Mentor Graphics Corporation F4Q09 (Qtr End 01/31/09) Earnings Call Transcript

Mentor Graphics Corporation (MENT)

F4Q09 (Qtr End 01/31/09) Earnings Call

February 26, 2009 5:00 pm ET

Executives

Joe Reinhart - Director of IR

Walden Rhines - CEO and Chairman

Greg Hinckley - President

Analysts

Rich Valera - Needham & Company

Matt Petkun - DA Davidson & Company

Presentation

Operator

Welcome to the Q4 '09 financial release conference call.

(Operator Instructions).

I would now like to turn the conference over to Joe Reinhart, Director of Investor Relations. Please go ahead.

Joe Reinhart

Thank you very much, Linda and good afternoon everyone. Welcome to Mentor Graphics fiscal fourth quarter 2009 conference call.

This afternoon, Walden Rhines, CEO and Chairman will open with a discussion of key trends in our business. Gregory Hinckley, our President will then discuss operational highlights, financial highlights, and guidance. Wally and Greg will then take your questions.

As a reminder to everyone, this conference call contains forward-looking statements. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary. In addition to the factors noted later, these risks factors could be found in our most recent 10-K, 10-Qs and Annual Report.

For reconciliation from GAAP to non-GAAP measures used in this presentation, please refer to today's financial release. This release is available online at the Mentor Graphics website. Wally?

Walden Rhines

Thanks, Joe. Mentor achieved Q4 revenue of $243 million and non-GAAP earnings of $0.35 per share. Thanks to growth of approximately 10% in the contract value of our major renewal. As Greg will explain in more detail, this growth was offset by weakness in small orders, an area that has traditionally shown good stability, even in weak economic times.

The current economic environment is helping mentor to gain significant market share and we're reaffirming our first quarter 2010 guidance during this call. Our basic strategy of best-in-class number one market share design platforms, in both traditional and emerging electronic design applications, is helped by the current market environment, even in areas where growth will not resume until conditions improve.

This help is showing itself in several ways. First, customer consolidation and design flows; in the more mature areas of electronic design, such as printed circuit board design, economic and design efficiency pressures are forcing companies to consolidate their design flows.

We have been the beneficiary of most of these PCB consolidations because of our leading market share with about 1.5 times our nearest competitor and our willingness in recent years to invest in advanced technology to consolidate and improve both the flows and the individual tools. Three of our top transactions this past quarter were systems companies that have consolidated their printed circuit board flows or are moving in that direction.

The second effect that has helped mentor has been in leading edge integrated circuit design, where customers must have best-in-class tools to differentiate themselves but also where different EDA companies make up the design platforms in each company's flow. One example is the physical verification analysis and design for manufacturing backend platform.

Nine out of our ten largest orders in the quarter involved Calibre family products, and during the year the growth of Calibre DFM has been a significant contributor and provided of 45% market share in the emerging DFM market.

The third effect has been the more rapid emergence and consolidation of new design technologies that will be the platforms of the future. One example is the 45-nanometer generation of place-and-route, where Mentor secured our first order from yet another Top 5 semiconductor company, also our first major order from another Top 10 semiconductor company, and a follow-on multi-million dollar order from another Top 10 semiconductor company. Another example is in high level synthesis where Catapult C now constitutes more than 50% of the market and was part of six of our ten largest transactions in the quarter.

Fourth, despite the weak economic environment, adoption of emerging EDA design platforms by totally new industries is apparently been driven by the need to reduce costs, to automate design, and to manage increasing electronic complexity.

Fiscal 2009 was a record year for our automotive design platforms with 70% growth in bookings. Looking within the transportation business are some interesting trends. Specialty manufacturers for applications ranging from helicopters, boats, trains, and fire trucks are becoming significant users of EDA.

During Q4, for example, we received a $700,000 order from our first farm equipment manufacturer for wire harness design, and fixed wing aircraft companies are becoming a significant part of the transportation EDA business with orders from nine companies during the year and evaluations underway at three more.

