新思科技 (SNPS) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys earnings conference call for fourth quarter and 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).

Today's call will last one hour.

Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference.

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

And at this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you, Nick, and good afternoon, everyone.

With us on the call today are Aart de Geus, Chairman and CEO of Synopsys, and Brian Beattie, Chief Financial Officer.

Today's conference call will include a commentary regarding our Q4 and fiscal 2011 results, and also the definitive agreement to acquire Magma Design Automation, both of which we announced this afternoon.

Before we begin, I would like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts and targets, and will make other forward-looking statements regarding the Company and it's financial results, our expectations about the timing and likelihood of closing the acquisition, and about the potential benefits of a combination.

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 July 31, 2011, our earnings release for the fourth quarter of fiscal year 2011, and our press release announcing the definitive agreement to acquire Magma issued this afternoon.

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 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 supplements.

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

In addition, the information we discuss on this conference call related to our intent to acquire Magma is for informational purposes only.

This information is not an offer to buy, or the solicitation of an offer to sell any securities.

Magma intends to file with the Securities and Exchange Commission preliminary and definitive proxy statements, and other relevant materials in connection with the proposed transaction.

Before making any voting or investment decision with respect to the acquisition, investors are urged to read Magma's proxy statement and the other relevant materials when they become available because they will contain important information about the transaction.

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

Good afternoon, and thank you for joining us.

Today, I'm happy to report, first on our excellent Q4 and fiscal 2011 results and our raised guidance for FY 2012.

And second, on the signing of a definitive agreement to acquire Magma Design Automation which we announced this afternoon.

Let me begin with our results.

Our business in Q4 was strong, closing an outstanding overall fiscal '11, and most importantly, yielding an excellent position heading into FY '12.

Specifically, in Q4 we delivered revenue of $391 million, resulting in $1.536 billion for the fiscal year.

This is 11% growth over FY '10.

With non-GAAP earnings per share of $0.45 in Q4, we delivered $1.80 for the year, above the target range we communicated at the beginning of fiscal '11, and 13% growth over fiscal '10.

In the process, we managed to a solid non-GAAP operating margin of 22.3% for the year, while generating $440 million in operating cash flow.

Our three-year backlog grew to $2.5 billion, and we have more than 80% of the next year's planned revenue scheduled from current backlog.

In summary, a strong year with double-digit growth, in both top and bottom line.

Looking forward to fiscal year 2012, we are raising our outlook.

While we are conscious of the continued economic uncertainty, our good momentum and backlog support an objective of double digit non-GAAP EPS growth.

We plan to achieve this goal on the basis of solid top line growth, and improvement of our operating margin.

Brian will give you more detail in just a minute.

Before moving to the business highlights, let me the address today's announcement that we have signed a definitive agreement to acquire Magma Design Automation.

This acquisition is motivated by our customer's need for further technology acceleration and productivity.

Indeed, today's chip designs require customers to either deal with the very complex physics of advanced 28-, 20- or even 14-nanometer silicon, or squeeze the last bit of performance, power and cost from designs of more mature nodes.

Either way, the R&D and support demands to keep the state of the art moving, necessitate more invention and more investments.

Bringing together the complementary technologies of Synopsys and Magma, as well as our R&D and support capabilities, will help us deliver advanced tools earlier, thus directly impacting our customers' demand for increased design productivity.

As you can understand, although we wanted to share our enthusiasm about this combination, we have limited ability to comment about our specific plans until the transaction is closed.

Brian Beattie will address some of the financial terms, in just a moment.

Looking at our business overall, we see our customers continue to drive design aggressively.

Even in the context of the unsettled economy, we expect electronics to do relatively well, as the main markets of mobile, cloud, and smart-everything remain quite vibrant.

While the rate of growth in semiconductor revenue did slow in 2011, a good number of successful companies beat expectations, and provided positive outlooks.

Customers have shown that they will prioritize the next mobile-connected device, over almost any other discretionary purchase.

At the same time, these devices push the limits of performance and power, efficiency, demanding state-of-the-art EDA and IP solutions.

Among our customers, the race for differentiation is very much on, which explains the rapid adoption of advanced design nodes such as 28- and 20-nanometer In addition, the development of FinFETs or vertical transistors, will bring further density and power consumption improvement, as well as additional requirements for leading-edge EDA solutions.

In this context, EDA and third-party IP are crucial, and Synopsys is positioned well as the technology leader, offering comprehensive and best-in-class solutions, from system design, to chip, to manufacturing.

Let me provide some highlights, beginning with core EDA.

Today's Synopsys enables the most advanced production designs in the world.

For example, major customers such as STMicroelectronics and Samsung, have already taped out their first 20-nanometer test chips with our Galaxy Implementation flow.

In Q4, we announced yet another major technology advance, the integration of our cornerstone IC Compiler solution with Custom Designer.

Even though the product was just introduced, STMicroelectronics has already reported that it reduced it's final layout preparation time by 25% compared to it's previous flow.

While the move to still smaller geometries, with the move -- sorry -- to still smaller geometries, the bridge to manufacturing is increasingly critical, to achieve acceptable yields in chip production.

