新思科技 (SNPS) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Synopsys Earnings Conference Call for the Second 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.

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, Laurie.

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'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 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 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.

Synopsys again delivered strong business, technology, and customer results in Q2, meeting or beating every target we communicated last quarter.

We achieved revenue of $499 million, non-GAAP earnings per share of $0.66, and considerable operating cash flow.

As a result, we are raising our non-GAAP earnings-per-share outlook for fiscal 2013 to a range of $2.37 to $2.42, representing solid double-digit growth for the year.

Also raising our operating cash flow target to $375 million to $400 million.

Brian will provide more financial detail in just a minute.

Before discussing some highlights, let me comment on the customer landscape, which I would characterize as steady.

Semiconductor companies continue to face significant challenges; and while cognizant of ongoing uncertainty in the macro environment, the race for differentiation in time to market, product functionality, and advanced technology continues unabated.

Synopsys has collaborated closely with market leaders for many years.

With the high value but also great technical challenges of the latest silicon technologies, more and more customer executives are sharing their future direction with us and how Synopsys is needed to get them there.

As a result, we see continued successes and business strengths across key customer segments, the foundries, top IBM's, and key fablis customers, particularly in mobile and cloud-related systems companies.

Let me provide a couple of examples.

First, during the quarter, we renewed a significant multi-year agreement with Intel.

Second, we've made excellent progress with a large semiconductor company who had been a competitor's stronghold for more than a decade.

For a number of years, we have worked closely with them on their most advanced designs.

This quarter was a substantial long-term commitment; they moved to Synopsys as their main partner because of our technology excellence and dedicated support.

The common denominator driving the largest semiconductor and systems companies in the unrelenting demand for still faster, lower-power, and broader functionality chip.

There is increasing commitment to the most advanced processes, as a growing group of customers joined the leaders in migrating to 20-nanometer, 14-nanometer and 15-nanometer, and even below.

The race to 3-D FinFET design is very promising, as it has opened another decade of Moore's Law.

Specifically, the low-power characteristics of FinFET transistors will impact end-product differentiation, and is enabled by Synopsys leading-edge design tools and IP.

With a rapidly growing set of engagements with customer designed to migrate to FinFET, production delivery of FinFET designed with Synopsys tools has already passed 100 million chips.

Our clear and long-standing focus on advanced technology not only positions us well for the future, but has already driven significant design and customer successes.

To date, 90% of 20-nanometer and below take-outs have used Synopsys implementation, and we're already engaged all the way down to 10 nanometers.

Because of the breath and maturity of our tools, we believe that we have at least a year head-start over any competitor.

To support this assertion, let me comment that we have been working on FinFET enablement for have a decade; and almost every FinFET design to date has relied on Synopsys.

Our solution is truly comprehensive, ranging from TCAD to design tools to IT to sophisticated support.

TCAD is used by foundries for simulation at the earliest stages of technology and FinFET development, giving us six to 12 months early access to foundry models.

The resulting information feeds into the foundational technologies of H5 and extraction, where Synopsys tools are the gold standard.

From there, our IT compiler, which is clearly the most advanced and production-proven FinFET physical design system, creates the layout of the chips.

In addition, our analog mixed-signal design and verification tools are well ahead in terms of readiness and qualification for FinFET.

We have been engaged in developing FinFET-based IP for several years now, and have production-class memory and interface IP ready to integrate into our customers' SOP.

We're engaged with five foundries on developing a full range of production-ready IP for them.

Lastly, our IP design engineers have taped out multiple FinFET test chips for several customer processes.

One example of our leadership is the announcement last week that FPGA provider Achronix has standardized on IT Compiler and IT Validator.

And has taped out the industry's first commercial FinFET-based SOT using Synopsys tools.

At our Silicon Valley User Group meeting in March, more than 600 engineers attended a standing-room-only FinFET panel featuring Samsung, Qualcomm, Cavium, and GlobalFoundries, sharing their early experiences and collaboration with Synopsys.

In addition, you may recall that already in December we announced a successful tape-out of Samsung's first 14-nanometer low-power test chip.

Seven chose Synopsys as their FinFET partner because of the successful collaboration history and the comprehensive capabilities throughout our portfolio.

Now let me turn to verification, which is the largest bottle-neck in system and chip design today.

Synopsys has been developing verification solutions for many years, and is the clear leader in both leading-edge digital verification, with about 70% of advanced designs utilizing Synopsys; and circuit simulation, where 19 of the top 20 semiconductor companies rely on us.

