新思科技 (SNPS) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Synopsys earnings conference call for the third quarter of fiscal-year 2011.

(Operator Instructions).

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

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

Please go ahead, ma'am.

Thank you, Dave.

Good afternoon, everyone.

On the call today are Aart de Geus, Chairman and CEO of Synopsys, and Bryan Beatty, 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 quarter ended April 30, 2011, and in our earnings release for the third quarter of fiscal-year 2011, issued earlier today.

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

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 had an excellent Q3.

Combined with strong results in the first half and a solid outlook for Q4, we're confident that we will exit fiscal 2011 with a great deal of strength.

Financially in the quarter, we delivered revenue of $387 million and non-GAAP earnings per share of $0.46.

Our orders for the year have been strong, and the run rate of the business grew nicely this quarter.

We are increasing our revenue, EPS, and cash flow guidance for the year, and expect to deliver double-digit growth for both top- and bottom-line.

Now before commenting on our products and results, let me give you some color on the customer landscape.

Notwithstanding the global economic worries and the high volatility in the stock market, design activity continues unabated in pursuit of three markets -- mobile devices, the cloud infrastructure, and smart everything.

In the mobile market, semiconductor companies are grappling with the technical challenge of increasing speed without increasing power.

These highly-competitive customers are racing to meet market windows, while, of course, also aiming at the lowest possible production costs.

The cloud is a system of massive data centers running very high performance servers, offloading compute- and storage-intensive tasks for the portable devices.

The technical need here is symmetric -- decrease power while delivering the highest possible performance.

The rest of the electronics industry, be it in the automotive, industrial, or consumer segments, is seeing significant growth in silicon content to an explosion of embedded smart-everything chips.

To give a sense of proportion, of the top 50 electronic design software spenders in the world, 36 are mobile providers and nine are providers of cloud hardware.

We are the largest supplier in almost every case.

In Asia-Pacific, which dominates in the development of consumer devices, we are strong as well with, on top of our tools business, already 60% of the leading semiconductor companies embedding our IP box.

So regardless where the market goes over the next few months, we expect Synopsys to be in a cornerstone position.

We have a compelling combination of global scale, complete solutions, product excellence, and outstanding support.

Our financial strength allows us to continually invest in technology and help our customers safely streamline the number of vendors.

This makes us an ideal partner in any phase of the business cycle.

So how are we impacting the mobile cloud and smart-everything markets?

The customers' challenges are easily summarized in three words -- better, sooner, cheaper.

Better means more compute performance and less power utilization.

Sooner means higher design productivity and scheduled predictability.

Cheaper means best silicon utilization with highest yields.

While easy to state, delivering on these expectations demands advanced silicon technology, state-of-the-art integrated tools and flows, and very sophisticated IP.

Let me highlight what progress was made in a number of areas this past quarter.

Our core solutions are doing very well in terms of business levels, technology advances, and customer adoption.

For example for the mobile market, achieving lower power consumption implies continually migrating to smaller geometries.

Synopsys has a well-earned reputation for being the key enabler of the most advanced designs.

This quarter, both STMicroelectronics and Samsung taped out their first 20-nanometer test chips with our Galaxy implementation flow.

To achieve this, we collaborated with foundry partners and customers to support these very complex geometries.

During the quarter, we also announced widespread support for TSMC's 28-nanometer reference flow, from system level to chip design to verification to yield improvement.

Of particular note is the inclusion of our physical verifier, IC Validator.

This product is experiencing rapid adoption as its integration in the design flow removes the need for a separate physical verification tool.

Custom Designer, our analog design solution, continues to progress.

We are systematically removing the barriers to entry put up by incumbent tools, and the tapeout count of our customers is growing.

This includes a recently taped -- completed design by Moortec Semiconductor, a company specializing in high-performance analog IP for medical, consumer wireless, audio, and automotive markets.

We also displaced a major competitor at a company using mobile apps to enable personalized medical therapy.

Confirming the completeness of our solution, Custom Designer is now included in TSMC's 28-nanometer analog mixed-signal reference flow.

Moving on to verification as the single biggest challenge in productivity, we saw excellent progress this quarter throughout our portfolio.

In digital, we are the primary solution and the strongest player for leading customers in both mobile and cloud due to our continued technology strength.

Our new at low power release, for example, just became 2X faster while using half the memory, a very significant enhancement.

In analog simulation, we serve 19 of the top 20 chip companies and are driving significant technology advances, including excellent speed improvement with our FastSPICE solutions.

At the systems level, our prototyping products are aimed at modeling the interaction of hardware and software.

In essence, virtual prototyping allows software designers to develop their software on a model of the hardware before the hardware exists.

Synopsys leads in this emerging area.

In Q3, we shipped a brand-new product, Virtualizer, which is the integration of the three previous generation virtual prototyping solutions that we had acquired in recent years.

Virtualizer unites the best features of each system, while providing a platform that unifies our offering.

Customer reaction is very positive, and we expect a fairly rapid migration to the new solution.

As the design gets more refined, one can also build a prototype of programmable FPGAs.

