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Synopsys (NASDAQ:SNPS)

Q2 2012 Earnings Call

May 23, 2012 5:00 pm ET

Executives

Lisa Ewbank

Aart J. de Geus - Co-Founder, Chairman and Chief Executive Officer

Brian M. Beattie - Chief Financial Officer

Analysts

Richard Valera - Needham & Company, LLC, Research Division

Raj Seth - Cowen and Company, LLC, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Second Quarter Fiscal Year 2012. [Operator Instructions] Today's call will last 1 hour. 5 minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Lisa Ewbank

Thank you, Kathy. Good afternoon, everyone. With us on the call today are Aart de Geus, Chairman and Co-CEO of Synopsys; and Brian Beattie, Chief Financial Officer.

Before we begin our remarks this afternoon, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts and targets and will make other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our quarterly report on Form 10-Q for the quarter ended January 31, 2012, and our earnings release for the second quarter of fiscal year 2012.

All financial information to be discussed on this conference call, the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures and supplemental financial information can be found in the current report on Form 8-K that we filed today, our second quarter earnings release and our financial supplement. All of these items are currently available on our website at www.synopsys.com.

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

Aart J. de Geus

Good afternoon, and thank you for joining us. Today, I'm pleased to report excellent Q2 results, very rapid progress on the integration of Magma Design Automation and raise guidance for fiscal year 2012.

Let me begin with a financial summary. Our business in Q2 was strong across all metrics with revenue of $433 million and non-GAAP earnings per share of $0.53, which includes $0.01 of dilution from Magma that was not included in our previous guidance range. For the year, we are raising our outlook based on increased visibility and confidence and the progress made on the Magma integration to a range of $2.03 to $2.07.

From the perspective of our long-term financial management, you may recall that in 2010, we communicated to you a high single-digit EPS growth objective based on 5 pillars: One, organic revenue growth in core EDA of low to mid-single-digits; two, double-digit organic revenue growth in IP and systems; three, continued M&A; four, efficient allocation of resources; and five, keeping share count roughly flat at approximately 150 million shares.

Clearly, we continue to deliver against these objectives and are already well on track to achieve double-digit EPS growth again this year. We will provide 2013 guidance in our December earnings release, but I will say already now that our objective is to achieve high single-digit EPS growth for next year as well.

For the present quarter and year, Brian will provide more financial detail in just a minute. Before addressing the product highlights, let me comment on the current landscape. For as the economic ups and downs are readily visible in the press on a daily basis, the electronics and semiconductor industries are racing forward from a technology point of view. While electronic consumption is staying high, the battle for share among the providers is quite intense, resulting in some consolidation and accelerated push towards the 28-nanometer production of advanced chips and substantial investments into the next generations of technology.

For our industry, this clearly means additional pressure as we support challenged and very competitive customers. But also, a solid landscape of renewals, add-on purchases and emphasis on value selling.

We expect that going forward, customers will rely more on EDA for improved design efficiency and product differentiation, which bodes well for our sustained growth prospects. In that sense, EDA feels healthier than it has been in a number of years.

These analysts are particularly positive for Synopsys. For many years, we have focused on building a set of complete solutions, ranging from system design to chip implementation to manufacturing. In addition, our time-based business model, supported by a substantial multiyear backlog, lets us continually invest in R&D and support in virtually any phase of the economic cycle.

Consequently, it's not surprising that the majority of the state-of-the-art designs are done with Synopsys tools and rely on the skills of our global support teams, which brings me to the highlights for the quarter, starting with our core EDA and manufacturing offerings.

One of the advanced areas in which both stress and excitement are visible on a daily basis, is in the design of processors, graphics and SSE. Clearly, our customers aim to achieve highest performance at lowest power. In this area, Synopsys shines. One example is with Samsung, who completed the first-ever production tape-out of a high-speed ARM Cortex-A15 processor relying exclusively on IC Compiler and Galaxy for physical design.

Simultaneously, the acceleration to 28-nanometer saw the number of active designs and tape-outs grow 15% to 20% this quarter. The vast majority of these use our Galaxy solution. For the even more advanced 20-nanometer node, we estimate that Synopsys is being used in about 80% of designs and tape-outs.