Verification is rapidly evolving as chip complexity moves into its next phase.

Two principles remain -- tool performance is key, and a complete home solution is increasingly a must.

Today, our VCS simulator and WIBU emulator both have the fastest run time in their respective categories.

In combination with virtual prototyping in our FPGA-based prototyping system, we cover the entire hardware/software verification space.

With the addition of the most comprehensive open de-bug system, Verdi, and our next-generation verification IP offering, we now address the entire verification market with outstanding tools.

During the quarter, we delivered the first product release of Verdi under Synopsys.

The first is an aggressive road map of advanced as a CD bugs technology.

Our integration is progressing very well, and customer reactions to our complete verification solution have been very positive.

The third area I would like to highlight is IPM systems, which represents about 25% of our revenue and continues to see strong business.

Synopsys is the second--largest IP provider in the world, with 1,700 engineers designing commercial IP blocks that give us the number one position in interface, embedded memories, and analog IP.

According to Gartner's, Synopsys is the largest provider of physical IP, more than double the nearest competitor.

We expect this area of our business to continue to yield double-digit growth.

Top 20 semiconductor vendors continue to outsource more IP to Synopsys, trusting us to deliver high-quality blocks into their critical chips.

The amount of IP these companies consume has increased by 5X over the past few years, and now represents almost half of our designware IT revenue.

This quarter, we also surpassed our 2,000th USB design win.

Last year, our USB solutions shipped well in excess of 500 million units.

Finally, our PCI Express solutions are well ahead of the competition.

We are approaching 1,000 wins in our PCI Express family, and recently passed compliance with 20-nanometer silicon.

In systems, we had our strongest bookings quarter ever for FPGA-based prototyping, with broad-based demands by some of the largest semiconductor and systems companies in the world.

The promise of earlier development of software, as well as robust hardware/software verification is driving continued demand for our out-sourced solution.

In automotive, as software content and complexity continue to grow, our customers are taking advantage of our leading virtual prototyping technology so they can start their software development earlier, and accelerate system integration test and validation.

Finally, our partnership with ARM continues to bear fruit, as we release an ARM Cortex A57-based virtual design kit, enabling our customers to create software for ARM V8-based designs, up to one year before silicon is available.

In summary, as we reach the halfway point of the fiscal year, Synopsys continues to execute very well.

Demand for technology is strong, customer momentum continues, and we again delivered very solid financial results.

Consequently, we are raising our non-GAAP earnings per share and operating cash flow guidance for the year.

I'll now to 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 you with our guidance for Q3 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 February.

Q2 financial results were highlighted by strong business levels, double-digit growth in both revenue and non-GAAP earnings, and considerable free-cash-flow generation.

In addition, the revenue run rate was positive.

Now, some additional detail.

Total revenue was $499 million, an increase of 15% compared to a year ago, and at the high end of our target range.

Greater than 90% of Q2 revenue came from beginning of quarter backlog, and one customer accounted for slightly more than 10% of second-quarter revenue.

The weighted average duration of our renewable customer license commitments for the quarter was greater than four years, reflecting a mix of contracts, including the impact of a large contract renewal.

As a result, we now expect average duration for fiscal 2013 to be greater than three years.

Turning to expenses, Q2 total GAAP cost and expenses were $420 million, which included $32 million of amortization of intangible assets, and $16 million of stock-based compensation.

Q2 total non-GAAP cost and expenses were $365 million, an expected year-over-year increase due primarily to increases in head count and expenses from our recent acquisitions.

Non-GAAP operating margin was 27% for the quarter, and 26% for the first half of fiscal 2013.

As we mentioned last quarter, we expect total non-GAAP expenses to be skewed towards the second half of the year.

This is simply due to timing of expenses such as employee compensation, some hiring that shifted to the second half, and traditionally higher Q4 expenses.

However, for all of FY 2013, we are still on track to expand our non-GAAP operating margin by approximately 100 basis points over FY 2012 levels.

Our ongoing goal continues to be a focus of operational efficiency, with annual operating margins moving solidly into the mid-20%s.

Turning now to earnings, GAAP earnings per share were $0.44; non-GAAP earnings per share increased 25% to $0.66, slightly exceeding our target range, driven by expenses at the lower end of guidance, and higher than expected other income.

