新思科技 (SNPS) 2013 Q4 法說會逐字稿

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

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 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 financial measures, and supplemental financial information, can be found in the 8-K, the earnings press release, and the financial supplement that we released today.

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

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

Good afternoon, and thank you for joining us.

I'm happy to report that we closed a very good quarter, and achieved excellent 2013 results.

We're seeing strong product and customer momentum, and we're positioned well as we head into 2014.

Summarizing our results, we delivered revenue of $505 million in Q4, and $1.962 billion for the fiscal year, a 12% increase over 2012.

We reported non-GAAP earnings per share of $0.56 in Q4, and $2.44 for the year.

This is 16% growth over fiscal 2012, and substantially above the target range communicated at the beginning of the year.

Simultaneously, we increased our non-GAAP ops margin to 24% for the year, and generated $497 million in operating cash flow.

With strong multi-year commitments by a number of key customers, we grew our three year backlog to $3.1 billion.

Lastly, we continued to diversify and broaden our product portfolio, with strong momentum in IP and systems.

Building on a very solid year and position, we're setting a 2014 non-GAAP EPS objective of $2.55 to $2.60, and a revenue target of $2.06 billion to $2.085 billion.

Brian will discuss these in more detail shortly.

Before providing some highlights for the year, let me comment on the customer landscape.

As you've seen, 2013 has been a year of gradual and uneven economic recovery across the globe.

Against this backdrop, the semiconductor market, while forecasted to show modest growth in 2013, remains highly competitive.

To prosper, our customers must excel in both costs and time to market, while accelerating their adoption of disruptive new technology such as FinFET transistors, 20 and 16-14 process geometries and multi pattern masks.

While we have not seen a material change in customer behavior, we realize that 2013 is another year in an extended period of uncertainty, and customers remain somewhat cautious.

Nonetheless, they're willing to spend on technology that enables them to differentiate.

This is great for Synopsys, as many key customers are specifically counting on us to accelerate their differentiation and speed their time to market.

Driving growth of the markets are the three segments of mobile, cloud infrastructure, and what can be summarized as smart everything, also known as the Internet of things.

The mobile market shows very good growth, which is projected to continue well into the future, albeit with a shifting mix towards more lower cost devices.

The customers in this market are particularly counting on Synopsys, as they require both advanced FinFET technology and substantial amounts of IP.

The increasing amounts of mobile devices, combined with massive Internet search, social applications and video, in turn drives continued demand for cloud infrastructure capacity.

This bodes well for Synopsys as servers and internet infrastructure use the most challenging silicon technology and EDA optimizations for speed and low power.

The third category of smart everything is readily visible in the automotive segment, for example.

Today's cars include hundreds of sensors, dozens of electronic control units, extensive network systems, and millions of lines of software code, which can already exceed 20% of a car's total cost.

The electronic and software content will continue to grow, as increasingly smart and powerful driving assistance features are added.

Integrating these complex hardware-software systems is a real challenge, necessitating the adoption of types of hardware-software prototyping tools at Synopsys, refining it over the last decade.

The outlook is especially promising for top tier customers who are demanding the most advanced tools, design flows, global support, and sophisticated IP.

For many of them, we're already their preferred collaboration partner, and their multi-year commitment to Synopsys, reflected in our backlog, has allowed us to invest substantially in new technology that we'll be introducing over the next 18 months.

Let me provide some technical highlights, starting with implementation.

The move to advanced silicon nodes continues unabated, as customers seek to take advantage of considerable power, performance and area benefits.

During Q4, we saw the number of designs at 20-22-nanometer and 14-16-nanometer increase notably.

This has a positive impact on us, as Synopsys is the acknowledged leader at these geometries.

Approximately 90% of 20-nanometer and below tape-outs have used Synopsys implementation tools.

We're already engaged all the way down to 10-nanometer in design, and at 7-nanometer with TCAD.

The design activity on 14-16-nanometer FinFET processes is accelerating.