Fiscal 2010 will be a challenge and an opportunity. Mentor's number 1 market position in three of the 10 largest EDA product segments provides the basis for further consolidation. In addition we believe that emulation which was disappointing in fiscal 2009 will grow substantially this year because of Mentor's Veloce capacity advantage of being 2 times its nearest competitor, and ,embedded software offers promise to grow as well, building upon the use of the Mentor Nucleus Real Time Operating System in over a billion wireless handsets.

Recent orders include ratable multimillion dollar licensing arrangements at two of the leading handset providers, as well as Q4 orders for the new Inflexion platform, a set of development utilities, and interfaces for customers to build products on the Nucleus platform. Finally, our customers see Mentor as one of the healthy, stable EDA companies that can be depended upon for the long-term. Despite market share gains, we're conscious of the need to reduce our cost base to maintain that stability, in the event that markets continue to weaken.

Greg will provide more detail on how we're doing that. We expect to emerge from this recession with a stronger industry position than ever. Greg?

Greg Hinckley

Thanks, Wally. Revenues for the fourth quarter of our fiscal year '09 as earlier reported were $243 million well below our guidance of $270 million. We had built that guidance by compartmentalizing our business into four separate categories which we called: services; scheduled back log and expiring contracts; base and distributor business, comprised mostly of bookings less than a million dollars; and early renewal and contract growth on renewals.

Last quarter we said that business and forecast risk was least for the first two categories, services and schedule backlog and expiring contracts, and greater for the other two, base and distributor business, and early renewal and contract growth. We recognized that the electronics business environment was indeed becoming increasingly difficult but thought that with an increasing margin of the first two categories of business, we could offset environment risks and safely forecast the next two quarters. We were clearly wrong, at least as concerns the fourth quarter.

We didn't predict bankruptcy and insolvency risk which in Q4 saw public announcements of deterioration of financial conditions at Qimonda, Nortel and Spansion as well as declining credit ratings of several other large electronics companies. Directly and indirectly, industry credit condition was responsible for about a third of our fourth quarter miss. The majority of our miss, however, was centered in small dollar contracts ranging from a few thousand to 1 million dollars from smaller or newer customers, or smaller end of the year orders from our larger customers.

That category of business fell 45% in the fourth quarter from its multiyear trend rate and that decline was also seen in the fall off of our perpetual license business, down 30%, and new customers down sharply in numbers and average value. That said, bookings were only slightly off from that embedded in our guidance, even though product bookings were down 10% and total bookings down 15% from last year, we exited the quarter with a book-to-bill greater than 1.0. Once again, our book-to-bill was greater than 1.0 with a build-in software back log more than offsetting weakness in services. Book-to-bill for the year was also greater than 1 and the deal length remained about three years.

Expenses: expenses from costs of goods sold through operating expenses came in essentially as guided. Mentor's cost structure is largely fixed. Salary and benefits make up around 75% of annual expenses, so, we have little ability to adjust expense run rates in the short-term, other than modulating incentive pay which, of course, we did. That said, efforts through the year to reduce running costs were met.

Non-GAAP G&A expense in the fourth quarter was down 10% from the prior year in absolute dollars. As a result of promised consolidation of European administration and elimination of facilities and office space at more than 20 locations.

Over the course of the year total non-GAAP SG&A, despite adding the Flomeric sales organization and absorbing the effect of an appreciated euro and British pound, was absolutely flat at $397 million and total expense increased only $10 million, which was all currency effect. As we enter fiscal year 2010, we commit to our shareholders that we will be vigilant on costs.

In this quarter we identified and put in action a series of programs to reduce costs. Travel has been sharply restricted. We have frozen wages, curtailed hiring and selectively reduced employee compensation and benefits. We are in the process of conducting business reviews that will lead to reductions in headcount. These actions in combination with the recent favorable movements in currency, the British pound and the euro, will lead to an annualized reduction in operating expense of about $35 million.