We are raising our annual EPS guidance to reflect our strong second-quarter results, and are confident in the rest of the year.

Our non-GAAP tax rate was 24% for the quarter, and we continue to think that a non-GAAP tax rate of approximately 23% is a reasonable estimate for FY 2013, reflecting the benefit of the R&D tax credit for FY 2012 and 2013.

As a reminder, the reinstatement of the R&D tax credit has an impact of approximately $0.09 to FY 2013 non-GAAP earnings.

Turning now to our cash and balance sheet items.

During the quarter, we generated $134 million in cash from operations, and are raising our operating cash flow target for the year to $375 million to $400 million.

We paid back $7.5 million of our outstanding term loan, leaving a remaining balance of $120 million.

We also purchased 1 million shares of Synopsys stock for $35 million, and have approximately $237 million remaining on our current share repurchase authorization.

As a result, we ended the quarter with cash and cash equivalents of $681 million, with 39% on-shore and 61% off-shore.

We will continue to optimize the use of our strong cash flow, whether on M&A, debt reduction, or stock buy-backs.

DSO declined six days sequentially to 46 days, and we ended Q2 with 8,195 employees, with about one third in lower-cost geographies.

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

For the third quarter of FY 2013, our targets are revenue between $475 million and $485 million, a year-over-year increase of 8% at the midpoint.

As a reminder, we do expect some increased variability in quarterly revenue going forward, driven by factors such as growing hardware business in emulation and prototyping.

But continue to expect a 90% time-based revenue model.

Total GAAP cost and expenses between $411 million and $428 million, which includes approximately $16 million of stock-based compensation expense.

Total non-GAAP costs and expenses between $365 million and $375 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 155 million and 159 million.

GAAP earnings of $0.28 to $0.34 per share, and non-GAAP earnings of $0.53 to $0.55 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.

We've been able to maintain our revenue targets, even in the context of the yen depreciation this year.

Other income and expense between $5 million and $9 million; a non-GAAP tax rate of approximately 23%; outstanding shares between 155 million and 159 million.

GAAP earnings per share of $1.48 to $1.56, which includes the impact of approximately $67 million in stock-based compensation expense.

Non-GAAP earnings per share of $2.37 to $2.42, 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 $375 million to $400 million.

In summary, we're pleased with our strong Q2 financial performance and continued execution.

This is highlighted by top and bottom line growth, and solid operating margin.

We are also pleased to provide increased EPS and cash flow guidance for FY 2013.

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

Thank you.

(Operator Instructions)

Rich Valera, Needham.

Thank you.

Good afternoon, and congratulations on the nice numbers.

Brian, just a question with respect to one of the comments you made.

I think you said the revenue run rate was positive on the quarter.

I wondered if that also applied to the bookings run rate versus the prior years, on average?

That's in fact how we do measure the revenue run rate.

We're looking at the bookings and compare that to the beginning of the year.

Looking at revenue that we'd be expecting to get in the deals as we go forward.

So that actually is your sort of standard measure of run rate?

Yes.

Okay, and that was positive on aggregate.

Great, thank you.

Then Aart I just wanted to ask a couple questions on the IP business, which is clearly a big focus and a nice growth driver for you guys.

I want to try to understand where the margin of that business is today.

I believe it's below the corporate average, but where you see it today and where you see it going.

Does that require any meaningful up-front investment for the move to FinFET, to crank out all the different FinFET versions of these products, which obviously you would benefit from down the road?

In general, that business is strong and we have continued our push to improve its profitability.

At the same time, balancing it, I think, well with the amount of continued investment in creating the products available for next year.

The good news is on the FinFET side, we have actually invested already quite a while ago.

I think we're going to start to see the benefits of that as the early investment will start to turn now into growing the revenue from that.

I actually see it as a very positive outlook for that business.

Great, thank you.

With respect to the Intel renewal, a couple questions.

First, was it really exclusively the Intel deal that drove up the average duration for the quarter?

Was the rest of the business in line with your norm?

Two, would've thought that all things equal your deferred revenue would've gone up sequentially with that renewal in the quarter, but it actually went down a bit.

Just wondering if you could comment on those couple of items?

Well as you know, in general we are very shy to comment about anything regarding a specific customer, and that includes Intel.

Needless to say, this is an important customer for us and a significant agreement.

Let me not break it out further, given that we really don't want to comment about the specifics of the transaction.