Foundries are under pressure to stabilize their process, and provision the necessary IP.

Design houses are under pressure to execute their first designs, and we expect that during 2014 and early 2015, pressure will mount to ramp yield.

These are all areas where Synopsys plays a central role.

Competitively, Synopsys has at least a year head start.

Our complete solution from earliest stages with TCAD to digital and analog mixed signal design and verification, to IP and global support is unmatched.

Our FinFET solutions are also production proven, with well over 100 million FinFET chips in the market today that were designed with Synopsys tools.

During the past year, we announced a number of customer and ecosystem partner successes.

TSMC certified both our digital and custom design and verification solutions for its 16-nanometer FinFET process, and awarded us Partner of the Year for joint development of their 16-nanometer FinFET design infrastructure.

We were also presented TSMC's Partner of the Year award for interface IP for the fourth consecutive year.

Samsung chose Synopsys as their FinFET partner, because of a successful collaboration history and our complete solution.

We enabled the tape-out of Samsung's first 14-nanometer low-power test chip and delivered a comprehensive design implementation flow for its leading-edge 14-nanometer FinFET process.

We announced UMC's first qualification tape-out in its 14-nanometer FinFET process, achieved using Synopsys tools.

Our early collaboration with Global Foundries helped accelerate availability of their 14-nanometer XM process for the mobile market.

Achronix standardized on IC Compiler and IC Validator, and taped out the industry's first commercial FinFET based complex FPGA, using our tools.

In addition, in 2014, we plan to roll out next-generation capabilities that will enable notably faster design, than anything seen so far.

This is the result of many years of R&D, and the initial collaborations show outstanding results, that will materially impact the competitiveness of our customers.

Moving to verification, these increasingly complex chips require an immense amount of complex simulation, emulation, prototyping, verification IP, and debug tools.

Leading customers rely on us in this area as well, with approximately 70% of advanced digital design utilizing Synopsys and 19 of the top 20 semiconductors counting on our analog circuit simulation.

In 2013, we embarked on the development and assembly of a major new verification platform.

First, we completed our solution through the acquisitions on EVE, with the industry's fastest emulator, and SpringSoft, with the gold standard debug tool.

Since then, we have mounted a massive effort to develop a next generation verification platform.

The customer response has been excellent and here, too, we have a strong pipeline of capabilities that will be rolled out over the next 18 months.

Finally our IP and systems products continued to grow very nicely, now representing approximately 25% of revenue.

Synopsys is the second-largest IP provider in the world, and number one in interface, analog, and memory segments.

Outsourcing of standard base IP continues to increase.

We estimate that just over about 50% is outsourced today.

With the potential TAM of $4 billion to $5 billion, there's plenty of runway for continued Synopsys growth in IP.

Our track record of quality and efficiency, plus the increased complexity of the IP we are delivering, means that our customers not only save money buying from Synopsys, but also accelerate their schedules and de-risk their chips.

During the past year, we continued to deliver highly sophisticated products, including memory IP and logic libraries for a number of 14-16-nanometer FinFET processes.

Looking into 2014, we expect FinFET-based IP to grow, as design in these technologies accelerates.

Simultaneously, we have embarked on next generation interface protocols such as DDR4, PCI Express gen4, USB 3.1, and HDMI 2.0, all significantly more complex, and thus promising for our continued growth.

Given the sophistication of our IP teams, we are very involved in the development of new standards to best meet initial customer demands.

For example, after working for two years as part of the HDMI forum to architect the 2.0 specification, we launched our digital analog cores just one day after the forum ratified the specification.

We have subsequently closed HDMI 2.0 deals with a number of customers in applications such as ultra hi-def 4K TV, video cameras, and tablets.

In summary, amid a customer environment characterized by a mix of economic uncertainty and aggressive investment in design, Synopsys is in a very good position with product and customer momentum, as well as a financial base that supports continued execution and investment.

We performed well in 2013, and look at 2014 as a year to expand our technology and market leadership.

