Magma Design Automation Inc. F3Q09 (Qtr End 02/01/09) Earnings Call Transcript

Magma Design Automation Inc. (LAVA)

F3Q09 (Qtr End 02/01/09) Earnings Call Transcript

February 26, 2009 5:00 pm ET

Executives

Milan Lazich – VP, Corporate Marketing

Rajeev Madhavan – Chairman & CEO

Roy Jewell – President & COO

Pete Teshima – VP, Finance and CFO

Analysts

Rich Valera – Needham & Company

Raj Seth – Cowen and Company

Tim Fox – Deutsche Bank

Sterling Auty – JP Morgan

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Magma Design Automation third quarter 2009 conference call. This call is being recorded. I would now like to turn the conference over to Mr. Milan Lazich. Please go ahead, sir.

Milan Lazich

Thank you. Welcome to Magma’s third quarter fiscal 2009 earnings call, hosted by Chairman and CEO, Rajeev Madhavan, President and Chief Operating Officer, Roy Jewell, and CFO, Pete Teshima. Our Q3 earnings release is on Magma’s website and includes a reconciliation of non-GAAP results to GAAP results. The Financial Data Supplement in our website’s Investor Relations section also includes a reconciliation of non-GAAP results to GAAP results, as well as updated financial guidance.

During our call, including the question-and-answer period, we make forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, including statements about our expected financial results, current and future products and plans, market share and competition, customer spending trends, market trends and sources of future revenue.

These forward-looking statements represent our current judgment of business and operating conditions but are subject to risks and uncertainties that could cause actual results to differ materially from current expectations. In addition to any risks we highlight during this call, other potential risk factors are discussed in today’s earnings press release and in our Form 10-Q for the period ended November 2, 2008. Magma undertakes no additional obligation to update these forward-looking statements.

With that let me turn the call over to Rajeev Madhavan.

Rajeev Madhavan

Good afternoon. And thank you, Milan. Magma put up good numbers in the third quarter. Revenue came in at $30.7 million, above our guidance range, and we remain on path towards a high-visibility 90/10 revenue model, which we expect to reach this quarter as planned. We also made good progress towards profitability, with both non-GAAP EPS and operating margin finishing better than guidance. We expect to reach non-GAAP profitability this quarter.

Today I’ll review three areas investors should focus on when reviewing our recent quarter and outlook; the market, our technology and our financial performance. First, the market. In this environment, customers tell us of their reduced visibility and admit to flying blind when it comes to forecasting their own businesses. As a result many wait longer to renew contracts with EDA suppliers, and in some cases renew for shorter periods. Nonetheless, many Magma customers who have adjusted their businesses are beginning to renew licenses on existing products, they continue to license new products and we continue to sign up new customers.

Second, our technology. In a viewpoint article I wrote for EE Times a few weeks ago, I contended that during tough economic periods we must run our businesses to survive but that long-term success will come only from innovation. Consistent with that, our product teams continue to churn out better capabilities.

This week we announced a new release of Talus Vortex. The Talus platform is now production proven on nearly 100 tape-outs, and our customers who have adopted this newest Talus Vortex say it delivers better quality of results for advanced designs than our competitors’ physical design flows. Talus Vortex offers automated simultaneous optimization of multi-mode/multi-corner variability, low-power clock-tree design and cross-talk, the capabilities required for designing leading-edge chips. Of the designs completed thus far with Talus, more than 40 have been at 45-nanometer or smaller. Talus is being used for designs as small as 32-nanometer and by Magma customers moving to 28-nanometer.

A couple weeks ago we announced an updated release of the Quartz DRC/LVS verification products with improved runtime and compatibility with traditional physical verification tools. Quartz DRC and LVS remain the only verification products architected to process designs of any size, at any technology node, with significant throughput advantage. This accelerates verification drastically. For a firsthand account of their use on a 1.5 billion transistor microprocessor in under five hours, take a look at a user’s review published this month on John Cooley’s DeepChip website.

In library characterization we announced that SiliconSmart has new functional recognition capabilities that enable automatic recognition and modeling of complex circuits. This dramatically reduces the time required to set up and characterize complex components across a wide range of process points, supply voltages and junction temperatures. You can expect to hear more product milestones announced in conjunction with our MUSIC conferences in Silicon Valley, Shanghai and Bangalore in April.