In this context, links to manufacturing become even more important. Our two-pronged strategy features integrating manufacturing elements into design tools for faster and better results and developing manufacturing tools to attack the most difficult challenges at the next advanced processes.

Our Proteus mask synthesis solution, for example, continues to gain share. During the quarter, we announced that Renesas had adopted Proteus LRC for lithography verification. Also in the quarter, we had another major manufacturer adopted Proteus for 20-nanometer.

In parallel to implementation, verification continues to be a crucial part of the design flow with 70% plus of advanced designs from processors to graphics to SSEs being verified using Synopsys. A particular highlight for the quarter was our success in expanding our verification IP offering. We introduced groundbreaking technical advances in this area, yielding competitive wins at several large companies. For example, last week, we announced that AMD had selected Synopsys as its verification IP partner.

Let me briefly also comment on our excellent progress in integrating Magma and working with their customers. In last 90 days since we closed, we integrated all of the teams. While keeping the critical core of technologies and technical support, we're able to recognize considerable expense synergies by eliminating overlapping infrastructure positions. We are progressing swiftly to rationalize facilities and other long-term expenses as well.

Focusing immediately on our joint customers, our combined teams conducted very insightful face-to-face worldwide listening tours. In parallel, our R&D teams that detailed cross-training and analysis to assess where strength could be leveraged on each product line. This week, we started to roll out customized roadmaps to our customers responsive to their stated needs.

From the start, we have been very clear that we will support the former Magma tools to make sure that our customers' projects will not be jeopardized. It is also clear that in a number of areas, there are very good technologies that will integrate with other Synopsys tools, creating even better solutions and providing interesting upgrade opportunities.

We see some of these capabilities becoming available as soon as year end or early next year. Since the roadmap discussions have just started, it's too early to comment on the specifics, but in general, the customer interactions are going very well.

Now to IP, where Synopsys is the second largest vendor in the world leading at interface, memory and analog IP blocks. Given the high time-to-market pressure for most consumer applications, and the enormous number of sophisticated IP blocks used in the key SSE chips, the build versus buy trade-off for IP continues to evolve to the benefit of commercial solutions.

Q2 is another strong business quarter for our IP, and we continue to expand our portfolio both organically and through acquisition. For example, during the quarter, we acquired 10-gigabit SERDES technology from MOSAID, further expanding our high-speed service offering.

With increased attention on the advanced technology nodes, adoption of our IP blocks for advanced 28- and 20-nanometer designs is ramping steadily. We expect Synopsys' IP to continue to be a good driver of growth for us this year.

In systems, our SPGA-based and virtual prototyping product line are doing well also. The ability to accelerate embedded software developments by 6 to 9 months is a compelling value proposition for project managers. Given that most prototyping systems are still built in-house today, we see increased outsourcing to commercial solutions from Synopsys as the driver of growth here as well.

Bringing IP and system solutions together, last month, we introduced the Soundwave Audio Subsystem, a complete, integrated hardware and software audio IP subsystem for system-on-chip designs. This first of its kind solution is designed to save customers years of integration and verification effort and supports popular audio standards such as Dolby, SRS and DTS.

Overall, be it in low power design, in complex system verification or in sophisticated IP reuse, all of our products are supported by a worldwide team of experts that our customers greatly rely on for their differentiation and success.

Before I conclude, let me briefly comment on today's announcement that Chi-Foon Chan has been appointed to join me as co-CEO. Many of you know that Chi-Foon and I have been working in this matter for over a decade, and while this is formal recognition of the success we've had in co-leading the company into his present leadership position, there are no major changes in structure or responsibilities.

I will continue as Chairman and CEO, being the main face to Wall Street, and Chi-Foon will continue as President and co-CEO shouldering much of the operational responsibilities for the company. I'm extremely pleased that we are recognizing Chi-Foon's hard work and talent in this way. I look forward to together conceive and drive the next phase of growth of Synopsys.

In summary, we delivered excellent Q2 results and are raising yearly guidance based on both intrinsic strength in our base business and the addition of Magma. The environment for EDA and Synopsys is robust and demand for our technology is strong. We're making rapid progress in integrating Magma and expect to deliver even better technology going forward.

I'll now call over to Brian Beattie.