Our primary economic objective is to drive high single digit non-GAAP earnings per share expansion.

We plan to achieve our goal through a combination of the following: One, drive traditional EDA organic revenue growth, generally in the low to mid-single digit range.

Two, achieve IP and systems organic revenue growth, generally in the low double-digits.

Three, continue to grow non-GAAP operating margin solidly into the mid-20s, to continued global focus and operational efficiency.

Four, actively explore value and TAM expanding M&A.

And five, optimize the use of our strong cash flow through a balance of M&A, debt reduction and/or stock buyback.

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

Thank you, Aart, and good afternoon, everyone.

in my comments today, I will summarize our financial results for the quarter and fiscal year, and provide you with our guidance for Q1 and the full year of 2014.

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

Now as a reminder, FY12 included an extra fiscal week, affecting both revenue and total expenses by $25 million and $16 million, respectively.

Synopsys delivered a solid fourth quarter, wrapping up an outstanding year.

FY13 financial results were highlighted by double-digit growth in both revenue and non-GAAP earnings, and considerable free cash flow generation.

Additionally, we significantly exceeded our original 2013 target for operating cash flow, and continued our stock repurchase program.

Q4 total revenue increased 11% to $505 million.

Annual revenue grew 12% to $1.962 billion, the third consecutive year we've delivered double-digit growth.

This, of course, includes the revenue contribution from our fiscal 2012 acquisitions, but even excluding these transactions, business was very solid.

We met our original 2013 revenue growth targets, even in the context of the significant yen depreciation this year, due to our stronger business levels.

About 90% of Q4 revenue came from beginning of quarter backlog, and one customer accounted for approximately 11% of Q4 and fiscal year revenue.

The weighted average duration of our renewable customer license commitments for the quarter was about three years.

For all of fiscal 2013, it was greater than 3.5 years, reflecting a mix of contracts, including the impact of a large contract renewal in Q2.

We currently expect average duration for FY14 to be approximately three years.

Three year backlog increased to $3.1 billion from $2.7 billion, with just over $1.5 billion scheduled to be recognized as revenue in fiscal 2014.

Taking into account the impact of our larger hardware sales and the continued strengths in IP, we have approximately 75% of our target fiscal 2014 revenue in hand for the coming year.

Turning to expenses, Q4 total GAAP cost and expenses were $454 million, which included $30.5 million of amortization of intangible assets, and $18 million of stock-based compensation.

For the year, total GAAP costs and expenses were $1.716 billion, which included $127.5 million of amortization of intangible assets, and $67.5 million of stock-based compensation.

Q4 total non-GAAP costs and expenses were $396 million.

For the full year, total non-GAAP costs and expenses were $1.491 billion, an expected increase, due to headcount and expenses from our 2012 acquisitions, primarily SpringSoft and EVE, along with year-over-year increases, such as employee compensation and planned hiring.

Non-GAAP operating margin was 21.7% for the quarter and 24% for the full year, the second consecutive year of margin expansion.

For all of FY14, we expect an increase in non-GAAP operating margin, similar to that of FY13.

Our ongoing goal continues to be to focus on operational efficiency, with annual non-GAAP operating margins moving solidly into the mid-20s.

Turning now to earnings, GAAP earnings per share were $0.36 for the quarter, and $1.58 for the year.

Q4 non-GAAP earnings per share increased 19% to $0.56, while full-year non-GAAP earnings grew 16% to $2.44.

This is the third consecutive year in which we've substantially exceeded our high single digit EPS growth objective.

Non-GAAP tax rate was approximately 21% for both Q4 and the full year.

As a reminder, the full year 2013 reflects the reinstated R&D tax credit for both FY12 and FY13, which benefited FY13 earnings by approximately $0.12.

For modeling purposes, we think that a non-GAAP tax rate of approximately 24% is a reasonable estimate for all of fiscal 2014.

Now turning to our cash flow, we generated $191 million in cash from operations in Q4, and $497 million for all of fiscal 2013.