Third, our financial performance. As I said, key third quarter results exceeded guidance. We recently announced restructuring steps to bring our costs in line with current economic realities. Most importantly, recent advances in product usability enabled us to reduce the cost of deployment. Expect to hear more usability advances at MUSIC. When Pete covers our guidance for the fourth quarter, you will see that even during difficult times we are managing the company to deliver the best results possible.

Thank you. And Roy?

Roy Jewell

Thanks, Rajeev. As we have said before, we can’t change the macroeconomic environment, but we can and will make the necessary management decisions to take advantage of the recovery when it comes. On February 5th, we announced steps necessary to align our financial model with the current economy. We approach cost-cutting in a manner intended to maintain our competitiveness and deliver our targeted financial results regardless of when the economy recovers.

Our operational objectives include resuming profitability and positive cash flow, which we expect to accomplish in the current quarter, restoring business to the levels of two years ago, and restoring employee compensation to where it was before recent cost- cutting actions. After discussions with major customers we’re confident the actions we took are the right ones. They will focus our resources so we can continue to serve customers and enhance competitive advantages in the business segments we consider key for Magma’s success.

Let me give you a few examples. First, digital implementation. Talus continues strong market penetration and success. If you’ve followed the physical design segment of EDA you know that a couple of startups entered the market in recent years. These new entrants generated interest based on one or two early features. But as Rajeev pointed out, with the latest Magma releases they have no advantage. And against our larger competitors, Magma maintains technology leadership, particularly for deep-submicron advanced chips.

Case in point, one of the world’s largest semiconductor companies experimented with the implementation platform from one of our larger competitors as part of an attempted primary vendor consolidation. But when they couldn’t complete their designs, they abandoned that experiment and resumed use of Magma. The Talus platform is clearly the standard for IC implementation today.

One of the latest to adopt Talus is IDT, which deployed Talus to its design teams worldwide. IDT chose the Talus platform because it offers integrated capabilities that enable them to reduce power consumption and improve performance of advanced chips. XMOS, AltaSens and Intrinsity are among other recent adopters of our physical implementation platform. Another key segment is analog mixed-signal, and the Titan platform continues to generate strong results.

Design service company Sondrel adopted Titan Chip Finishing for its automation and integration with Talus and our Quartz physical verification products. And QThink Design Services added Titan Chip Finishing to its Talus-based flow to implement next-generation digital and mixed-signal designs. The Titan-Talus integration automates what are usually manual, repetitive and time-consuming steps in the chip finishing process. The market is very interested in Titan’s ability to bring new approaches to analog mixed-signal design, and it has been nominated for EDN Magazine’s Innovation of the Year Award.

In physical verification, the recent releases of Quartz DRC and LVS dramatically reduce the cost of adoption while providing superior throughput over legacy solutions. Today we announced they are part of a design environment used by ZiiLABS for ultra-low-power 65-nanometer SoC design. This system is based on our Talus platform, with Quartz DRC/LVS reducing runtime from 2.5 days to just nine hours for physical verification. Our customers continue to face extraordinary challenges. We are taking steps in the near term to maintain a strong and resilient company. But we are also investing resources to develop the products that will significantly improve our customers’ productivity. Stay tuned for future announcements.

Now let me turn the call over to Pete.

Pete Teshima

Thanks, Roy. Good afternoon, everyone. After we cover quarter three results, I’ll review our updated guidance, which is in the Financial Data Supplement on our website. Unless otherwise noted, during this call all references to expenses, margins and other financials are on a non-GAAP basis. Revenue for quarter three was $30.7 million, above our guidance range of $28 million to $29 million, due in part to the transition to a more ratable revenue model, this was down 45% from the year-ago quarter and down from quarter two’s revenue of $36.5 million.

In quarter three the percentage of revenue from backlog-related transactions was in the high 80s, as it was in quarter two, and we expect 90% or more of quarter four revenue to come from backlog. Quarter three spending for R&D, sales & marketing, and G&A totaled $29 million, or 94% of revenue. Operating income for quarter three was a loss of $3.3 million, or minus 11% of revenue. This was better than our guidance range of minus 20% to minus 18% of revenue, and compared to quarter two’s operating loss of $6.1 million, or minus 16.8% of revenue.