Brian M. Beattie

Well, thank you, Aart, and good afternoon, everyone. In my comments today, I will summarize our financial results for the quarter and provide you with our guidance for Q3 and the full year.

In this first quarter following our recent Magma acquisition, I will also address the related Q2 financial impacts and will outline the revenue trends of the Magma business leading into FY '13. Going forward, we will not be breaking out the impact of Magma as the company has become fully integrated. In my discussions, all of my comparisons will be year-over-year unless I specify otherwise.

Now Synopsys delivered an excellent quarter, highlighted by strong business levels, double-digit growth in both revenue and non-GAAP earnings and considerable free cash flow generation. Additionally, we are raising our full year outlook for revenue, non-GAAP earnings and operating cash flow.

Let me now provide some additional detail on our financials. Total revenue was $433 million, an increase of 10% compared to a year ago and well above our target range. As expected, revenue contribution from Magma was modest at $14 million, primarily reflecting the standard purchase accounting haircut that was applied to deferred revenue.

We delivered growth across all product groups, with particular strength from our core EDA platform. One customer accounted for slightly more than 10% of second quarter revenue.

Approximately 90% of Q2 revenue came from beginning-of-quarter backlog, while upfront revenue was 5% of total. Now this is well within our target range of less than 10% upfront. The average length of our renewable customer license commitments for the quarter was about 2.7 years, and we expect average duration in fiscal 2012 to be about 2.8 years.

Turning to expenses. Total GAAP costs and expenses were $415 million, which included $29 million of amortization of intangible assets, $21 million of stock-based compensation. We also had $31 million of acquisition-related costs that related primarily to Magma.

Total non-GAAP costs and expenses were $332 million, an expected year-over-year increase also due mainly to our Magma acquisition. Excluding Magma, total non-GAAP costs and expenses would have declined sequentially.

Non-GAAP operating margin was 23% for the quarter and 24% for the first half of fiscal 2012. For all of FY '12, we continue to expect non-GAAP operating margin to increase over FY '11 levels by approximately 100 basis points.

Turning now to earnings. GAAP earnings per share were $0.14, down from $0.53 a year ago. And recall that Q2 of FY '11 earnings included the onetime impact of a $32.8 million or $0.21 per share GAAP-only tax benefit associated with an IRS settlement for fiscal years 2006 through 2009.

Non-GAAP earnings per share increased 18% to $0.53 and includes the $0.01 dilution from Magma. Our non-GAAP tax rate was 24% for the quarter. And for modeling purposes, we continue to think that a non-GAAP tax rate of approximately 25% is a reasonable estimate for fiscal 2012.

Now turning to our cash and balance sheet items. Our balance sheet remains strong with $797 million in cash and cash equivalents. We also had $250 million of debt at the end of the quarter due to the Magma acquisition. Of our total cash balance, 19% was onshore at quarter end and 81% was offshore.

As expected, our domestic cash declined as a result of the Magma acquisition. We generated $127 million in cash from operations in the quarter, and we are raising our operating cash flow target for the year to $320 million to $340 million.

Continuing on with our cash and balance sheet items. Capital expenditures were $9 million for the quarter. For the year, we expect capital spending of approximately $55 million. We did not spend cash to repurchase stock in the quarter and have approximately $272 million remaining on our current share repurchase authorization. And as always, we'll evaluate the best uses of cash each quarter, including company operations, M&A investments, repayment of debt and stock repurchases.

So continue on with our balance sheet items. Q2 net accounts receivable totaled $236 million and DSO was 50 days, within our target range. Deferred revenue at the end of the quarter was $736 million. We ended Q2 with approximately 7,475 employees, with more than 1/3 in lower-cost geographies. Approximately 590 of the additional employees were from our recent acquisitions, the majority coming from Magma.

Now let's address our third quarter and fiscal 2012 guidance, which excludes any future M&A, including the impact of future acquisition-related expenses on GAAP targets that may be incurred in Q3 and beyond.

So for the third quarter of FY '12, our targets are: Revenue between $440 million and $448 million; total GAAP costs and expenses between $371 million and $387 million, which includes approximately $16 million of stock-based compensation expense; total non-GAAP costs and expenses between $333 million and $343 million; other income and expense between 0 and negative $2 million; a non-GAAP tax rate of approximately 26%; outstanding shares between 149 million and 153 million; GAAP earnings of $0.29 to $0.34 per share; and non-GAAP earnings of $0.49 to $0.51 per share. And we expect greater than 90% of the quarter's revenue to come from backlog.

