新思科技 (SNPS) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Synopsys earnings conference call for the first-quarter fiscal year 2013.

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, and 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.

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

Please go ahead.

Thank you, Rochelle.

Good afternoon, everyone.

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

Before we begin our remarks this afternoon, I'd 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 this call, important factors that may affect our future results are described in our most recent annual report on Form 10-K 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 will turn the call over to Aart de Geus.

Good afternoon.

And thank you for joining us.

I'm happy to report that in Q1 our business, technology progress and customer engagements were strong across the board.

We met or beat every target we communicated last quarter, achieving revenue of $475 million and non-GAAP earnings per share of $0.67.

As a result of this excellent start to the year, as well as reinstatement of the federal R&D tax credit, we're raising our non-GAAP earnings per share outlook for fiscal 2013 to a range of $2.35 to $2.40, up solidly from our high single-digit guidance into double-digit growth.

Brian will provide more financial detail in just a minute.

Before discussing some highlights, let me briefly comment on the customer landscape, which fundamentally has not changed much from last quarter but benefits from a slightly more stable macroeconomic outlook.

Against this backdrop we see the semiconductor industry continuing a very aggressive push, both in terms of technology and efficiency.

The technology drive is motivated by companies seeking to differentiate themselves by adopting a wave of emerging new semiconductor capabilities.

The efficiency push addresses the challenge of delivering these new technologies under aggressive product cycle and cost requirements.

The EDA industry and Synopsys in particular is a key partner in these quests.

Increasingly, customers see their EDA relationship as an essential differentiator in their market battles.

Although difficult to generalize in our very competitive landscape, we do sense a bit of improvement in the pricing environment and business terms.

The corollary to my comment on differentiation is this.

Customers and suppliers increasingly realize that to navigate the intersection of advanced technology, unforgiving time to market and intense competition, close collaboration is essential.

Synopsys' focus on both point to leadership and integrated solutions makes us a desirable supplier.

And our collaboration with advanced customers and key partners continues to yield great results.

Just last week for example we further extended our broad collaboration agreement with ARM to include the latest ARM V-8 processor models.

Working with mutual customers Synopsys and ARM jointly accelerate product development cycles around ARM's latest processors.

State-of-the-art collaboration relies on the constant delivery of new capabilities so let me provide some recent product highlights.

On the implementation side, Synopsys supports a continued aggressive adoption of more complex design nodes.

Simultaneously, we see a fundamental discontinuity in the structure of the transistor.

We're closely working with silicon providers to roll out evolving technology to address these challenges.

With the structure of the transistor itself migrating from horizontal to new vertical FinFETs, better power and performance open the door to great new applications.

It also brings about a slew of technical challenges in EDA and IT.

Challenges for which Synopsys is particularly well equipped, again making us a key partner in our customers' future differentiation.

As an example of how customers rely on us, 90% of 20-nanometer and below tape-outs to date have used Synopsys implementation while we're already working with some all the way back down to 10 nanometers.

Synopsys is the only EDA company that has been investing for many years in FinFET enablement throughout our portfolio from three-dimensional TCAD simulation, to photo lithography, to manufacturing tools, to physical placement, routing, extraction and verification, circuitry relation, custom design, all the way to sophisticated IP, libraries, memories, and building blocks.

A good example of multi-year collaboration in this area is with Samsung, where we successfully taped out the first test chip on their 14-nanometer low-power process.

Samsung chose Synopsys as its FinFET partner because of our successful 20-nanometer collaboration history and our comprehensive FinFET focus throughout our portfolio.

As advanced transistor research accelerates demand for our 3-D TCAD products continues to grow.

For example, during the quarter we expanded our collaboration with Imec, a world-leading research center to jointly optimize FinFET technology for 10-nanometer and below design.

Multi-year collaborations have not only yielded a number of advanced tape-outs, but today we are also selling our own FinFET-based embedded memory, libraries, and logic IP.

Finally, through the acquisition of SpringSoft we also have a FinFE- ready custom implementation solution.

Notwithstanding the emphasis on advanced technology our business with customers who are focused on more established node is also strong.