Tax expense for quarter three was $534,000, or 14% of pretax income. This compared to $700,000, or 13% of pretax income in quarter two. Quarter three’s non-GAAP EPS was a loss of $0.09 per share, better than our guidance range of a loss between $0.17 and $0.15 per share, and as expected was an improvement from quarter two’s loss of $0.14 per share. On a GAAP basis, we estimate EPS was a loss of $1.73 per share, below our guidance of a loss in the range of $0.67 to $0.65.

For context, the discrepancy was not related to operations. Our annual asset impairment analysis required a goodwill impairment charge due to the decline in our market cap during quarter three. Without the impairment, GAAP EPS would have been $0.38, better than our guidance. We expect to report the final amount of the impairment in our Form 10-Q. Non-GAAP to GAAP adjustments for quarter three accounted for approximately $1.64 per share on a diluted basis.

We ended quarter three with total cash and investments, including restricted cash, of $55.6 million, a smaller-than-expected decline from $58.3 million at the end of quarter two. The decline resulted principally from charges associated with cost-cutting actions. Accounts receivable was $39.4 million for quarter three compared to $28.3 million for quarter two.

DSO for quarter three was 115 days compared to 70 days in quarter two. This increase is an anomaly, because we changed our fiscal year, certain contracts were scheduled for billing late in the quarter to be collected in the quarter – too late in the quarter to be collected in the quarter. They were collected in early quarter four. Also, as I’ve said before, we do not factor our receivables.

Current headcount of 771 reflects the employment reduction we announced February 5th. This compares to 900 at the end of quarter three and 926 at the end of Q2. Here is our guidance for the fourth quarter ending May 3, 2009. Revenue in quarter four is expected to be in the range of $33 million to $34 million. Non-GAAP operating margin is expected to be in the range of 2% to 4%. Non-GAAP taxes are expected to be $500,000 to $600,000. Non-GAAP EPS is expected to be in the range of $0.01 to $0.03 per share. Basic shares outstanding are expected to be in the range of 46.5 million to 47.5 million shares.

Now here is our guidance for fiscal 2009. Revenue in fiscal 2009 is expected to be in the range of $146 million to $147 million, an increase from our previous guidance range of $144 million to $146 million. Non-GAAP operating margin is expected to be in the range of minus 6% to minus 4%. Non-GAAP EPS is expected to be a loss in the range of $0.21 to $0.19 per share compared to the previous guidance of a loss in the range of $0.29 to $0.25. Basic shares outstanding are expected to be in the range of 45 million to 47 million shares. Guidance for the fourth quarter and fiscal 2009 is in the Financial Data Supplement on our website.

Now let’s take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And we’ll take our first question from Rich Valera from Needham & Company.

Rich Valera – Needham & Company

Thanks. Good afternoon. Nice job on the expense reductions. I was wondering if the fourth quarter implied expense run rate is roughly where you think you’re going to end up or if you think you could actually go lower because of some phase-in of expense cuts.

Pete Teshima

Rich, Pete here. What we are expecting is to go lower from there. The full effect of it we’re not going to see it in quarter four. So we are expecting it to go lower.

Rich Valera – Needham & Company

Can you give any sense of how much low do you think it might go?

Pete Teshima

I prefer not to right now [ph] as we haven’t done our planning. I’m just telling you based on our estimate that we’ve looked at, at this point. We don’t have any formal data for you right now.

Rich Valera – Needham & Company

Okay. And then you mentioned I think that – first of all, do you have a cash from ops number during the just reported quarter? And it sounds like you expect to be cash flow positive in the fourth quarter, is that correct?

Pete Teshima

Yes. Previously I’ve stated that I expected to use cash of between $7 million and $8 million during the quarter. And we ended up using considerably less than that, about half, about $3.7 million.

Rich Valera – Needham & Company

Okay.

Pete Teshima

Decrease, Rich, was primarily the result of cash management and expense reduction efforts. Right? And also, as I said in last quarter, I expect to have positive cash flow in quarter four and throughout fiscal 2010.

