future acquisition-related expenses that may be incurred in Q2 and beyond.

So for the second quarter of FY '11, our targets are, revenue between $386 million and $394 million, total GAAP costs and expenses between $319 million and $338 million, which includes approximately $12 million of stock-based compensation expense, total non-GAAP costs and expenses between $292 million and $302 million, other income and expense between $0 and $2 million, a non-GAAP tax rate between 26% and 27%, outstanding shares between 150 million and 155 million, GAAP earnings of $0.26 to $0.31 per share, and non-GAAP earnings of $0.43 to $0.45 per share.

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

Now our fiscal 2011 outlook.

We reiterate that we expect revenue between $1.5 billion and $1.525 billion, a growth rate of approximately 8.5% to 10.5%, other income and expense, between $1 million and $5 million, a non-GAAP tax rate between 25% and 26%, outstanding shares, 149 million and 154 million, GAAP earnings per share between $1.03 and $1.20, which includes the impact of approximately $52 million in stock-based compensation expense, and at this early point in the year, we're maintaining non-GAAP earnings per share of $1.67 to $1.77.

R&D tax credit benefit I discussed earlier will be partially offset by expected higher taxes in other geographies, with the remainder of the benefit primarily used to offset higher share count.

However, our Q1 over-achievement gives us even more confidence in this range.

And as I mentioned earlier, we are targeting cash flow from operations of $230 million to $250 million.

Now, finally, to help you with your modeling, let me provide some additional 2011 commentary for expenses and revenue.

For the balance of the year, we expect a fairly linear expense profile through Q3 and Q4, while the revenue profile is coming in just slightly lower than what we expect in Q2.

For all of FY '11, we expect total non-GAAP costs and expenses to increase generally in line with our targeted revenue growth, give or take a bit.

In summary, we're very pleased with our very good first quarter results, highlighted by top- and bottom-line growth and continued solid operating margin.

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

Thank you.

(Operator Instructions).

One moment, please, for the first question.

And our first question will come from the line of Paul Thomas with Bank of America-Merrill Lynch.

Please go ahead.

Thank you.

Good afternoon.

Thanks for taking my questions.

Just in terms of the guidance for Q2 and for full year, I guess if you take the midpoints of the numbers you laid out, you get flat half-over-half.

Could you talk a little bit about what you expect in second half, and why we wouldn't see any of the momentum from the first half carry over?

And maybe also what in particular is going on in Q2, with respect to that, that seems like it might be reversing the second half?

Yes, let me cover that one.

It's, again, fairly early in the year, right.

We just completed our first quarter and we're very happy with better-than-expected results against all of our key metrics.

Q2, with the visibility we already have, is coming in with more than 90% of the quarter's revenues in hand, shows a very strong quarter materializing for us, and as we look at the profile ahead for the rest of the year, we just guided in a way that says, look, we've got a good first half up and coming, good performance, we're still in the middle of integrating our acquisitions, it's early in the year.

And so, again, we just had a good start to both the revenue and the EPS targets that we set.

So again, expense will fluctuate quarter to quarter and overall we're happy to say we're still on track.

Okay.

Then maybe with respect to the 2Q expenses, I guess so 1Q was up from comp expense a little bit and Q2 revenue was a little bit higher, so are there other expense that's are a little bit higher seasonal in Q2?

Yes, it's just a seasonal -- if you look at our performance from Q1, typically the accrued expenses are lighter than the rest of the profile for the year.

And then it picks up to a more normal path and that's where I was giving a little bit more clarity around expenses to be roughly flat each quarter for the rest of the year.

So again, just Q1, it's very typical to be a little bit lighter and then the rest of the year comes through since we do those accruals regularly over the year.

Okay.

Then maybe just one last one on the license duration.

You talked about the shorter duration this quarter because you had some contracts come back in.

Could you talk a little bit about that during the quarter, maybe with respect to the last few?

Was that quite a bit more customers coming back in, any sense for the magnitude of that that you saw in 1Q versus maybe the second half of last year.

In general, I wouldn't pay too much attention to that.