These customers invariably squeeze performance, power, and area out of their chips to be competitive.

We recently demonstrated that advances made in our leading-edge tools have great impact on established nodes as well.

Most notably in run time and capacity.

Which is a good transition to the topic of verification.

The move to smaller transistors also enables the other side of Moore's Law, many more transistors.

Indeed the overall complexity of not only chips but systems of chips is precisely what makes continued end product innovation possible.

Verifying these products is the largest bottleneck in electronics.

Just looking at the latest smartphones, one finds multiple multi-core processors with hundreds of millions of transistors, coupled with complex operating systems, applications, networking, and wireless protocols.

Not only is the hardware complex, but so is the interaction of the hardware and the software.

Solving these verification challenges has been a major focus for Synopsys for many years.

Today we are the market leader in both leading-edge digital verification, with about 70% of advanced designs utilizing Synopsys, and analog simulation where 80% of the designs rely on our tools.

VCS, which continues to grow well is the fastest simulator on the market today.

With the acquisition of EVE we also have added the fastest hardware emulator, and combined with our HAPS FPGA boards we cover the entire hardware validation and hardware software verification space.

With the acquisition of SpringSoft we have added to our portfolio the most comprehensive open debug system, thus addressing the entire verification market with outstanding point tools.

We have started to combine the best features of these and we're driving integration of all the elements into a full-line verification solution.

Initial customer reaction has been strongly positive, as we have quickly asked for feedback from them.

We're now well into the process of developing and communicating combined road maps.

Both the EVE and SpringSoft integrations are progressing very well.

The third area I would like to briefly highlight is ITM systems, which now represent one-quarter of our revenue.

We are the second largest IP vendor with approximately 1,400 IP engineers worldwide designing the most complex IP blocks and porting to all key foundry processes.

After 15 years of investment our design ware IP is shipped in more than a billion chips per year.

Every two days a chip is taped out using our USB.

Every week a chip tapes out with our PCI express, and customers have already delivered tens of millions of chips containing our 28-nanometer IP.

Today Synopsys is the number one vendor in interface cores, analog IP and embedded memories.

And the market for more IP, including our 20-nanometer nodes, continues to expand.

We intend to grow our IP business at double-digit rates while gradually increasing its profitability as we've successfully done in the last two years.

In systems, we're seeing momentum in both software- and hardware-based prototyping.

This is promising, as we've invested in this area for a number of years, believing that hardware/software verification, as well as the ability to develop software earlier in the process, would grow in importance over time.

This quarter, two large and influential electronics companies increased deployment of virtual prototyping, driving good run rate growth.

As a key enabler to early modeling of chips for software development, we expect virtual prototyping to grow gradually and become more mainstream as system complexity emerges as the weak link in time to market.

Bridging between systems and verification, our earlier mentioned FPGA-based prototyping system, HAPS, is doing very well also.

With the who's who of customers, our newly launched HAPS 70 series, which uses the most advanced FPGAs on the market, was named Electronics Designs 2012 EDA Product of the Year.

In summary, Synopsys is doing very well in all dimensions.

Technology progress, customer collaboration, and financial execution.

In Q1 we delivered results that serve as an excellent start to the year, and as a consequence we're raising EPS guidance to reflect confidence in our outlook.

I will 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, then provide with you our guidance for Q2 and the full year.

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

Now Synopsys delivered an excellent quarter, meeting or exceeding all of the quarterly financial targets that we provided in December.

Q1 financial results were highlighted by double-digit growth in both revenue and non-GAAP earnings.

And now some additional detail.

As a reminder, Q1 of FY '12 included an extra fiscal week, affecting revenue and total non-GAAP expenses by approximately $25 million and $16 million respectively.

Total revenue was $475 million, an increase of 12% compared to a year ago, and at the high end of our target range.

Normalizing for the extra week in FY '12 revenue grew 19%.

Greater than 90% of Q1 revenue came from beginning of quarter backlog and one customer accounted for slightly more than 10% of first-quarter revenue.

The average length of our renewable customer license commitments for the quarter was about 2.4 years, affected by a couple of large one-year add-on deals.

