新思科技 (SNPS) 2012 Q3 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 2012.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session with instructions 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 reminder, today's conference is being recorded.

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

Please go ahead.

Thank you, Dave.

Good afternoon, everyone.

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

Before we begin our remarks this afternoon, I would like to remind everyone that during the course of this conference call, Synopsys will discuss plans, forecasts and targets and will make other forward-looking statements regarding the Company, its business and its financial results.

While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent quarterly report on form 10-Q and today's earnings press release.

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 8-K, the earnings press release, and the financial supplement that we released today.

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, and thank you for joining us.

Today, I'm pleased to report excellent Q3 results, an increase in non-GAAP earnings and cash flow guidance for the full year, and excellent progress on our product road map and acquisitions integration.

Let me begin with a summary of our results.

Our business in Q3 was strong, with revenue of $444 million, non-GAAP earnings per share of $0.55, and excellent operating cash flow.

For the year, we are raising the midpoint of our non-GAAP EPS outlook by $0.05, to a range of $2.09 to $2.11.

We are also raising our operating cash flow outlook to approximately $450 million, and we reiterate our target of high single-digit non-GAAP EPS growth for 2013.

Brian will provide more financial details for the current quarter and year in just a moment.

Let me briefly comment on the current landscape.

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

Even in the context of an uncertain economy, they are focused on accelerating the innovation required to stay competitive.

In this context, EDA and IP are increasing in importance, enabling designers to achieve the necessary power, performance, and cost specs of each wave of new products within the tight schedules dictated by challenging end markets.

Synopsys is at the forefront of this design wave.

Our financial strength has enabled us to invest in innovation and global support consistently over many years.

Our technically deep and complete solutions are hard to beat in benchmarks, and our corporate stability makes us an ideal partner in any phase of the business cycle.

So regardless of fluctuations in the overall economy, we expect Synopsys to continue to do very well.

From the perspective of our customers, we continue to see rapid migration to ever more advanced technology nodes, an area in which Synopsys is particularly well-qualified.

Migration to the very advanced 20 nanometer node is progressing rapidly, as we now track approximately 80 active 20 nanometer designs.

We're also supporting intense efforts in the development of FinFETs, which are the fundamentally new vertical transistors that are needed to keep Moore's Law on track.

Here Synopsys is at the forefront through our TCAD offering, which is used to do three-dimensional simulations of these new devices.

Our latest IC Validator physical verification solution also supports emerging FinFET requirements and is already demonstrating success with customers.

Leading-edge customers such as Samsung and STMicroelectronics have been taping out 20 nanometer designs using our solutions for more than two years now.

At this summer's Design Automation Conference, ST, GLOBALFOUNDRIES, Samsung and Oracle highlighted remarkable 20 nanometer design successes using IC Compiler.

Moving to 28 and 32 nanometers, which we consider the mainstream leading-edge node, we are seeing rapidly broadening adoption.

While the designs are complex, the design rules are now stable and [recent] yield progress has improved the availability of manufacturing capacity.

Approximately 80% of 20 and 28 nanometer designs use Synopsys physical design, and approximately 70% use Synopsys verification.

To achieve this, 20 nanometer alignment with foundries and with ecosystem partners such as ARM, GLOBALFOUNDRIES and Samsung are vital.

[ADAC] these three partners described our excellent collaboration with Synopsys is essential to help mutual customers address leading-edge challenges.

In Q3, Samsung announced qualification of Synopsys Galaxy Design platform for their 20 nanometer processes, and TSMC announced phase one certification of Galaxy for their 20 nanometer.

I should add that, although less in the limelight, 45 and 65 nanometer design can be very challenging, as well.

While the technology is clearly well proven and our tools have been honed over thousands of designs, our customers still push for maximum functionality and performance and minimum power and cost.

It's interesting to note that many of our tool innovations aimed at the advanced nodes, also greatly benefit the more mainstream technologies and thus, directly improve the economics of our customers in those nodes.

Let me now give a brief update on the integration of Magma, the acquisition which closed in February.

As we had planned, within 30 days we had fully integrated our teams, retaining the great majority of their technologists.

30 days later, we had completed our listening tour of the key customers.

Another 30 days after that, we shared road maps with those customers.

Overall, response has been very positive, as customers saw us first and foremost support their existing designs.

Secondly, build on most Magma tools that they thought were strong.

And third, immediately begin accelerating the joint long-term road maps.

With this enhanced confidence, we have seen a number of customers migrate to Synopsys faster than originally anticipated.

A key part of that road map is analog mixed signal, an area with particular strength for us in verification and opportunity in custom design.

In Verification, the addition of Magma's FineSim solution, which had especially good success in memory companies, has been very well received by the broader Synopsys customer base.

In custom design, we continue to build a more and more differentiated solution and have seen the number of tapeouts with Custom Designer continue to grow.