FY13 operating cash flow exceeded our original expectations, due primarily to higher than planned business levels, and cash collections experienced throughout the year.

We repaid $7.5 million of our outstanding term loan in Q4, and $30 million for the full year, leaving a remaining balance of $105 million.

During the quarter, we purchased about 2 million shares of Synopsys stock for $75 million.

For all of fiscal 2013 we spent $145 million, repurchasing about 4 million shares.

Yesterday, the Board replenished its share repurchase authorization to $500 million

We ended the year with cash and cash equivalents of $1 billion, with 46% onshore and 54% offshore.

At this time, we're targeting operating cash flow of $425 million to $450 million in FY14.

We plan to continue optimizing the use of our strong cash flow, whether on M&A, debt reduction, or stock buybacks.

Finally, we expect our operating cash flow quarterly profile to be similar to last year, with a net operating cash outflow during the first quarter of fiscal 2014, due primarily to the timing of our prior-year annual incentive compensation payments.

Capital expenditures were $18 million for the quarter, and $65 million for the year.

For fiscal 2014, we expect capital spending of approximately $130 million.

The increase is primarily facilities-related, including a two-year project to build out a newly leased Bay Area facility that will replace several current buildings, and several projects related to past acquisitions.

DSO was 46 days, reflecting the timing of invoices.

And we ended Q4 with approximately 8,570 employees, with about one-third in lower-cost geographies.

So now let's address our first quarter and fiscal 2014 guidance.

For the first quarter of FY14, our targets are revenue between $475 million and $485 million.

As we communicated last year, we expect some increased variability in quarterly revenue going forward.

This can be driven by factors such as sales volatility, and emulation and prototyping hardware, which generates upfront revenue, timing of IP consulting projects and royalties, and certain contracts, where revenue is recognized when customer installment payments are received.

However, we continue to expect a revenue model that's approximately 90% time-based.

Total GAAP costs and expenses between $422 million and $444 million, which includes approximately $18 million of stock-based compensation expense, total non-GAAP costs and expenses between $377 million and $387 million, other income and expense between $6 million and $8 million, which includes a gain associated with a previous investment, a non-GAAP tax rate of approximately 24%, outstanding shares between 154 million and 158 million, GAAP earnings of $0.30 to $0.38 per share, and non-GAAP earnings of $0.51 to $0.53 per share.

So now looking at fiscal 2014, our outlook is for revenue between $2.06 billion and $2.085 billion, a growth rate of approximately 5% to 6%.

We note an approximate 1 percentage point headwind.

It's not material, but it results from the devalued yen rates we locked in during 2013.

Other income and expense between $7 million and $10 million, a non-GAAP tax rate of approximately 24%, outstanding shares between 154 million and 158 million, GAAP earnings per share of $1.69 to $1.82, including the impact of approximately $78 million in stock-based compensation expense, non-GAAP earnings per share of $2.55 to $2.60, a growth rate of approximately 5% to 7%.

As I mentioned, FY13 earnings reflect the approximate $0.12 benefit from the reinstated R&D tax credit, and we are targeting cash flow from operations of $425 million to $450 million.

Now finally, to help you with your modeling, let me provide some brief commentary on our 2014 revenue and expense profile.

At this time, we expect second-half revenue to be a bit higher than our first-half revenue, with Q4 higher than both Q2 and Q3, which are similar.

At this point, we expect total non-GAAP expenses to be skewed slightly towards the second half of the year.

In summary, we're pleased with our fourth quarter and full-year financial performance, highlighted by double-digit top and bottom line growth, solid operating margin and strong cash flow generation.

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

(Operator Instructions)

Our first question comes from the line of Sterling Auty of JPMorgan.

Please go ahead.

So, as you noted in your prepared remarks, for the full year outlook, you've got 75% coming from backlog versus the 80% we've seen for the last couple of years.

How much of that revenue that won't be coming from backlog would you attribute to the emulation type of products versus IP, versus other things that maybe is more transactional or upfront revenue recognition?