With our yield explorer tool, designers are now able to identify and correct areas in their design, which affect manufacturability.

This can directly impact our customer's profitability.

In Q4, another highly influential top 10 fabless company chose our solution.

Synopsys is also technology leader in FinFET support, with tools throughout the flow.

Our popular TCAD Solution is where 3D transistor design begins.

It simulates transistors at the near molecular level, and is being used today by nearly every leading semiconductor manufacturer, as well as many fab-lite companies.

The move to smaller geometries brings more high-value chip functionality, but the huge number of transistors on the chip also requires a tremendous amount of verification.

In analog simulation, we are seeing good momentum, as speed and ease-of-use enhancements are enabling us to win important benchmarks in business.

LG Electronics for example, selected Synopsys after we delivered a 10 X acceleration over previous solutions.

In digital, customers continue to depend on our flagship VCS product for their most advanced designs.

VCS had a solid year, and is poised well for FY '12, especially in all the advanced nodes, and for complex chips such as CPUs, graphics cores and sophisticated networking chips.

Our new optical products did very well in 2011, and we expect continued growth in '12.

While a small part of our overall business, it's performance illustrates the importance of simulation even beyond the electronic space.

Now turning to IP and systems which performed very well in 2011 and contributed 23% of total revenue.

At the systems level, we successfully integrated a broad set of virtual platform technologies and acquisitions into a single offering, Virtualizer.

Software development has become a large part of most chip design projects, and virtual platforms are of high value because they accelerate delivery of software by six to nine months.

Another tool aimed at speeding software development and system validation is FPGA-based prototyping.

Our HAPS solution has successfully demonstrated it's effectiveness, and demand has been very good.

The other great source of productivity for customers is Synopsys IP.

As the complexity of IP blocks grows, and external economic pressures continue, customers are increasingly reevaluating make-versus-buy decisions, with more and more IP being outsourced.

We estimate that well under half of IP is outsourced thus far, creating a substantial opportunity for Synopsys.

During the year, we announced more than 40 design wins across more than 30 customers for our USB 3.0 products.

We had our largest year ever in PCI Express controllers, DDR and HDMI.

And for the second year in a row, we received TSMC's Interface IP Partner of the Year Award.

In FY '11, we delivered excellent revenue growth, and improved profitability.

Looking forward, we anticipate continued growth in this area, as we further broaden our IP portfolio, and as customers are already ordering IP for the more advanced nodes.

In conclusion, we finished fiscal '11 strongly in terms of top line, bottom line, backlog, technology and customer relationships.

Our predictable business model provides stability, and supports continued investments, even in the face of the stormy economic situation.

We are confident in our ability to deliver healthy results for the fiscal year, and are setting an objective for double digit non-GAAP EPS growth for FY '12.

Let me now turn the call over to Brian Beattie.

Well, thanks, Aart, and good afternoon.

In my comments today, I will summarize our financial results for the quarter and fiscal year, provide you with our 2012 guidance for Q1 and the full-year, and provide some financial details of the Magma transaction.

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

And we provided reconciliations and explanations in the press release, 8-K, and financial supplement, posted on our website.

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

Now as Aart mentioned, Synopsys delivered a very solid fourth quarter, wrapping up an outstanding year.

FY '11 financial results were highlighted by strong business levels, double digit growth in both revenue and non-GAAP earnings, and considerable free cash flow generation.

Let me now provide some additional detail on our financials.

Q4 total revenue increased 4% to $391 million, and annual revenue grew 11% to $1.536 billion.

Our IP and systems products continued their momentum and achieved double-digit revenue growth in Q4 and the year.

One customer accounted for slightly more than 10% of Q4 and fiscal year revenue.

Greater than 90% of Q4 revenue came from beginning of quarter backlog, while up-front revenue was up 5% of the total for Q4, and 6% for all of FY '11.

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 2.7 years.

We currently expect average duration in fiscal 2012 to be between 2.7 and 2.9 years, as we are seeing some customers refine their contract durations to match their particular design cycles.

Three year backlog increased to $2.5 billion, from $2.4 billion, with a book-to-bill slightly greater than 1.

And finally, we have greater than 80% of our target fiscal 2012 revenue in hand for the coming year, and more than 90% for the coming quarter.

Turning to expenses.

Q4 total GAAP costs and expenses were $334 million, which included $17 million of amortization of intangible assets, and $15 million of stock-based compensation.

For the year, total GAAP costs and expenses were $1.323 billion, which included $69 million of amortization of intangible assets, and $56 million of stock-based compensation.

Q4 total non-GAAP cost and expenses were $305 million, well within our target range.

For the full-year, total non-GAAP costs and expenses were $1.193 billion, an expected increase due mainly to our acquisitions, along with some year-over-year cost pressures, such as employee compensation and the variable compensation impact that resulted from strong orders, and other key financial metrics.

Non-GAAP operating margin was 22% for the quarter, and 22.3% for the full-year.

For all of FY '12, we expect non-GAAP operating margin to increase over FY '11 levels.

Turning now to earnings.