To further accelerate innovation in this area, we recently acquired Ciranova and announced a definitive agreement to acquire SpringSoft.

In addition to some excellent shape-based routing and optimization technology from Magma, Ciranova brings strong placement in a number of other key pieces.

SpringSoft, which is the world's second largest provider of custom design tools, contributes not only great products, but also an expanded geographic reach.

Headquartered in Taiwan, SpringSoft broadens our analog mixed signal product offering, while strengthening our position in the growing Asia-Pacific market.

SpringSoft is also the technology leader in functional debug tools which are increasingly critical for complex designs.

Their tools are frequently paired with our simulation solution and are perfectly complementary to our offering.

Here again, we expect the acquisition to accelerate our future road maps and drive good business growth in an area of great customer need.

To round out the SpringSoft comments, we are currently executing tender offer and Taiwan regulatory approval processes which can take several months.

We will then move to SpringSoft shareholder approval.

We expect the transition to close in our first fiscal quarter and anticipate the SpringSoft addition to be slightly accretive to 2013 non-GAAP EPS.

Now let me turn to IP and systems, both of which are growing in importance and essential to meeting schedules on complex products.

Similar to our core tools business, we have been systematically investing in both areas for many years.

In IP, we have built a large lead in terms of portfolio of [titles], reliability and quality,and customer commitment to us.

Today, we are second only to our business partner ARM and our focus is to be the leading provider of connectivity, analog, and memory IP.

IP revenue grew nicely again this quarter and we saw continued momentum with numerous customer wins in PCI Express, USB 3.0, and memory compilers among others.

In systems, to complement our historically strong presence in the mobile market, we are methodically expanding our reach in the automotive market with virtual prototyping.

Recall that prototyping can accelerate embedded software development by six to 12 months, and with nearly 100 million lines of code in today's premium cars, virtual prototyping is a must-use technology.

Consequently, we are seeing good momentum in the automotive space with companies such as Renesas and Infineon further adopting Virtualizer to enable their customers to develop software earlier.

During Q3, we also launched the industry's first hybrid prototyping solution, which seamlessly integrates software-based virtual prototyping and FPGA-based prototyping approaches.

Even at this early stage, we are already seeing strong and growing customer interest.

In conclusion, we delivered excellent Q3 revenue, earnings, and cash flow.

As a result, we are raising cash flow and non-GAAP EPS guidance for the year.

The EDA and IP industries are doing well, and Synopsys in particular is executing on all fronts, with strong demand for our technology across the board.

Looking forward, we remain committed to deliver continued solid growth and profitability in the years to come.

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

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

In my comments today, I will summarize our financial results for the quarter, provide you with our guidance for Q4 and the full year, and provide some financial details of the SpringSoft transaction.

As a reminder, we will not be breaking out the impact of Magma, as the Company is now deeply integrated.

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

Synopsys delivered a great quarter, highlighted by strong business levels, increased run rate, double-digit growth in both revenue and non-GAAP earnings, and considerable free cash flow generation.

Total revenue was $444 million, an increase of 15% compared to a year ago, and within our target range.

We delivered growth across all product groups, with particular strength in IP and systems.

Greater than 90% of Q3 revenue came from beginning of quarter backlog, and one customer accounted for slightly more than 10% of third quarter revenue.

The average length of our renewable customer license commitments for the quarter was about 2.5 years.

We continue to expect average duration in fiscal 2012 to be about 2.8 years, which is very similar to last year.

Turning to expenses, total GAAP costs and expenses were $380 million, which included $26 million of amortization of intangible assets, $17 million of stock-based compensation, and $3.7 million of acquisition-related costs.

Total non-GAAP costs and expenses were $335 million, an expected year-over-year increase due to increases in head count, and expenses from our recent acquisitions, but at the low end of our guidance range.

This was driven primarily by timing of expenses, such as some hiring and other expenses, that shifted out of Q3 into Q4.

Non-GAAP operating margin was 24.5% for the quarter and about 24% for the first three quarters of the year.

For all of FY '12, we are still on track to expand non-GAAP operating margin by more than 100 basis points over FY '11 levels.

Turning now to earnings.

GAAP earnings per share were $0.50.

Non-GAAP earnings per share increased 20% to $0.55, above our target range.

Now turning to our cash and balance sheet items.

Our balance sheet remains strong, with $964 million in cash and cash equivalents.

Of our total cash balance, 22% was onshore at quarter end, and 78% was offshore.

We paid back the outstanding $100 million of our revolving debt, along with $7.5 million of our term loan, leaving only the $142.5 million term loan outstanding.

Additionally, we made two small acquisitions during the quarter.

We generated $296 million in cash from operations, including the expected payment from a large customer in the quarter.

We are raising our operating cash flow target for the year to approximately $450 million to reflect increased collections, driven primarily by strong business levels.

