Mentor Graphics F3Q08 (Qtr End 10/31/07) Earnings Call Transcript

Mentor Graphics (MENT)

F3Q08 Earnings Call

November 29, 2007 5:00 pm ET

Executives

Walden C. Rhines - Chairman of the Board, Chief Executive Officer

Gregory K. Hinckley - President, Director

Maria M. Pope - Chief Financial Officer, Vice President, Chief Accounting Officer

Ry Schwark - Director of Public and Investor Relations

Analysts

Dennis Wassung - Canaccord Adams

Terence Whalen - Citigroup Investment Research

Matt Petkum - D.A. Davidson

Tim Fox - Deutsche Bank Securities

Brett Carson - GARP Research

Sterling Auty - J.P. Morgan

Jay Vleeschhouwer - Merrill Lynch

Rich Valera - Needham & Company

Dan Nelson - Ragen MacKenzie

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2008 financial release conference call. (Operator Instructions) I will now turn the conference over to our host, Director of Public and Investor Relations, Mr. Ry Schwark. Please go ahead, sir.

Ry Schwark

Good afternoon, everyone. Welcome to Mentor Graphics third quarter 2008 results conference call. As a reminder, Mentor has changed its fiscal year. The fiscal 2008 third quarter ran from August 1 to October 31. Comparisons in our presentations this quarter will be the prior third calendar quarter of 2006. During this call, Gregory K. Hinckley, our President, will discuss financial and operating topics while W.C. Rhines, our CEO and Chairman, will then discuss trends of the business. Mr. Hinckley will close the outlook for the remainder of fiscal 2008 and preliminary 2009 guidance. Dr. Rhines, Mr. Hinckley, and Ms. Pope will then take your questions.

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 factors noted later, these risk factors can be found on a recent 10(k), 10(q) and annual report. For reconciliation from GAAP to non-GAAP measures used in this presentation, please refer to today’s earnings release. This information is available online at www.Mentor.com/Investor_Relations. Greg?

Gregory K. Hinckley

Thank you, Ry. The third quarter of our 2008 was a very mixed quarter. Bookings were robust, up 10% setting an all time record for any quarter but a fourth. But revenues at $186.3 million and net income at breakeven were light. Indeed, we booked business that we had included in our forecasted revenue. In one case, a booking customer rescheduled a shipment to a later date in the fourth quarter and, in another case, documentation that we received late in the quarter qualified as a booking, but not for revenue. We are confident that in both cases we will be able to record revenue for them before year end and that both were unusual enough that we don’t expect similar revenue deferrals in the future.

Currency moved sharply in the last 90 days away from our forecast rates of $1.21 for the end dollar now up 10% to around $1.10 to the dollar and $1.33 for the Euro dollar now nearly $1.50. Effect this increased expense levels, recall Mentor is structurally short a Euro and reduced our gross and operating income margins. Much of the gross margin compression in the quarter and most of the increase in operating expense was currency related.

Book-to-bill was greater than 1.0 unusually strong for this time of the year, but reflecting the two booked, but not revenue contracts, that caused the miss in the quarter. New accounts were active with new logos increasing 9%. Emulation doubled its revenue and doubled its Veloce install base. Services, often an early indicator of an upturn in electronics, climbed 65% in bookings. Lastly, our place in wealth software, Olympus, seems comfortably positioned to close at least $12 million of forecasted bookings for fiscal year 2008. Cash flow from operations was $15 million half of which was used to retire convertible debt. Now, some more detail starting with bookings.

Bookings were up 10% as I said from last year with the PacRim up the most strongly up 35%, North America very strong up 25%, and Japan up 5%. Europe declined 15% from the prior year. Services, consulting and training, as I said before, were up 65% from last year. By-product line, New and Emerging, grew by 35% driving by success in TestKompress and ESL (Electronic System Level) product lines. Scalable Verification was up 25% due to a sharp upswing in Veloce orders. Integrated System Design was flat on bookings, but up strongly in business--I repeat business--as we took ratably a large three-year North American automotive company contact ratably. Design to Silicon was down 5% again contrasted to an unusually strong third quarter of 2006.