On average, the license duration is pretty much the same.

Q1 is -- tends to be a smaller quarter, and moreover, we alluded to the fact that we had a few deals that were not necessarily renewals, but more additions, and they tend to be shorter because somebody buys something until the end of their contract or they may buy some additional IP or so.

In general, though, we do not see a fundamental change in the business practices for us and we remain very solidly centered around the three years.

Okay.

Thank you very much.

You're welcome.

Thank you.

Thank you.

,Next we go to the line of Raj Seth with Cowen Inc.

Please go ahead.

Thank you, this is Simran Brar calling in for Raj Seth.

I had a couple questions.

Firstly, Aart, could you talk a little bit about the progress in your analog offering?

And secondly, how are you thinking about core EDA industry growth for the year and are you seeing any material share shift in your business segments?

Thank you.

Okay.

On the analog side, we have of course a fairly broad analog mixed signal business, and in that business we have a strong position in all the verification side, we have an emerging position in the implementation side.

In addition, there are interesting connections between that business and the digital tools as well as the IP.

And on all fronts, we're actually making very good progress.

I highlighted the fact that on the verification, we had just fielded some very good speed improvements.

On the implementation, we have number of customer adoptions.

This is still a very small business and obviously we're playing in a field that has been completely dominated by one competitor for many decades.

But the solidity of what we have is actually starting to make some marks.

And overall, the fact that we have all of these technologies at hand, as we develop most advanced analog/mixed-signal IP, it's turning out to be a very good value for us.

Regarding the growth rate for what we would call sometimes core EDA or traditional EDA, we told you that what we're banking on is low- to mid single-digit growth, and that appears to be on track so far.

It's only our first quarter went in the right direction.

Okay.

Great.

Thank you.

(Operator Instructions).

Next we'll go to the line of Rich Valera with Needham & Company.

Please go ahead.

Thanks.

Good afternoon.

Aart, it sounds like the IP business is doing quite well.

Can you give us an update on the systems level business, in particular how the integration of the various assets there is going and where you see that market.

Sure.

And as you probably know, this is a business that is very much aligned with the IP, because fundamentally, it is predicated on the fact that, with much, much larger deigns, people are both moving up in terms of how they assemble these large designs out of many IP blocks, and, as they do that, they get confounded with of there being a lot of software there.

And so for those of you not familiar with our path, as much as we've had a few tools literally for 20 years at the high end, it is really in the last two, three years that we've out a major emphasis on investing both internally and acquiring a number of technologies all with the objective to provide people an opportunity to model their system or to prototype their system, be it in software or in hardware.

With the acquisitions of last year, we are in full integration mode right now.

And what is exciting, is that we've been able to find a good pathway that allows us to both integrate into a new much more integrated and powerful version, while sustaining and supporting all the existing customers, because the various products we bought also came with a set of customer relationships that are quite broad in terms of the nature, and being able to continue to support them is very valuable because they will -- they are providing us the feedback on where to go with this.

So my expectation is that later on this year we will be rolling out the first round of integration, there will be multiple rounds.

And so for the customer response is very positive.

Are there any specific products we could lsook for as that integration rolls out this year?

Yes and no, but I don't think we're ready to give the specifics because there are always people that are very worried about, oh, well is it mine, is it the other one?

And the reality is we've found a pathway that actually creates sort of a super set of the best features of each one of the tools.

We will give a bit of an update already in March at our next users group meeting, but in general I think you should anticipate hearing more I would say towards the end of the summer, roughly.

Okay.

So not quite that timeframe.

Well, yes, I'm not sure -- frankly, I don't know if we -- I'm sure we'll talk to customers at DAC as well.

All of these things are sort of work in progress, and because we're so much involved with many customers on different fronts on this topic, there's actually a lot to talk about and I don't know if we specifically will roll out a product or not at that timeframe.

Frankly, DAC for us is not all that meaningful, given that our own conferences are so extremely well attended, and in aggregate, attract more people than DAC.

Sure.

Understood.

Brian, a couple questions, just clarifying the guidance.