Despite missing the third and fourth quarter of last year and markedly dropping the entire year's guidance, Wally and I remain positive about the outcome of our first quarter. With the positive book-to-bill in the fourth quarter, mentor has a favorable mix of high margin software content in our first quarter backlog.

With this backlog, services and scheduled backlog and expiring contracts make up 95%, and I repeat, 95% of our $200 million to $210 million revenue target. We, hence, have some, but relatively little, need for base turns business or contract renewal growth. So, we cautiously but confidently reaffirm guidance of $200 million to $210 million in revenues and non-GAAP EPS in the range of $0.05 to $0.10.

Now, for more financial details. The results for the company's fourth quarter included revenue of $243 million; $42 million lower than last year's fourth quarter, and $27 million lower than guidance. Non-GAAP earnings were $0.35 per share while GAAP earnings were $0.33 per share. For the entire year non-GAAP earnings were $0.20 and a GAAP loss of $0.97 per share.

Bookings: bookings were down 15% from Q4 of last year. Europe increased 10%. Pac Rim remained flat, while North America decreased 15% and Japan decreased 70%. The significant decrease in Japanese bookings reflects a difficult compare as Q4 of last year including bookings that have more than doubled with three large renewals.

Services: consulting and training decreased 55%, which is consistent with the electronics industry being in recession. By product category, scalable verification grew 5%, reflecting our success in analog mixed signal stimulation at STMicroelectronics.

IC design to silicon was down about 5%, integrated systems were down 10%, and new and emerging was down 50%. The decline in new and emerging resulted from the absence of large deals that were DFT centered; as what happened last year.

In the quarter, product revenue was $158 million, maintenance revenue was $77 million, and services revenue was $8 million. Product revenue was down 22%, while support and services were up 2%. Foreign exchange favorably affected revenue by $3 million.

Revenue mix by geography was 40% for North America, 35% for Europe, and 15% for Pac Rim, and 10% for Japan. Of the total quarterly revenue, approximately 45% was ratable.

For the quarter, new customers excluding PADS were down 15% in total number and 25% in average contract value. The company's top 10 customers represented 65% of bookings for Q4 2009 compared to 50% for the prior year.

In Q4 total operating expenses on a non-GAAP basis were up 5% from last year due to the addition of Flomerics expense. Excluding the operating expenses associated with recently acquired Flomerics of about $7 million, operating expenses were flat with last year.

Foreign exchange favorably affected operating expenses by $1 million. We expect this favorable foreign exchange impact to increase in future quarters as contracts in our hedging program roll forward. Parenthetically, the P&L impact from our hedging instruments was a gain in the first quarter of last year and is expected to be a loss this first quarter.

Quarter end headcount was 4,518, up 4% from last year. Excluding acquisitions, headcount was lower by 72 people compared to the prior year end. On a non-GAAP basis, other income was $3.5 million, up from the prior year of $1.3 million as a result of foreign exchange gains.

Interest expense was $4.7 million, up slightly from $4.5 million the prior year, due to interest on the outstanding balance of our line of credit. Special charges of $2 million were related to cost cutting initiatives and ongoing advisory fees that came as a result of the cadence offer.

In the fourth quarter, we completed a review of our long lived assets for impairment under FAS 144. As a result of this review, we recorded a GAAP charge associated with purchase technology and fixed assets to operating expenses of $4.6 million. In addition, we recorded a GAAP charge associated with minority equity investments, in start-up companies to other income and expense of $3.5 million. The value of our remaining equity investment is immaterial. Cash and equivalents increased $16 million from the third quarter to a total of $94 million at year end.

Our cash is invested in U.S. Treasury or government funds primarily through Bank of America, JPMorgan, Goldman Sachs, and Fidelity. Cash from operations was $17 million, compared to $60 million last year. The year-over-year decrease is due to lower year-to-date revenue and lower factored receivables in the fourth quarter of this year, last year. In the fourth quarter, we factored $13 million of receivables, versus $20 million a year ago. During the quarter we paid back $10 million on a revolving credit facility and currently $20 million remains outstanding.