Well, the shift of where we've seen last year, for example, 80% moving to 75%, does reflect the increased amount of revenue associated with hardware businesses, and with our IP balance of increasing revenues there, which are a little bit more front-end loaded, and it's just the profile of the business that comes through, based on the makeup of that.

Our hardware business continues to grow.

We can see again continued growth in our IP and systems business.

So that really takes into account the shift from the 80% to the 75%.

And when you look at the -- you mentioned the leading edge designs, et cetera, how would you characterize the budget and the headcount views in terms of design teams, design engineers at your customers, heading into 2014?

Well, actually I think it follows very much the semiconductor evolution, which is a light of slight growth.

I think a lot of the companies that are venturing into the very advanced designs, do it pretty much with the same teams.

There are a number of situations where companies acquire additional teams, mostly for the specialties that they bring in-house, as they go towards more complete solutions, but I can't say that I even have heard anywhere that suddenly teams are dramatically different.

I think they just follow the industry.

And that makes sense because everything we see in terms of the complexity growing rapidly, our tools can, I wouldn't say easily, but they can certainly match the increasing complexity, and good old Moore's Law is very much alive and well, and our industry follows up with it

Last question.

as you look at 2014, you characterized the growth rate, I thought more industry like core EDA versus IP.

As you look at your business, that core EDA growth in fiscal 2014 is going to be faster, slower, or the same as what you saw in 2013, and the same question for IP business?

I think it's all in all pretty much the same.

The only reason we are a little bit prudent is because we realize that the semiconductor industry has had essentially five years of fairly slow growth, is under some degree of pressure.

But on the positive side, there's no question that it also accelerates the adoption of some of the newer technology, because they're really looking hard for differentiation.

And by the way, we do see continued strong growth on the IP side, because maybe that ties a little bit to your earlier question.

One way to, out of the same teams, get actually more productivity is increase the amount of IP we use, and so we definitely see an evolution of design methodology towards what we have predicted for a number of years, and that serves us well.

Thank you.

Thank you.

And the next question is from the line of Tom Diffely of D.A. Davidson.

Please go ahead.

Brian, I was hoping you could give us a little more quantitatively in terms of the yen impact for both 2013 and your outlook for 2014?

Sure.

The yen impact did affect us in 2013 on various lines of the P&L, both revenue and to some extent, the earnings piece, because we do have spending also, in Japan.

That went in a favorable direction.

So overall you looked at about a 20% reduction in the impact of the yen last year, going from 2012 to 2013, but that's just something we've had to manage.

It did not have a material impact on either revenues, or expenses, or the bottom line, as a result of the hedging program that we have in effect.

Then if I look at 2014, I said we had a 1 percentage point impact on the top line, that is something again we've locked in those hedges, as we directed everybody during FY13, that we are looking in those rates in 2013 for 2014.

And it's about a 1% impact to the growth rate, and it's just one of those things we've had to offset with our operating efficiencies and growth in other parts and other regions.

Have you also seen weakness with some of the Japanese customers, or is it really just a yen issue for you in 2013 and 2014?

I think the economic impact that you just heard about it a yen currency issue, because, from a customer point of view, Synopsys and not just last year, I think in the last -- in quite a number of years, has done particularly well, while it's well understood that the overall Japanese industry is going through almost sort of a generational shift in how they do business, who's doing business, how the companies are made up.

And so we've actually done quite well in Japan.

I think we have a very strong team there, working with all the top companies.

So I would say the only impact really that we have felt has been through the currency change.

Okay.

And then, Aart, in the past you've talked a little bit about progress made in the IP, from the margin side.

Maybe give us an update there, and where you are, and where you think you can get to?

Yes.

In general, in all the IP that we've had on the market, or that is part of our business we keep improving our efficiency.

At the same time, and economically, of course, that's relevant, is we also keep investing in it, because we see more opportunity.

So in general, we feel very, very comfortable, where the margins of the business are now.