Now our fiscal 2012 outlook. We're raising our revenue range with our new target between $1.74 billion and $1.76 billion, reflecting underlying strength in our base Synopsys business and also the addition of Magma. At this time, we anticipate that Magma will contribute approximately $60 million for the full year.

Other income and expense between 0 and $3 million, a non-GAAP tax rate of approximately 25%; Outstanding shares between 148 million and 152 million; GAAP earnings per share between $1.04 and $1.16, which includes the impact of approximately $71 million in stock-based compensation expense; non-GAAP earnings per share of $2.03 to $2.07; and we raised the midpoint of our guidance range by $0.05, $0.03 of that due to Magma. And our current range represents year-over-year growth of approximately 13% to 15%, exceeding our beginning-of-the-year commitment to deliver high single-digit earnings growth in FY '12. And we are now targeting cash flow from operations of $320 million to $340 million.

Now as I've mentioned, while we're still analyzing the business and planning for FY '13, our objective is to achieve high single-digit non-GAAP EPS growth. For modeling purposes, we think that a reasonable estimate for Magma revenue is just shy of about $100 million, taking into account the business model transition under Synopsys, along with the backlog profile that was acquired.

So in summary, we're pleased with our excellent second quarter results highlighted by top and bottom line growth, solid operating margin and strong cash flow generation. We're also pleased to provide increased revenue, EPS and cash flow guidance for FY '12.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Rich Valera with Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

I'd like to extend my congratulations to Chi-Foon on his promotion. So to start out, Aart, with something referred to in your prepared remarks about 28-nanometer where there's a lot of activity and some issues with respect to yield and I guess, capacity. Can you talk to how sort of that's potentially benefiting Synopsys? Where are the opportunities there and perhaps also at below 28-nanometer at this point?

Aart J. de Geus

Sure. The 28-nanometer node has been in the works for a long time, both from a technology development, as well as from a designer perspective. And I think the reality is that the 2 are coming together now all at the same time with both market opportunities, designs that are ready to go and applications that really would like to take advantage of this node. And as you pointed out correctly, there's definitely the perception of lack of capacity and maybe even some yield issues that cause a lack of capacity. Now nothing that drives capacity growth more rapidly and yield improvements more rapidly than customers that are eager to buy, but we are clearly seeing that all of the suppliers of silicon are working very hard to try to take advantage of this opportunity. Simultaneously, it's an opportunity for us because the chip design itself has influence on the quality and the yields that one can get in the implementation. And so products such as our Yields Explorer allows people to look at their design and look up to the manufacturing and identify more easily issues that could reduce yield. And therefore work more closely with a foundry rapidly to fix those. And we are definitely seeing upswing on that specifically around that node. In general, I think it's encouraging that 28-nanometer is doing well because it indicates that the wave of moving to this node is now really becoming very real from a production point of view. And of course, a few companies are already well ahead of that. But this indicates that there's a lot of, I would say, advanced, if not super advanced, chips are now migrating there, and so that demands a lot of tools, a lot of handholding, which is some pressure, but also a lot of opportunity for us.

Richard Valera - Needham & Company, LLC, Research Division

Great. And then with respect to your discussions with customers that have -- that were both Synopsys and Magma customers, any one concern is that the degree that those customers wanted a dual-vendor strategy, now they're effectively a single vendor strategy. What can you do to prevent them from the fact that -- if you to try to prevent them from going to another vendor to sort of create a dual-vendor strategy and what -- how were those talks going?

Aart J. de Geus

Well, for starters, we don't want to prevent them from doing anything because if people really want alternatives, then they're free to do so. I think what the bringing together of the Magma technology and the Synopsys technology does is for starter actually accelerate the overall frame that we have. It makes it more solid for the coming node of 20-nanometer, which is a node that requires a large amount of technical investment and support, dedication. So in that sense, I think we are a much more and even better bet, I should say, because of combining those things. And at the same time, we have been very clear to the customers that certainly for all of their ongoing projects, we don't want to jeopardize where they're heading there, and we'll continue to support the former Magma tools. So I think the customers have a lot of choice, but the customers are also very, very focused on figuring out which solutions really work and actually try to reduce some of the application.