Split of bookings by geography was 45% North American, 20% Japan, 20% Pacific Rim, and 15% Europe. Split by product group was 30% Design to Silicon, 30% Scalable Verification, 20% Integrated System Design, and 20% New and Emerging. Top 10 accounts were 50% of total bookings compared to 55% a year ago. Term bookings were 55% of total, perpetual was 30%, and subscription was 15% compared to 60/25/15, respectively, the prior year. New customers, excluding PADS, were up 9% in number but down 16% in average contract value. Mentor was particular well-served in the quarter by its distributors and resellers. These are companies who target small-to-medium electronics companies. The bookings through distribution and reseller were up 25%. Book-to-bill was greater than 1.0.

Revenue was $186.3 million down 2% from the third quarter of 2006 and down $14.0 million from our forecast. Despite relatively strong bookings in the Surge and Emulation business, product revenue dropped 10%. Service revenue, on the other hand, was up 10% to a third quarter record. Split of revenue by geography was 40% North America, 25% Europe, 20% Japan, and 15% PacRim. Foreign currencies favorably affected revenue by a little over a million dollars compared to the prior year period. Split by product line was 30% Design to Silicon, 30% Scalable Verification, 25% Integrated System Design, and 15% New and Emerging. Term revenue was 60% of total, perpetual 25%, and subscription 15%. The prior year was respectively 65/20/15. I’d like to point out that our ratable revenue was 55% of total. That, of course, includes our maintenance revenue.

Gross margin, excluding $2.4 million of purchase technology amortization and stock compensation costs, was 85% down from the prior year. Product gross margin was 96%. Services was 71%. FX had unfavorable impact on costs to sold of about $1.7 million from the prior year.

Operating expense, before special charges, amortization, and stock compensation, was $158.1 million up $5.5 million from last year. The increase over the prior year was due to unfavorable foreign exchange totaling $3.7 million. Remember the $5.5 million total. Head count additions, including the Sierra acquisition during the second quarter of fiscal year 2008 and annual raises which began this quarter. Worldwide head count was 4,330 compared to 4,304 a quarter ago and 4,095 a year ago. Special charges of $1.1 million were due to reductions in head count.

Other income and expense was $300,000 of income compared to $900,000 in income last quarter and a $700,000 expense in the third quarter of a year ago. Since last year, interest is up on our expanded portfolio of term leases and expenses is down as we have retired $26 million in convertible debt. Tax per Asian was 17% on non-GAAP earnings consistent with prior quarters and our long term forecasts. Now, onto the balance sheet.

– Cash decreased $3.0 million in the second quarters to a total of $98.0 million primarily due to increased receivables from our term leases, purchases of property plant equipment, repurchase of debt offset by cash received from factor receivables.

– Trade accounts receivables was $135.0 million up $38.0 million sequentially. The increase is primarily due to a large term transaction that will be collected in the fourth quarter of this year. We also built two sizable emulation transactions that will be collected this quarter. We impacted $30.0 million in receivables this quarters and $44.0 million for the year.

– Short term unbilled term receivables were $142.0 million down $31.0 million sequentially. The decrease is due to the timing of payments on the company’s term business.

– Quality receivables remains strong. Net reserves of Mentor has no receivables greater than 65 days past due. DSO trade receivables was 65 days up 23 days from the second quarter. Total DSO was 134 days compared to 118 days the second quarter and 100 days the prior year.

– Depreciation and amortization was $12.4 million. Net cap ex was $9.2 million. Goodwill is $420.0 million. Other intangibles are $40.0 million, a sequential decrease of $4.0 million. The decrease is due to quarterly amortization.

– Other assets are $56.0 million, an increase of $2.0 million from last quarter.

– Deferred revenue, now including both short and long term balances, was $131.0 million, an increase of $3.0 million sequentially and $18.0 million from last year. The increases both sequentially and from the prior year were driven by upfront payment on term license transactions and prepaid training and consulting. The sequential increase was partially offset by amortization of maintenance contracts.