To your question on the deferred revenues, Rich, just recall that increases in deferred revenue happen only when we are able to invoice the customers.

So could I take it that maybe you didn't yet invoice for that particular large deal?

Same comment in terms of providing, we don't provide the details of the individual accounts.

Yes.

I understand you don't want to provide the duration of that specific deal, but can you say if we should be expecting any change in duration going forward?

Any other change in your average duration other than that one deal?

Well, what we would do is look at the total weighted average renewal length that we've been able to close in the quarter.

The impact, as we've said for Q2, was that it became greater than four years; and then the impact as we look at bookings perspectives for all of FY '13 will be just over three years as well.

Okay.

That's it for me, gentlemen.

Thank you.

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

I had a few of them.

Aart, in the past you've spoken about growing your IP business in the double-digit range, or the low double digits.

Is that still the target for this year?

Can you a little bit around the competition now that Cadence has turned silicon?

Yes, we have not changed our outlook.

We think that this is a part of our business that is growing in double-digit range.

We foresee it to continue to be there.

Of course, at any point in time we are dealing with a variety of competitors.

I think that is more an indication that it is a healthy business than anything else.

Got it, all right.

On the emulation side of the market, after you guys purchased EVE, can you talk about what kind of trends you're seeing there?

I know that everyone believes in it being a secular grower.

Are there any cyclical trends that's in that, because two or three companies have two different view, at least for this year, on how the emulation revenue is going to trend.

Along the same path, when I look at your operating margin or your margin profile, you're improve your margins to IT business.

How is the margins on the emulation business, and where do you think it can get to?

Well, let me go backwards.

We actually do not break out the margins of any of the individual businesses, partially because there are some fluctuations as we decide to invest or not.

The key objective, of course, is to manage the overall profitability of the Company to be in line with our even higher-level objective, which is to grow the earnings per share in high-single-digit range.

All of this fits together nicely in that regard.

As we look at EVE particularly, we are now in the very interesting phase of integrating it while we simultaneously are integrating the de-bugging capability acquired from SpringSoft.

Our aim and objective is really to now take what is a fabulous collection of really best-in-class technologies and deliver a well-thought-out integrated platform.

EVE absolutely is a key piece in that, and so far I think that's going very well.

Got it.

Then the final question.

On the FinFET side, clearly you guys have a lot of experience on the FinFET design.

When you interacted the foundries, most foundries are expected to start manufacturing FinFET-based chips some time next year.

I don't think there's any specific timing quite yet.

But when you look at it, is the challenge in FinFET more on the design side or do you think it's more on the manufacturing side?

Well, I don't want to be not humble and say well the design side we have it sort of under control, but the reality is I think it is both -- meaning that these are new structures that are simultaneously being introduced with much smaller notes, so that's sort of squaring the complexity of the problem; simultaneously, achieving much higher density of transistors, which brings a lot of challenges for the tools.

The only reason that I speak with I think a fairly high degree of confidence is we have already helped customers tape out chips that are on the market today with this technology.

In that sense, the proof of concept is beyond contest; it is actually in production.

Now having said that, there is no question that there are multiple players that are all racing forward to deliver their own version of this technology.

That requires adjusting to their specific technologies, adjusting to how they like to see the design come together.

We are extremely engaged with all of them, which from my perspective is a really positive sign, because I think that FinFET is one of the enablers for truly a next generation, meaning a decade or so of advanced design.

I think this is moving at super-high speed.

Got it.

Thank you very much, Aart.

Thanks.

Sterling Auty, JPMorgan.

I was wondering if we could approach it this way -- if you take out your largest couple of deals, was the duration of the rest of the contract below three years, or above three years?

I think let's not go too much into trying to reverse-engineer all the numbers.

Fundamentally, our business has not changed.

In aggregate, we have always said that the balance of transactions that we do is in the three-year range.

The last few quarters it was a little bit lower, before that it was a little higher; but fundamentally, there is nothing that would indicate to me that our business is changing.

Everything else, I think we are not going to into further, if you don't mind.

Thank you.

Once a year, as we think about the collections through the year, you do have a seasonality to it.

Given the increase in cash flow for the year, would you say that your second-half collections are going to be above seasonal as compared to the past?

You're right on.

They're typically higher in the third quarter, is what we've seen every year; and still expect then we would have a second half which is stronger than the first half.

With the confidence we had and the business activity, we had increased confidence in cash flow -- primarily around collections.