DSOs declined 10 days sequentially to 40 days, and we ended Q3 with approximately 7,525 employees with about one-third in low-cost geographies.

Before moving onto guidance, let me provide some of the financial details of the SpringSoft transaction.

The value of the transaction is expected to be approximately $305 million net of cash acquired, or $1.90 US per SpringSoft share, which we intend to fund with our existing offshore cash.

Subject to the terms of the tender offer agreement, Taiwan regulatory approvals, and other customer closing conditions, we expect the transaction to close in the first fiscal quarter of 2013.

In Taiwan, this is a two-step process.

Step one is a tender offer, step two is a subsequent shareholder vote.

And if 51% of the SpringSoft shares are tendered during the tender offer, our Q4 2012 financials will include our portion of SpringSoft's net income as of October 3 at the earliest, and November 3 at the latest.

We do not expect the consolidated numbers to be material and have not included that impact in our guidance.

We continue to expect the combinations, once closed, to be slightly accretive to FY '13 non-GAAP earnings per share.

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

Now let's address our fourth quarter and fiscal 2012 guidance, which excludes the impact of SpringSoft and any other future acquisitions on the targets.

For the fourth quarter of FY '12, our targets are revenue between $440 million and $448 million; total GAAP costs and expenses between $387 million and $403 million, which includes approximately $17 million of stock-based compensation expense; total non-GAAP costs and expenses between $345 million and $355 million; other income and expense between zero and a negative $2 million; a non-GAAP tax rate of approximately 24%, outstanding shares between 150 million and 154 million; GAAP earnings of $0.22 to $0.28 per share; and non-GAAP earnings of $0.46 to $0.48 per share.

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

Now our fiscal 2012 outlook.

Revenue between $1.742 billion and $1.75 billion, other income and expenses between $1 million and $3 million; a non-GAAP tax rate of approximately 24%; outstanding shares between 148 million and 152 million; GAAP earnings per share between $1.25 and $1.31, which includes the impact of approximately $72 million in stock-based compensation expense; non-GAAP earnings per share of $2.09 to $2.11; and we are raising our guidance range by $0.05 to reflect our Q3 over achievement.

Capital expenditures of approximately $55 million, and we're now targeting cash flow from operations of approximately $450 million.

So as Aart mentioned, we are also reiterating our objective of high single-digit non-GAAP EPS growth in FY '13, even when factoring in the extra week that contributed $0.05 in FY '12.

In summary, we're pleased with our excellent third quarter results, highlighted by top and bottom line growth, solid operating margin, and strong cash flow generation.

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

Thank you.

(Operator Instructions)

Thank you very much.

First we'll hear from the line of Rich Valera with Needham & Company.

Go ahead, please.

Thank you, good afternoon, gentlemen.

Just a question on the revenue guidance.

Small change, but you did bring that down a little bit at the midpoint.

Anything you can ascribe to that change?

I don't think there is much meaning to that.

Yes, we manage for the year and so if you look at the overall numbers for the year, I forgot the exact number, but we must be growing about 14% or so.

And so everything else falls in place gradually during the year as the reality of transactions get executed, and as far as I recall within the same range that we had before.

Nothing like perhaps related to Magma being different than expected or anything?

I think Magma and all of our own businesses are always a bit different than expected.

I am, frankly, always a little bit baffled that the number of digits that we have in accuracy in giving guidance a year ahead of time.

But in general the picture actually is very, very solid and actually we are executing quite well with Magma.

As said, the companies have been completely integrated and so how all of these arrangements with customers actually play out over time is actually very difficult to predict exactly.

But fundamentally I think there is no change to the business picture.

Fair enough, and with respect to business levels, which seems to be your terms for bookings, you had apparently very strong business levels in the first half and then that seemed to be reflected in higher than expected sales and marketing expense.

This quarter, sales and marketing was actually better than we had modeled at least.

Not sure if that actually is reflecting maybe less strong, quote, business levels, but just wondering if you can say anything about the bookings or business level [franks] as you move through the year?

By the way, and I can see why that would be slightly confusing, but when I said business levels, really what I always think of it is really how is the run rate of the business developing?

Because we're certainly very clear that high or low orders can be significant or completely insignificant, it's all a function of how they roll out in the backlog over time.

Actually combination of both orders and run rate were positive.

And so I didn't mean to obfuscate things, it was a general term for actually business feeling good.

Okay, that's great.

Rich, just to add some clarity around.

We did have a very good quarter, as you can see, from cash collections and it allowed us to raise our cash forecast for the year.

And it does relate to a number of those elements, just saying the business is coming in stronger, the payment terms that we typically see actually were also more favorable relative to the amount of cash collected in the first year of the roughly 2.8-year deals.

And we're also seeing lower disbursements, as well.

So all that contributed to good cash flow in the quarter and our ability to raise fairly significantly our cash flow for the year.

And then the last thing is, again, we always highlight it, it does move quite a bit.