Trade accounts receivable was $134 million, up $21 million sequentially, while short-term unbilled receivables were $139 million, up $7 million sequentially. These increases represented normal fourth quarter seasonality. Trade DSOs were 50 days, a decrease of five days from last quarter, and down five days since last year. Total DSOs were 101 days, an increase of 18 days from the third quarter, and a decrease of four days from last year. We rigorously monitor our accounts receivable portfolio for customers with low or slipping credit ratings and we review the credit of customers prior to entering into large transactions.

Revenue from credit challenged customers is recognized on a cash basis over the life of the agreement. The quality of receivables remains strong with less than 1% of receivables greater than 60 days past due. During the quarter we increased our reserve for three customers due to deteriorating financial health. As an aside I would like to point out that our annual bad debt expense has been averaging approximately $500,000 a year over the last five reported years, including 2009. A pretty minimal amount given the fact we have probably been averaging around $800 million to $850 million in revenues.

Parenthetically, I note that the business model up front, versus subscription revenue recognition, does not offer any protection in the event of customer bankruptcy or inability to pay. Given the declining health of many EDA customers, all major EDA vendors have exposure during these difficult economic times. Capital expenditures were $7 million for the fourth quarter of 2009, compared with $14 million last quarter, and $9 million last year. Depreciation and amortization was $15 million for the fourth quarter, flat with last quarter and up slightly from $12 million last year.

Now, the guidance. For the first quarter of fiscal 2010 ending April 30th, we reaffirmed the guidance provided in November. We expect revenues of between $200 million and $210 million in non-GAAP earnings per share between $0.05 and $0.10. Our customers are experiencing unprecedented levels of uncertainty both relative to demand for their products and financial and credit conditions. Many, I could say most, have chosen not to provide annual guidance.

Mentor does not have the same capital concerns that afflict some of our customers, but we find it challenging to forecast outlook until we better understand how this recession affects our smaller dollar value business and how our contracts fare as some of our customers are voluntarily or involuntarily restructured. Until we get our; until we get better visibility, we will limit guidance to quarterly. Wally?

Wally Rhines

Thanks, Greg. Despite a challenging market environment, Mentor completed a profitable cash flow, a positive quarter and year. And we are reiterating our guidance for non-GAAP profitability in the first quarter of fiscal 2010, with revenue growth up over 10% from last year in the quarter. Our major contract renewals grew about 10%, although much slower than in third quarter of '09, and we continued a highly successful adoption program with Olympus Place-and-Route.

Growth trends in emerging markets like transportation where we face little or no competition have helped to offset some of the weakness we have seen in our base of small orders. Mentor's strong market penetration and design product platforms that constitute most of our revenue, positions us well for a difficult market environment. We continue to take significant cost reduction actions to lower our breakeven point. We believe that this worldwide recession is a time of opportunity, and Mentor will emerge a stronger company in the years ahead.

Now, let's take some questions. Joe?

Joe Reinhart

Linda, if you could open the lines please?

Question-and-Answer Session

Operator

Thank you.

(Operator Instructions).

And our first question comes from the line of Rich Valera from Needham & Company. Please go ahead.

Rich Valera - Needham & Company

Thank you, good evening. Just want to make sure I understood what the 95%, sort of booked figure, for the first quarter was comprised of. Is that scheduled renewals and backlog?

Walden Rhines

Greg?

Greg Hinckley

Yeah. Well, it is services, which is maintenance, and consulting and training, which is all backlog business and it represents backlog, plus the historical value of contracts that are expiring.

Rich Valera - Needham & Company

Does that mean you're assuming no increase in run rate?

Greg Hinckley

That we include as yet another category, and we have a category which is what we call “early renewals and contract growth”. So, we have 95% of our revenue for the range of $200 million to $210 million consisting of maintenance, consulting, and training backlog, backlog at hand for products, and the historical value of our contracts that are expiring in the first quarter.

Rich Valera - Needham & Company

So, to get the 95% number you wouldn't need any increase in run rate? Am I interpreting that correctly?