Richard Valera - Needham & Company, LLC, Research Division

And finally, for Brian, can you state what the interest rate is on the debt that you took out?

Brian M. Beattie

Yes. It's effectively today at about 1.375%.

Richard Valera - Needham & Company, LLC, Research Division

And is that a floating rate?

Brian M. Beattie

It does, yes. It floats on a LIBOR. We've been using 30-day LIBOR rates, and the premium on top of that, the spread is about 1.1%. So LIBOR rate now is very inexpensive. We continue to expect the rates will stay low for the foreseeable future.

Richard Valera - Needham & Company, LLC, Research Division

And is it your intent to maintain that debt for some period? Or would you consider paying that off rather quickly as you generate cash and the balance of the year?

Brian M. Beattie

Yes, I'd say our goal is to obtain really the maximum optionality that we can with the resources that we've got. But it's a balancing item there between our operations and repaying that debt. Also, the M&A opportunities, it's still maybe in front of us and also the buyback scenario. So we look at all 4 of those areas as areas that we need to address and use the cash in the appropriate way.

Operator

We have a question from Raj Seth with Cowen and Company.

Raj Seth - Cowen and Company, LLC, Research Division

Brian, first, a question for you. Your guidance suggests, your annual guidance, that we'll see sequentially lower operating margins into Q4. I mean, there was the same trajectory pre-Magma. Can you remind me what the reason is for that? And I'm just curious if there's some residual lot of costs in there that one might expect go away as you moved into the next year? I mean, fundamentally, I guess, I'm curious how to think about margins in the next year. You mentioned high single growth -- high single-digit growth expectation. Do you think that margins ought to expand in the next year, stay about where they are? How do I think about that next?

Brian M. Beattie

Sure, Raj, you bet. Yes, as we look at margins, first thing we'd say is, again, we're focused on improving the efficiency and driving margin up. And we anticipate that for this year, we will be up approximately 100 basis points over the numbers that we had seen last year in 2011. Relative to the Magma costs and the margin pressure, again, we anticipated that back of the last quarter that the earnings contribution from Magma would be modest and, in fact, we came out at $0.03. So for this year, the operating margins aren't quite up to the standard as you'd anticipate from the transition costs that we have for integrating the products, and again, anticipating that to improve as we drive profitability up from Magma well into '13. And then the last point I'd say is that, again, our -- as you see us already being close to 23% to 24% operating margin, that our goal continues to be achieving the mid-20% levels over the next few years as well. So again, just recall that on a quarter-to-quarter basis, it does move around a little bit based on the timing of the expenses and how things work. Recall the extra week we had in the first quarter, which happens every 5 to 6 years. And you will see a bit of movement. But overall, again, about 100 basis points improvement in 2012 over 2011, inclusive of our acquisition.

Raj Seth - Cowen and Company, LLC, Research Division

Great. And a question, if I might, for Aart. Aart, on the IP business, you talked about a good momentum there. Can you talk briefly about sort of what the margin trajectory is there? And as you balance, I suppose, the desire for breadth in the portfolio, how do you balance that against the -- and you tell me if this is true or not, but the fact that you probably have some hit products with them, the portfolio that probably generate, I'm guessing, a lot of the disproportionate amount of the revenue, just talk a little bit about you're going to build that out over the next 12 months or so?

Aart J. de Geus

Sure. Raj, I think you gave most of the answer in your question, which is, it is precisely a balancing act between growth, profitability and broadening the portfolio for the short and the broad term. And in that context, a, we are clearly seeing continued growth, the business is doing well, and we think it's an important one going forward; b, without giving specifics, I think we've commented started maybe roughly 4 to 6 quarters ago, that we were gradually improving the operating margin of that business largely because as the business becomes larger, it should become more and more profitable; and c, you saw some of the results of that overall in the results for the corporation. Brian just mentioned that this year, we will be moving up the operating margin by roughly 100 basis points. Well, that is the result of all of those things, including this business. And so I think we're well on track in every domain. Now from a broadening point of view, at any point in time, yes, some of the products are "hot" because when somebody needs it, their competitor needs it, and before you know it, everybody needs it. And that is, by the way, also the nature of many of those standards. But it's also true that to be evolved constantly, they constantly have to be mapped into other technologies, and so there's actually quite a distribution of efforts over a broad portfolio. And that is actually one of the Synopsys' strength.