We continue to expect average duration for fiscal 2013 to be about 2.7 years.

Turning to expenses, Q1 total GAAP cost and expenses were $414 million, which included $32 million of amortization of intangible assets and $18 million of stock-based compensation.

Q1 total non-GAAP costs and expenses were $355 million, an expected year-over-year increase due to increases in compensation and other expenses from our recent acquisitions.

Non-GAAP operating margin was 25% for the quarter.

For all of FY '13 we are on track to expand non-GAAP operating margin by approximately 100 basis points over FY '12.

Turning now to earnings, GAAP earnings per share were $0.45.

Non-GAAP earnings per share increased 20% to $0.67, exceeding our target range.

Normalizing for the extra week in FY '12, earnings grew 31%.

Earnings outperformance was driven primarily by a lower than expected tax rate as well as higher than expected other income, along with operational execution.

Our non-GAAP tax rate was 18% for the quarter, well below our target range driven primarily by January's reinstatement of the federal R&D tax credit for fiscal years 2012 and 2013.

The Q1 2013 tax rate includes a retroactive benefit of $6 million for fiscal year 2012, in addition to the impact of the tax credit for Q1 of 2013.

As a result, we now think that a non-GAAP tax rate of approximately 23% is a reasonable estimate for FY '13.

Now turning to our cash and balance sheet items, we ended the quarter with $550 million in cash and cash equivalents, with 27% onshore and 73% offshore.

As expected, there was a net operating cash outflow.

The Q1 outflow of $91 million was due primarily to the timing of our prior year annual incentive compensation payments.

We continue to target operating cash flow of at least $350 million in FY '13.

During the quarter, we paid back $7.5 million of our outstanding term loan.

We did not spend back cash -- spend cash to repurchase our stock, however, we will consider buying back stock during the year.

The amount and timing of which would depend on acquisition opportunities.

We have approximately $272 million remaining on our current share repurchase authorization.

DSO declined 7 days to 52 days, and we ended Q1 with 8,165 employees, with about one-third in lower-cost geographies.

Now, let's address our second quarter and fiscal 2013 guidance, which excludes the impact of any future acquisitions.

For the second quarter of FY '13, our targets are revenue between $490 million and $500 million.

Total GAAP cost and expenses between $409 million and $425 million, which includes approximately $17 million of stock-based compensation expense.

Total non-GAAP costs and expenses between $362 million and $372 million.

Other income and expense between $1 million and a negative $1 million.

A non-GAAP tax rate of 24% to 25%.

Outstanding shares between 154 million and 158 million.

GAAP earnings of $0.38 to $0.44 per share, and non-GAAP earnings of $0.63 to $0.65 per share.

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

Now, our fiscal 2013 outlook.

Revenue between $1.955 billion and $1.975 billion.

A growth rate of approximately 11% to 12%, or 13% to 14% excluding the extra week in 2012.

Other income and expense between $1 million and $5 million.

A non-GAAP tax rate of approximately 23%.

Outstanding shares between 155 million and 159 million.

GAAP earnings per share of $1.44 to $1.56, which includes the impact of approximately $70 million in stock-based compensation expense, and non-GAAP earnings per share of $2.35 to $2.40 which represents solid double-digit year over year growth.

Capital expenditures of approximately $70 million, and as I mentioned earlier, we're targeting cash flow from operations of at least $350 million.

To assist in your modeling, second-half revenue is expected to be greater than first-half revenue and total non-GAAP expenses are expected to be skewed towards the second half of the year.

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

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

(Operator Instructions)

Rich Valera, Needham & Company.

Thank you.

Good afternoon, gentlemen.

Aart, you mentioned that you were seeing a slightly more stable macro environment but I would think that government agencies and perhaps aerospace companies that are exposed to government might be seeing some hesitation due to the potential for sequestration coming.

Have you seen any of that, and if not, do you think you might?

Thanks, Rich.

That's a good question.

We have indeed seen a little bit of that with some of the government related businesses that are just a little bit more careful before committing to whatever renewal they may have.