Rajeev Madhavan

Rich, just to clarify on one of the first questions you asked here – I'm Rajeev. You asked about and Pete answered that the expense will – we expect it to go lower. It’s predominantly because some of the changes we’ve done does not take into effect. We’ve already done all the changes. For example, some of the office leases coming now, some of the headcount in places like Europe where we have made the changes, it actually stays in our books for six months type of things or it takes time for those changes to come into effect. That’s the reason why it will go low.

Rich Valera – Needham & Company

Right. Understood. Thank you. And then finally, I know it’s – visibility is low to say the least, but is there anything you are willing to say about fiscal 2010 with respect to either revenue bookings or –? It sounds like you expect to be profitable, but is there anything you would be willing to say beyond that about fiscal 2010 at this point?

Pete Teshima

So, Rich, what I’d say is we’re going to give formal guidance during quarter four, during that call. But by way of color, given the order environment and visibility, I’d say you could annualize the second half of fiscal 2009. And that puts it in the neighborhood of high-120s, 127, 128, something like that, but also I would add that we expect to be – have a positive operating margin in fiscal 2010.

Rich Valera – Needham & Company

So – I mean, you’re going to exit with like $33 million, $34 million quarter. So you’re saying – it sounds like the number you’re talking about is essentially that times four, sort of high 120s.

Pete Teshima

Given the visibility and just given the order environment that I think most companies are seeing right now, that’s what we are seeing.

Rich Valera – Needham & Company

Yes, that’s fair. I mean, certainly we’re hearing from everyone that – everyone is sort of – customers are pushing out their renewals to the last possible date, so that’s very consistent. And what are you seeing with respect to run rates on renewals in the couple quarters?

Pete Teshima

What we’re seeing is, is that the renewals are still at plus 99%, but what we are seeing is, is that at least in some cases we are seeing shorter term length. Right? I think that a lot of companies are seeing that at this point in time. Given that, I mean, if you have a standard – let me use an example here. If you have a standard three-year deal and if a customer wants to do something less than that because their visibility is lacking, that does not impact our revenue for fiscal 2010. I want to make sure that that point is clear.

Rich Valera – Needham & Company

But it sounds like you’re getting flattish run rates. Is that the takeaway from your comments?

Pete Teshima

I would say that, again, that the overall renewal rate stays the same. Right? I mean, it’s very, very high, but from a – if you’re talking about backlog, right – if you’re talking about backlog, we are in a situation where we have customer caution. There is a general theme of cash preservation and then, what I alluded to before, shorter deal lengths. It’s all tied to the macroeconomic environment. And then the other point was that although we’re experiencing shorter deal length, again, that doesn’t necessarily impact the revenue recognition for next year. So – I don’t know, is that clear?

Rich Valera – Needham & Company

That’s clear. So – I mean, you could expect a smaller backlog, but you’re suggesting the run rate isn’t really changing. It’s just the duration that’s changing.

Pete Teshima

The dollar run rate of the deal, we’re not experiencing net discount [ph] reduction. Okay?

Rich Valera – Needham & Company

Right, right. And then what are your thoughts – I mean, I guess just – I think the concern in general is that you’re seeing a fair bit of attrition out there in the semi world with respect to headcount reductions and just general stress amongst the semi customer base. What’s your feeling like looking – I don’t know if past downturns are necessarily good indicator. This one seems to be a little broader and probably more severe. But what are your expectations of next year as these companies have felt the impact of this downturn for several quarters? Do you think at some point in general for EDA you might start seeing lower run rates, or is it just too early to tell at this point?

Pete Teshima

I personally think it’s too early to tell. And historically, even in downturns in the semi business, the overall design activity has not been materially reduced because people tend to continue to design. So when it turns around they have a new product to put out in the pipeline. But it’s frankly too – we've just started seeing customers that have told me that they have seen an ace – and an end to the free fall in their business, which now starts giving us some hope that they will be able to calibrate what the baseline revenues are for their companies and they will spend to those numbers, but nobody knew what to do.

Rich Valera – Needham & Company

Sure. Okay, that’s helpful. Thanks for taking my questions, guys.

Rajeev Madhavan

Thanks, Rich.

Operator

Our next question comes from Raj Seth from Cowen and Company.

Raj Seth – Cowen and Company

Hi, thank you. A couple if I might. First, Roy, for you, on Talus, one of your objectives on your having some teething problems with the early version of the product was to reduce the service intensity of that product. I understand you have made enhancements and improvements. I’m curious if you think you’ve made progress in that regard, which used to be at least, one of the big advantages of Magma was it took a lot less support and ultimately less OpEx dollars to support your customers. Where are you there?