Greg Hinckley

That's correct, Rich.

Rich Valera - Needham & Company

So, if you have any turns business, any sort of new turns business, or any increase in run rate, you would make the number?

Greg Hinckley

You got it.

Rich Valera - Needham & Company

Assuming no breakage should happen on the other parts of it.

Greg Hinckley

Yeah, which is why I said, that we had some, but relative little, need for base turns business or contract renewal growth, and that we were cautious but pretty confident about our first quarter guidance.

Rich Valera - Needham & Company

Okay. And just to understand, it sounds like you want a pretty favorable mix and maybe an unusually high level of visibility into the first quarter due to, I guess, a strong bookings quarter in the fourth quarter.

If we're looking out into the second quarter, I mean typically, your first quarter is not as strong, from a bookings standpoint, whereas it typically, seasonally, I think, maybe your weakest quarter of the year. Do we assume that heading into the second quarter? You probably wouldn't have as much visibility as you do heading into the first quarter?

Greg Hinckley

I will say that we have a great deal of visibility in the first quarter and we're not prepared to comment yet on the second quarter.

Rich Valera - Needham & Company

Fair enough. With respect to the expense run rates that you are expecting to, sort of, get to, obviously, there is a certain expense run rate implied in your first quarter guidance. It sounds like you are taking several initiatives which, theoretically, should bring that down. Is that how we should think about it? That there should be some decrease in expense run rate, OpEx run rate, as we move from the first quarter to the second quarter?

Greg Hinckley

I think that's fair.

Rich Valera - Needham & Company

And can we get any sense on that magnitude, or is it a little too tough to cut it that fine at this point.

Greg Hinckley

We are not prepared yet to give any comments on the second quarter or later quarters of this fiscal year.

Rich Valera - Needham & Company

Fair enough. And the $17 million of cash flow from ops; was that from the fourth quarter?

Greg Hinckley

That was for the fourth quarter.

Rich Valera - Needham & Company

Okay. And I understand you are not giving full year guidance, but can you comment at all on cash flow expectations, either for the first quarter or for fiscal 2010?

Greg Hinckley

Yeah, well, for the first quarter we think cash flow will be approximately $10 million, but I have to say, that assumes that our customers pay per contract terms. So, in this environment, we are having customers requesting payment forbearance, but so far we have been successful at collecting for terms. But it is a different environment, Rich.

Rich Valera - Needham & Company

Sure. I know you probably don't have enough data points yet in the downturn, but you had a surprisingly high renewal run rate increase in the third quarter, I think, of around a 35% dip down to 10% in the fourth quarter; still positive. Any sense of where this is going? I mean, do you think the right operating assumption for the year is, sort of, a flat renewal run rate or are we going to take it one quarter at a time at this point?

Greg Hinckley

We are going to take it one quarter at a time, Rich.

Rich Valera - Needham & Company

Okay, fair enough. Well, thanks for taking my questions.

Greg Hinckley

Thank you, Rich.

Operator

(Operator Instructions).

And now we will go to the line of Matt Petkun from DA Davidson & Company. Please go ahead.

Matt Petkun - DA Davidson & Company

Hi, good afternoon. Couple of questions from me. First, Wally, you made a broader comment about the move by your customers to, perhaps, consolidate their design flow in the printed circuit board area of the business and that's a benefit to Mentor. And historically you talked about, in the core IC area, that customers are still very focused on the best point tools with the continued vogue amongst your competitors of getting themselves named the primary EDA vendor. Do you think that we're starting to see more consolidation on the IC side as well? And do you have an opportunity for playing that with the Olympus product?

Wally Rhines

Yes. So, Matt, what I said was, as you correctly quoted. In PCB, Mentor has the largest market share and it is a mature technology, though it doesn't change much. The point tools don't have as big an effect, and so, we tend to benefit quite a bit from consolidations there. In the IC design area we benefit as well, because the consolidations that are occurring are around platforms. So in a typical consolidation they may, if they have a primary vendor, in the areas where the primary vendor is the leading supplier, they will consolidate around those platforms.