– Finally, non-GAAP basic shares were $90.0 million.

Wally?

Walden C. Rhines

Thanks, Greg. Well, as Greg mentioned, fiscal Q3 of 2008 was a strong quarter for bookings with 10% growth over the third quarter of 2006. The question is whether this strength will continue given the substantial changes going on in the semiconductor industry.

Integrated Device Manufactures or IDMs are clearly decreasing in importance compared to Fabless or Fab-light suppliers. Most large IDMs are increasing their dependence upon silicon foundries and moving an increasing portion of their digital products to standard, undifferentiated CMOS processes. This change will have a beneficial effect on EDA of placing more of the burden of product differentiation on the design of products. Strong unit growth for semiconductor, especially memory, has been offset by declining prices resulting in low single digit revenue growth this year and only modest growth forecast for next year.

So what did we see this quarter that tells us anything about the broader trends?

Well, first, growth in the average dollar amount of major customer orders was strong. Of the 10 largest bookings in the quarter, five were renewals. On average, the amount of the renewals grew 50% versus their prior booking three years ago. Two of these orders were driven largely by printed circuit board design in Q3 for a broad range of semiconductor design software. Our largest order of the quarter was the all-time record order ever received by Mentor Graphics Japan and almost doubled from this customer’s previous contract three years ago. The customer was a major semiconductor company that had previously been largely a Calibre only customer. They expanded their use of Mentor products to a Mentor-based flow switching to Questa for system Verilog, adopting zero-in formal verification, TestKompress for design for tests, Olympus for future 65 and 45 Nanometer Place & Route, Calibre for design for manufacturing as well as elimination of the use of Calibre competitors for design world checking and logic verification while continuing the use of Calibre OPC for resolution enhancement. It’s unusual for an established Japanese semiconductor company to make a broad switch of design flows suggesting that new design challenges, like Test, Place & Route, Logic Verification, and DFM, are forcing change in design methodologies.

Other indicators in support of the broader industry trends with the strength of consulting up over 50% and training up 95%. This strength was concentrated in Verification, particularly for System Verilog, and yield enhancement services mean DFM. System Verilog and DFM are among the primary design methodology changes going on in the semiconductor industry.

Design differentiation products did indeed showed the strongest growth. Design for Test was up 75%, Analog/Mixed-Signal up 55%, Electronic System Level Design up 145% along with strength in Emulation up 430% as well as Place & Route. Design-to-Silicon was down 5% and Integrated System Design was flat.

Design-to-Silicon segment performance was as expected since we had only one scheduled renewal in the quarter. The growth of the Calibre portion of that renewal contract was good at over 6x versus the last contract three years ago.

Fabless semiconductor startup showed strong growth in bookings up 100%. Venture capital funding of Fabless semiconductor companies last quarter was at the highest level since 2001. Finally, the strong growth in PacRim bookings at 35% was very broad, including orders from Fabless companies, foundries, large IDMs, automotive, and rapid growth of new startups.

In the fourth quarter, the principle things to watch are in three areas. Design-to-Silicon, which was not expected to grow this year after a 35% growth last year, we’ll see its principal renewals in the fourth quarter. Olympus Place & Route and Veloce Emulation are significant growth opportunities now and in the coming year. New Emulation opportunities have been driven by Veloce’s unique ability to offer both simulation acceleration and in-circuit emulation in the same product. In addition, industry adoption of transaction based verification at company’s like Broadcom is spreading and is currently supported only by Veloce. Since this is a new methodology, it’s hard to predict how rapidly companies can make the conversion and ramp up their usage.