GAAP earnings per share were $0.27 for the quarter and $1.47 for the year, compared to $1.56 for all of 2010.

Q4 non-GAAP earnings per share increased 15% to $0.45, and full-year non-GAAP earnings grew 13% to $1.80.

FY '11 growth was driven primarily by top line growth and a lower effective tax rate, and to a lesser extent, reduced share count.

Q4 non-GAAP tax rate was 24%, within our guidance range.

For the full-year, our tax rate declined to 22%, due primarily to the reenactment of the Federal R&D Tax Credit for fiscal years 2010 and 2011, which resulted in certain one-time tax benefits in fiscal 2011.

For modeling purposes, we think that a non-GAAP tax rate between 25% and 26% is a reasonable estimate for fiscal 2012.

Now turning to our cash and balance sheet items.

Our balance sheet remains strong, with $1 billion in cash and short-term investments.

Of our total cash balance, 23% is onshore, and 77% is offshore.

Of course, our US balance reflects our share repurchase program, and two small acquisitions during the year, both funded with US cash.

We generated a $73 million in cash from operations in Q4, and $440 million for all of fiscal 2011.

At this time, we are targeting operating cash flow of approximately $300 million in FY '12.

As we reiterated at our New York investor meeting last quarter, operating cash flows tend to be lumpy from year-to-year, which is why we believe it's important to focus on multi-year averages.

For the three-year period ended in FY '11, annual operating cash flow was on average, about $340 million.

We expect our operating cash flow quarterly profile to be similar to last year, with a net operating cash outflow during the first quarter of fiscal 2012, due primarily to the timing of our prior year annual incentive compensation payments.

Now continuing on with our cash and balance sheet items, capital expenditures were $15 million for the quarter, and $57 million for the year.

Our fiscal 2012, we see capital spending, coming in approximately $50 million.

During the quarter, we purchased 1 million shares of Synopsys stock in the open market for $25 million, and also entered into an accelerated share repurchase agreement or ASR for $75 million.

Under this agreement, we receive 1.7 million shares in Q4, and expect to receive the balance of approximately 1.1 million shares in Q1 when the ASR is completed.

For all of fiscal 2011, we were aggressive with our balance sheet, and spent a $435 million repurchasing 15.1 million shares, buying back 4 times as many shares as we granted during the year.

We have approximately $313 million remaining on our current share repurchase authorization.

Now when factoring in cash generated from options exercised during the year, we spent a net $299 million on repurchases.

FY '11 fully diluted share count declined 1.5 million to 150 million shares.

And more importantly, Q4 share count declined 5.6 million year-over-year to 146.4 million as a result of our share repurchases.

Continuing on with the balance sheet items, Q4 net accounts receivable totaled $203 million, and DSO was 45 days, reflecting the high quality of our AR portfolio.

Deferred revenue at the end of the quarter was $760 million, and we ended Q4 with approximately 6,800 employees.

Now while we've selectively grown our headcount, primarily through acquisitions, we continue to have about a third of our total employees in the lower cost geographies.

We also renewed our credit facility in Q4 for $350 million.

This revolver, which may be increased by an additional $150 million, provides excellent flexibility in supporting our business operations.

Now to some of the financial details of the Magma transaction.

The value of the transaction is approximately $507 million, net of cash and debt acquired, or $7.35 per Magma share, which we intend to fund using a combination of US cash and debt, the specifics of which will be determined as we approach the close.

Subject to Hart-Scott-Rodino regulatory review and other customary closing conditions, including Magma shareholder approval, we expect the transaction to close in the second calendar quarter of 2012.

Given the timing of the anticipated close, we expect the combination to be modestly accretive to 2012 non-GAAP earnings per share.

We will update 2012 guidance at the time of close.

Now let's address our first quarter and fiscal 2012 guidance, which excludes Magma and any future M&A.

Our GAAP targets also exclude any future acquisition-related expenses, which may be incurred in Q1 and beyond.

Similar to what we saw in fiscal 2007, we have an extra week in fiscal 2012 that occurs in the first quarter.

For the first quarter of FY '12, our targets are revenue between $412 million and $420 million.

Total GAAP costs and expenses between $340 million and $357 million, which includes approximately $16 million of stock-based compensation expense.

Total non-GAAP costs and expenses between $310 million and $320 million.

Other income expense between zero and $2 million.

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

Outstanding shares between 145 million and 149 million.

GAAP earnings of $0.33 to $0.38 per share, and non-GAAP earnings of $0.51 to $0.53 per share.

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

Now our fiscal 2012 outlook, based on what we know now, we expect revenue between $1.64 billion and $1.665 billion, a growth rate of approximately 7% to 8%.

Other income and expense between zero and $4 million.

A non-GAAP tax rate between 25% and 26%.

Outstanding shares between 145 million and 149 million.

GAAP earnings per share between $1.28 and $1.44, which includes the impact of approximately $61 million in stock-based compensation expense.

Non-GAAP earnings per share of $1.93 to $1.99, and cash flow from operations of approximately $300 million.

Now finally, to help you with your modeling, let me provide some brief commentary on our 2012 quarterly revenue and expense profile.