It is tough to forecast and tracks our EBITDA numbers over time.

So we are, again, happy with the output on cash flow for this year.

Understood.

And just one final one, if I could, with respect to SpringSoft.

You noted that the Debussy debug stuff is perfectly complementary which is great.

Agree there.

Obviously, the Laker stuff would appear to be somewhat overlapping with your current Custom Designer offering.

Just wondering how you think about those two?

Do you look to integrate Laker with IC Compiler, as you have with Custom Designer?

Do you think those two sit side by side or how do you think they play out?

This is a little bit always the dilemma commenting before one actually has closed, and most importantly, really have the teams work together on this.

And so I can't really make many comments about this.

But I can tell you one thing, which is what we do is we try to take the best people that we have from the acquisitions, and in this context actually, multiple acquisitions that play together and ask them the question what is the best thing for the customer today, meaning to make sure that they fare well, and what's the best thing for the customer two years from now?

And then you have to build the bridge trajectory.

And having just done that with the Magma tools I think we are well versed in that.

And there may be some overlap, but I think there's a lot of complementary capabilities and strengths.

So I don't foresee any big problems there.

Great, thank you, gentlemen.

Thank you.

Thank you.

Next we will hear from the line of Raj Seth with Cowen and Company.

Go ahead, please.

Yes, hi, thanks for taking my question.

Just a couple of follow-ups on a couple of things Rich was talking about.

Brian, on SpringSoft, I know there's not much you can talk about vis-à-vis integration, et cetera.

But I'm curious if you can comment on the model that they were running and whether or not you are going to need to twist that model towards a much more ratable model like you are currently operating, and whether or not that's likely to be dilutive at the beginning of the year, admittedly, if you have talked about accretion for the full year, but maybe you can talk a little bit about what kind of model they were operating?

Thanks.

You bet, Raj.

They are expected to be slightly accretive, as we've said, for all of FY '13.

Of course, what will happen is that we will take their business model, which was more up front, again, under their local accounting standards and so on, that is all totally appropriate, and they are looking at how we then would go through on a contract-by-contract basis, just as we did with Magma, and then we will re-profile that revenue under the Synopsys business model which has that 90% minimum ratability curve to it.

And then we will extend that, again, out over time.

Their deferred revenues, at the last financial statements, were not very significant.

With a lot more revenue taken up front and, again, we will go back and when we get into the details of the contract break out the deferred revenues, apply the appropriate revenue haircut in purchase accounting and then integrate that.

And, again, our intent would be on the next earnings call where we would give the guidance for 2013 that we could identify more of the details, only if the transaction closes by that time.

If it doesn't, we will give you the update at the end of the first quarter when we expect all of it to be fully complete.

Right, couple of other follow-ups, if I might.

You pointed to increasing cash flow guidance rather substantive, deferred revenues also jumped materially.

How much of that is just the payments off a renewal from one of your biggest customers, is that the majority what drove those increases, or is it broader than that?

Specifically, to each third quarter, we have a significant customer with an annual payment that does come through.

You've seen over a number of years now, quite a nice growth in the deferred revenue accounts.

And that is reflected again in this third quarter, as we expected.

Anything relative to backlog and other things, we will give you more details at our year-end call, as we typically do.

Right.

Overall, the message being very strong broad-based growth and strength in our business levels, and have to be able to pass that through in terms of increased earnings per share guidance for (multiple speakers.)

Right.

When you guided cash flow last quarter, did you presume the payment from that large customer as you usually see in Q3, or do you wait til you get it to guide for it?

No, fortunately, it is very tightly tracked and aligned and very tight payment schedules against that.

No surprises, exactly as expected.

And we factor that in.

The growth in cash flow guidance from last quarter was related to the strong business levels, better terms and conditions, and lower disbursements as our expenses are coming in lighter for the year.

That's great.

Last one for me, it looks like maintenance, your service maintenance line popped sequentially, it looks like it is probably maintenance.

What is going on there?

Actually, maintenance in itself does not move a lot for us, it's fairly consistent.

The delta from our prior quarters is in the service piece, which is what we call business unit consulting, which does tie into either milestone-based revenues or a percentage of completion revenues.

And in Q3, there was a number of specific deliverables in our IP and systems group that contributed to that growth in the quarter.

Great, thank you.

Thank you.

Next we'll hear from the line of Sterling Auty with JPMorgan.

Your line is open.

Yes, thanks, hi guys.

First, you mentioned that you had a typical customer, just over 10% of revenue, but can you comment, did you have any deals that were over 10% of bookings in the quarter?

We wouldn't give you the details of the bookings activity.

Recall that we will provide the amount of three-year backlog at the end of each year.

We track the revenues, of course, and go through contributors.

We address the fact that we had a nice run rate growth in the deals we did sign during the quarter.

And, again, anticipating very strong business levels through the second half to generate that ability, again, as last quarter, as we're doing today, reiterating high-single-digit EPS growth for '13.