At the same time that is a relatively small portion of our business, and it is completely overshadowed by the much bigger companies, certainly bigger in terms of their EDA spending that are driving all the commercial markets and the global markets.

So I just happen to know of one case where what you said is true, and that's all I know.

So it's not very heavy on our minds.

That's great.

And then, Aart, some pretty positive comments with respect to your positioning with respect to FinFET adoption and the move to 3-D.

Can you say if you think you're seeing incremental purchasing for FinFET implementation above and beyond what you might have seen if folks had been sticking with 2-D, or do you think this is sort of the normal progression, that there's sort of a continuous progression where there's always purchasing being done for sort of the next technology?

I do not think it's the normal progression.

And actually one of the reasons I'm bullish on FinFET in general is because I think FinFET heralds another decade of Moore's law.

And that's a pretty bold statement given how many people have said it's all getting too expensive, too difficult, which are all sort of true statements.

But the fact is from being an interesting idea two years ago to at least one company having already shipped in production FinFET capabilities to now all the key manufacturers really racing forward to get this capability.

You can at a minimum see an industry that's making a big bet that FinFET adds new life to Moore's law.

And my opinion there's actually a fairly simple explanation why it's good and it's a difficult explanation, how do you make it work, which is that FinFET has the potential of a discontinuity in performance power ratio.

Power has been one of the key limiters in modern semiconductors.

The fact that it's difficult is actually something we love, because Synopsys is focused on making problems like that go away.

In that context I'm not surprised at all that there are heavy investments in simulation, in modeling.

I think we have the place and route, things already completely under control, and so now the next phase is really for the semiconductor industry to arrive at good yields for this, and that will take a couple of years.

But I wouldn't be surprised if a number of design companies go fairly light on the 20-nanometer node because they really want to go full bore on the FinFET wave, so there's a lot of work that we have and can do with those companies.

And from that perspective I think it bodes well for the EDA industry.

Great.

Thanks for that.

Wonder if you could give some thoughts on the emulation market and the growth prospects there.

Obviously you became sort of a new player in that with your EVE acquisition.

One of the largest players in that market in their recent report said they were looking for a down year in '13.

So just wondering what your thoughts are on the medium term growth prospects for the emulation market.

I think that for any given company you can have up and down years, partially because that's just the reality of when people buy something, they may buy a lot, then they don't buy that much the subsequent year.

I wouldn't make too much out of these ups and downs.

I think in general, there's no question that verification is a big topic that's going to be bigger as we see even more transistors and even bigger systems needing to be verified.

In the emulation field, of course everybody hopes that they have the gold standard of technology, but the reality there is that there are different needs and applications, and I think we will see steady growth for all the players.

So I expect it to be a healthy market even if there may be quarter to quarter some ups and downs.

Just one final one, if I could, for you, Brian.

Looks like you guys beat by about $0.12 on the quarter, and you mentioned what the different contributing factors were, and you increased your EPS range for the year by about $0.09.

So wondering if maybe there was some shifting of expenses out of the first quarter or something that maybe you're figuring or to catch you in Q2 or Q3.

Any color on that would be helpful.

Yes, maybe what I could do is just kind of break out some of the significant over achievements in the quarter and how that profiles into the rest of the year.

So, first off, in terms of the achievements, we had about $0.06 flow through as a result of the federal R&D tax credits for both '12 and '13, and that means about $0.04 for '12 and about $0.02 for the first quarter of '13.

We had some improvements on other income that related to mark to market adjustments we had for our currency hedges, and we don't expect that to reiterate again for the rest of the year.

Then we had some operational improvements, a little bit higher revenue, a little bit less in terms of spending.

And then as you say, we did increase our overall guidance by about $0.09, which reflects that plus the continuing R&D tax credit for quarters two through four.

So that gives us the additional $0.03 just coming from the tax side.

So the rest of the year we look at it, it's still early on.

It obviously gives us the flexibility of making the target investments we need to invest in for providing that longer term growth such as the IP areas.

Happy to see we now have top-line double-digit growth in '13 and top line and bottom-line growth as well.

Okay, thank you.