Here, too, we have the leading position, and our FPGA prototyping did very well again this quarter.

Renaissance Electronics, for example, adopted our solution, demonstrating considerable time saving and high quality of results over their previous environment.

With more activity coming to all the advanced mobile, cloud, and smart-everything customers is that IP reuse continues to be an outstanding productivity booster.

Indeed, more and more customers are collaborating with us as they increasingly outsource sophisticated building blocks to accelerate their time to market and save costs in the process.

Over the last 15 years, we hare systematically built a large portfolio of high-quality IP blocks, which, together with systems, represent about 20% of our revenue.

IP is the highest area of growth for us this year.

We estimate that only about 25% of IP is currently outsourced.

Today, next to ARM, which focuses primarily on embedded processors, we are the second-largest IP supplier and the leading provider of standards-based interface, analog, and memory IP.

All of these are in great demand for the mobile markets and represent a TAM of approximately $600 million.

During the quarter, Synopsys and ARM, an important long-term ecosystem partner, also jointly announced as part of our ongoing relationship a multi-year collaboration, tools deal, and IP access agreement.

Since we assist virtually all of the design groups in the world that develop the most advanced mobile systems, this alignment is of great value to our customers and has been extremely well received.

Summarizing the product perspective, our technology is very strong and we again saw good renewal activity in our core businesses and excellent growth in the adjacencies.

Let me conclude with a few remarks on how we're managing our business.

At the beginning of the year, we embarked on a five-point plan to achieve high single-digit earnings per-share growth.

As evidenced by our guidance today, we're executing above plan and expect to deliver double-digit growth for the year.

Revenue growth and profitability for our traditional solutions is well on track with good renewals and consistent growing share of customer budgets.

We're also seeing incremental benefits of a multi-year effort to improve our contract terms and discounting.

Our high-growth adjacencies are well on track, with IP and systems making up 20% of our topline.

We have grown this business considerably and are seeing incremental margin improvements as well.

On the M&A side, we are successfully integrating the eight acquisitions we made last year, while mostly absorbing the near-term operating margin pressure that results from deferred revenue accounting and typical integration costs.

In the area of efficient financial management, we continue to allocate resources and capital to areas of highest growth and to broadening our TAM.

We executed our share repurchase strategy to keep share count roughly flat, and we did slightly better here as well.

Finally, I would like to also highlight that we again expect very strong cash flow from operations, exceeding $400 million for the year.

To summarize, based on our results, backlog, business model, and consistently strong earnings and cash flow, we feel that we are well positioned and currently on a bullish track for the coming year.

We look forward to talking more about our long-term strategy and plans at our investor and analyst event in New York on September 28.

I'll now turn the call over to Brian Beattie.

Thank you, Art, and good afternoon, everyone.

In my comments today, I will summarize our financial results for the quarter and provide you with our guidance for Q4 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, which was posted on our website.

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

Synopsys delivered a great quarter, meeting or exceeding all of the quarterly financial targets that we provided in May.

Q3 financial results were highlighted by strong orders, double-digit growth in both revenue and non-GAAP earnings, and considerable free cash flow generation.

Additionally, we are raising our full-year outlook for revenue, non-GAAP earnings, and operating cash flow.

Total revenue was $387 million, an increase of 15% and slightly above our target range.

Our IP and systems products continued their momentum and achieved double-digit revenue growth in Q3 and 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 $329 million, which included $17 million of amortization of intangible assets and $13.5 million of stock-based compensation.

Total non-GAAP costs and expenses were $301 million, an expected year-over-year increase due mainly to our acquisitions, along with the timing of quarterly expenses such as the variable compensation impact that resulted from strong orders in the first three quarters of the year.

Non-GAAP operating margin was about 22% for Q3 and about 22.5% for the first three quarters of the year, as we worked through the integration of a number of 2010 acquisitions.

Turning now to earnings, GAAP earnings per share were $0.35.

Non-GAAP earnings per share increased 18% to $0.46, exceeding our target range, driven primarily by topline growth along with a lower effective tax rate and reduced share count.

We are raising our annual EPS guidance, reflecting our strong third quarter and year-to-date results, along with our outlook for Q4.

Our non-GAAP tax rate was 21% for the quarter, below our target range due primarily to one-time tax benefits that resulted from a true-up of our FY10 taxes.

As a result, a non-GAAP tax rate for FY11 of 22% to 23% is a reasonable estimate.

For modeling purposes, we think that a 26% non-GAAP tax rate is a reasonable estimate for 2012.

Greater than 90% of Q3 revenue came from beginning-of-quarter backlog, while upfront revenue was 5% of total.

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

The average length of our renewable customer license commitments for the quarter was 2.7 years.

We 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 over $1 billion in cash and short-term investments.

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

We generated $310 million in cash from operations, including an expected annual payment from a large customer in the quarter.

We are raising our operating cash-flow target for the year to more than $400 million, driven primarily by increased volume of bookings and timing of collections for the year.

Operating cash flow can be lumpy from year to year, which is why we believe it is important to focus on multi-ear averages.