Can you add a little bit more color?

You've mentioned on several quarters in a row the idea of run rates, better business levels, but there hasn't really been any kind of quantification behind it.

Can you put a little meat on that in terms of what you're seeing maybe on renewal run rates compared to the last contract?

Or something else that can quantify that we can get a handle on?

It is actually quite difficult to quantify because it's always a little bit hidden in between the organic growth that we have, and, of course, the M&A that we are doing.

And you could say, well, why don't you segregate the M&A out, but from an operational point of view we are mostly doing exactly the opposite, which is as quickly as possible integrate the acquisitions.

And so at the end of the day, the only metric that passes the sniff test of time is the revenue over time, which you can see growing this year at about 14% and I think we did better than we had planned last year, as well.

And while we are not really commenting about revenue yet, we have said that we expect to be on the same plan of commitment as last year in terms of the earnings per share growth.

And so fundamentally, I think we are managing a very stable, well growing business right now that is in a phase that is quite solid.

I think that's fair.

And along the lines of treatment of the M&A, I guess we understand in terms of the integration and I frankly think strategically Magma was a great deal.

But do you and the Board have a measuring stick in mind in terms of financially how you will measure the Magma acquisition's success, either at one year or some point in the future, either on IRR or something else that you can share with us?

Well, we won't share the actual numbers with you, but the fact is we do have a great number of these metrics.

And I will be the first one to say that they are very important to work through prior to an acquisition and look at to what extent they were roughly right afterwards.

But I will also be the first one to say that they are often are not as meaningful as one would want to, because the very nature of success is for these metrics to disappear and become part of the Synopsys overall metric.

And therein lies the challenge, and having been on other boards, I see the problem in many of these situations where you really would like to track for the next five years if it was a great decision.

And the reality is, they are part of the family and the products are integrated and one builds on it in different ways.

And so at the end of the day, it ends up being executive judgment to see which ones were well done and were not.

Now to just give a little bit more color, we do look back on the acquisitions, and there's always the test of fire, which is would you do it again?

And would you do it again definitely?

And would you not do it at all?

And in the very, very majority, we never arrive at the question we would not do it at all.

But we use each one of those look backs, which we do periodically as a way to learn on how to do it better going forward.

All right.

And last question around SpringSoft, you mentioned using offshore cash, are there any tax implications, in other words do you have enough cash in that jurisdiction, or is there going to be some either transfer payments or other things that we should think about in terms of how we are considering your cash flow as you close that deal?

I would say that there would be a minimal tax impact on the transfer.

The major jurisdiction is the US versus offshore, if you like.

And that is where, again, a pretty significant charge if you had to bring funds back to the country.

So in a way, this is an excellent use of the cash that is offshore.

The fact that it is offshore allows a lot of flexibility in which country, in which subsidiary it is associated with and then bringing it into Taiwan to actually close the tender offer and the full share buy out.

So minimal impact from a tax perspective since the cash is already offshore.

All right, great, thank you.

Thank you.

Next we'll hear from the line of Krish Sankar with Bank of America.

Go ahead, please.

Hi, this is Thomas Yeh calling in for Krish Sankar.

Thanks for taking my questions.

Within the context of the photomask business, recently talking about some weakness in leading-edge IC design, have you seen any signs of increased caution from your semi customers?

And if not, what kind of scenario would it take for customers to really pull back on their R&D spending?

I think we have seen caution for the last two years, and that is mostly due to the up-and-down of the economic picture.

But interestingly enough, that caution has one aspect that tends to accelerate things, which is that people are even more conscious that if there is any economic challenge, you need to be very, very competitive.

And if nothing else, I would say that the utilization of the advanced geometries, and that touches certainly everything that has to do with lithography as well, has been a very, very strong and very demanding.

Now these new nodes tend to be actually fairly difficult to design in, and we can see that by just watching the amount of support and hand holding required.

But we can also see it by the level of interest in having tools that are ready for these advanced nodes.

So, interestingly enough, this is a clear situation where the overall, let me call it, caution in the global markets has had no negative impact on the R&D side of things at all.

On the contrary, it may bring additional caution to the volume management side of these companies, but we have very little to do with that.

Thanks, that's very helpful.

You're welcome.

And then a quick one on SpringSoft.

You had mentioned that SpringSoft is more up front than Synopsys in terms of the Synopsys 90/10 ratable model, is it safe to assume that SpringSoft's revenue recognition is potentially more ratable than Magma's previous split which was around 50/50?

Again, it's hard to compare until we dig into the specific details, because, again, we are under a slightly different local Taiwan GAAP standards to US GAAP standards and the treatment of that.

So, we have a good assessment internally for our due diligence work that has gone on, and we operate as two separate companies until the transaction is completed.