With regard to Place & Route’s, we’re confident in our previous forecast of $12 million or more for Olympus bookings this year. Right now, there are more than fifteen active benchmarks at seven different companies. Design Rule’s range from 40 nanometer to 65 nanometer and Design sizes from 2 to more than 100,000,000 gates. As we discussed last quarter, new Place & Route technology adoption usually occurs when existing methodologies fail. These failures are occurring largely due to multi-corner multi-mode (MCMM) design closure problems. In these cases, Olympus has come out on top of all evaluations we are aware of. ST Microelectronics just announced the 12,000,000 gate, first pass, functional, set top box chip design with six modes in four corners that was completed in a fraction of the plan’s schedule due to the capabilities of a full Olympus Place &Route flow. Problems with MCMM will increase as the industry moves to 65 and 45 nanometer technologies. Most of the Olympus bookings in the third quarter of this year came from a major Japanese semiconductor company. In fiscal Q4 of 2008, we expect one more additional major semiconductor company commitment in addition to the usual ongoing smaller orders.

As the electronics industry progresses through its structural changes in the next few years, the outcome will affect the EDA industry. Basic characteristics are likely to be:

1. Evolution of new verification methodologies and tools favoring System Verilog, assertion based verification, increased use of emulation, new test bench approaches, and emergence of transaction-based verification;

2. Emergence of Electronic System Level (ESL) design methodologies into the mainstream using C or System C to model power and timing at the chip architectural level;

3. Adoption of new leading edge place & route technology with tools that can achieve low power by optimizing the layout for multiple modes and multiple corners of the design;

4. Consolidation of manufacturing around fewer digital CMOS processes and foundries with easier multi-sourcing of designs among foundries and mandatory use of design for manufacturing tools by designers; and

5. Rapid growth of EDA in system application areas, like automotive and aerospace, and emergence of large numbers of systems design companies to serve the rapidly growing middle class demand for consumer electronics in Asia.

Mentor is best positioned to lead the way in the major transitions ahead. Greg?

Gregory K. Hinckley

Thanks, Wally. Now, I’ll update our guidance.

For the full fiscal year 2008, we continue to expect revenue of approximately $860.0 million and non-GAAP earnings per share of approximately $1.02 representing 9% and 19% growth. Both guidance for the quarter and for the fiscal year are unchanged from that given previously.

As Wally and I have discussed, there were many indications evidenced in the third quarter that EDA if very much alive and well. Our bookings for the quarter were, in fact, stronger than we had planned going into the quarter. Consulting and training, the strength of which to us is the leading indicator of the EDA business, were exceptionally robust. Our average renewal in our top 10 deals increased 50% by value. That’s a lot. And Mentor distribution, dealing with small accounts typically most vulnerable and sensitive to downturns, did great up 25%. Offsetting these indications, the strong Euro has potential to put pressure on our margins and, most importantly, the U.S. economy seems to weaken week-by-week. Not every IC downturn has been accompanied by slowdown in GDP growth, but every slowdown in GDP growth has seen a decline in the IC business. We are optimistic, but cautiously so, and see more risks in the reliability of our forecast.

For fiscal year 2009, Mentor also reaffirms preliminary guidance of a 20% increase in non-GAAP EPS to $1.22 on revenue up 7% to $920.0 million. We believe that 2009 will be a very healthy year for our place & route and emulation products. That belief is also dependent upon the vitality of the U.S. economy.

Wally, let’s now take some questions.

Walden C. Rhines

Laurie, would you prompt for questions, please?

Question-and-Answer Session

Operator

Yes. (Operator Instructions) Our first question, from the line of Jay Vleeschhouwer with Merrill Lynch. Please go ahead.

Jay Vleeschhouwer - Merrill Lynch

Yeah. Thanks. Good afternoon. Greg, I’d like to ask a couple of questions regarding your comments on revenue performance. First, with respect to the economy, is this just a natural hedge, so to say, in terms of what you’re seeing in the last few weeks and how it may translate into the IC business or are you, in fact, seeing or hearing from customers anything having to do with curtailment of semi RND, spending, RND budgets, run rates, anything of that kind?

And similarly, with respect to your own performance in Q3 and the several deals that weren’t translated into revenue, how do you mitigate in the future? You mentioned one or two deals that were unusual perhaps, but part of the reason for changing the fiscal year was to mitigate those kinds of affects in the fourth quarter. So how operationally do you think that you can reduce the number of deals that you saw in Q3 that you weren’t able to close or return to revenue?