As far as I know, no consolidation has ever squeezed out or even reduced usage of Calibre verification DFM products, for example, as people consolidate on our Calibre platform.

As an example, this quarter Freescale announced broad usage of Mentor products and our penetration has continued to grow there, despite a previously announced standardization on another vendor. And one customer in our prime vendor situation attempted adoption of a non-Mentor resolution enhancement technology tool from a competitor, but gave up after trying for a year, and none of the other product usage has been reduced.

So over time, we expect consolidations to benefit us in the platforms where we are usually number one. That's about 85% of our revenue where we're either number one or close to number one, and those would include all of the Calibre family including Calibre RET, DFM, and so forth. It would include all the PCB, it would include the multi-language functional verification, design for test, ESL, and a number of other smaller ones.

Matt Petkun - DA Davidson & Company

Okay. And then Greg, you mentioned that you increased your allowance for doubtful accounts, but you took no specific write downs in the quarter associated with maybe some of those big name IC, not necessarily bankruptcies, but close to it?

Greg Hinckley

No, we took provisions. I think our reserve provisions were, while I said they have averaged $500,000 a year, we took about $2 million worth of reserves in the fourth quarter.

Matt Petkun - DA Davidson & Company

Okay. And when approaching new deals with, perhaps, customers with more stressed balance sheets, will you look to, maybe, not move those as term-based licenses, but rather maybe something that’s more ratable?

Greg Hinckley

Yes. And we have done that in the past, Matt. That is the reason why on $800 million to $850 million in revenues, that through the years we have averaged $500,000 worth of bad debt. Our bad debt has traditionally been de minimis.

Matt Petkun - DA Davidson & Company

Okay.

Greg Hinckley

So, when in the past there has been concern, we would recognize both the bookings and the revenue, at the time the cash was paid.

Matt Petkun - DA Davidson & Company

Okay. So, now?

Greg Hinckley

For example, we have a flourishing business in transportation, but we have all the North American automotive accounts and their suppliers on a pay as you go.

Matt Petkun - DA Davidson & Company

Okay. So would it be reasonable to say then, that this last year you did about 70% of your business by revenues up front, maybe that number did trend back towards the 60%, 65% level we saw the past two years?

Greg Hinckley

Perhaps. It just depends what happens. There is; there clearly is a; it is a different environment today, 5%, or not 5%, 25% of the top 20 semiconductor companies are now rated a B or worse. And when you look to what Standard & Poor's says about a B, it is that the obligor has the capacity to meet commitment on obligations but adverse conditions are likely to impair obligor's capacity to do so. And I would argue that today's environment is pretty adverse.

Matt Petkun - DA Davidson & Company

Agreed. Okay. And then, just one final question from me. I recall in the past, that you guys have shared that one of your bonus-related compensation benchmarks was the guidance provided at the beginning of the year to the street when it came to earnings, and you're not providing that. Is there another metric? And how are you, kind of, modeling or guiding the business for targets for the full-year?

Greg Hinckley

Well, certainly, we had no executive bonuses paid this last year, and we are still trying to understand the implications of this economy upon our business. But if you will go back and look at proxy statements, you will see that Mentor has always believed in pay for performance.

Matt Petkun - DA Davidson & Company

Right. So, I am just wondering with no guidance for this year as of right now, have you set a performance benchmark, at least internally?

Greg Hinckley

No, we haven't.

Matt Petkun - DA Davidson & Company

Okay. That's all for me now. Thank you.

Greg Hinckley

Thanks Matt.

Operator

Thank you.

(Operator Instructions).

And now we will go back to the line of Rich Valera from Needham & Company. Please go ahead.

Rich Valera - Needham & Company

Thanks. Just a quick book keeping one here. Can you say what your assumption for other income is in your first quarter guidance?

Greg Hinckley

Give me a second. That isn't a number I have at the tip of my tongue.

Rich Valera - Needham & Company

We can follow-up offline if you don't have it right in front of you.