That is looking better for this year and allowed us to raise guidance.

You mentioned the FX impact.

You've been able to hold the revenue guidance.

As you look at the pipeline for the back half of the year, is there any concentration in terms of either bookings in the pipeline or other that we should think about being -- coming out of Japan?

I think let's just align on the question there.

It's really a perspective for foreign exchange, is that we typically hedge off all the expenses as we operate around the world; but in this past six months or so, we have seen a notable devaluation in the end, which affects the revenues -- most of the revenues out of Japan, not all of them.

As we look for the year, we've been able to offset that impact.

We have not had a material impact to any of the key line items, in particular in terms of earnings per share.

We've been able to offset that with good operational performance, being able to hold the revenues for the year, and just good hedging, natural hedging, and managed it to have a very minimal impact to the year, and even allowed us to raise guidance.

This year has been very good from a yen perspective.

We typically don't have any fluctuations to the budgets we set for the year, because of all these programs that I just went through.

At the end of the day, with Japan and the economy, is expected to pick up as a result of this devaluation.

In the long run, we think that's good for our customers, as well.

Great.

Last question, Aart.

Can you just maybe characterize where we are in the transition?

It seems like 20-nanometer might be a little bit of a transition node.

Do you agree with that?

Where are we in the move to the next big node in terms of tooling?

Well, we are definitely seeing the number of designs growing in the 20-, 22-nanometer node.

I concur with the general feel of somewhat of a transition from 28 to 14, 16.

The reason that is a little bit of a misnomer is because the transition to FinFET is actually the important driver, not necessarily the node size -- although the two, of course, interact.

The reason that the transition to FinFET is so enticing is that it really changes the performance power nature of the transistor, and that is being one of the increasing -- the difficult bottle-necks in semiconductors.

That being the opener to a next volley, so to speak, the race is obviously on.

But it is also fair to say that the number of customers will land at least temporarily on the 20-, 22-nanometer, just because they want to pipe-clean their design flows; they want to minimize the risk in the transition, and that makes a lot of sense.

But we definitely see both behaviors.

Okay, great.

Thank you.

Tom Diffely, D.A. Davidson.

Brian, looking at the operating, or I guess the margin expansion -- the 100 basis points this year, perhaps a little bit more on the out year, is that driven by the ramping IP and better- margins IP, or is it just overall revenue growth in the Company that's driving the operating margin expansion?

Well, Tom, it's all of the above.

It's really that our revenues are up very nicely this year.

We're looking at revenue growth in the range of 11% to 12%.

Spending is not growing as fast is that.

We are seeing good improvements across the board in the operating margins of the Company.

At the same time, we've got to retain dollars to invest in leading-edge technology.

Again, still on track for the commitment for the year to see approximately 100-basis-points improvement in the margins.

Okay.

When you look at the -- all the acquisitions last year, is there an opportunity to have operating expense improvements as integration happens over the next few quarters, or are we pretty much at the ongoing level at this point?

No, there is still in a number of the product lines, still some of the integration activities under way, getting best-in-class performance features out of all of the various products and products and bringing those to market as quickly as we can.

Again, there could be some opportunities there; but again, overall the Company does need to stay invested in leading-edge technologies and continue to drive EPS at the same time.

Okay.

What was the actual impact of the yen during the quarter?

Really not very material at all.

As you saw from an impact through the yen on the revenues because of our hedging and the other activities and over-achieving, as well as other income and expense, where we are able to recognize some of the non-hedge accounting impacts of the Company.

Bottom line to the Company was really minimal, nothing almost.

Okay, great.

Then you talk about a tax rate of 23%.

That includes, I guess, the $0.09 impact of the R&D tax credit already?

Yes, it does?

Totally imbedded in your guidance?

Absolutely, yes, that is factored in.

That came through in our first quarter.

There was about $0.04 impact related to FY '12 as a retro catch-up that we had in Q1.

Then we had forecast an additional $0.05 to come through in earnings per share for the balance of FY '13, which again, we are just building on.

So we saw the $0.09 increase in Q1, primarily coming from tax; and then we are adding on another $0.02 improvement in EPS coming from operational improvements this quarter.

Okay.

Your long-term view without the tax credit going forward in the out years is still around 25%?

Yes, at 25% to 26%; because when you look at us at 23%, so roughly 3 percentage points change; so 25% to 26% is a good long-term planning model for us.