Gregory K. Hinckley

Let me address the second one, Jay, first. Since the quarter closed, I can assure you we’ve conducted a detailed review of our policies and procedures concerning our revenue documentation and believe that we already have controls and procedures in place that substantially mitigate that risk in the future. So I don’t think you will be seeing that again. With the comments on the economy, a portion of it, of course, is just if you look back historically as I commented, every time there’s been a slowdown in the U.S. gross domestic product, it has followed right on its heels a slowdown in the IC business. There are lots of signals around that the U.S. economy is slowing down and we would expect that if it does slow down, it will have some affect upon our business. But I’ll provide a little more color to that and I’ll still say we’re optimistic about our results which is why we’re reaffirming guidance for the fourth quarter and for all of next year. But I have to say that in the third quarter, there were more strained relations and it was more difficult to close business with many of electronic customers which, you know, just could mean that they’re seeing pressure themselves and it’s clear that a lot of high tech companies, for the life and breadth of high tech, many had pretty erratic results.

Jay Vleeschhouwer - Merrill Lynch

All right. A couple of technology questions. First, with respect with Sierra, you alluded to it’s being used more as a discreet PNR tool where before it had largely been used as a kind of optimizer for other flows. Besides ST, are you, in fact, seeing this become more of a phenomenon that Sierra or Olympus is being used as an individual sole flow for place & route?

Walden C. Rhines

Jay, this is Wally, I’ll take that. As you noted, the way Sierra got in business was as an optimization. They would wait until an existing place & route tool failed and the designers were struggling for how to get design closure and they would come in and then fix the design and get tape out by being able to do a simultaneous optimization of the design at multiple corners and handling all of the variables, including signal integrity. What’s happened in the last year, of course, has been the adoption of the complete flow. You noted the tape out at ST Microelectronics. They are a full flow user, front to back. The major order we got this quarter was a full flow adoption of a major Japanese company that will be using it as point of record for all future 65 and 45 nanometer designs and that will be full flow. Most of the evaluations we’re in now are full flow as well, so now the optimization function, while we still do support is, is not our primary thrust and really isn’t a primary outlook for orders that we’re planning in the year ahead. In fact, we expect the majority to be full flow users and we’ll still use the older capabilities for optimization to rescue companies that have problems with their existing tools, but with the intent of bringing them into the full Olympus flow.

Jay Vleeschhouwer - Merrill Lynch

All right. And, finally, where were you going to be in a position of having to ramp up your internal investments most substantially? For example, to support the growth at Sierra, what are you going to be able to do with respect to field support, ramping up a labor intensive area like physical implementation. And then, similarly, for Veloce, are you going to be able to ramp up to meet demand and field support if the bookings continue as they’ve been doing?

Gregory K. Hinckley

Jay, let me answer that. We’ve already made substantial steps towards doing that. In the third quarter, what we talk about on special charges and severance costs are associated with the actions that we took so that we would be able to hire for a Veloce and the Olympus product line.

Operator

Okay. Thank you. We’ll go next to the line of Matt Petkum with D.A. Davidson & Company. Please go ahead.

Matt Petkum - D.A. Davidson & Company

Hi. Good afternoon. Just to clarify a little bit on this commentary regarding the guidance, Greg. You make a statement in the press release if the U.S. economy slows in the fourth quarter, you’re ability to meet guidance will be challenged. I’m looking at an economic survey in the Wall Street Journey, the most recent data, almost every single economist is predicting slower growth in Q4 relative to Q3. So are you saying that if we actually see negative growth, you’ll be challenged, meaning a decline in the U.S. economy, or slowing growth? I’m a little confused because I think everybody thinks the economy is slowing in Q4.

Gregory K. Hinckley

I’m not prepared to quantitate it. If I were, I would have a different forecast. What I’m saying is this is a qualitative risk to our guidance and I don’t know how far and how sharply and what parts of the economy will be most affected. It’s just a risk factor.