For the three-year period ended in Q3 of 2011, trailing four-quarter operating cash flow was, on average, about $354 million.

Continuing on with our cash and balance-sheet items, capital expenditures were $22 million in the quarter, consistent with our operating plan, resulting in a free cash flow of $288 million.

For the year, we expect capital spending of approximately $55 million.

During the quarter, we purchased 3.8 million shares of Synopsys stock for $100 million.

During the first three quarters of the fiscal year, we spent $335 million repurchasing 12.4 million shares, and we have $413 million remaining on our current authorization.

When factoring in cash generated from options exercised year to date, we spent a net $222 million on repurchases.

Fully-diluted share count declined sequentially and year over year to 148 million as a result of our year-to-date share repurchases.

Continuing on with our balance-sheet items, Q3 net accounts receivable totaled $175 million and DSO was excellent at 41 days, reflecting the high quality of our AR portfolio.

Deferred revenue at the end of the quarter was $754 million, and we ended Q3 with approximately 6,650 employees.

Now, let's address our fourth-quarter and fiscal 2011 guidance.

Our GAAP targets exclude any future acquisition-related expenses that may be incurred in Q4 and beyond.

For the fourth quarter of FY11, our targets are revenue between $386 million and $392 million.

Total GAAP costs and expenses between $329 million and $341 million, which includes approximately $15 million of stock-based compensation expense.

Total non-GAAP costs and expenses between $300 million and $305 million.

Other income and expense between zero and $1 million.

A non-GAAP tax rate of between 24% and 25%.

Outstanding shares between 146 million and 150 million.

GAAP earnings of $0.26 to $0.31 per share and non-GAAP earnings of $0.44 to $0.46 per share.

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

Now our fiscal 2011 outlook, we're raising our revenue range with our new target between $1.531 billion and $1.537 billion, primarily reflecting higher-than-expected business levels.

Other income and expense between $3 million and $4 million.

A non-GAAP tax rate of between 22% and 23%.

Outstanding shares between 148 million and 152 million.

GAAP earnings per share between $1.46 and $1.51, which includes the impact of approximately $57 million in stock-based compensation expense and the Q2 IRS settlement of $32.8 million.

Non-GAAP earnings per share of $1.79 to $1.81.

We've increased the low end of our guidance range by $0.09 and the high end by $0.04.

Our current range represents year-over-year double-digit growth of approximately 12% to 13%, which exceeds our beginning-of-the-year commitment to deliver the high single-digit earnings growth in FY11.

And as I mentioned earlier, we are targeting cash flow from operations of more than $400 million.

In summary, we're really pleased with our Q3 financial performance, highlighted by strong top- and bottom-line growth and significant free cash flow generation.

We look forward to seeing you at our upcoming investor and analyst event, which will be held on September 28.

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

(Operator Instructions).

Rich Valera, Needham & Company.

Thank you.

Good afternoon.

Art, I'm sure you don't want to talk about fiscal 2012 guidance right now, but I'm wondering if you could just refresh us on how you characterize the different pieces of -- the growth rates of the different pieces of your business.

Before, you know, you have 80% that I think you call core EDA.

I think you've said that has roughly a mid single-digit long-term growth rate, and then you have 20% in the IP and system, which I think you've characterized as maybe 15% or so.

If you could just refresh us on those and tell us if you think those rates still apply.

I don't think there is much to refresh.

You just gave the answer, roughly.

We are in low to mid-single digits for the core EDA.

We said double-digit for the IP and systems area, and then there are a variety of other smaller components that have their own growth rate.

But fundamentally for the year, we entered the year with an expectation setting of high single digits.

We are exiting the year doing quite a bit better than that.

And in general, I think -- we feel that the portfolio is strengthened because some of the high-growth components are now a bigger percentage of our overall revenue.

And so in that sense, I think we're heading in the right direction.

Based on your comments, it doesn't sound like you're seeing any adverse impact from some of the macro headwinds, if you will, out there.

But just if you could give us maybe a little more color on what you're seeing from your customers in terms of EDA spending, despite some of the obvious sort of negative headlines in certain semiconductor areas, if you will.

Of course, our customers read the newspapers, too, and so they, on one hand, share the concern.

On the other hand, they also share the race forward towards being very competitive in areas of high growth.

And no matter what happens to the economy, I think electronics will outperform the economy just because the demand for especially the mobile devices, the many Internet interaction capability, is very, very high.

I think one of the other reasons that we are probably feeling actually very good market results is that even if there were any challenges in the overall market, we are definitely a very, very safe bet for customers because we provide a complete solution.

We can help them streamline their expenses while staying extremely competitive.

So whichever scenario ultimately plays out, and far for me to be able to tell which one it is, I think we are in a very good position.

Great.

And could you just talk about what you are seeing in terms of pricing?

I think for years we've seen pretty significant price pressure within EDA.

Recently, we've actually heard some talk of prices actually going up in certain instances.

I was just wondering if you could give any color on what you're seeing from a pricing perspective?