Okay, and then I guess finally on the technology side, is the move to some of these advanced technologies for memory like the 3-D NAND, are they big drivers as well?

It sounds like FinFET and the fact that the established guys are in conglomerate your biggest customers, per se.

Are you going to see much of an impact once the industry moves to some of these other memory technologies?

Absolutely, although they are not completely linked.

There is a key reason for that, which is that the largest portion of the industry that sees the biggest benefit in changing the performance power segment is clearly the mobile side of the industry.

Now the power equation is starting to impact the cloud side as well, because these very large centers of servers are definitely eating up too much power; but that is going to be a little slower.

So mobility is driving this, and mobility is just incredibly hungry for even more performance.

We're essentially limited by battery power.

Since most of the computational energy goes into the core processors, that is where the emphasis on FinFET is going to be first.

Now memories are following their own track of technology development; but they have the very same need of being very -- in this case -- being very price sensitive.

So we are going to see more and more push there as well in parallel to the processors.

By the way, when I say processors, I should clarify that.

I mean not just the apps processes, but any other form as well -- the graphics processors are key; the DSP processors as well.

Okay.

Once again, it really comes down to just battery life as the main driver of the mobile consumer today?

In many ways, largely because I think battery improvements -- and don't quote me on the number, but I think it may be in the 10% to 15% per year, which is woefully insufficient versus what we wish our phone could do.

Therefore, I think any advances in semiconductors are going to be a very high value.

By the way, I think this is going to continue in years to come, because the demand for more computer power will, if nothing else, accelerate with the type of applications that are possible.

Therefore, over time, I certainly have hopes that we will see some more migration of capital and money flow into the semiconductor industry, precisely because there is such a high leverage on being able to improve the performance power ratio over a number of these chips

Okay, thanks for your time.

Jay Vleeschhouwer, Griffin Securities.

Brian, to start with you, just to reconcile some revenue numbers here.

You had an unusually large increase in your Asia-Pacific revenue, both year over year and sequentially; but your up-front revenues declined sequentially by a fair amount.

Was the increase in Asia-Pac largely tied to the increase in PBL revenues generally; and was IP and/or services the main driver to that increase in Asia Pac?

Yes, let's go through a couple of your points, here.

One is that APAC did have a very strong quarter; and when we look at trailing 12 months is doing very well, as well.

So very strong region for the Company.

In terms of the mix of products, of course it fluctuates from quarter to quarter when we look at now that of course we have an increased hardware business; we have more business coming in the areas of percentage completion or milestone-based accounting for our revenues; and also that we see from time to time royalties coming through in a quarter-to-quarter basis.

There will be some natural fluctuations from quarter to quarter.

I don't link it specifically to the region, but overall for the Company; but APAC is very strong for us, and looking at very strong year-over-year growth.

Okay, so just to clarify that, so it was a variety of things, it wasn't necessarily a single large scheduled PBL payment, or anything like that?

Right, that is correct.

Okay.

For Aart, let's see how far we can take the Intel discussion.

When you last publicly disclosed a renewal with them, which was August 2007, there were some comments you made at the time with regard to technology collaboration and work with them.

Perhaps you could comment in what ways the arrangement now might in any way be different from what you talked about back then?

Also, at that time, in 2007 your quarterly revenue run rate with them that you disclosed was roughly $34 million a quarter.

Now based on recent disclosures you are up to over $50 million a quarter.

Some of that's inorganic, of course; but would you foresee a prospect of further material increases in the run rate with them as we've seen over the last five to six years?

Well, if nothing else, Jay, you are keeping very good notes; but unfortunately, I'm not going to add much to the notes, because we don't comment about the business relationship we have with our customers.

Intel is an obviously, visibly so, an important technology driver, and has been a very good partner to us.

All I can say is that relationship continues on that basis.

Okay.

On the IP business, I think you mentioned in an earlier call that you have something like 1,400 engineers now in that business.

Could you just remind us what proportion of that head count is inwardly focused in terms of R&D, versus customer engagements where you're doing projects for customers, apart from the internal R&D work that you do?

Well, the number I mentioned was 1,700 and I'm not quite sure how to answer the question, because these are engineers that are essentially developing IP for customers.

Some of the IP is very generic, some of the IP gets tuned specifically for the customer's technology.

Whenever an IP is not fully synthesizable, you have to do that in order to take advantage of the specific nature of their silicon node.