At this time, revenue in the first half is expected to be higher than the second half, reflecting the extra week in Q1, which contributes about $25 million to revenues.

We expect Q2 revenue to be a similar to Q1, reflecting timing of certain deals, deliverables and consulting milestones, and the second half revenue to be evenly distributed between Q3 and Q4.

At this time, we expect Q1 expenses to be higher than what is typical of our business due to the extra week, a sequential decrease in Q2 and Q3, which is moderately below our traditional higher Q4.

As a result, we expect Q2 to be the highest quarter for non-GAAP earnings per share, with Q3 and Q4 roughly equal, again, due to the timing of revenues.

So in summary, we are very pleased with our exceptional fourth quarter and fiscal 2011 results highlighted by top and bottom line growth, and strong cash flow generation.

We look forward to another year of solid business execution.

And with that, I will turn it over to Lisa, for a word before we open it up for questions.

Thank you, Brian.

We know there will be a lot of questions today.

So to help us accommodate everyone, we would like to ask a favor, and request that you try to focus on one or two questions at first.

And then we will, of course, come back around after we get everyone a chance, to ask additional questions.

Thank you very much.

And I would like to turn it over to the operator.

Thank you.

(Operator Instructions).

Our first question will come from the line of Rich Valera with Needham & Company.

Thank you.

Good afternoon.

I guess to, start it off on the acquisition, Aart, with all due respect in your comments, you suggested that Magma is complementary to you, but most people would suggest, I think, that they have quite a bit of overlap with your core businesses.

So just wondering how you think about how much overlap there is there, how much do you see as not overlapping, and how do you sort of deal with that, potentially from a regulatory perspective?

Thanks.

Well, as you know EDA is a very competitive field, with constant innovation and many tools, with many different capabilities, and often catering to different sub segments of the market.

Simultaneously, as I highlighted my preamble, what we are seeing right now -- and when I mean right now, I am really meaning the last 18 months or so -- is just a tremendous acceleration of technology demands.

And I think partially due to the fact, that there is no opportunity in some of the mobile devices that demand really state-of-the-art technology, that the advances needed to just keep up with what the customers need, will require substantial R&D investment and also substantial technical support.

And so it's in that context, that there is no question, that we will be able to jointly, much better support the customer.

As a matter of fact, we have already gotten a wave of very positive feedback from the customers that we have spoken to.

Great.

And just to follow up on that, have you done any preliminary anti-trust analysis.

Do you have any feel for how this might be viewed?

Obviously, Magma, much smaller in scale than the other three big players, which I think would be something in your favor, but still a lot of overlap.

Do you have any initial feel for that, and anything that you can share with us?

Of course, I can not go into any of the details, but we understand perfectly the process of going through the governmental steps.

And of course, we do our homework beforehand very carefully.

But in that context, we will engage with the government on these issues, as we have done in the past, and are confident in the outcome.

Great, and just one quick one if I could for Brian.

When you talk about being somewhat accretive or modestly accretive into fiscal '12, does that include the expected loss of deferred revenue from Magma?

It does Rich, yes.

Okay.

Perfect.

Thank you.

You're welcome.

Thank you.

Our next question will come from Raj Seth with Cowen and Company.

Hi.

Thanks very much.

Aart, if I could follow up on Rich's line of questioning, just a bit.

And congratulations, actually, I think it's quite a good deal.

Is your plan, to the extent you can discuss it at all, is your plan to keep two platforms in digital, your Galaxy platform and Talus where there is overlap?

Or would you anticipate over some time, taking sort of the best of both worlds and creating sort of a new optimized flow for some of the leading-edge customers that you have talked about?

Good question.

And as you understand, we cannot comment about specific plans, partially because these plans can only be finalized or developed once we have closed the deal.

But there are two fundamental principles that we follow.

And the first principle is a very, very important one, which is do not disrupt the customer.

In both of our values, and maybe our business thinking, it is very clear customers absolutely rely on for chips that are vital to their success.

And we will continue to support them being successful, through all of those chips.

Simultaneously, in the long-term, we -- actually in the short-term, we also follow the principle of understanding where the most rapid developments in technology are needed.

And as I mentioned earlier, the race is very much on in technology.

And so long-term, we will obviously deliver more precise road maps once this is closed, but long-term we absolutely have to lead the state-of-the-art.

This is important, for not just the EDA industry, it is important for the semiconductor industry, and a lot of opportunities there.

So we have a lot of work ahead of us here.

Yes.

I mean, given that both of these flows are somewhat integrated -- you mentioned a lot of work.

How long did you think it takes to resolve these kinds of issues in the customer base, notwithstanding your commentary on not wanting to disrupt them?

Is this something that you would anticipate in this domain that takes, I don't know a year or 18 months?

Or is this something that takes even longer?

And then I'm curious as it relates to the attractiveness of Magma.

They have had some success, certainly in FineSim and some of the other simulation products they have.

Was there, aside from the obvious advantages of taking some of the Talus stuff and some of those customers under your wing, was something particular in the product set that was -- or has become more attractive to you, and the -- recently that helped drive your decision to do this now?