It's certainly encouraging to hear a number of people actively speaking about pricing as being an important component to do well in our market.

As you know, I think we have been quite disciplined for now a long time.

We have a business model that has an extremely high degree of linearity and we manage the contracts within all in all a fairly tight window, which is typically around three years or so.

So that stability gives us an opportunity to be quite watchful about the overall terms.

But on top of that, in the last few years we have, step by step, put a bit more emphasis on how to improve the contract, and the fact that we hear from others in our industry that they're heading in the same direction is very encouraging.

Great, and one final one, if I could.

Just with respect to your operating margins, I think this year you had some pressure from the integration of numerous acquisitions, especially Virage, and I think you've been investing pretty aggressively developing some new IP.

Is there any reason to think some of those pressures wouldn't abate at least somewhat as we move into next year, and maybe see some upward move on the operating margin on a year-to-year basis?

I think you understand the overall picture quite well.

You're correct that -- actually, more than just this year, even the previous year, we did put a high degree of emphasis during the downturn to continue to invest both in technology and in serving the customers.

The acquisitions bring with them, as you know, a revenue haircut, and then a number of costs of integration, and often are companies that have a lower ops margin than what we have.

We have managed to mostly absorb that, but definitely the ops margin has been at the lower end of what we would normally would manage towards.

Going forward, without making hard commitments at this point in time given that the guidance will be really done at the end of the fourth quarter, we are looking at the fact that it's possible to put a little bit more emphasis on the ops margin towards the positive.

And so, I think at this point in time I would say there should not be any negative surprises by the time we give you guidance.

Appreciate that.

Thanks very much.

Raj Seth, Cowen and Company.

Hi, thanks.

Art, if I could, just to follow up a little bit on a couple of Rich's questions vis-a-vis ambitions for 2012.

It sounds like the revenue line, especially given a higher mix of IP, et cetera, you feel pretty good.

It sounds like, from your previous answer, that we shouldn't expect negative on the operating-margin side.

In terms of your own R&D intensity, et cetera, in this business, given all the shifts, is there in fact an opportunity to move, do you think, over time -- I'm not looking for any short-term commitment, but operating margins significantly up beyond the -- you know, getting back some of the pressure that some of the acquisitions caused?

I mean, you're running 23%-ish, 22%.

Can you move that back into the mid-20%s, even upper 20%s?

How do you think about that just generally?

You know, we have been on record for, now, a long period of time saying that the longer-term ambition was towards the mid-20%s, and we certainly would only say that if we thought that that actually was not only possible, but desirable.

And as you well know, there's always a tension pair between, on one hand, having no ends to wanting to do more investments; on the other hand, also wanting to have high profitability as it generates the cash for potential M&A, and the M&A is mostly important to actually broaden our TAM.

And we are step by step doing that, and actually see of the positive effects of that very strategy over the last three, four years.

And so, in general, I do agree with the tenor of your question, and I don't want to turn this entire earnings release into the guessing for guidance for next year, but if there's one more comment coming out of not only this quarter, but really the sum of the year, is we're building a very solid backlog that allow us, again, to enter the next year with a high degree of confidence.

Once you have that, it allows you to focus on some of the other financial variables, and we do want to put a high degree of emphasis on the P&L profile of the Company to generate more shareholder value.

Would it be reaching too far to take that as an ambition beyond high single-digit earnings growth into next year?

Or is that stretching?

You know, the notion of standing on thin ice and going further and further applies to this discussion.

Let's keep the -- both the strategy discussion will be at the September and then the hard guidance should be complete by the end of our fiscal year.

But I think, in general, we are thinking about the Company both, of course, in terms of technology investments, but also in terms of the financial management that we want to apply more systematically, and there are many opportunities to see how we can tune to make the Company even stronger.

One follow-up, if I might, just on capital structure and cash.

You're generating -- you have probably one of the most visible models around semiconductors.

You've talked about some of the attributes that give you that visibility vis-a-vis the model, et cetera.

You're generating tons of cash.

I think you have somewhere around $7 of cash (sic - see Press Release).

Can you just talk about the tradeoffs, as you see them, between buybacks, maybe even dividends in a model like this?

Where are you in the thinking around capital structure, please?

Thanks.

Yes, Raj, why don't I grab that one?

The performance of our Company is really strong again this year on cash flow, as we've highlighted with our targets of over $400 million.

When you look at the structure of the business, we now have $340 million in the U.S.

and the rest of our -- just over $1 billion of cash offshore.

So, again, we look very carefully at the blend of where that cash resides, and then we've laid out pretty clearly that we're focused on growth.

We're focused on M&A as a key ingredient of that growth, in addition to our organic growth.

And we committed to keep our share count roughly flat, and again, you can see a very strong impact on our buyback program this year with spending $335 million of U.S.

cash on that buyback to take our share count down even a little bit actually this year, compared to where we were from the prior quarter and over last year.

So those are the top two priorities, and at this point we don't have dividends on the table as long as the Company continues to grow both the topline and the bottom line.

Great.

Thank you.