They are lower than for the rest of the Company, but as you have seen, we continue to improve the overall ops margin of Synopsys, and that certainly includes paying a high degree of attention to the ops margin of a growing business such as the IP.

Is it as simple as just getting more customers to use the IP, or is it, you're fine-tuning how you customize the IP per customer?

Is it a little bit of everything?

I wish we could say it was as simple as.

Nothing that we do is simple, partially for a good reason, actually a positive reason, which is the very IP that we I do, think every two years, is dramatically increasing in complexity.

And while that does add a lot of stress, including economic stress of how to develop it, how to make sure that the quality is there, it does add not only differentiation, it really impacts the efficiency of our customers, that are okay with adopting very complex IP from the outside.

And so, in that context, I think it's a business that is not only a growth business, it's a very foundational business, in terms of where the design methodology is going.

And I think even if it gets harder, it is really good for Synopsys, because there's a high value we provide, and therefore we will see good return.

Earlier you talked about how you've even seen some very early work on 7 nanometers.

I'm just curious, how much of your business is driven by 10 and 7 at this point?

It is only through our very most advanced tools.

Those fall into the general area of manufacturing, and really, they're two areas.

One is TCAD and for those of you not familiar with it, TCAD is really three dimensional modeling of devices, almost at the molecular or atomic level, and the other area is, of course, in the mask making.

Where doing mask for these geometries requires fabulous photolithography tricks, if I can put it like that.

That's the area that we are investing in, and the manufacturing is -- I don't know -- 10%, 15% of our company, or so.

So that gives you a sense.

It's a subcategory of that, but a very important one, and one that gives us very important insight where things are going, and also gives the first models of transistors, even before transistors are manufactured.

Lastly, there's a lot of concern today about the ability to yield the 14-nanometer FinFET as we ramp over the next year or two.

Do you feel as though your tools are complete and ready to go, as far as that transition goes?

Yes, I do, because at the end of the day, we do impact yield, but the reality is the sleepless nights on the part of the guys in the fab.

They have to continually tune the manufacturing to literally wring out percentage point after percentage point.

Recently, the indications are getting more positive about those nodes, so I think that the foundries are really making excellent progress on it.

But, you know, this is not any different than 1980s, 1990s and 2000s.

Tomorrow was always really hard.

On the design side, though, which is where we sit, I can absolutely say that the tools for FinFET design are not only ready to go, they have been used on quite a number of designs that have either taped out, or have gone to production already.

And so, while nothing is simple there, I think we're in a very strong technology situation, maybe much stronger even than where we as a field were in the late 1990s or 2000s.

Great.

Thanks for your time today.

Thank you.

And the next question is from the line of Krish Sankar of Bank of America.

Please go ahead.

I just had one industry-level questions.

You highlighted how you're getting very good traction on the FinFET side of the business, there's going to be a big opportunity for EDA down the road, and Synopsys, specifically.

Given that it's a consolidated industry with only three large players, I'm curious to know are you seeing any pricing upside?

Is there any way you can actually get value pricing because you're providing such a value-added service?

Should we start hoping that down the road, pricing should start improving during the consolidated industry, and the fact that you are enabling such leading technology transitions like FinFET?

Well, in general, the best way to maintain pricing is obviously not only be providing superior value, but to actually be differentiated in it, and I do think that we have a number of areas that Synopsys specifically is differentiated.

At the same time, we are in a hyper competitive market, and this is especially competitive, because our customers are seeing their world change at a rapid pace, and they have not seen their market grow all that rapidly.

So having said that, I think we're in as good a position as any of the companies, and we've always believed that if one can conquer the next round of really tough technical problems, that's the first premise to do well, and as a matter of fact, we've seen, again this year our run rate go up.

I don't think that we've seen any price erosion beyond the normal customers always wanting more for the same renewals, but beside that, I think we actually are in a quite good position.

Got it.