So obviously, I cannot comment about specific products at this point in time.

But what is clear, and I want to emphasize that, when you say, how long will it take for customers to know.

They should know immediately.

We will support them.

It's that simple.

We care first and foremost about their success, with whichever tools they use.

And we will continue to do that as much as we possibly can, until they tapeout successfully, and probably long beyond that.

At the same time, road maps are actually almost a misnomer, because the road keeps changing very rapidly in our field.

And so I think we have an opportunity here, to think through what are the things that in the long-term will have the biggest impact on our customers.

And we have such a large number of requests and demands from the customers right now, that I am not worried at all that, we will not be able to really make a difference for the customers soon after we close the transaction.

Right.

And just a quick one for Brian.

Brian, in your accretion commentary, are you assuming some meaningful cost reductions out of the combination?

You mentioned to Rich that deferred was accommodated in that commentary.

Do have a number, in terms of channel costs, or anything else to come out, that you are assuming?

Well, I think these are all -- the forms of the details are going to be worked out, as we work through the regulatory approvals of the next little while.

But certainly, as we look at the company, I think there is certain levels of synergies, you might expect to come through.

So as we see that, plus the revenues, we see the deal as modestly accretive in FY '12, assuming it can close in the second quarter, calendar quarter of next year.

Right.

Congratulations again.

Thanks.

Thank you.

Thank you.

And our question comes from the line of Sterling Auty with JPMorgan.

Yes, thanks.

Hello.

I want to keep beating a dead horse here.

In terms of the regulatory environment that we are in, it feels like you've got, number one, buying number four, we see this in a much larger case that is out there when I look specifically at SPICE simulators, and even the strong combined market share on digital Place and Route.

What is it that gave you the confidence that you felt that you could move forward, and get a transaction like this done?

Yes, you are beating indeed a dead horse.

We won't go much deeper in this area, but we did very good due diligence on these areas.

We have seen that it's an extremely competitive landscape, with actually many more players than what you're mentioning.

And so our sense right now, is that we are on a good track.

But we will follow the rules and worked with the HSR authorities to make this the right thing.

So [Marvell] moved over to subscription basically about the same time that Cadence did.

So thinking about how the combined the financials will look, Brian, are you anticipating of having a non-GAAP revenue, where you are actually going to add back the deferred revenue that is written down?

And that is part of the accretion that we are talking about?

No, Sterling, we typically don't do that.

In the case, if you look at Magma's financials, there is just approximately $20 million of deferred revenue backlog.

So relative to the entire size of the company, it's not that significant.

So again, people know what the amount is.

We typically do not adjust for that.

I think the results will be pretty visible, as we complete the transaction.

And we will build that into the guidance as the deal closes, and we'll update our outlook for 2012 at that point.

All right.

Great.

And last question just on the core business.

You're finishing up a strong year, and you had the shortened contract durations, you made some commentary there.

Just as you look at the macro environment, and some of the comments coming out of semis, do you think that the contract durations that you have included are short enough?

Could we actually go to an even shorter level, as you move into 2012, or does it just not make economic sense for them to go much shorter?

Actually, I am in the second camp.

I don't think that it's going to be much shorter.

It's possible that people will want to go a little bit shorter, if they feel a high degree of uncertainty of the other markets around us.

And you know more about it than I do, but we all observe the -- our screens being red one day, and green the next, based on effects that have nothing to do with the semiconductor industry.

But obviously, there is a certain degree of nervousness overall.

Having said that, it is precisely the model that we have, and the really strong backlog, and relatively speaking very long commitment that we have, that gives us the ability to weather any storm very well.

And it's particularly positive to be able to move forward on this transaction at a time where our own results for the year were good, our outlook is very solid.

And as you have heard, that we have a very large portion of our FY '12 business already scheduled, in hand.

And so in that sense, no matter what, I think there are few companies that have a degree of stability and solidity that we have in light of the degree of uncertain, as in question marks around it.

All right.

Great.

Thank you.

Thank you.

Our next question comes from Paul Thomas with Bank of America Merrill Lynch.

Your line is open.

Good afternoon.

Thanks for taking my question.

If we look at the guidance, the full-year guidance for Synopsys stand-alone -- you're in the 7% to 8% range.

And if we take out the extra week, it would be a little bit below that.

And if, Aart, and we look back to your previous commentary about what you'd expect from a normal year for core and system and IP growth, it seems like you might be in line with that, to a little bit less than that.

And so I just wanted to get your sense of, do think that this year is starting out as a little bit below what you might expect for normal year, or are you just being conservative at this point?

I think we may have the reputation that we are conservative, and we tend to deliver well on commitments, let's say.

But at the same time, no, my sense is not that we are starting off particularly weak.

On the contrary, I think that as a Company we feel that we have good momentum.

But not to beat another dead horse, which is the economy around us, there is clearly a certain degree of uncertainty about what may happen.

And not that, that necessarily changes the actual outcome on markets, but it does change a little bit the caution that customers will display.

And so in that context, we actually feel that we are doing quite well.

Now it may be digging slightly deeper into your question, a different angle which is, we've said before that the growth in core EDA is less high than some of the new areas that we are growing in.