Operator

We have a question from Sterling Auty with JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Brian, can you start with maybe walk us through from a high level, if you can. So you have Magma that was out there with, what, a high $30 million, almost $40 million quarterly revenue run rate. How do we think about starting there, taking the deferred revenue haircut, what the impact from the model transition might be to get us to the revenue contributions you talked about for this year and next year?

Brian M. Beattie

Yes, sure will, Sterling. As you know, we said that this year, the revenue contribution from Magma would be about $60 million. And that, that, on a full year basis, going into '13, would give us just slightly less than about $100 million of run rate. So first of all, it starts with a very significantly different business model. And as we look at the business and the operations of Magma, now we've had an opportunity to go through every single contract and profile those out for the years, we found a few things. Number one was that, as you know, from the last 2 quarters, that more than 50% of those revenues were taken upfront. As you can imagine, that's a significant difference from us that is this past quarter, we had about 5% of revenues that are taken upfront. So under Synopsys, we look at taking those revenues for both contracts that were signed and contracts to be signed with the Magma products to our very, very ratable model. So it's quite different. So naturally, it would have the impact of stretching out those revenues. The other thing that we saw was also the length of contracts. We had one of the contracts we acquired also went out to 2019, first quarter of our 2019 plan. So you could see that many of the contracts, as referred to in the backlog, were some in excess of 5 to 6 years. And of course, we're trying to align that again with the Synopsys model, which averaged about 2.7 years. But we'll certainly honor all of the commitments that were made in that regard. And finally, down to the backlog, looking at the very specific backlog of products and contracts that were acquired on the transition, we saw about $200 million of backlog that meets the Synopsys' standard of not having options included in them for transitions. And we've taken that backlog very specifically into account as we projected both the end of this year and well into 2013 revenue. So I'd say those are the 3 contributors to the difference from what was seen as Magma numbers from the last quarter it was reported to our detailed review of them now as we look forward.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

So we can assume the ratable mix to be identical to your -- to the 90 plus going forward?

Brian M. Beattie

That's correct.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

And that could be a transition period? Okay.

Brian M. Beattie

Absolutely, yes. And recall again, in the first number for this year, we had deferred revenues that were about $23 million that we acquired. And we'll lose about $12 million of that due to the standard purchase accounting haircut that's done on deferred revenues. So it has a little bit of an impact in '13, that cut kind of happens over 12 months or so. So again, pretty standard process as we look through it. But again, we told everybody last quarter, we would break out all the Magma impact through revenues, spending and earnings contribution. We've done that for the year. And then now as we said very clearly, the products, the teams, the customer accounts are all fully integrated, and we're moving forward.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then touching upon an earlier question, as we think about the expense run rate, associated to LAVA, how much of the cost synergies that you would want to capture from the deal have already been recognized? How much is still in front of us?

Brian M. Beattie

Well, I'd say, again, specifically identifying the Magma revenue or the Magma employees is really not the way the company is operating right now. We are totally integrated on an integrated product offering, integrated from a development perspective where the teams are jointly developing both a maintenance of products that were signed prior to our acquisition on February 22, as well as all the integration work to the best of all the products that are outlined earlier. So the teams are very integrated going forward. And clearly, we have goals we set for 2013 and beyond of high single-digit growth, and we know that we have to work that through. And again, that's a commitment we've already made with still 6 months to go in 2012, and we just see the teams as totally integrated. There's a last few elements that we have to address relative to some facilities that we actually moved out of this past weekend, the main headquarter facility. And that's actually a Q3 activity, but again, we're moving very, very quickly on customer integration, employee integration and facility rationalization with some very significant cuts that have been taken place already in the infrastructure groups to make all of this happen.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. One more, and I'll hop back into the queue. As I look at the $0.01 of dilution, it would seem to suggest the LAVA-related expenses are about $16 million in the quarter. But total expenses were about $23 million, $24 million. Higher than that I would have expected, meaning that there are -- looks like there's $7 million or $8 million of higher expenses in just the core Synopsys. Can you give me a sense as to when you looked at it -- where maybe expenses were a little bit towards the higher end of what you expected, was it sales marketing, was it research development? Where was the heavier spend?