Roy Jewell

If you remember, Rajeev in his presentation little earlier talked about we’ve been able to basically have some expense reduction as a result of a reduction in the cost of deployment of products like Talus. And rolling out a major platform like that two years ago, and as we evolved it and enhanced it and built out more and more stability in it, it was a pretty challenging effort, but we’re seeing very measurable differences in the amount of support we have to provide the product today. And with our release coming out in May with a new fixed flow, we are expecting extremely good results now. So that is a number one initiative that frankly Rajeev has been driving personally.

Raj Seth – Cowen and Company

And Roy or Rajeev, how do you think – can you maybe describe the competitive environment a little bit? Is share frozen here or do you actually see share shifts in this period? Historically, Rajeev, I think you’ve said this market, at least in your view, was flattish. It’s all about share gains and part of your strategy was new products in addition to the Talus. What’s going on right now out there?

Rajeev Madhavan

I think in the early stages where Talus was not robust and when we had to put in a lot of resources, we were almost caught on the defense of having to put resources to do the – to make sure that we compensate for reliability and stability of the tool. From the November release, we are not just stability. We actually – Roy talked and alluded to fixed flow, which I’m personally running and making sure happens within the company. We are now at a stage where if it takes you four or five engineers to use with the other vendors’ tools, it will take you one to two vendors with our tools. But this impact will be fully understood by our customers with the May release.

You know the value of Magma has been that that integration from A to Z is completely automated. However, when the tool stability is not there, what happens, the integration value stops. And as a result of that, the share was frozen during this period. Not only was it frozen, we had to put in a lot of resources to make sure that we fight for those shares. Today, with much lesser resources we can fight that by May. We will take that more into the enemy’s territory and we will be actually engaged in a large, large number of accounts. It’s very, very simple. And that is a very simple goal. End of May, we are going to be having a lease where average designers using Magma can outpace super, super AEs from our competition. And that –

Raj Seth – Cowen and Company

Do you have business in the pipeline that you think you will be able to announce this year that underscores share gain? Everybody to some extent has the same logo less, but everybody has different share and always different accounts.

Rajeev Madhavan

Roy already talked about IBD, which is a gain. We ran another gain, which we expect to close very shortly. And so we have had gains that have happened, the gains to actually build into a quicker pace, we need – the release that just went off, in the May release, we’ll just make it as our point that we can just drop it on anybody in line, I mean, and not require to handle the engagements, which is where we are headed for.

Raj Seth – Cowen and Company

And are there headcount reductions that follow that release or they have already assumed and sort of what Pete talked about vis-à-vis next year and expenses coming down a little bit more?

Rajeev Madhavan

No, no, we do not – at this current stage, we do not have any expectations of headcount releases – headcount changes after that release. We have made some of that transitions, because today it’s very easy to say conclusively that on every design Talus can outpace Fusion, et cetera. So where we have saved [ph] is not having to handle and upgrade and do things on the Fusion platform as all of our customers have transitioned over to the Talus platform. So that’s what it helps us in reducing the cost. What next helps us is to use the cost. We free up on these engagements to actually increase the larger – the number of engagements we are involved in. And that’s basically where we are.

Raj Seth – Cowen and Company

Okay. Two more quick ones. Can you talk a little bit about the analog strategy, the rollout strategy in the context of more constraints on field resource? And then, Pete, can you talk a little bit – I don’t know how much you can say, but you’ve got a convert that is due in 2010, so you’ve still got well over a year. Can you talk about what options you might have? I think that’s a big concern for a lot of investors. Thank you.

Rajeev Madhavan

I’ll let Pete talk about the convert. I’ll go with the analog strategy first and then let Pete talk about the convert. With respect to analog, I mean, we believe that in EDA, taking somebody who is an incumbent just head on and saying we got one of those two tools too in analog is a very bad strategy. Just like when Magma entered (inaudible) we didn’t go in and say, we have just a place-and-route tool. We combine place-and-route and synthesis. Same thing here in analog. We have a unified integrated strategy of a flow where you can take an existing design with the capabilities of modeling it, you can actually put that design both – we've already announced schematic, but yes, the company has talked about research and layout, and we expect to roll our products where you can actually take an existing design.