And we will be working during that period to identify each one of the contracts and profiling according to the Synopsys and the US GAAP standards that we will follow, and the end result will be that those revenues will be taken that have not yet been taken, they will be taken over very ratable, more than 90% ratability curve.

And that will be profiled.

Expect to give more details in the next earnings call as we learn more of that ourselves.

And then just a quick one on the average length or duration of the contracts for SpringSoft.

Is that something that you have available off the top of your head?

I don't, but just color it by saying more up front revenue than what we have.

So, as we get those contracts in place, we will align them, integrate them, report back to you on our new duration, we anticipate it will be very similar.

It's all software, just as ours is predominantly software.

And we will give you the details once we integrate it.

Thanks, that's helpful.

Thank you.

Next we'll hear from the line of Tom Diffely with D.A. Davidson.

Go ahead, please.

Yes, good afternoon.

First a quick clarification, the high-single-digit growth next year, that's earnings growth not revenue growth?

Earnings growth, that's correct, EPS.

Okay.

What is your view then of the industry growth for core EDA at this point?

It sound like across the board things are better than they were a year ago and I'm just curious if you've changed your outlook for low- to mid-single-digit?

I think they are better than a year ago and right now we have not really changed the outlook.

Remember that we are hesitant to comment about the industry, A) because there are fewer players that really matter, and B) because we are all on slightly different revenue recognition models.

And so for ourselves, we think that this year turned out to be stronger than anticipated when we did the planning last year, and at the same time I think we are executing well, so that helps.

Going forward, all in all, I don't expect to see huge change, but obviously economy does impact things a little bit.

It's just not as much as for most other companies.

Yes, okay.

And when you look at the revenue growth in the industry, are you seeing higher growth rates at the smaller companies that are moving to these advanced node [status] than they have in the past or is it really the large customers that are driving the pace still?

I'm hesitant to say yes and yes.

It is very individual to companies.

There are some large companies that are racing like crazy.

It's quite amazing actually how they do that.

And then there are some small companies that see an opportunity by racing like crazy to either get acquired or to take a piece out of the hide of some of the medium-sized companies.

So in many ways, the history of advanced high-tech is in full swing here.

And with that, I think we're going to see a continual change in the industry, some positive surprises, some unexpected changes.

But I would like to highlight, again, this fairly high degree of concentration on advanced technology.

A lot of people betting on getting their next ship to be at the next node, and being still faster, still larger and in some cases, also lower power.

That's a race that we absolutely want to participate in.

Yes.

Well, it seems like since there is such a large investment at several foundries right now that the mid-tier fabless guy could get access to advanced technology sooner than they would in the past --

Well, I think generically that's true.

At the same time, it's interesting to observe that in the last six there were innumerable stories about not being able to get sufficient access to 28-nanometer and that was a combination of capacity not being in place, but also the yields not being as good as people would like to have.

And so why is that important to us?

It is important to us because not only do we have tools that help improve the yield, but we also have design techniques that create higher yield.

And so it just closes, again, the loop that for manufacturing to design it is really one success ecosystem, and it's to our benefit to help people be as competitive as possible.

Okay.

And earlier, Aart, you talked about the 80 active designs at 20 nanometers today.

How does that compare to the 28-nanometer ramp and maybe how does it compare to what the total design activity is at 28 today?

Okay.

Well, to give you a comparison, rough round numbers, at 28 and 32, we lump those things together.

We have about -- a bit over 400 of those active designs.

Okay, and so the 80 at 20, does that kind of ramp what you've seeing in the past, or is it a faster ramp than you've seen in the past?

No, it's similar.

There was a bit of a delay on the ramps, I would say, about two years ago and you can see it on the graphs of the different nodes.

But fundamentally, at least at this stage, the shapes look similar, and we certainly know that people our are already chasing the next one too.

So far, as much as the proverbial death of Moore's Law has been predicted many times, probably including by us, right now we are defying death and for the next five to 10 years I think there is a lot of work to be done.

That sounds good.

And then, Brian, back on the cash flow, you talked about $450 million this year.

In a typical year, how does that break out between onshore and offshore?

I'm just kind of curious how fast you will be able to build back up your onshore cash?

Yes, good question, Tom.

It's 50/50.

It flows -- if you look where our revenues are split, 50% US and 50% outside of the US.

Cash flow follows that profile, as well.

Relative to SpringSoft, use of offshore cash that will continue to build up there.

For the US side, where, again, we can look at US M&A, our buyback scenarios and other things, half of the cash will be attributed to the US, and good strong balances, as well as having both debt capacities and the small amount of current debt currently on the Board to really put our -- continue to put our balance sheet to work.

Okay, great, thanks for your time today.

You're welcome.

Thank you.

And next we'll hear from the line of Mahesh Sanganeria with RBC Capital.

Go ahead, please.

Thank you.

Brian, just on the non-GAAP operating margin, you've been pretty consistent since 2008 in the 23% to 24% range.