Brian M. Beattie

You bet. The -- looking specifically at Q2 numbers, our spending was up again primarily related to the very, very strong business levels that we've seen in the first half of the year related to overachievements of those levels. We have also accrued and used Q2 as a 6-month catch-up on bearable compensation payments that are now being anticipated due to this overachievement that we've reflected both in our midpoint growing by about $85 million on the top line. And as you know, that’s both $65 million or $60 million for Magma and $25 million organic growth. And so again, a lot of it came from that perspective of the business is doing very well. We did need to accrue a little bit more to take into account the 6-month catch-up on variable comp.

Operator

We have a question from Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

I have 2 of them. Brian, just to get back on the synergy standpoint, I understand the Magma is well integrated, at what point do you think the operating margins of Magma would trend towards your corporate margins?

Brian M. Beattie

Well, it -- again, we're moving very, very quickly to bring up that newly acquired business. But again, let's put this in the context that the Magma business represents about 6% to 7% of the overall Magma -- or the overall Synopsys financial performance as measured by the revenues. And we're very quickly integrating those teams that they're doing the total development work for both product groups. The expenses reflect that. The revenues reflect that. And again, we have already made a commitment now for 2013 that we will continue with that high single-digit growth for 2013 and make sure the margins are there to do it, taking into account the momentum we had already this year, being up 100 basis points over last year and the commitment we've made to continue to drive our margins to the mid-20s.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it, all right, and then I have a question for Aart. In all the last several quarters, you've seen many of the foundries and the chipmakers try to the 28-nanometer. In a scenario like that, did you actually see EDA spending stall out because customers are trying to fix the manufacturing issue? Or it was agnostic to what is happening in the factory? And secondly, if that is the scenario, do you expect a similar trend to 20-nanometer?

Aart J. de Geus

So we saw none of that. As a matter of fact, I think design is mostly driven by the complexity of design. And if there are yield issues, on any node, some people will spend some more money on the interface between design and manufacturing. Other people will rush to immediately remap their designs to either another node or another foundry if they can. And so I could not say, at all, that any yield issues, which, by the way, are common for every node in history, so I wouldn't overdramatize it either. But I don't think it has any negative impact on design. I think maybe on the positive side, the very fact that there's so many designs queued up for 28-nanometer tells us that there's a lot of very sophisticated chips in the works. And we certainly feel that through the perspective of our field support because they are very, very central to the success of these chip designs. And so in that context, I think that technology is racing forward as fast as it has been in the past, and the value is certainly very high because the competitiveness among our customers is very high right now.

Krish Sankar - BofA Merrill Lynch, Research Division

Did you guys give what -- I mean, what's your breakout? What part of your revenue comes from 20-nanometer design today?

Aart J. de Geus

We actually don't break it out for a simple reason, which is our most advanced tools that are used for 20-nanometer, for example, are actually also bringing substantial benefits to 28- and 40-nanometer because they are faster. They're better. They're more optimized for low-power design and so on. And so in EDA, there's been a bit of a myth for years that every time there's a new node, people are going to change all their tools. I would say it's absolutely the opposite. People hate to change tools because these are very, very sophisticated programs. You learn how to use them, and so they upgrade if there is value to the next release, and it is true that advanced nodes tend to need the new release. But in general, I would not say that is a massive shift of tools because of a node transition.

Operator

[Operator Instructions] We have a question from Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Aart, I'd like to ask first about the Magma integration, of course. With respect to your sales and support model, the base business previously had a model where Synopsys would have about 3 or 4 AEs and field support per sales rep. And you also had, if I recall correctly, about 150 named accounts. With the integration of Magma, could you talk about how that might have changed in terms of the scope or ratios within your sales and support model?