If you find these in the Magma topology, Magma tools, you can actually migrate them from one process and on to the other, which is not available with any technology from anybody else. So in essence, we are not competing against them. Yes, we have some tools and capability, which does layout editing, schematic editing, et cetera, but that’s not our differentiation. Our differentiation is that we can do something that cannot be done by anybody else with any other tools, and we can offer something very, very unique in the analog design strategy. That coupled with our FineSim is a very, very unique strategy in analog.

Raj Seth – Cowen and Company

How big a market do you think that is, Rajeev?

Rajeev Madhavan

I mean, ultimately it is going to encompass the whole analog market of custom manual, just only schematic design and layout design. Initially it will be a smaller percentage of that because you’ve got to build momentum. We have a couple of customers we – when there was a paper at – in the Japan EDA conference, which just ended last month, from Matsushita, MEI, about using some of these platforms, there has been press releases with TSMC about (inaudible). So it is mushrooming. We expect that to pick up momentum. We have had one or two customers who have picked up the chip finishing platform. And you’re going to see some articles appearing in (inaudible). So, the percentage of that total analog market that probably encompasses [ph] in the first year is about 20% and it will grow because more and more analog designers will understand that having foundry independence is an essential portion of migration strategy and adoption of more decent micron as we move here obviously from one process and on to the other.

Raj Seth – Cowen and Company

Okay, thank you.

Roy Jewell

Let me add on to what Rajeev said. To answer part of your question also is in terms of our strategy and deploying this in a field and supporting the field resources, we are really going back and we’ve still are [ph] talking internally that we need to go back and rediscover our roots. We did an excellent job of rolling out a digital implementation platform back out in ’99, in 2000 and beyond. And we’re taking really that same model where these initial engagements will truly be R&D partnerships, and we’ll have our R&D teams working directly with key customers. And we will both be gaining from that interaction because we will continue to improve our product and they will get the best resources in the technical side working to adopt these products. We are not going to go out and hire 150 guys to support it in the field right now. It’s really a startup strategy, and I think it was very successful before and we believe it will be very successful now.

Raj Seth – Cowen and Company

Thank you.

Pete Teshima

Okay. So, on the issues of convert, yes, Raj, at 29 May, we originally (inaudible) 150 million, and like you said, during May of 2010, which is about 15 months away. So in terms of the options that are available to us, some are – and we’re looking really hard at these, term loans, extending the maturity and some equity-based options. So taking advantage of the current discount to market is something we’re definitely on top of and we are hoping to have something to report in the next couple of quarters or so. But those are some of the options that are available to us.

Raj Seth – Cowen and Company

Okay, thank you.

Operator

We will take our next question from Tim Fox from Deutsche Bank.

Tim Fox – Deutsche Bank

Hi, thanks. Good afternoon. We’ve sort of seen this play before where one would assume that your competitors are out there trying to put some scare into your survival. Just wondering how much of that you are seeing and what effect that’s actually had on your customers buying behavior – renewal behavior? Is it having any impact?

Roy Jewell

Tim, as you know, we’ve talked about – I spend a lot of time out in the field. And one of the things I don’t think you can substitute for direct face-to-face interaction with either the end user of a product or the executives or a customer base. I think our competitors have spent a lot of effort in trying to spread about our viability, and especially our viability isn’t as related to our convertible debt. Most customers after spending ten minutes with them, they are pretty – the software companies that have an annuity-based business model like we do are not really candidates for concern about viability in the short-term or the medium term.

The one thing they want to make sure we do is keep investing in the products so that we deliver them the advanced capabilities they are going to need for their next-generation designs, because quite frankly, Magma is not a guy that has a me-too product that’s focusing on legacy design. We are focusing on the bleeding edge most of the time. So we’ve got to invest in the R&D, and we live and die by the quality of our engineer teams. So I’ll say that we’ve spent a lot of the time, me personally, Rajeev personally, Pete, in talking to customers. And I think they are comfortable because we really haven’t had any people that have moved over to anybody else or I think are considering.