Congratulations on the nice results gentlemen.

Thank you.

Thank you.

Krish Shankar, Bank of America Merrill Lynch.

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

Thanks for taking my questions.

You're welcome.

Given the strong M&A activity in FY '12 I just wanted to get your view on capital allocation this year.

Will your primary use of cash still largely be focused on acquisitions, or could priorities start shifting towards maybe buybacks or potentially a dividend?

Well, as you know, we have multiple ways to use the cash, and M&A is something that you have to sort of build up towards, and so at any point in time we want to maintain a certain amount of cash level.

We have a little bit of debt that we are very gradually buying back that is just good health discipline.

In that context, the two things that we really trade off is M&A versus buybacks.

We contemplate both pretty much all the time.

And so we have an open authorization from the Board.

We have done it in the past.

We are certainly well versed in understanding that decreasing the share count is a good thing.

At the same time, doing good acquisitions grows the business going forward, and as you well know, we don't comment much about any M&A we may do, but fundamentally, our strategy at Synopsys has not changed.

In terms of dividends, that is not a pathway that we have chosen to date and we are not really contemplating it right now either.

Tom, if I could just add to that as well, as you know buybacks require US cash to be able to enact that.

We're currently sitting, after the end of our first quarter with about $150 million in US cash, and again we anticipate that amount, apart from M&A discussions, we expect that amount to continue to grow from now to the end of the year as well, which gives us more flexibility on that side, too.

Thanks.

That's very helpful.

And can you talk a little bit about progress around the integration of EVE and within your unchanged revenue guidance for the full year should we be still expecting roughly $100 million from both EVE and SpringSoft combined?

Yes, I think that number feels in the right ballpark, although I don't recall exactly what guidance we may have given.

One of the reasons, to be honest, I don't quite recall the guidance is, once we start integrating it is quite surprising how quickly the old companies fade away, largely because we have the benefit of a much broader sales force and a broader market appeal.

And the products get either integrated or associated with other things that we sell.

Having said that, I think the progress on integration is actually quite good.

We have no big surprises to deal with.

We are, of course, looking immediately at areas where we can strengthen the technology or areas where customers are looking at us now having a broader portfolio.

And in general, the verification field is one where we clearly added a lot of capabilities.

Lastly, the ultimate barometer, of course, is the customer reaction.

The initial reactions have been very positive, and so the next 12 months reactions is, of course, in terms of, so, how much do they buy, and that will be the metric against which we measure our success.

Great.

And final one from me, you talked a little bit about IP.

Can you provide us an update on the percentage of IP that is currently outsourced today, and where you see that penetration of outsourced IP reaching over the next year or two, where it is expected to level off?

There are a lot of different estimates on that.

One of them says that today about 50% is outsourced, but having literally just had, not exactly that discussion, but a similar discussion yesterday with the vice president of marketing of that group, he was commenting that, it's not only that percentage itself that is relevant, it's also the fact that IP we use in general is growing.

And so I think right now we see a good horizon for our capabilities, because it is growing also because the type of IP is becoming more and more complex.

And again that plays well to our strength.

So it's an area that, while demanding investments to build the IP, I think the business potential is good for us.

Thanks so much.

You're most welcome.

Sterling Auty, JPMorgan.

Thanks.

Hi, guys.

Aart, I'm just curious, for 2013, what do you think are the end markets that are going to pull through that demand, and especially that demand for the smaller geometry in FinFET design chips?

In one word, mobile.

Mobile drives everything still like crazy for a couple reasons.

A, it's super high volume, so that gets everybody's attention so therefore there's also a high attention being put on the price of the chips.

Secondly, is because everything mobile is limited in its performance by the power consumption.

And so any promise that one could have more capabilities with, let's say, the same power because that's typically what happens, is of high value in future product differentiation.

I do not expect that to change at all.

Now, around mobility, of course is the whole infrastructure that has to support this.

Sometimes people call it the cloud, sometimes people call it the compute centers, but -- or data centers, and they are essentially a reflection of not only the amount of -- the number of mobile devices, but also the tremendous traffic that is engendered by them.