Sterling Auty, JPMorgan.

Thanks.

Hi, guys.

Within the comment about strong orders for the quarter, can you give us a sense that, relative to your own expectation, where there any one or two areas that really stood out?

In many ways, the areas that stand out are precisely what makes up the Company.

IP, again, did very well.

We had a number of other individual products that really stand out by particular technical strength, such as the whole physical domain.

We had a number of products that we introduced in the last couple of years that are going well.

IC Validator is a good example.

And so, it is all in all relatively balanced, but it fits very well, I think, the makeup story that we have told you as in exactly the facts of the growth rates that we see.

In general, we were -- I don't think that we were surprised.

I think we executed very well on all the transactions that came up, and I think mostly it is because we have very good relationships with the customers right now, and in many situations they're involved in really, really sophisticated designs, and that's good for us.

Okay, and then, Aart, can you give us a little bit more color -- I wasn't completely clear about the agreement that you have in place with ARM and exactly how that is going to -- how are you going to monetize that relationship over the next couple of years?

We are, of course, in different businesses.

Their main business is in the processor business, where they are doing extremely well.

We provide many of the things around that, be it some of the IP blocks, but mostly a large number of tools and especially the tool support with their key customers.

And one needs to understand what happens, really, at those most advanced customers that are typically in the mobile field.

They are driving extremely hard on the course of the processors and on the IP around that to be as high performance as possible and as low power as possible, and there's really a race among them.

And so, by being well aligned and having access to some of the IP from ARM, in time and with the right support, we can actually make their cores shine in the hands of their customers.

And so, we have -- I would say probably half of our worldwide support is dedicated to that type of task in the broad sense, embedding these cores in very complex chips.

In addition, ARM has access for quite a number of years to our tools, and hopefully they can say equally the positive things about the quality and capabilities of our tools.

It certainly helps them drive the state of the art.

And then, last question, Brian, can you give us a sense -- given the strong orders, was did that do in terms of the variable expense in the sales and marketing line?

In other words, how much higher was that sales and marketing than maybe you would have expected when you originally gave guidance?

It is up over what we had originally anticipated for Q3, as both the bookings for this year and the outlook for bookings for the rest of the year came in higher than what we had anticipated.

So, as we look at the overall expenses, you know, we're within the range.

We're at the top end of that as we came through.

So we managed to control the expenses within what we'd anticipated.

But again, just reiterating, very strong bookings year.

Has come in stronger each sequential quarter as far as performance against our anticipations.

Again, that was the biggest driver of our cash flow as well, as we look at that from last quarter to this quarter.

So nice diversity of accounts, high volumes, collections earlier than what we had planned on a historical basis.

Very good performance in that, but we just had to manage those expenses all within our expectations.

All right, great.

Thank you.

Paul Thomas, BofA Merrill Lynch.

Good afternoon and thanks for taking my questions.

One of your competitors went out of their way recently to highlight some competitive displacements at two top 10 semi customers.

I know historically there's a lot of back and forth amongst the competitors in this space, but this was the first time we'd heard a dollar figure of $10 million or more in revenue from this couple of agreements.

So I wanted to ask you guys directly about it.

Have there been any significant losses for Synopsys in any of the top 10 customers recently, or is Synopsys' market share stable and growing?

You know, we have not seen any, and our market share feels very stable and growing.

As much as $10 million is a great number, we do $1.5 billion.

So, it doesn't -- it was not visible to us.

And the reality is many of the very large customers have a broad set of customer -- [to] arrangements, sorry.

So frankly, we don't know what they're talking about.

Okay, fair enough.

On the average contract life you've talked about the long-term three-year average, but you've been below that for several quarters.

I was just wondering, are you still getting intracontract renewals that are (multiple speakers) a bit, or is this a little more active management to get shorter contracts?

Is there anything going on sort of near term that is going to go away later on to get that back to three years, or how should we be thinking about that?

Sorry for interrupting you.

I think the -- in general, from our perspective, the contracts are sort of staying the same.

At any point in time, the reality is one rarely goes to the end of a contract, then renews for three years.

The way this works in practice is, more often than not, after a year or so the customer wants some additional tools or some different configuration, and then one tends to renew and re-up for the next three years.

That is the most common situation.

During the massive downturn, we saw that some of the people waited a bit longer, mostly because they didn't want to make any additional commitments on where they were.

We are not seeing that recently.

From quarter to quarter, there can be big changes because it's a discrete number of contracts.

You are right.

I think in the last three quarters that it was a little bit below three years.

We, of course, ask ourselves the same question, but we have not really found any special rhyme or reason to be either concerned or elated about.

Maybe just to add to that, Paul.

We were at 2.7 last quarter, 2.8, and then 2.5 the previous quarter.

So we are seeing a little bit down from the 3.0 average, but we still feel that 3.0 is the target level, 2.9, so a couple of points.

We believe in the full transparency and be able to demonstrate what it is.

We say a 3.0 is the way to go.

The other really important part of that is the inherent run rate of those deals when they come through, and we're very happy with the run rates, the annual revenue increases that we've seen on each of those contracts, and that is also very positive.