Is that something we've kind of -- at a saturation level or are you thinking anything, is that anything that can be done there to push that beyond 24% levels?

Sure, Mahesh.

You can see that in 2012, we are forecasting over 100-basis-point improvement in our operating margin compared to 2011.

We have said for several years that our goal is over time to be in the mid-20s.

So just as we are delivering, as we have over the past several years, we continue to push for higher operating margin levels, expect that to be in the mid-20% range.

And where do you think that the most potential is, is it revenue growth, or slower cost to increase?

With the M&A, you can't keep up the cost increase.

You cannot slow down the cost increase, but where do think that lever is to go to the 25%?

It has to be both, of course.

At the end of the day, no business can grow its profitability well if it doesn't grow revenue, and, obviously, that's got to be our driving consideration.

At the same time, the rest is really the discipline of managing your P&L.

And that discipline, of course, gets sort of shocked every time we make an acquisition because, at least temporarily, a new family member, so to speak, with a different P&L configuration.

And moreover, a haircut has been applied or is being applied for the first year or so.

But having said that, we clearly look at acquisitions also from a perspective of efficiency, certainly for the infrastructure, certainly for part of our field connection to the customers, be it on the sales side or be it on the support side.

And even in some of the cases on the R&D side, although if there's efficiency on the R&D side, we tend to invariably use that to really accelerate other capabilities.

But fundamentally, there is no reason whatsoever that acquisitions should be negative over a longer period of time to our profitability.

As Brian said earlier, we have been on track to get to mid-20s, mathematically speaking 24% is not quite mid-20s yet.

Maybe, Mahesh, also, just maybe to add to that, all of the discussion on operating margins, of course, are vectored towards continued high-single-digit EPS growth.

We put that number out there several years ago.

We have been fortunate in the last few years to see double-digit top line and EPS growth.

And, again, all of the actions we take relative to driving our core business, our IP and systems business, which now even on a trailing 12-month basis is over $400 million, driving that on double-digit top line growth, managing our expenses, looking at M&A for continued growth and finally holding our share count at roughly flat with the FY '12 levels have been the ways that we have developed our plan on continued high EPS growth.

Margin management is just part of that related to both revenue growth and expense management.

Okay, that's helpful.

And just to follow up, just a clarification on the cash flow commentary, you are increasing the guidance pretty significantly.

But you mentioned one time that was related to one customer coming up at the high -- big payment -- but that was predictable.

I was wondering if you can give a little bit more color on where the higher cash flow guidance, the significant increase in cash flow guidance is coming from?

Absolutely.

The first element that you referred to, and the question earlier, was about our large customer, and that payment was expected and is not contributing materially to the growth.

Our prior guidance was about $320 million to $340 million.

And now based on Q3 results and cash achieved, plus the outlook for our fourth quarter, based on those stronger business levels, is one reason to show that our cash flow can increase hereby between $130 million and $110 million.

The second thing was the profile of those new transactions which we saw in Q3, and anticipated in Q4, just show that the ability to collect cash within the first year of the three-year agreement is actually coming in better than we expected, and very strong, good terms and conditions being put in place.

And then remember, the third point was about the lower spending, lower disbursements and all that contributing.

But, again, to put it in context, we look at how that relates over time to our EBITDA less the tax -- cash taxes paid, and if you look back on the last three years, '11, from '11, '09, and '10, our average operating cash flow is about $340 million.

It will track that EBITDA over time and just forecasting it of when a particular contract is signed and whether it is renewed early or renewed on time, those are all the elements we try to forecast each quarter in our outlook.

And, again, it's just all of it coming in much better than where we saw it a quarter ago.

Okay, thank you very much.

Thanks, Mahesh.

You're welcome.

Thank you, and if there are any, in a moment we'll hear from the line of Jay Vleeschhouwer.

(Operator Instructions) And so next we'll hear from the line of Jay Vleeschhouwer with Griffin Securities.

Go ahead, please.

Thank you, good afternoon.

Aart, two somewhat related questions about EDA customer activity.

Historically, the EDA industry was not particularly governed by a large number of licenses installed.

Even within the larger revenue categories of EDA, it's not a particularly high-volume industry.

And the question is, is there anything now, particularly at the newer nodes, or the newer applications requirements that might suggest that there would be some meaningful increases in the volume of licenses?

Not that you would get paid by a customer for their volume, but instead that they would consume more licenses than they might have in the past.

Secondly, at the DAC breakfast that you had mentioned earlier, Synopsys highlighted the fact that you have now double patterned and enabled many of your tools.

There was even some mention of something called triple patterning.

But the question there is, are you, in fact, seeing a large usage, or increased usage, of those newly enabled tools, particularly since the 20-nanometer design activity has gone from the 50 that was quoted at DAC to the 80 now?

So on the licenses, I assume that you say it is a low license market, if you compare to, let's say, design drawing tools and things like that.