Both of those will continue.

The number of companies that are leading this is not super large, but is very, very focused and very aggressive.

And so that is why I have a high degree of confidence that as soon as FinFET yields well we're going to see a lot of activity there.

Got you.

On the contract duration side, can you give us an idea, if you strip out the one-year deals, what duration would have looked like, and can you confirm again, did I hear correct, those one-year deals were only add-ons, they were not renewals?

That's correct, we had a number of add-ons where customers already have a three-year deal and then they look towards the end of the contract expiry and say, hey, we just need another one-year addition to what we already have in place to handle some additional seats and applications.

So that's how they look at it.

Our average, again, for the year, we'll say is the 2.7 to 2.8 years.

And just based on the first quarter that came in at 2.4 we think it will revert back to the mean.

All right.

So stripping out the one year, there's nothing that dissuades you from that 2.7 for the year obviously?

No, it doesn't, no.

Okay, back to the guidance question, did the reinstatement of the R&D tax credit and the performance in the first quarter, did you guys decide to increase investment for either the rest of the year or perhaps the second half?

Or can you just maybe give us at least some additional color on your thoughts around what the operating margin for the year, in terms of what you're thinking about, how it trends here?

Absolutely.

Yes, we're still on track on the operating margin question to be approximately 100 basis points improvement, which builds on last year's 100-basis-point improvement as well.

When we look at the profile, again, the R&D tax credit is great, in that it provided us that flexibility as we look at the whole year.

We've seen a very good first quarter come through.

Forecast also a very strong second quarter.

And then as we just look at in terms of tweaking the overall quarterly profile of expenses to maintain that double-digit EPS growth as well for the year, and in the second half is typically where you see the impact coming from compensation increases that are in place from our facilities around the world.

We see that factor coming in, some increased headcount as a result of the investments.

And these investments in the second half are really essential as we drive continued growth through '14 and beyond.

So, again, we're just targeting those investments toward the back half of the year and that's what's factored into our profile.

And last question, because I know it's going to come up.

It's already come up in a couple of conversations with investors, looking at the quarter, the sales and marketing expenses were one area that provided some EPS up side at least relative to our estimates, we all think about sales commissions tied to bookings from that line item.

Is there anything in the one-year add-on deals that perhaps lead to lower sales commission expense that could explain it or anything else that we should kind of factor in?

Not really, no.

Stay with the total year expectation around expenses that we were addressing.

And it just reflects from quarter to quarter the amount of profile towards the business levels that come through, and other than that, it comes in a little bit this quarter, the next quarter goes back up, that type of thing.

It just moves around.

Again, it's just some of the hiring, some of the headcount that came in a little bit lighter than we anticipated, and anticipate that picking up again in the second quarter and beyond.

Thank you.

(Operator Instructions)

Tom Diffely, D.A. Davidson.

Good afternoon.

First, Brian to clarify, you said there was a $0.02 impact from the R&D tax credit in the first quarter?

Yes, that's right, for the FY '13 impact.

Okay.

What was your expectation then for the full year?

Is it $0.02 per quarter?

No, it's about $0.01 each, of the next three quarters.

So about $0.05 for FY '13, and $0.04 for FY '12.

That makes up your $0.09 profile.

Okay.

All right, when you look at the -- kind of the increase in the non-GAAP expenses in the second half, is that more fourth quarter loaded, like it typically is?

It's a little bit more towards the fourth quarter, but almost even, just a little bit higher in the fourth, based on the profile we've got right now, and, again, the compensation increases kick in about the June time frame, and then the rest is a profile of the investment in headcount growth that we've got.

So it kind of leans a little bit towards the fourth but not too far off the third.

Okay.

And then earlier you guys were talking about the pricing getting a little bit better.

Was on the core EDA side versus the IP side?

Yes, it's on the core business.

Okay.

And also, Aart, we've heard from some of the large foundries lately that there's been a ramp-up in 28-nanometer business with some new customers, especially emerging out of Asia, China in particular.

Is that becoming a meaningful part of your business at this point, some of these new fabless players at the leading edge?

Yes and no.