Greg Hinckley

Let me do that.

Rich Valera - Needham & Company

That's fine. Thank you.

Operator

Thank you. And now we will go to the line of Sterling Auty from JPMorgan. Please go ahead.

Unidentified Analyst

Hi, guys. It is Saket here for Sterling. Just a few questions for my side. So, I believe the upfront contribution in the quarter ticked up from 60 to 80. I realize that happened last Q4 as well, but was there anything out of the ordinary on that? And can you just sort of explain why that happened?

Greg Hinckley

I think we commented that the top 10 transactions during the quarter were 65% of our bookings, and compared to what we typically run of 45% to 50%. That means, those large transactions are always term deals and what we are seeing in this quarter, they were much larger than what they normally run.

Unidentified Analyst

Okay. Okay. On the services and support line, that is an item that is historically pretty steady and usually up in Q4, and I was kind of surprised to see it down this quarter. Can you talk to that a little bit?

Greg Hinckley

Yeah. So, what we had there, the maintenance part of the business was in fact up. What we had was: I said that our consulting and training business was down 55% in bookings. The playbook of most IC companies is to really squeeze outside services and training when times are difficult, and we certainly have experienced that.

Unidentified Analyst

But that again, the service and consulting is something that you expect to be a bigger component of next quarter's revenue, correct?

Greg Hinckley

Well, no. What we say is, whatever we have in backlog going into a quarter will be revenued. It always converts to revenue. But what we have as maintenance has been growing, and we are also saying that we have significant scheduled backlog for the first quarter.

Unidentified Analyst

Okay. Okay. This will be my later question, but I figured since you mentioned “backlog”. Usually you disclose it at the end of the year usually in the 10-K, I was just wondering if you were going to provide it in the conference call?

Greg Hinckley

We will disclose it, as always, in the 10-K.

Unidentified Analyst

Okay. Last question: on the $35 million expense savings, I guess, I just wanted to frame it a little bit. Is it fair to take Q4 OpEx of $175 million or, well, yes, let's start with $175 million, OpEx and just sort of subtract $35 million from it, I guess, for Q4 of '10. Is that sort of the way you view those expense savings?

Wally Rhines

Well, what we have right now, Saket, is, we have some expenses that are on a fly wheel effect into fiscal year 2010. One of them was the acquisition of Flomeric which has added, we acquired, in our third quarter. And, if I remember right, relatively late in the third quarter. And we will then have a full year's worth of expense effect this year. We also had last year, non-executive raises, and I point out non-executive raises, that we expensed for approximately half of the year, and we will have for all of this next year. So, we have various expenses.

We have added capital to the company in the third and fourth quarter, which we have partial year depreciation on, that will continue into the next year. But, what we have identified is a series of actions that are already in place which are targeted, we have got identified reductions in headcount. We have identified reductions in compensation and benefits. We have got a wage freeze. We have got curtailed hiring. We have T&E restrictions and all of that will produce $35 million worth of savings from what we would have otherwise had in fiscal year 2010.

Unidentified Analyst

Okay. Okay. And I am sorry, I lied. One last question. With the contracts that you have expiring this year, I guess, can you compare them to what you saw last year in terms of contracts expiring? Just meaning; no increase in run-rate, just general volume.

Wally Rhines

What I can say is we have a much healthier renewal portfolio this year than we did last year.

Unidentified Analyst

Okay. Thank you.

Wally Rhines

Thank you.

Operator

At this time we have no further questions, please continue.

Joe Reinhart

Linda, thank you, very much. And thank all of you for joining us for our fourth quarter conference call this afternoon. For follow-up questions Greg Hinckley and I will be available. The best way to reach us is by calling Monte Koller at [phone]. And she will make sure that we get back to you in as timely a fashion as we can.

Operator, if you could please provide the replay dial-in information.

Operator

Thank you, ladies and gentlemen, this conference will be available for replay today, through March 5th, from 4:00 p.m. to 12:00 midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 984668. International participants can dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 984668.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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