And so, for example, if you look at the IP area, we are clearly doing very well there.

And some years, we will see a little bit more core EDA than expected.

Some years we will see a little bit more IP than expected.

But in aggregate, we felt comfortable enough, that without any M&A, we are right now setting an objective of double digit non-GAAP EPS growth.

And that is definitely more aggressive than what we did last year, even if we delivered more than what we had promised.

Okay.

Thank you very much.

You are welcome, Paul.

Thank you.

Next we go to the line of Tom Diffely with the D.A.

Davidson.

Yes, good afternoon.

Just one question on LAVA.

Is there a break-up fee, a no-shop or go-shop provision at all?

Yes.

There is some -- included in the definitive agreement, which we signed this afternoon is a standard break-up fee of 3.25%, that's about $17 million to the value.

There is also a reverse break-up fee of $30 million, that we would pay Magma.

So it works on both sides of the agreement, and you will see all the details in the definitive agreement.

Okay.

And who are the advisors on this one?

On our side, we did not use external advisors.

We had, of course, a number of legal counsels, specifically, Dewey & LeBoeuf.

On the Magma side, you can ask them, but they use [Catalyst].

Okay.

And then, Aart, did something happen with the business, just as far as normal seasonality?

I mean, usually fourth quarters are quite strong, and it seems like the last couple of years, it's become a lot more evenly split through the year?

Oh, yes.

And there is a good reason for that, it's because these are the benefits of much more ratable businesses.

You have very natural and good objective setting in human behavior, that at the end of the year, you really want to close all the deals that you have been working on.

And so therefore, there tends to be always somewhat of a push, in any business, ratable or not, in that context.

But from an utilization of tools, and from a revenue recognition point of view, the two things reflect each other now very well.

And so in that sense, this is the part of the positive outcome of having moved to a much more ratable business model.

Now there is a small percentage of this that is not completely ratable, because it tends to be attached to either specific milestones or IP delivery.

And with IP growing, you will see a slight increase there.

At the same time though, there is a certain base of IP business that keeps happening every quarter.

So even there, you don't see all that much fluctuation.

And given that people really buy IP when they need it, meaning when they have projects, there is not like over-purchasing massively occurring there.

And so it's in that sense, also a fairly predictable revenue stream.

So I think we have a very balanced model that is well-suited for multi-year, technical and support investments, which is what our customers care about.

And maybe I would just add, with the transparency of course, and that we have the visibility, using $2.5 billion of backlog that we profile out over the next three years, we have that greater than 80% of the full-year already booked.

And that profile, as you know, we split that by customer, we split the cash flows by customer, by quarter, so we can get an excellent level of visibility.

And that is what you see, relative to the quarterly profiles.

We just wanted to give you all of the transparencies on the quarter 1, quarter 2 shifts, and quarter 3 and 4, for the year.

So no surprises during the year, and we are committed to delivering on that.

Okay.

And Brian, I didn't hear -- did you mention anything about the go-shop provision?

No I did not, no.

So there is nothing in there right now?

No.

Okay.

And then I was curious, with your book-to-bill being around 1 for the year, did acquisitions impact that in either direction?

For -- are you talking about past year?

Yes.

Yes, of course, because we have done many acquisitions over the years.

They layer in over time.

Once a company gets acquired, of course, gradually -- actually reasonably fast, the revenue becomes indistinguishable of the other revenue.

And so if -- some of you had the opportunity to attend our Investor presentation in New York a couple months ago, I tried to explain that the way we grow is really through a combination of investing in new technology ourself, as well as acquiring technology.

And so all of these things are part of an business model that has been honed over many years, and is working well for us.

Okay.

I was just kind of curious if the book-to-bill would have been close to 1, even without acquisitions?

It is really not a big factor at all.

If you looked at the acquisitions, the largest we did in the fourth quarter of last year -- of 2010 I should say -- and the impact relative to bookings level is, new deals get booked as they were.

The backlog comes over, as it were, and then the revenue, as you know gets a bit of a revenue haircut, due to some of the deferred revenues that were on the balance sheet.

And then that folds in over the year.

So again, just relative to our total business, it's really an insignificant impact on the book-to-bill.

Okay.

And then finally, when you look at the $300 million projected for cash flow next year, what is the projected kind of onshore, offshore mix of that?

Well, we have our certain balance right now of 23%, 77% of our $1 billion dollars in cash.

As we go forward on operating cash flow, it is split about 50/50, of onshore and offshore cash.

Okay.

Thank you.

Okay.

Thank you.

And our next question is from Mahesh Sanganeria with RBC Capital Markets.

Thank you.

Again, congratulations on the acquisition.

Thank you.

Assuming that most of the revenue from Magma side will come from Place & Route, can you refresh us on the market place in that market, in terms of where the -- what are the market shares, and what are the features of different products?

And how will combining your product with Magma, does that give you a pricing advantage, but less than other players in the market.

Well, the Place & Route market is extremely competitive with many players.

And moreover, most of the players have multiple Place & Route systems.

We, ourselves, I think have 4 routers or something like that.