China has been growing in general over the last few years, and in parallel to that, the technical competence has steadily moved up.

And so now there are a few players in China that do very advanced design, and, of course, they tend to quickly also become the biggest spenders in that geography.

Even so, they are still relatively small compared to the really very large international companies that have been leading the field, but I think this will steadily grow and we're doing particularly well with them because of the advanced nodes.

So I think we're increasingly in a very global world that includes China and the technology just follows suit.

Okay.

And then also earlier, you talked about the FinFET and how that was going to drive growth going forward.

Do you see similar trends from things such as 3-D NAND that's on the horizon, as well as EUV, or how do those technologies impact both your design of your products as well as what the market might be longer term?

Well, just to clarify there are two types of 3-D.

One is inside of the chip, which is the 3-D often referred to as the FinFET, a vertical transistor.

The other 3-D that's often used as a term is the stacking in various forms of multiple chips.

And for awhile people looked at the second one as an alternative, just in case the 3-D transistor wasn't coming about.

I think the 3-D transistor is absolutely coming about, which doesn't negate the need for the second one, but I think that will take its time.

When you're talking about things like EUV, you're talking about a whole new form of photo lithography, and the jury is still very much out in terms of how economically viable this is and when it becomes economically viable.

And so most of the investments that go in that direction are in the equipment manufacturing industry.

And, yes, we touch it a little bit, because we have some R&D efforts in photo lithography and how to model these things, but from a volume or big deployment point of view, I think it's premature to look at that as a major business.

Okay.

Finally, on the NAND side, I know memory hasn't been a big driver of EDA tools in general, but when an industry does move towards more of the perpendicular, or I should say the vertical NAND structure, does that increase complexity enough to kind of kick up EDA spend?

Well, if I may slightly correct the perception, we actually have done quite a bit of very good business with memory providers, and there's a lot of simulation that gets done for all of the different memory types.

And more over, memories today are so large that you have to build in all the logic to fix them because almost no memory is perfect so they have a lot of self-correcting capabilities, and that actually demands some of the place and route tools.

So it is clearly its own segment, but as a segment per se, we have done quite well with it, and we expect it to continue to grow.

Okay.

Thank you.

You're welcome.

Jay Vleeschhouwer, Griffin Securities.

Thanks.

Good afternoon.

Couple of financial questions first for Brian, and then market questions for Aart.

First, Brian, in the fourth quarter, there was a very close correlation between your IP, your services, and your Asia Pac revenues.

I'm wondering if there was a similar correlation at all in terms of several forms of business in the first quarter, or at least perhaps you could explain the strength you saw in your maintenance and services line.

And then secondly, for you as well, could you talk about your cash flow expectations?

You took up your GAAP earnings expectations for the year but you left your cash flow the same.

It is clear your GAAP net income will be higher for the year, plus your depreciation and amortization and your stock-based comp.

So is there something in working capital that you're thinking would be negative or adverse to your total cash flow for the year?

Good questions.

Okay, Jay, let me run through that.

On the first one about the services business and our IP business, over the last 18 months or so, we've seen a small shift in the make-up of the business.

So we now see significant amount of what we call percentage completion contracts entering from a number of the acquisitions we've done.

And as we advance to really some incredible technologies, we have to get in and tweak some of the software that goes into the IP.

And when you look at things like percentage completion and deliverables of that, as well as the hardware business now related to both emulation and our hardware prototyping businesses, those have a slightly different profile relative to our traditional three-year businesses.

So, again, just as I say, tweaking the profiles of that, hardware is typically taken up-front, the percentage completion on services is exactly that, as the job gets done.

But typically, over a six-month period and not a three-year window as a traditional license is taken.

So apart from that, anything else is just coincidental based on timing of those deliverables and when we make the commitment.

On your cash flow question, as we look at the total year, again, still feel comfortable with approximately $350 million of good cash inflow for the year.

Relative to tax benefits and other things that go through, again, it just kind of comes into account for where the specific cash flows are forecast originally, and again, this is predominantly a US R&D tax credit so obviously it has an impact on our US taxes payable.