Okay, that's very helpful.

Thank you.

And then, maybe following up on the buyback question from earlier, so you did mention, too, in your prepared remarks that your share count stepped down a little bit more, I guess, than normal quarter over quarter.

And so, is there anything to read into that?

Are you guys getting a little more aggressive on buybacks or is that just kind of an anomaly with the stock compensation not truing up to that in the short term?

Well, that's a good question.

But again, we remain committed to keeping our share count roughly flat, and we exercise against the program we put in place that looks as the source of cash and how we can best apply it.

And then as we went through the year, we exercised against our plan in the most recent quarter, and the amount of exercises that came through towards the end of the quarter, as the stock price had come down a little bit, came in less than anticipated.

So, we executed on our buyback.

The amount of exercises came in a little bit lighter, based on the price, and we ended up in the lowest net stock position we've had in the last two years.

So, very good position to be in.

Okay, that makes sense.

Thanks a lot, guys.

Thank you.

Tom Diffely, D.A.

Davidson.

Good afternoon.

Maybe another cash flow question.

You know, of the $400 million that you're projecting for this year, are there any unusual or one-time items there, or is this the level you'd expect from this revenue and earnings level?

Yes, we wanted to highlight that when we looked at the three-year average of our operating cash flow, it came in at $354 million.

We are looking at $400 million.

And as you know, cash flow forecasting can be lumpy from year to year.

The increase in our guidance from last year -- from last quarter, I should say, even from the beginning of the quarter, really all came as a result of increased collections.

We hit record levels of collections, reflecting a very strong business in our third quarter.

We saw that both the level of bookings we anticipated came in higher, volume-wise, as well as came in earlier in the year, and that again gives the opportunity for us to collect cash with the new negotiated terms that are put into place.

So again, very happy with the amount of cash [raised] on the bookings, but kind of highlighting that our average over the last three years has been about $350 million.

So, just say this is one of our record levels of performance, but it's hard to forecast and it can be lumpy going forward.

Okay.

And then, also, you talked about one-third onshore, two-thirds offshore.

What's the split for the, I guess, cash flow run rate at this point?

It is about half and half, generating half of our cash in the U.S.

and the other half outside of the country, based on where this comes through based on our current mix of profitability by region.

Okay.

Has there been any changes in the laws as far as bringing cash back to the U.S.?

No, not yet.

We're following the developments in Washington very closely.

There've been a number of proposals on improved tax rates for repatriation.

We're watching that really, really closely and support any initiative that does allow us to do that and to bring back cash at more favorable rates.

All right, and then switching gears a bit.

Aart, when you look at the memory space and going down to 2X nodes and talk about the vertical NAND and all this type of stuff, does this increase CDA intensity at all for memory, or is it still pretty small or pretty low compared to logic?

It increases it.

Every step to the next node down just brings a boatload of physics, if I can call it like that.

You may have heard about the very fact that Intel announced that they are betting on FinFETs.

Think of FinFET as transistors that, instead of being flat, are vertical, and so it's a little bit like high-rise transistors, so to speak.

In order to build those things, the physics are extremely tricky.

They are very thin and it requires a lot of simulation.

We're very well positioned with that because Synopsys is the prime provider of so-called TCADs, technology computer-aided design, and TCAD in the last few years has had the breakthrough that it can now simulate three dimensions.

Well, perfect timing because transistors are now three dimension.

The transistor technology, of course, is driven mostly by memory, FPGA, and processor people because they are the leading edge of technology.

And so the trend that you are highlighting, which is the smaller and smaller devices in Moore's Law, absolutely demands more TCAD, more extraction, more simulation, more sophisticated building of libraries and memories.

And by the way, also, more sophisticated investments in IP blocks.

And that serves us well, again, because our IP blocks will become of higher and higher value as they're more and more difficult to build.

So, we're lovers of Moore's Law, what can I say?

So do you view this as just kind of a continuation of the Moore's Law you're been on for 15 years or so, or is this more -- is there more of a step function now because of this move to the vertical transistor?

You know, the funky thing with the Moore's Law is because it is an exponential, it feels like every five years there is a step function because it's not just a little bit harder.

It is a lot harder.

At the same time, Moore's Law is suddenly alive for now for 45 or 50 years, and we can see today another decade.

Predicting beyond that is always a little haphazard.

But for right now, we see people working at sub-10 microns -- nanometer, not micron, nanometers, and these are extremely small devices.

And the hunger for more transistors will continue.

So, I think there's a lot of work to be done, and we're at the heart of that.

And then, finally, when you look at your business, you have 90% going into the quarter.

Of that remaining 10%, is there some way to characterize the makeup of it?

Is it different than the other 90%?

Yes, it is.

And the reason it is is because IP tends to be higher percentage of that because in many situations the IP is a shorter-duration sale, or in a number of cases also just an upfront sale.

So that is -- that tends to fill the last 10%.

And then, of course, we also have a number of services, and there, the services essentially are being accounted for upon delivery of certain milestones.