Can you clarify your comments about the revenue trajectory in the back-half?

Are you suggesting that that there might be a little sequential down-tick from the second quarter as we moved into 3Q, 4Q.

Yes, that's right.

We're showing a very strong increase in our second quarter from our first quarter, just looking at the profile of the way the revenue's going to be recognized.

And then at this point in time, anticipate a -- just a very slight decline into Q3 and Q4 from the second quarter, all of it, again, built into our total-year numbers which are between 8.5% and 10.5% net revenue growth year-over-year.

Great.

And again, following up on the question from before about the flat EPS first half to second half, it seems like as you integrate Virage, you should be recovering some of that deferred -- lost deferred revenue from the purchase accounting, and I would think that would drive some incremental profitability for you in the back-half, at least as it relates to Virage.

Can you just talk us through where -- how you see that happening?

I'm assuming it's baked into your guidance, but would have thought it would have drove a little bit more EPS in the back-half.

Yes, that's correct.

Our deferred revenues, you do take a pretty significant haircut up front on that, and that was certainly the case with Virage.

Typically you start out with -- this is our first full quarter with our Virage financials built into that, and over time you would anticipate seeing some of the growth in there.

So, yes, exclusively in that category of the Virage, anticipate seeing growth quart-over-quarter, but then putting that in the context of the $1.5 billion overall top-line revenue growth and where the contracts are specifically outlined.

As you know, one of the elements of our business model is having a very high level of visibility and so elements are going to go up, some of the elements will get variations based on when cash is due, when the collections are expected to come in, and that's just that slight variation we're seeing right now.

Okay.

Fair enough.

Thank up.

Thank you.

(Operator Instructions).

Next we'll from to the line of Tom Diffely with DA Davidson.

Good afternoon.

Maybe just one more question on the revenues in the second half.

Typically there's a bit of seasonality in your fourth quarter that provides a nice little uptick in the revenues.

Is that not historically the case?

If it is, what's different this year?

Tom, I think the seasonality is mostly in our orders.

Just because compensation and the workload of much of the sales team tends to want to end at the end of a year, what happens is that in the fourth quarter, a lot of things tend to get closed.

For all the renewals, that fundamentally has rarely much impact on revenue.

It may have impact on expenses because the commissions are due for some of these deals, and it may pull in a few things that are add-ons, IP or things that were in the works anyway.

I think that the last two or three questions seem to be all centered around the fact that oh, are you worried that the second half is worse than the first one?

No, we're not.

I think what we're just saying is that the first quarter and the second quarter happen to be particularly strong.

There were also a couple of areas where there was a bit of an almost an overhang in demand in prototyping that we're able to execute very quickly on, and many of those tend to be less renewals but more spot sales in the moment.

Overall, the business picture is just quite solid for us, and as Brian had said, we have such a good insight in all the renewal deals with their unevenness.

Don't think that the sum of all the deals that we have is an exactly perfectly flat line.

The reality is never quite that simple.

But it is true that with 80% to 90% in-hand entering a year, we do have a substantial amount of insight, and that's why, with the particularly strong Q1 guidance -- or sorry, Q2 guidance, we assume, hey, maybe Q3 and Q4 won't quite be that strong on a continuation, but, of course, so far, so good.

It's just early in the year, and with one quarter behind us, we're pleased with the results and we'll update you again next quarter as Q2 materializes and we'll have even more visibility in the second half.

Okay.

And then maybe just another question then on the operating margin side.

Where do you see those trending over the next few years?

Seems like if your IP is ramping and industry fundamentals are getting stronger, we should an increase in the operating margin line as well.

But we seem like we're kind of stuck here between that 23% and 24% range.

Well, there's a reason why you would come to that conclusion, because we have shifted our main financial objective a little bit.

And we have shifted it to say our objective is to grow earnings per share, and as you well know, there are fundamentally only three variables, which is revenue, expenses and share count.

And to make it simpler, we are trying to remove the share count out of this all together by holding it flat with buybacks, notwithstanding that any given quarter may have some fluctuation.