So all of these things tend to end up being quickly specialized in multiple dimensions, be it detailed route, be it block route, be it [clock T-routing] or top-level routing.

And even there, there are specializations for different end markets.

So there is really a plethora of technology.

And the very fact that customers at time, have a hard time knowing what are the strengths and weaknesses of each of the customers, makes it impossible for me to go into detail here.

But suffice to say, this is an area that sees continual evolution and innovation, and new entrants and quite a large number of players.

And I think our challenge is going to be just live up to the expectations of the customers that we have, and we have done well, And it's never been an easy journey.

But does having a bigger pie, does that help you in terms of pricing, going forward?

No, I don't think so.

The -- fundamentally, this is extremely competitive market.

I know that many of you have asked pricing questions for many years.

And the reality is that, most of the pricing question is actually answered in a very different area, which is the content.

Meaning that the rate of change of what customers get for the same dollar is astronomically high.

Meaning, we deliver a really large number of -- a large amount of value, and continually changing value.

Now at times, we try to explain that to the customer, and they say, yes, and so do we.

Meaning that they too, for the same size chips, get about the same amount of money, while delivering dramatically new capabilities.

That is the nature of high-tech.

And so I think that none of these things are won or lost on pricing.

They are won or lost on the basis of driving technology forward and being really there for the customer when they need you in support.

And that is really what we are focusing on, in how we build Synopsys.

One last question, Brian.

How should we think about, in terms of your cash requirement to -- I mean, right now you have what, $230 million onshore.

How much do you need to run the business?

I would think that remaining, you will have to issue a debt?

Is that right way to think about it?

Well, what we covered today as well, is the renewal of our line of credit facility, with very attractive rates, just renewing what we have in place earlier.

And that is up to $350 million.

So as we look forward, we will have more details of this, as we complete all of the acquisition-related activities over the next six months.

It is also, of course, a period where we will generate additional cash for the business.

And at that point, we will be determining to what extent do we use a relatively low-cost line of credit, plus our US cash that we have available.

And as many transactions you have on a global basis, you do sometimes have to put your IP into some of the other jurisdictions, and that also requires in some ways, some of the offshore cash.

So a lot of details to be worked through, but again we are in very good shape relative to cash in the cash availabilities.

We do not have any use of our line of credit already.

And we are in fully compliance with all of the covenants built into those agreements as well.

So we're very good shape.

Thank you.

Thank you.

(Operator Instructions).

We will go now to the line of Jay Vleeschhouwer with Griffin Securities.

Thanks.

Good afternoon.

Aart, I would like to ask if there is anything instructive from your experience with the Avanti acquisition a decade ago for what might occur with the Magma acquisition?

What I mean is, you bought then a company, that was barely overlapping with Synopsys, but it took you a number of years longer to fully benefit from the integration of their complementary technology.

And so again, the question is, do you think that there is anything that is instructive from that experience, that you may be able to apply to LAVA?

Yes.

Actually, a very interesting question.

We pride ourselves on being a learning company, and one can argue how good we are at that.

But there is no question that -- not just the Avanti acquisition, but a number of others, each one of those have taught us new facets.

I think it's important to start one of the fundamental principles, back to it's all about the customer.

And so no matter what we think about our plans and directions and technology, the first thing to do is to make sure that the customers are successful during this.

Secondly, you are right that sometimes how one integrates or how one leverages new technologies, or how one invents new things, is very much a function of how one executes.

And of course, we have learned many management lessons on how to do that better, how to set the objectives aggressively, while at the same time not a short-shrifting the support of the existing customer.

And so, I think we will be able to execute more rapidly than in the past.

But at the same time, I think it is also clear that the external landscape has evolved significantly, since the middle of the last decade.

And so, it will be very important to involve customers, in helping us set some of the key priorities, because we are getting so much feedback of them wanting us to do even more than what we are doing today.

So it's another a learning experience I guess, but we definitely benefit from the teachings of the past.

Could you comment on how LAVA helps you with your adjacencies strategy, particularly in the area of system level design, or anything else you may care to mention?

Well, of course, there are many adjacencies.

And each one of these technologies has some key angles that are very valuable.

Maybe highlighting one, which is the whole custom analog mixed signal domain, is one where an enormous amount of invention actually is needed.

Or maybe innovation is a better word.

Because it is clear that not only has analog mixed signal design not lived up to the same rate of productivity increase, it is in addition, if I could use the term, harassed, by the physics of small dimensions, in a fashion that is actually tougher than on some of the design side -- of the digital side.

And so, I think they're areas here that can be exciting for us going forward.

But this is all looking into the future, at a time where we don't have specific plans ready yet.

And so, we will communicate when we are ready.

But the space around us is still very, very big.

Thanks.

And just a market follow-up, and one quick one for Brian.

At the Analyst meeting, John mentioned that by your estimation, about a tenth of the typical cost of an IC or semi project is comprised of EDA tools.

And I don't know if that was a specific or limited case example you were giving, but could you comment on that ratio, particularly in the context of all the technology and market pressures you referred to.

If there is a possibility that that proportion, that one-tenth share that you mentioned, might possibly go up?