Matt Petkum - D.A. Davidson & Company

Okay. Then, Wally, you made the comment about the consolidation of manufacturing as a long-term trend for the EDA industry. Could you comment a little bit more specifically on what that means for Calibre and do you see that as sort of commoditizing the rule decks that is in place for Calibre and how that product stands relative to your other products?

Walden C. Rhines

No, I don’t see it as commoditizing rule decks. In fact, rule decks are becoming substantially more complex and more differentiated and, in fact, migrating to new approaches to writing them out rhythmically and the verification that tools itself are moving from rule-based to model-based. So I think they’ll be continued opportunity for differentiation as we move ahead. And, of course, Calibre, Design Rule Checking, and Logic Verification is almost all sold to designers as opposed to manufacturers, so I see little effect of manufacturing consolidation on that part. On the other part, the parts of Calibre that are sold directly to the manufactures--wafer fabs, mass makers, and so forth--the consolidation doesn’t change the usage. The net result is, for example, as more and more customers have joined the common platform alliance, that has meant that more and more use the Calibre optimal proximity correction tools that, in some cases, they mask data prep tools, and so I’d say that if you have a large market position in the manufacturing tools--resolution, enhancement, and mass data prep--that consolidation tends to work in your favor.

Matt Petkum - D.A. Davidson & Company

Okay. Can you update us a little bit, Wally, in terms of what you’re seeing on the competitive environment for Calibre?

Walden C. Rhines

Well, we don’t have a whole lot of cases to refer to as we’ve mentioned that we only had one major renewal. If that’s indicative, that’s wonderful for the competitive environment because the Caliber bookings were up 6x at a customer that had another vendor for a large share of their verification in the past and they, basically, went to an all Calibre flow. But I don’t think you can take a single customer as indicative of the broader trend, but in general, the broader trend has favored consolidation around fewer design verification tools just because of its overhead you described earlier of maintaining rule decks and having a tool that you trust that your foundry will support and will support directly with their own detailed qualification and product development. Like other areas of EDA, large market penetration in a specific area tends to be very stable and, ultimately, leads to even larger market penetration.

Matt Petkum - D.A. Davidson & Company

Okay. Thanks. One final housekeeping question from me, Greg. Stock comp was up about 18% sequentially. Is that primarily Sierra coming on?

Gregory K. Hinckley

Stock compensation?

Matt Petkum - D.A. Davidson & Company

Yeah. As the aggregate stock compensation across all the line items.

Gregory K. Hinckley

I don’t have a good answer for you off the cuff, Matt. Can I give you a phone call after this?

Matt Petkum - D.A. Davidson & Company

You sure can. Thanks so much, guys.

Operator

We’ll go to the line of Tim Fox of Deutsche Bank. Your line is open.

Tim Fox - Deutsche Bank Securities

Thank you. One question about the contract renewals. You suggested there that the 10 largest orders were up about 50% . I was wondering what the average order was for all contract renewals in the quarters? Did you see any meaningful change from the typical 25% area?

Gregory K. Hinckley

By 25% you mean the growth in the dollar value?

Tim Fox - Deutsche Bank Securities

Correct

Gregory K. Hinckley

Yeah. As we mentioned, the average contract was up 50%. The median contract was up 30%. Oh, I’m sorry. We only go through and do a detailed analysis on the top 10 contracts because it’s just too much detailed analysis to go through to figure it all out, so I can’t tell you for all contracts, but just for the renewals among the top 10 contracts.

Walden C. Rhines

The other part here, Tim, why it becomes--we have hundreds of contracts in the quarter. Most of them are not renewals. The top 10 contracts typically tend to be 50-55% of our total bookings for the quarter, and so I think the rest of the contracts, by the time you get down to the 10^th largest contract, it’s relatively small. And I think that the rest is just there isn’t enough there to influence what the rules will be determined by the sample size of the top 10.