Certainly, in that sense, we are relatively low license, also much lower number of customers.

However, certainly in the last decade, we have can see in a continual growth of the number of licenses, and the challenge that as an industry we have always faced is that customers need many more licenses, but don't have many more times the budget that they had before.

And so for better or for worse, the reality of that has been that they have gradually grown larger pools of licenses and gradually grown the amounts that they have spent with us.

But the spending is, unfortunately, not proportional to the number of licenses.

Be that as it may, that is just way this industry functions, and I'm not complaining, it is just an observation.

Having said that, I think there are some areas that have seen, clearly, more license growth than others, and the area that immediately comes to mind is the various forms of simulation.

And what you can see is that the complexity of the designs that people are dealing with, and simulation can be at the transistor level all the way to the system level.

Those complexities are such that the number of potential errors is very large and growing much more rapidly than the size of the design.

Therefore, verification continues to grow.

And so this is one of the reasons we are spending attention to that area.

And I think we will see continued license growth there.

On the double patterning, yes, this is technology that is both very advanced and now very necessary.

And for those that are not initiated with that term, what this is all about is that in order to get very, very small devices on a chip, instead of doing a single illumination, a flash of light, you do two flashes of light or even three, in most cases two, therefore, double patterning, and the combination of the patterns give you sharper lines, so to speak.

Now you can quickly imagine that that becomes very difficult because you are essentially doing two designs at the same time, that become one design through the interaction of light rays.

I purposely make the story a little complicated because then you will appreciate that the tools to make this actually work are very, very sophisticated.

The good news is I think we're very much on top of this field.

We have been investing in this for at least a decade.

Many of the acquisitions that we made in the lithography area over the years have greatly enhanced our understanding from every which way you can think about this.

And so for the advanced tools the answer is yes, this is now in utilization and is actually a point of differentiation when you can point to the fact that you have these technologies and get good timing and good power and all the other metrics of success.

So the games continue to become more complex and that so far plays into our hands.

All right.

A couple of follow-ups for Brian, please.

First, according to your website, you are listing close to 400 open positions globally.

Mostly in engineering and R&D, of course, and that number that you're showing is roughly equivalent to 5% of your current headcount.

The question is, does your margin guidance for the rest of the year and earnings assumption going into next year envision that you would fill most, if not all, of those positions?

And then one final one on IP.

Yes, the expenses we factored in for the rest of the year assumes some growth in the numbers.

But I'd take you away from those open [rec] lists because in there, again, you've got a number of things.

One is, again, we go after very, very specific technical engineering skills around the world in terms of EDA and semiconductor technologies.

And those people aren't always at available, so we are constantly looking for the best people.

The second thing is there are normal industry levels of attrition that go on, and it happens in different places around the world at different rates.

And you always have to have people available to come in and join your team.

Just taking care of normal attrition levels that we and every other company in the industry is seeing.

So, again, the specific heads coming in, we factor through after, you look at a significant list of potential hires, and then bring that down to specific names, and numbers, and when would they start, and what jobs would they have, and so on.

All of that is factored in very clearly into our ['12] plans, and, again, we are also very cognizant of '13 spending levels.

And we're working through some of the internal budgeting activities between now and, of course, our next earnings call to complete the details of how we are going to deliver, again, high-single-digit earnings growth in '13.

All right.

And lastly, IP, is there an appreciable change in the license mix in your IP and systems business?

For instance, sequentially, your IP and systems business was up about $17 million from Q2, but your upfront revenue in total was up only $3 million.

I know that in the past IP was somewhat more up front than the software tools business, but has there been an appreciable change at all in that respect, Brian?

Yes, Jay, what I would highlight is that, again, relative to our organic growth and the number of the acquisitions in this area, that we have seen some changes in our slight business model.

Less up front revenue generically.

We see more revenue related to both percentage completion and milestone based, and that was the discussion of how Q3 had picked up in the service line earlier.

And, again, many times in terms of some of the IP activities in that, there are commitments that take place over multiple years and the revenue has to be recognized over that period as well.

So, again, you see very strong numbers in terms of IP and systems, even on a trailing 12-month basis, we are up about 26% in that area.

And as I mentioned, we're now over $400 million trailing 12-months revenues in the area.

We said double-digit growth and, clearly, you can see the results reflecting that over the past several years.

Okay, thank you.

Thank you.

Thank you, speakers.

We've got about a minute and a half before the top of the hour.

No further questions in queue.

Well, thank you very much for attending this earnings conference call.

As said, I think we're looking back on a very strong quarter, with a strong outlook for the year, which we shared with you.

And also a lot of good work already in preparation for 2013.

With that, thank you for joining us and we will follow up with some of you individually after this call.

Thank you very much.

And ladies and gentlemen, that concludes your conference today.

We appreciate your participation and your using AT&T Executive Teleconference.

And you may now disconnect.