Then a quick followup, even in your fiscal 2014 guidance for Synopsys, or broadly speaking for the industry, what do you think is emulation growth going to be and what contribution is EVE going to be out of your 2014 guidance?

Well, we don't break out the contribution of any of our individual products, and we look very much at the emulation part as a key ingredient in our broader verification strategy.

It's hard for me to speak for the industry, given that there have been other people in emulation that have substantial size, and they have clearly shown that they can go up and down quite rapidly.

Our approach has been I think more tempered and more steady because we're looking at a more integrated broader solution, and that is how we differentiate ourselves, and that has turned out to be a wise direction.

Thank you very much.

Thank you.

And next question from the line of Jay Vleeschhouwer of Griffin Securities.

This is Zack Ajzenman in for Jay.

First question, when you refer to communicating or substantiating the value of EDA, that is with customers, are there certain metrics that you use in terms of the results for a specific product segment?

Yes.

There's some metrics that just come back over and over again and, there are two or three key categories.

Some have been more emphasized in the past than today, but in the past, number one was always the performance of the chips, number two invariably was the power consumption, and because the two trade off, you never look at them in isolation.

Underneath of that is always how dense a chip can you make, meaning what is the area going to be, because that impacts directly to costs of the chips, and that gets refined by oh, well, if you make them small, can you also make them yield well, because that multiplies all of this.

And so pretty quickly, you're into a pretty broad set of metrics.

On top of that, touching the time to market metrics are really two, which is the run time of the tools, and that includes how long does it take to read in the design and set it up, and the amount of memory needed on computers, because, we like you say, oh, I'm doing a chip with 1 billion transistors.

That takes substantial compute power.

So time to market is very much impacted by how efficient the tools are and how cost effective they are.

And last but not least, as we move more and more towards the hardware/software world, a variety of prototyping forms become important.

Now, hopefully this is not too long an answer, but what I told you here is in one way nothing new.

It's always been objectives that one keeps optimizing.

On the other hand, what is new is that the interaction between all of the terms I just gave you is much more prevalent, and therein lies, I think, one of the differentiations for Synopsys, which is, we are optimizing so many variables at the same time, and I think we do it quite well.

So in that context, over and over again, we take existing designs, pass them through the new tools, and at the same time make sure that the new tools are ready for the new technologies.

And I think we have quite a machine capable of doing that today.

Okay.

Has Synopsys been able to quantify what the incremental revenue opportunities from FinFET might be, when we take into account specific tools that are most likely to be affected, the number of customers that could design with the new structure, and your share of the affected segment?

It's very difficult to quantify it, partially because in all the key customers, and the key customers invariably are the most advanced ones that are also the first adopting FinFET technology, we have multi-year agreements that make sure that at no point time in time are they left hanging.

In other words, we work with them to migrate the tools to the newest technologies.

Now the benefit of that for them, of course, is the high degree of stability in the economic relationship, and most importantly the technology.

But for us is that at renewal, we have an opportunity to grow our business be to be very stable, where others are maybe in question, in ups and downs of the market, and in general, we always connect it to where the state of the art is going.

And the state of the art is where most of the money is spent.

So I think we're in a good position there.

Okay.

And last question, when you look back on 2013, other than acquired products, which products or segment did you see the most increase in usage and/or the base of user licenses?

Good question.

I would say solely generically, IP is growing, just because that market is growing and the number of pieces are growing.

On the individual tools, invariably the highest growth in numbers of copy tend to be in verification, validation.

And the reason for that is that the systemic complexity, as you have more and more transistors, grows much more rapidly than the number of transistors.

And so those are sort of the tools that invariably our customers just want more and more copies, and it's almost like they're limited by their own compute farm availability.

Now in terms of some of the other tools, the IC compiler and IC validator have tended to do very well, because the advanced chips really do require a high degree of optimization and verification physically, and Synopsys, I think is particularly well-placed.

Great.

Thanks a lot.

(Operator Instructions)

You have a question from the line of Mahesh Sanganeria of RBC Capital Markets.