Rajeev Madhavan

Hi, Tim, I’m Rajeev. This strategy by the bye we know our competition plays. For example, when we first started the Fusion, the first comment was Fusion doesn’t work. Their physical tools would work. The second comment was, we are going IPO pretty too early, you don’t have money, you are going to run out of [ph] storm. The third technique is flood tactics. Combine – again, these kind of fear, uncertainty of our viability combined with some kind of packaging. I would say the same thing is happening here. Talus, when it first came out and didn’t – it had hiccups. They tried to leverage that.

The second one was fear, uncertainty and doubt about the viability of the company (inaudible). The third strategy is packaging. We are certainly seeing that packaging strategy from the competition where they try to combine everything. But these had no relevance. As Roy point out, if one of the customers who try to attempt migrating based on that, came back, because it just had to be done. Packaging and giving away tools only brings down the value of their own total available market at the end of the game. We’ve seen this before. We’re just into a repeat déjà vu at the same game.

Tim Fox – Deutsche Bank

Okay, thank you. That’s helpful. And Pete, in understanding that your commentary around fiscal ’10 is early. Just wondering how we should think about that sort of high 120s revenue base. What kind of bookings are you implying in there? And I’m thinking about this on the context of are you looking really out at next year as being predominantly a renewal year with some incremental benefit from all of the new products or are you implying in there some much larger penetration of some of these other new products that you’ve got rolling out?

Pete Teshima

My assumption is the former. The first scenario, which he just communicated.

Tim Fox – Deutsche Bank

Okay, great. That’s helpful. Thank you.

Operator

(Operator instructions) We will take our next question from Sterling Auty, JP Morgan.

Sterling Auty – JP Morgan

Thanks. Hi, guys.

Rajeev Madhavan

Hi.

Sterling Auty – JP Morgan

So, two quarters ago I think you started talking about, and I think Roy did the presentation, like the number of AEs that you have with some of your larger customers and you wanted to improve the post sales support and kind of change the business model. And what I’m wondering is we can obviously check the total expenses through the income statement, but is there any other metric that you’d be willing to provide us so we can track how you’re doing on that front specifically, whether it’s total number of AEs or average AEs per customer or something where we can watch that project in particular kind of gain traction?

Rajeev Madhavan

Sterling, I’m Rajeev. Actually if you attend our MUSIC conference out, we will give further data. We will be very clear about how many resources we used in these for supporting the most complex 40-nanometer designs versus where we will be with the May release and what’s happening. We have data, don’t have it in this call. But we have an elaborate set of data that will be displayed in Chilin [ph] in my presentations in the MUSIC conference. So, where we were in terms of our cost structure and doing and what this modification of the tools buys us in terms of the value proposition is there.

Sterling Auty – JP Morgan

Okay. And then I don’t have the supplement that’s in there but can you try to give us some commentary, I missed it if you said it. What was the average contract duration in the quarter?

Rajeev Madhavan

No, we did not give that, Sterling. Typically, historically in the company it’s been just under three years, but what we’ve seen recently is a trend trending down closer to a year, at least in terms of – it's the most recent quarter.

Pete Teshima

Yes, it’s one to two years basically, that range.

Sterling Auty – JP Morgan

Okay, okay. And last question is, on the analog side, you gave some examples of kind of where you’re seeing success. You talked about how you’re not kind of taking teams head out to different value proposition. But when you did set this, there is kind of a tie ratio that we talked about in terms of, you know, because of the flow. How should we think about the analog side in terms of the success? Is there going to be, again, a tie ratio into existing customers, or what’s kind of the metric that you guys are using to determine how successful you are being?

Rajeev Madhavan

I think we’re measuring by the number of customers who are migrating to this strategy rather than on just numbers. And their target numbers are profitability in things like that that we maintain on it. But most of the goals are we have engagement, as Roy said, and we can take X number of engagements at R&D very deeply involved in. And the products we spend maturity, we hope the market will improve, but that’s the model in which we are operating with those products.

Sterling Auty – JP Morgan

Okay, great. Thanks, guys.

Operator

It appears there are no further questions at this time. Mr. Madhavan, I’d like to turn the conference back over to you for any additional or closing remarks.

Rajeev Madhavan

Thank you for joining us today and we will speak with you again at our next quarterly call. Good afternoon, everyone.

Operator

This now concludes today’s teleconference. Thank you for your participation. Have a wonderful day.

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