Well, maybe I should take care of that question, Jay, if you don't mind.

The challenge with these statements, of course, is they are always directionally very correct.

And the second decimal point is always very suspect, in terms of putting exact numbers.

What is clear though, and we are seeing it with our customer engagement, is that the depth of the engagement is becoming very different than just three or four years ago.

And the reason for that is simple, which is, A -- the customers on the outside feel very much the pressure of having markets that are increasingly a little bit winner takes all, and are very fast.

And so, you cannot -- you cannot miss the tapeout ball.

Secondly is that, what they are attempting to do on these chips is complex in every dimension you can think about.

And by the way, the EDA tools, the word ease-of-use as much as it's a positive, now is continually in conflict with the necessity to be incredibly capable from a technology point of view, i.e., is another way of saying, it's that they're not necessarily that easy to use.

In other words, your support is suddenly becoming much more than support.

It's absolutely being a member of the design team.

And I think it's much more collaboration than anything else.

Therefore the conclusion has to be, that customers that start to appreciate what we actually can do to help them differentiate, rather than just a part of their cost equation, will do much better.

And we definitely have evidence of that with a number of customers, where we will take some pride in their success because we know it was done together.

And it is their differentiation.

And the moment when one moves more into the space of helping customers differentiate, rather than just be part of their cost equation, which by definition is always under pressure, I think we have a good opportunity.

And I think this applies to the entire EDA industry, not just to Synopsys.

And that is maybe the reason you hear, all in all, reasonably good results from all the participants in our industry.

Okay.

Just last one then for Brian.

Could you comment on the degree of operating margin improvement in the IP business in fiscal '11?

And could you perhaps talk about the extent of improvement you might see in fiscal '12 in IP?

We don't break out all the details down to the margin levels.

As you can see from the revenue growth in IP and systems, as a result of the acquisitions, and our organic growth, we grew by 75% on the top line.

And along with that came a very nice improvement in the operating margins for that business as well.

And again, that is what we are counting on to continue in 2012, as we have committed to expand our operating margins in the year.

And again, we have long-term targets and continuing to work towards, but again, a nice improvement in 2012, compared to where we are at the end of '11.

Thank you.

Thank you.

And speakers, we have about 3 minutes left until the top of the hour.

And we will go to a follow-up question with Sterling Auty with JPMorgan.

Thanks.

Brian, I want to drill into the idea, you mentioned the $20 million of deferred revenue.

So Magma had about $300 million of backlog coming into this fiscal year.

They have the July fiscal year.

So my question is this.

As you go through the accounting on the merger, would it only be the deferred revenue write-down that you wouldn't get a chance to put through the income statement?

If they haven't actually issued an invoice for -- let's say, an annual collection on a three-year deal, if they are paying once a year, does a big chunk of that backlog -- is that still eligible to come through the income statement for the combined Company?

Yes, I can't comment on the specifics of their business, but I will give you the update on how the accounting is done.

And what happens is, you do look at the deferred revenues at the point of closing the agreement, and signing all the final agreements after the shareholder vote.

And then, given it's software accounting, there is roughly a haircut, between -- in every deal we do, of 75% to 85%.

And that is it just based on the deferred revenues, on the books, at that point in time.

The rest of backlogs, and other contracts, typically are able to be invoiced, collected, and again, reflect the commitments that are in place, in the companies that we have acquired.

So that's really the haircut you see, is just the deferred revenues at that point in time.

All the rest is cash due, it's revenues in the future, and should contribute to the growth of the Company.

Okay.

So that is a big difference in terms of -- you would think of a subscription combination as taking a massive haircut on the combined company.

But based on what is there, it's sounds like it is a small haircut.

So that makes more sense.

Aart, one question to you.

Magma spent a lot of time and effort building out an analog platform, just like yourself, to compete with Cadence.

As you looked at that platform, how fresh is that technology relative to Synopsys' own efforts, and how important was that in the combination?

Well, in general, we cannot comment too much of the details of the products at this point in time.

But this is certainly an area that is highly complementary.

And as I mentioned earlier, the custom area is really in need for a lot of innovation.

And so I'm not worried that the capabilities that the companies offer, cannot be leveraged in many different ways.

And actually are badly needed in the market, frankly.

All right.

Thank you guys.

Thank you.

Thank you, speakers.

There no further questions in queue.

Well, it's almost perfect timing, because it's 3 o'clock.

So thank you very much for attending the session.

I understand, obviously, that with the acquisition, they are many questions, many that at this point in time, we can't answer until it's closed.

You understand that.

I also want to make sure that, notwithstanding the excitement of M&A, the really big message here was that we did have a very strong '11.

And most importantly, the strength manifested itself in our ability to set more aggressive objectives for FY '12.

And so, without M&A, I think we are sharing a very strong outlook with you.

And it's on to the next year.

Thank you very much for your support during FY '11.

And we hope to have further communication with you in what is now the new fiscal year.

Thank you.

Thank you, ladies and gentlemen, that does conclude is our conference for today.

And we do thank you for your participation for using AT&T executive teleconference.

You may now disconnect.