And so then you quickly come to the revenue versus expenses balance, and the key for us is to really hit the right balance.

Because if we see the opportunity to grow the top-line a little bit more, we want to do that.

And in that sense we're using our expense money right now already entirely focused on 2012 and beyond in order to maintain good earnings per share growth.

If we see that for whatever reason the top-line growth is more difficult, we will immediately revert to higher pressure on the operating margin, so that we stay with our top objective of earnings per share growth.

Okay.

Alright.

And then just finally, has there been any changes in the legislation as far as being able to bring your foreign cash back into the US?

Any update there?

Unfortunately, I don't think there's an update.

There's sort of waves of debate in Washington, as you may know.

I wouldn't be surprised if this debate will keep coming back as every government in the world right now is looking for money.

In that context, it's just completely unpredictable, and therefore we don't want to count on that.

Obviously, having the cash is a good thing, but we don't want to count on being able to repatriate it at this point in time.

Okay.

Thank you.

You're welcome.

Next we'll go to the line of with Sakic Talia with JPMorgan.

Please go ahead.

Hey, guys.

This Sakic here for Sterling.A couple questions from our side.

So first, understand the downtick in the second half, but in terms of modeling it, should we be taking that out of the up-front revenue, I guess part of the top-line, or should it be coming from both time-based license and up-front and services?

Well our average balance, as we've said, is to have less than 10% up-front activity, and even with a significant level of new acquisitions last year, we're still well within that range of less than 10%.

This quarter came in at 7%.

So just relative to modeling, if it was a little bit of each.

I think it's just the appropriate way, in a generic sense, of how to look at the profile going forward.

Okay.

That's helpful.

And then can you give us -- I know we talked about the technology purchases -- the incremental technology purchases in the quarter relative to the renewals, but can you comment at all on the contract renewals in the first quarter in terms of run rates?

And maybe any qualitative commentary on what your outlook is for renewals the rest of the year.

Thanks.

Sure.

Well we actually made I think a little comment in the preamble, saying that the contract renewals that we had were actually quite good, in that we were able to increase our run rates.

And, as you know, while this is somewhat of a fuzzy number because it's actually extremely complex to calculate and it's not audited, it is still a metric we use in-house to judge the overall quality of our business.

And in that context, first quarter was quite good in that regard.

Secondly, we said, while there were a few additions that were one-offs, so-to-speak, and I think those are all indications that our customers are looking for some additional technology from Synopsys, or some additional capacity, and that bodes well.

Going forward, we do see a good pipeline of renewal, and so far all indications are that we are well on track with that.

Great.

Thanks.

You're welcome.

Thank you.

We have a follow-up question from the line of Rich Valera with Needham & Company.

Please go ahead.

Hey, Aart.

You mentioned strong prototyping sales.

Was wondering how much of a factor that is in the second quarter bump-up in revenue, and is that maybe why the margins aren't quite what we might expect, given that big jump in revenue?

I don't think it is that big.

I think it's a healthy business, but relatively speaking it's small compared to the overall picture.

It's just one of many things that appear to be going well.

If there's one thing that I think characterizes not only Q1 but so far as we can see Q2, and as a matter of fact the whole year, is I think we're executing particularly well on many strategies that are actually coming together.

And many people realize that last year we made many acquisitions, we put many things in movement.

We're in full integration of all of this.

This is actually substantial multi-year task, and things are coming together.

We're fixing issues, we're making things better, more efficient, and the response from the customer base on all of those is actually quite positive.

But that response has to be earned with every new product, with every new way of doing business.

And so it's almost more that many pieces feel like they're coming together very nicely and that we're executing just quite well.

Okay.

Thank you.

Thank you.

At this time, I'll turn the conference back over to our host and presenters.

Well, we appreciate your attending today.

Obviously this was a quarter that was strong and had a good outlook ,and that's probably the reason why the call is also fairly short, and so all the more, we appreciate your questions, attending.

And, as usual, Brian and myself will be available a little bit later this afternoon for any follow-ups.

Thank you.

Ladies and gentlemen, that will conclude our conference for today.

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

You may now disconnect.