Please go ahead.

Aart, just see if you can give us a comparison of how you felt entering last year and how do you compare that to this year?

Last year your performance was much better than initial expectations, and also the semiconductor industry -- most of the growth, I mean this when I say last, this year, has come from memory, not from everything else.

So in that environment, the EDA has grown reasonably well.

I know there is a caution for the next year, but even in a very cautious semi environment, do you think you can perform in the same manner you did in 2013?

Obviously every year is a little bit different, although, we enter it typically with the same level of confidence, and then it's full speed ahead on evolving through the year.

What was different last year, we had made a large set of acquisitions, and so there was a high degree of emphasis on the integration, making sure that the transition for the customers would work well.

This year, we're entering 2014 with having made a large number of investments in R&D over the last -- actually more than 18 months, and integration of technologies acquired, and so it's going to be a fair degree of focus on advancing the introduction of new capabilities that will be announced throughout the year, and I think make a major impact on the customers.

Just to clarify a little bit more about how I look at the semiconductor market, I cannot really say that our customers have changed or are dramatically more or less cautious.

I'm just observing the number of years of mitigated growth in semiconductors, with an increase in complexity.

What that brings about is a fairly high dynamic among the customers on how are they competing.

In general, that is called uncertainty.

In practice it's called opportunity for us, because if we can help them in that situation do better, we add real value.

And by the way, it's interesting, you mentioning memory because we've actually done quite well in that domain, and you're absolutely correct, the price -- that segment grew, but it grew mostly because prices went up, and as you remember, it went all the way as bad as one of the fabs burning down, and immediately the market growing more.

So those dynamics are beyond our control.

But what we do have impact on is that they, too, are driving technology towards the systemic complexity end.

Meaning not just maker the transistor smaller, but actually make the memories much more complex, and that is very interesting to us, because again, many of our system tools, even some of our IP, and certainly our digital tools, are highly applicable to that revolution.

So in general, we're looking at a very dynamic market that hopefully will attract more money.

But for right now, we're in a good position.

That was very helpful.

And, Brian, just a question on your revenue profile.

Can you give us some color around what drives the linearity of revenue, so that we can model it better going forward, in terms of linearity?

You bet, Mahesh.

On the quarterly profile, it reflects again a very detailed bottom-up account by account profile.

Given that we've got $3.1 billion of backlog as you know, we profile that out by quarter by account, and the guidance that we provided this afternoon gives you the perspective of how much would be in Q1, and then what that revenue profile would be.

We said it would be slightly higher in the second half of the year.

Also, we could note that Q1 is followed by other quarters of growth as well, so that's how it is.

So it really breaks out to the individual make-up of the detailed backlog of those accounts.

It ties into when cash is scheduled to be collected, it takes into account the makeup of hardware, things like royalties, which again, are not in the backlog, they come in based on usage in the future.

So again we take all that into account, provided you that level of guidance for the quarters and in the halves of the year, to address the linearity question you had.

One last question on your 24% tax guide, does that include the investment tax credit?

It does not.

It takes into account, because it's a calendar R&D tax credit, it goes until December 31 of the year, but we have assumed no additional R&D tax credits to be in effect from January 1 forward through all of 2014.

But you do expect that to be there for 2014.

What's your opinion on that?

No, we don't.

We do not have that taken into account, based on, we call it, in the tax world, we call extenders and right now in a world of tax reform and all the other positioning, the expectations that all companies have right now is don't count on that for 2014.

So that's what's reflected on our statement, and if it got approved at some point in the future, then we would be able to reflect that in the numbers.

Okay.

Thank you very much.

Okay, thank you.

And, speakers, at this time, there are no further questions in queue.

Back to you for closing remarks.

Well, thank you very much for your time.

I think we closed a very strong 2013 with many investments that will become visible in 2014, and our job is to make this a great year again.

We look forward to talking to you after the call, or in subsequent events.

Thank you very much.

Okay.

Thank you.

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