And so, as much as on one hand it is great to have 90% going into the quarter, it's not like there's no work to be done.

But having such a strong percentage in hand, of course, gives a degree of stability that is good for the Company.

Great, okay.

Thanks for your time.

Mahesh Sanganeria, RBC Capital Management.

Aart, I would like to revisit that capital structure question.

Here we have -- it seems like the world is falling apart, but you are doing great, your bookings are up, your cash flow is great.

So what stops you from putting some leverage on the balance sheet?

We have equipment companies which are still volatile, but even the equipment companies are putting some leverage in their balance sheet.

So, I don't understand why you would not consider that very seriously.

Nothing stops us from doing that, and as a matter of fact, we are extremely conscious of the fact that the interest rates have become better and better.

And so, from the overall strength of the Company, obviously we can take on debt.

That also only makes sense if there is a good return to be had on that debt.

And far from me to say that there will be or will not be, but it is also clear that if there is more of a downturn, having a strong position has a high degree of value, and we certainly have learned a lot of things from the last downturn.

But again, I don't want to be quoted or so saying there is going to be a downturn.

There's many questions and uncertainty, and in that landscape we are solid.

If the market continues as it is today, our business will continue to grow well on its own volition.

But in any case, we are very proactively considering all of these options all the time.

Thank you.

That's helpful.

One more question, on the 28 nm.

How would you characterize the design starts and adoption of 28 nm right now compared to 40 nm at a similar stage?

Actually, all in all, it is not dissimilar.

We put 28 and 32 in the same bucket because technically they mostly are.

We've seen, for example, in the last quarter, the design tapeouts moved to 173 from 134 the previous quarter, so we track these things quite carefully.

And all in all, we're following sort of a 2.5- to three-year cycle from one node set to the next.

So I think 28 is [solely] where all of the advanced design that is going to go to market in the next 18 months is being done.

There are a number of people working at 20 and 22 already.

So that is the next wave that much of our deep technology emphasis is on.

And as I said, there are people already below that.

But 28 is the node that all of the foundries are completely focusing on as we speak.

Just one more follow-up on that.

It seems from the comments from TSMC that process technology is relatively better compared to 40 nm, that they have much better yields at 28 nm, but it seems like it is taking longer to close the design of product qualified.

So can you give your viewpoint as to what is happening?

Why is TSMC seeing some push-ups in terms of product qualification when your process technology is quite ready?

I think in general TSMC specifically has put a high degree of emphasis and hard work on 28 nm, and I think they have done very well with that.

At the same time, it is also clear that when you go to the smaller and smaller geometries, the tolerances of the technology become larger versus the size of the device.

Well, those very tolerances reflect themselves directly inside of the design.

And so, what we have now clearly demonstrated is that yield is about, I would say, one-half to two-thirds the results of design technology and about one-half to one-third the result of actually manufacturing prowess.

Well, that is a very important statement because that says that the design community needs to become much more yield-sensitive.

Now, if you compare that to, let's say, 10 years ago, where most people did designs and then they would send it to the fab and the fab would execute it, end of story.

Today, you have to really tune your design for yields optimization, and actually we have some very exciting tools that are doing well.

One is called Yield Explorer that allows our users, the design community, to find yield issues much more rapidly.

Because there's one more component.

It's not just the absolute number of how good is the yield.

It is how good is the yield over time, meaning when you start in a new node, it tends to be not so great.

And then you tune and tune and tune, both on the fab side as well as on the design side, and the yield moves up.

That is called the yield ramp.

So the faster you ramp, the faster your chips become cheaper, and so it is in that context that Yield Explorer is doing very well.

And actually just in the last couple of days, I've had interactions with foundries that are optimizing, and where Yield Explorer has been able to find some essentially bad situations in the design that immediately helped the resulting yield.

So I think it is an opportunity for us.

But the design world and the manufacturing world are no longer disconnected.

Can you assign some kind of incremental opportunity you might have or the industry might have from this systematic yield issue or the design validity yield issue?

I know it was talked about a long time ago that it was DFM and now we don't hear that word that much, but I'm sure the problem was a lot more severe.

Is that an area of growth?

You talked about that, but is there a dollar amount you can think about for this segment?

We don't break out individual tools, but there's no question that the whole area that touches manufacturing for us is actually of significant size.

And the reason for that is because it contains things such as the yield optimization techniques that I described, but also contains the optical proximity corrections, and there, too, there's a whole new discontinuity in physics happening.

The TCAD that I mentioned earlier, which has gone three dimensional.

And so, the overall manufacturing tool -- TAM is probably around $500 million or so, and we must be doing, top of my head I would say $175 million or something along those lines.

So, it's an area [of assembly] that will remain very solid or potentially growing a bit better than the core 88.

Thank you very much.

Ladies and gentlemen, we have five minutes remaining in today's conference.

We will next go to the line of Jay Vleeschhouwer, Griffin Securities.

Thank you.

Good afternoon.

First, I'd like to ask a couple of interrelated financial questions.