We're in pretty good shape based on that, and it helps build up NOLs and other tax elements for us going forward.

So no change to the overall forecast.

I think it's a good solid number.

Okay.

The other point you brought up about amortizations and capital and all the rest, there's really no change in those numbers for the year.

Okay.

For Aart, couple of things.

I would like to ask how you're thinking about your organic growth in core EDA, and currently you have high, if not majority share in a number of large categories.

Synthesis, obviously, implementation, RTL simulation and most of analysis.

You have very strong share.

Yet each of those categories is not necessarily growing at or above the industry growth rate.

So could you talk about your components or your drivers of getting to your, I think mid single-digit core EDA growth assumption?

Do you need FinFET and the other incremental forms of business you talked about to just get to mid single-digit core EDA, or do you think that what you have been talking about tonight can get you above your prior comments about core EDA growth?

Okay.

Well, let me first characterize where this comes from.

We've been talking now for a number of years that we enter a year typically with an objective to be high single-digit growth, and that we characterize that over long period of time, as the core being in the mid single-digit, and then some of the other capabilities such as IP being in double-digit.

And this all sort of adds up to high single-digit growth.

Now, having said that, the last two years we clearly exceeded on that.

Right now we just communicated that we are very solidly in double-digit growth for this year, so we anticipate.

Clearly we have done better in pretty much all the categories than our steady state model.

We don't want to give an impression that you can just look at many years out and assume that is always the case.

You have to work for it.

And so in that context this year, I think we will do better than these assumptions.

Clearly from an overall market growth point of view in our industry we're doing very well.

And because of that, our focus is already completely moved towards '14 and '15.

Last but not least, much of this is sold in fairly complex pools of technology that mix and match a little bit of everything.

So there's always a slight degree of artificiality to pinpoint the exact growth.

But I do think that in our industry, and specifically for Synopsys, we have a wave of pretty good organic growth.

All right.

Lastly, more on the technical side perhaps, last year at DAC the Company highlighted that you had enabled your critical tools with double patterning as filling an essential need for design at 20 nanometer and similar advanced nodes.

Tonight you spoke on a number of occasions of FinFET and yield of FinFET.

Is there some connection between having double pattern enabled your tools and yield on FinFET, or is there something more you need to do to meet industry need for the kind of yields you refer in this new technology?

Okay, a very good technical question.

Just for the benefit of everybody, let me make sure you understand what we're talking about.

When we're talking about FinFETs we're talking about transistors that right now most of the industry is focusing on a very small dimension.

I won't go into too much specifics because different companies are very guarded, rightfully so, on what they do.

But typically it is below 20 nanometers.

The connections between these transistors, there's a variety of approaches, from above 20 nanometer to below 20 nanometer, and again, different players are looking at different configurations of how to go to market and how to get yields and how to differentiate themselves.

As you go below 20 nanometer for many of these dimensions, it becomes mandatory in many cases to not have a single flash of light to illuminate a mask, but multiple flashes of light.

That's called double patterning.

I won't go any deeper on the technology than that.

But it is very sophisticated because it uses the addition and subtraction of light in order to get much more refinement to the picture.

You have to think a little about how you probably in grad school developed photographs in a dark lab.

In order to get it really sharp, you need very good lenses, and we apply all kinds of tricks to that.

Having said that, our tools today are completely conversant with double patterning, and that is a necessity to go through the smaller geometries.

We're also conversant with the FinFET structures.

So our tools have been used for FinFET chips that are on the market in production today.

They are being used for pretty much all of the tape outs for the new chips coming out.

And so from that perspective there's a lot of tuning that will happen between now and high-yield FinFETs, but the fundamental technology as far as Synopsys is concerned is in place.

Thanks, Aart.

You're most welcome.

Okay, thank you.

And there are no further questions in queue.

Back to you for closing remarks.

Well, thank you so much for attending this call.

As you saw through our results and through the fact that we increased our guidance, we feel that we have good results and good outlook going forward, and so we appreciate your comments and questions, and as usual, Brian and I will be available for some follow-ups today.

Have a good rest of the afternoon.

Okay, thank you.

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