Tim Fox - Deutsche Bank Securities

Okay. Well, thanks for the clarification. You suggested also that bookings--getting deals done on the quarter was incrementally more difficult, however, you had very nice renewals and, in fact, a record third quarter for bookings. So I’m having a little trouble balancing those two comments.

Walden C. Rhines

Tim, it was marginally more difficult closing contracts with some of our customers which may mean something, it may not. But you see the results. The U.S. economy is weaker than it was. The results of many of the high tech companies are erratic and, as I said, we had more difficulty with some of our accounts. And so, whether that is indicative of some kind of trend, I don’t know. It certainly points out there’s more uncertainty ahead of us than there was six months ago, and so we’re more cautious.

Tim Fox - Deutsche Bank Securities

Okay. And just a follow up there on the fourth quarter and in looking out. I mean, that is arguably the largest quarter for renewals. How much coverage for the fourth quarter, in general terms, do you have? I mean, how much risk is there really to the fourth quarter numbers in a slowing economy?

Walden C. Rhines

Well, I’m not certain that we’ve done any deep analysis. I can assure you, though, Tim, that we’ve never had a bad--all fourth quarters have always been great.

Tim Fox - Deutsche Bank Securities

Okay. That’s it for me. Thank you.

Operator

Thank you. Our next question from the line of Rich Valera with Needham & Company. Please go ahead.

Rich Valera - Needham & Company

Thank you. Good evening, gentlemen. I’m sort of following up on Tim’s question. I’m wondering if you’ve compared the visibility you feel like you have this fourth quarter relative to last year with respect to the amount of renewal and just the forecast, sort of the firmness of the forecast, from your sales force at this point in the quarter relative to your targeted revenue.

Walden C. Rhines

Our visibility is equivalent this year to where it was last year and, other than the fact that I think it’s a tougher economic environment, it’s no different than last year was.

Rich Valera - Needham & Company

Great. With Design-to-Silicon, I think, Wally, in your comments, you mentioned that you expected that to be flat this year off of a difficult comparison, you know, a very strong year last year. Can you talk about how you think about that business longer term or just specifically fiscal 2009? Do you expect that to return to growth? And looking back at some of the other questions on the competitive landscape, one of your competitors out there has talked about having come up with a translator for Calibre rule decks which they’ve felt will accelerate their sort of competitive thrust into the Calibre installed base. I’m wondering if you’ve seen that anywhere, you know, in any benchmark situations?

Walden C. Rhines

Okay. First of all, as you mentioned, Calibre grew 35% in 2006, so our plan and our guidance for this year has always been based on little or no additional growth in Design-to-Silicon. The answer to the second part of your question for will it grow next year, yes, we believe it will resume growth next year. Most of the major renewals occur in the fourth quarter so the largest share of the Design-to-Silicon bookings will occur then as well. Now, with regard to competitive threats, the idea of Calibre rule deck translators, other kinds of tools to emulate Calibre results and so forth has come and gone many, many times in the past and, while I applaud the fact that customers only want to do one set of rule decks, we haven’t seen any evidence that the translators have helped any of our competitors and really have seen no sign of competitive gain in any of our customers. If anything, the other way around. So this is not a period where we’re feeling any particular pressure on the Calibre product family. That could change, but today, we don’t feel any particular pressure.

Rich Valera - Needham & Company

Okay. That’s helpful. Thank you.

Operator

Our next question is from the line of Terence Whalen with Citi Investment Research. Please go ahead.

Terence Whalen - Citigroup Investment Research

Hi. Thanks for taking my question. My question relates to the order growth that you expect in the fourth quarter. I think you said Q3 order growth was up 10% annually. What’s your expectation for Q4 order growth of annually? Then, I have a follow up.

Gregory K. Hinckley

We haven’t ever forecasted bookings growth at the level of the quarter and I don’t want to start doing it now, Terence.

Terence Whalen - Citigroup Investment Research

Okay. I think you had taken a shot at that one last quarter.

Gregory K. Hinckley

I won’t this quarter.