In the third quarter, your deferred revenue on the cash flow statement was about $122 million, which was an unusually large amount, and that was versus that $77 million in the third quarter of a year ago.

And I know it's always tricky to compare one quarter versus another in EDA.

But would that increase be a rough proxy for your level of bookings' increase year over year?

In addition, in 2010 you increased your backlog by $100 million, not counting the affect of acquisitions, which were another $100 million.

Would it be fair to say that in fiscal 2011 you should be able to increase your year-end backlog versus last year by at least another $100 million or so?

Then, a couple of follow-ups.

Okay, so the first answer is no.

It's not related to any specific customer activity, but just overall the deferred revenues grew on our ability to invoice our customers, and of course it does grow very traditionally in the third quarter.

It grows compared to the prior quarter based on the profile of our ability to invoice our customers in cases of annually in advance or even quarterly in advance.

It's a very typical program for us to see a growth.

This year, it was even stronger, which relates to general bookings' increase and general abilities to invoice customers based on terms and conditions that we have negotiated.

So, it is very strong and does give confidence as we move forward in the year.

It is a factor that we do look at for managing cash flows, and it gives us a visibility into the amount that we've invoiced, and then therefore have very high probability on collections from that point on.

As far as the backlog, we did not comment at the beginning of the year of what the backlog would do for the year.

We did commit each year that we will disclose the amount of backlog at the end of this year, which would be effectively in an earnings call scheduled at the very end of November.

And we will give the numbers then at that point.

So, again, focus more on the run rate improvement and not just on the absolute gross-dollar values of the bookings because those do move around an awful lot.

For Aart, a couple of product and market questions.

First, at the Design Automation Conference in June, [the detail in] Intel's architecture group gave a pretty interesting talk on the importance of the necessary transformation in EDA, as they put it.

They were talking specifically, for example, about the need to optimize across all of systems, software and silicon together.

The question is, setting IP aside for the moment, how well do you think Synopsys is positioned to meet those kinds of needs, particularly at the systems level?

Then one last one after that.

Okay, yes, I think Gadi Singer gave the presentation, and he is tasked, of course, to try to look at the vision that Intel has for a more encompassing design development flow.

And there is no question that for a lot of products, the system angle is becoming much, much more important.

Now, I don't want to give the impression that many people are looking at a completely integrated system to silicon flow, because there are just too many tasks and they're all very specialized.

In the systems area, though, we have made substantial investments over the last number of years, and they range from two that are at the algorithmic architectural level at the very high end, and the companies that used to invest a lot in those were the high-end communication companies.

We have a number of tools that are focused on the virtual prototyping.

In other words, build a model of the hardware before the hardware exists.

And in that context, we acquired a number of companies and we have just released a product that integrates much of their efforts.

We have some efforts at high-level synthesis.

We have a number of experts in the prototyping based on FPGAs, which has also the benefit that it can be connected directly to analog/mixed-signal boards, for example.

So, we have a lot going is the bottom line, and at the same time I think that this is just the beginning of a field that is still evolving quite a bit.

I would add one more component, though, which is that in that old system thinking, one should also look at IP.

Because in many ways, IP has two faces, and let me just take memory blocks as an example.

You can think of a memory block as a set of transistors that have been really, really polished physically to be optimally dense.

Well, that is the low end of memory.

You can also think of it as almost a software device that can store ones and zeros.

Well, that's the systems perspective.

And the fact that we have a very strong IP position helps us again in looking at the whole system area.

So, I think we are by far and away in the strongest position of all the players.

At the same time, it is still very, very much a beginning market.

All right, lastly, along the lines of some of the earlier questions about where your growth will come from.

Synopsys already has the highest share in IC implementation, almost certainly the plurality of the market.

And of course, you still lead in synthesis, and that category has been doing better over the last year, and you still have very high share in simulation and analysis.

So the question is, in what other areas might you look to gain enough to share in material enough categories that there would be a material impact on your run rates and total revenue?

Well, there are a couple of specific areas where we do not have a high share, so physical verification would be a good example of that.

The entire custom domain, we do not have all that much share in the implementation side, so these are areas that we can grow into.

Secondly, the overall EDA market or EDA plus plus is actually quite a bit larger than Synopsys.

So, the share battles will continue.

It's a competitive market, and so our ambition should be to do better and better.

At the same time, we have been quite explicit that we want to use the strong position we have to use at least some of the capital strength that we have to broaden the TAM.

And you have seen our IP story expand substantially.

We have at least one nice little example in the optical area where we made an investment last year that is turning out to work extremely well.

And so, there are many opportunities.

The demand for new capability is unstoppable at this point in time.

I think we have arrived at the end of the hour, so we would like to thank you for attending the conference call.

Hopefully, the takeaway is that we have very good results for the quarter, a strong outlook for the year, and are very much looking forward to see a number of you, if not all, at the September analyst meeting.

Thank you for your time.

Thank you very much.

Ladies and gentlemen, that concludes our conference today.

We appreciate your participation and for using the AT&T executive teleconference.

And you may now disconnect.