The node is not only -- a single node, it often has different characteristics being optimized for performance or low power, for example.

So the breath of the type of these engagements is why quite broad; but the number I mentioned is all really fundamentally in the development and delivery of IP to the customers.

Okay, couple of last things.

You mentioned in your prepared remarks a win in Japan.

Could we speak about Japan a little bit more broadly, because it's been obvious for the last number of years that it's been shrinking in importance to EDA as a percentage of EDA spend.

Yet we've seen in the last couple of quarters or so some renewed momentum among other technical software companies.

I'm wondering if this particular win is indicative of all of a reinvestment cycle that may be occurring in Japan vis-a-vis EDA as a whole, and not just this one particular success that you've had there?

Just for the record, I did not mention any specific win in Japan; but on the general topic of Japan, it is very clear that over the last now -- actually more than a decade, but visibly so in the last half decade or so -- that the Japan economy and the semiconductor industry in particular have been under enormous pressure.

While we as a Company are doing quite well, I would like to link to one of the things that Brian said earlier, which is this very change in the valuation of the yen is viewed in Japan as at least the beginning of a ray of hope that they become more competitive on a worldwide basis.

With that, the opportunity for their business to sort of re-start themselves beyond this somewhat stale situation that the industry has been in.

Now having said that, there are a number of companies that have taken very aggressive steps in consolidating or in streamlining their businesses.

Like any other part of the world, these changes are difficult to do, they take some time; but after a while, the positive impact starts to show.

So we certainly hope that the industry in Japan in semiconductors will grow again, and potentially also re-focus on some of the newer opportunity spaces.

The indications are a little bit better than they were actually just six months ago.

But having said that, these are macroeconomic events that are certainly far beyond our control as a Company.

Okay and then lastly, would you care to comment on the announcement earlier this week by Cadence of a potentially competitive offering versus PT?

Of course this is tax season, and you will see a wave of announcements of products that are all better than what was ever built before; and the reality will sink in over time.

No, I don't think that there's anything more to be said right now.

We will have to see what the reality is, and obviously we have a strong competitor in Cadence, and we will compete equally strongly back.

Okay.

Thanks, Aart.

(Operator Instructions)

Mahesh Sanganeria, RBC Capital Markets.

Thank you very much.

Aart, can you comment on the design when you talked about this quarter you had was -- which product area that was in, and what was your driver for your design when?

I think I mentioned the term design wins when summarizing how far our USB franchise and delivery had gone; because it is quite astounding how the IP business for us has evolved over a number of years.

Sometimes we work so hard that we don't realize how many designs have actually utilized our IP; and in that context, I think the 3,000th design win of USB was actually, I think, quite remarkable.

Having said that, the other aspect where the word design wins comes in is literally every day; meaning that no matter how good a Company we hope we are, we have to prove every day again that we are worthy of the responsibility of being on the top chips for tomorrow.

Therefore, we do have a very active engagement in the field through our technical support team.

The good news is I think we are really massively involved in all the new advanced chips.

In that context, every day there is somewhere in the world some good news of being selected again to continue that journey.

But there's also the responsibility and the fun challenge to actually have to deliver on chips that are driving the boundaries of what we can do.

In that context, I think the FinFET effort, be it through the tools that are very much on top of it, I think, already the IP that is in very rapid development; and now increasingly, the technical skills in our field to support our customers -- these are very positive indicators for the future that we have with the people driving the most important design wins.

Just a follow-up on the FinFET.

You mentioned that you have experience designing with FinFET.

Can you give us a little bit more color?

Where is the more profound impact in terms of the different tools?

Is it more in the device simulation or placement or power closure?

Where is the most profound changes you had to make in the tools to enable the FinFET?

Good question.

It's actually very much across the board, because it starts with really the design of both the technology, which by the way is moving to a very small node -- 14-,16-nanometer.

With that, there's a lot of lithography-type of issues; but there's also lithography creeping into the place en route, by virtue of what's called double patterning.

Secondly, the entire layout space is highly impacted, because the nature of the transistor will change the timing and power calculations, but the layout is also influenced greatly by all the rules that you have to follow to place these things on the chip just right.

When I say rules, we are talking essentially doubling rules of 2,000 to 4,000 rules that you have to follow.

Then indirectly, it really impacts or will impact, I should say, going forward the entire verification space, because all the way down to the spike level simulation of the transistor, all the way up to the sheer number of transistors, and therefore complexity of chip verification from a functional point of view.