Terence Whalen - Citigroup Investment Research

Okay. And then another question related to order growth. What’s your expectation for renewal growth next year? I think in the past you’ve said value of renewals is expected to be up about 50% in calendar 2008, fiscal 2009. What’s that number as you look into that year now?

Gregory K. Hinckley

From when we gave that forecast, nothing has change which would cause me to change anything.

Terence Whalen - Citigroup Investment Research

Okay. And then in terms of the factoring, I think you mentioned you factored some receivables this quarter. Can you tell us the specific dollar amount of factored receivables in each of the three quarters this year? Thank you.

Gregory K. Hinckley

Yeah. I can’t go each quarter. I just don’t have the data at hand. I can certainly do it offline. We did $30.0 million if I remember right in the third quarter and we’ve done $44.0 million year-to-date, so $14.0 million over the first and second quarters.

Terence Whalen - Citigroup Investment Research

Okay. And I guess as just a last follow up. With that $43.0 million factored on a normalized day sales outstanding basis, it seems like receivables have gone up. I was wondering if you could just qualitatively comment on what you’re seeing at the customer level in terms of customers and their approach to invoicing and how reluctant they are maybe to let go of their cash. That’s it for me. Thanks.

Gregory K. Hinckley

We’ve got an odd one right now, Terence, which is a very large contract that we closed in the third quarter which is one of the reasons why our day sales outstanding increased and that by the end of December, they will pay the full balance of the contract over its entire life, including both the product portion and the maintenance portion. And that is not unique. We had a similar experience in a large transaction we did in the first quarter where it was prepaid the value of the contract of the life. So that doesn’t seem to be a pressure point. We have other pressure points, but that is not one of them.

Terence Whalen - Citigroup Investment Research

Great. Thank you.

Operator

Our next question from the line of Sakic Collier with J.P. Morgan. Please go ahead.

Sakic Collier - J.P. Morgan

Hi guys. It’s Sakic, here for Sterling. Two questions for me. First, when you talked about your top 10 renewals this quarter being 50% greater than their previous contract, I think you mentioned a pretty sizable increase in a Japanese customer. I was just wondering what that 50% would look like excluding that large Japanese? And I have a follow up.

Walden C. Rhines

Yes. As we mentioned, a large Japanese customer contract grew 90% but if you took the median of the renewal, it was a little over 30%. All of them grew and we had one that grew more than 90%. So I’d say it was a strong showing for renewal growth on our major renewals.

Sakic Collier - J.P. Morgan

Excellent. Lastly, you know, when you talked about services sort of being a bell weather for EDA going forward or for your business specifically going forward, I’m just wondering how much of the uptake and services that you’ve been seeing so far is related to Veloce and maybe how much of it is related to customers maybe going to external service providers as opposed to hiring internally? Thanks.

Walden C. Rhines

This one seems to be--in our case, we do little in the way of design services and virtually nothing, Sakic. So what tends to be, in our case, it’s either evaluation of current methodology or implementation of new methodologies. The portions which have been most active for us and account for the preponderance of the consulting business today is many, many companies are interested in switching from proprietary check benches to ones based upon system Verilog and that is having a great influence upon our consulting business. The other portion is the whole kind of implementing, building the libraries for DFM capability. So it’s DFM implementation and migration from legacy test benches to ones based upon system Verilog.

Sakic Collier - J.P. Morgan

Great. Thanks.

Ry Schwark

Everyone, thank you for joining us today. For follow up calls, Greg Hinckley, Dennis Weldon, and I will be available. The best way to reach us is by calling Monte Koller at 503-685-1462. That’s 503-685-1462. She’ll make sure we get back to you in a timely manner.

Laurie, would you please give the replay information?

Operator

Yes. Ladies and gentlemen, this conference call will be made available for replay starting today at 5:30 PM Pacific Time running through the date of December 6 at midnight Pacific. You may access the AT&T teleconference replay system by dialing 1-800-475-6701. Please enter the replay access code 894598. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and international participants dial 320-365-3844. The replay access code is 894598.

Well, that concludes our conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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