So it is quite remarkable the breadth of it, but it's also quite rewarding, because that is the very reason that we can see how much impact this will have on design and on electronics going forward.

Summarizing all of that, it also impacts every one of the building blocks.

Again, you can look at the transistor as being literally the smallest atomic building block, all the way to the large pieces of IP that have to be tuned for these technologies.

As I mentioned in the context of an earlier question, we have been working on IP development -- be it in memories or libraries are building blocks -- now already for quite a while.

In that sense, I think we are very much in sync with the foundries as they roll out their production-ready solutions.

One more question I want to follow-up on the topic that was discussed is the 20-nanometer being a transitory node.

Will it be possible for you to give us, in quantitative sense, at what will be the -- what is your expectation for big design starts on 28, 20 and 14 so that we can get an idea of how big or how small this 20 nanometer is going to be?

Yes, let me give you a little bit of sense.

For the 28-32-nanometer node, we actually have stopped tracking.

What that means is, we count the early chips up until 500.

After that, this becomes completely intractable.

So that node, I think, will continue to be a big node in the sense that a lot of designs will aggregate there.

On the 20-22 nanometer, we have I think about 100 designs and growing on the radar scope.

Then we do not communicate the 14-16 nanometer, partially because there's too much confidential information in that.

But I can certainly tell you that there are some very hard-driving folks engaged in both test chips and production chips, there.

Okay, that is very helpful.

Thank you, Aart.

Satya Kumar, Credit Suisse.

Hi, this is [Firhan] asking a question on behalf of Satya.

Thanks for taking the question.

A question on the fragmentation on the foundries.

Increasingly, there has been some large companies which have indicated they are entering the foundries space.

Compared to three, four years ago, there are more companies doing foundry work.

How does that affect the (inaudible) world?

Does that imply that you have a greater amount of OpEx now muted, because you have to support multiple design flows?

Also, is that leading to more design activity, because people have to design for the (inaudible) foundries?

Thanks.

To be honest, acoustically, it was a little hard to understand, so let me try to formulate the question and see if I answer the right one; which is, as the foundry landscape is changing and the number of the foundries are -- and a number of their users are trying to use multiple foundries -- what all do you have to support, because in that context, the number of nodes sort of multiplies in the dark, so to speak.

Meaning that not only do you have these small and smaller nodes, but you have variations on each one of those for performance, power, and maybe cost.

It is certainly true that this puts a fairly heavy burden on us, but also on the foundries to have the complete ecosystem ready.

The good news on our side is that we have designed our tools to be extremely flexible for a variety of parameters.

Therein lies actually one of the differentiating essences of what Synopsys has built literally for the last 20 years, all the way starting to synthesis and through the physical implementation, which is we can read in the characteristics of different technology nodes and their variations, and then optimize the circuit based on that.

So if a certain node, let's say, may have some better capabilities in low power, we will take advantage of that dramatically in the tools.

Now having said that, the one area where that is sometimes challenged is as you develop IP that has to be individually optimized -- in some cases almost manually for best results because it's going to get re-used so much -- now we need to have working contracts with the customers so that we can invest the resources to do that, deliver it on time; and they have a strong interest that their IP looks really good, because that will attract their customers to go to them.

So there is an economic relationship there that has to jive.

Moreover, there is a temporal relationship, because they want to have their technology ready at the same times as the tools being ready, at the same times as the IP being ready, and at the same times as the support being ready.

Of course, you are talking about things that are really state of the art, and so predicting the right arrival time is not always trivial.

But we are working closely with, as said, all the top foundries on that.

Again, I think it's both a privilege and an opportunity to be at the center of gravity of this whole next wave of capabilities.

Thank you, that is all I had.

Thank you.

I will turn it back to our speakers for closing remarks.

Well, at this point in time, thank you for attending the call.

I think we communicated to you that we had really an excellent quarter; and moreover, are making really great progress in many of the technology directions that I believe will profoundly impact semiconductors in the years to come.

From that perspective, as much as the pressure is on us to continue to deliver, the privilege is here to be part of that ride, and we're looking forward at finishing our year well within the targets that we've given you.

Thank you so much, and we will be available for questions afterwards, as usual.

Thank you.

Ladies and gentlemen, this will conclude our conference call for today.

Thank you for your participation and for using AT&T Executive Teleconference Service.

You may now disconnect.