Aart J. de Geus

It's a good question. I had to think a little bit because we certainly did not do the math that way. It's not a bad way to do the math. But in general, I would say that we kept the vast, vast majority of the technical people, and certainly, of the support people because there's such a high demand but only to support the previous Magma tools. But in general, for really good talent in the field as customers tackle more difficult designs. It is also true that we probably cut higher percentage in the sales team. But again, to put in perspective, we're talking about a very small company compared to the rest of Synopsys. And, but it still adds to your point, which is if you look at the last 5 years, my guess is that we have increased the number of support people per sales person largely because the sales activity, our team activities, anyway, with the business units and with others in the company. And whereas the support is something of which there's never enough of. And so I would say that balance has increased towards having more support people per sales person.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. With respect to the products or the forces of growth actually, with Magma, you now have majority shares implementation. You reinforced what was already probably majority of share in sign-off. And as you pointed out, you're #2 in IP. Could you talk about other areas where you might look to gain significant share or otherwise just your good enough organic growth that might have a material impact on run rates and revenues?

Aart J. de Geus

Well, as you know, we have a very broad portfolio, and I even hesitate to call the number of products because there's some very large products and of course, we have thousands of little IP products. But the reality is, to cover a broad set of designs, we need to have flows that are very complex and that have many different tools. So in that context, the first thing that Magma adds, and that was one of the key reasons to move ahead, is it adds even more technology and also more technologists and support people that are very capable to our team. And so we absolutely foresee that we will continue to invest in all the areas that you mentioned. At the same time, we have another set of tools that you didn't mention in the whole verification space, in the custom space, in the system space and, of course, in the IP space. And then, even within manufacturing, we are broadening somewhat. And although it is a really small addition, it's still noteworthy to mention that this past quarter, we added this small company in the Optical space, thus getting a little bit more footprint there as well. This is all maybe a long diatribe to clarify that there's no end to need for more technology and therefore, for opportunities for us. And in that context, it's both a quest for driving the best technology, the most advanced ones, but also integrating them really well and supporting them well. And so that is the, really the comprehensive picture that we're trying to drive forward for our customers.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

All right. Just one more for you, Aart, and then a financial follow-up for Brian. How would you rate this integration, thus far, versus Avanti a decade or so ago, particularly the area of key employee retention in R&D, for example? And how are you doing in keeping key LAVA people on the FineSim and Tekton teams and so forth?

Aart J. de Geus

Well, in general, every acquisition is different in nature. At the same time, hopefully, over our history, we learned lessons, given that we done, I don't know, 60 or 70 of them by now. And in this case, if there's one thing maybe that stands out in our own execution is that we have moved very, very rapidly. The sheer fact that in 30 days, we had decided on all the people situations. In 60 days, we had already feedback from customers systematically. And now, 90 days later, we're already back on the road with the roadmaps going forward, I think, illustrates that we're moving quickly. I don't know the exact numbers actually, but of the 750 or so people, we must have retained roughly 500, 480 or so. And so I'm sure there will be some ups and downs around that, but the fact is we have some really, really good people that are here, and some have communicated that they really like to be here. I'm sure some will rethink it, but the bottom line is we're moving very fast. And I think there's some experience in the company on how to do it well. And it can all be summarized in one sentence, which is, "Do whatever is best for the customer in the long term, and then the rest will find its way."

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

All right. And lastly, for Brian, you said that you had gone through the -- the LAVA backlog and contracts and, of course, changed the model. Could you talk about the degree to which you adhere to put all to LAVA's previously given bookings expectations? They have been public in giving some expectations for their bookings. Could you just talk about whether or not you haircutted those numbers at all? And with respect to your own internal increase in revenue, that $25 million you mentioned to yourself, if you gross that up to your bookings performance, would it be fair to say that you had roughly 100 million or more in bookings upside versus what you had set you would get to get to the prior revenue guidance?

Aart J. de Geus

Jay, this is Aart. Let me answer this one. For starters, as you know, we don't comment about our own bookings, and so we wouldn't comment about Magma's bookings either. Secondly, there was a lot of speak that the Magma business model was virtually the same as Synopsys. It is not anywhere close the same of Synopsys. And therefore, comparing their bookings practices to ours is not helpful driving the future. Everything we do right now is under exactly the practices that we've had in the past that you have heard from us about in the past. And I'm not saying theirs were better or worse or different -- or I'm saying they are different actually. And so we are just aligning it as if these were now Synopsys' products going forward, and so they follow exactly that same strategy. But clearly, we have reworked the backlog we received that came out quite different than the way they would have reported it. And hopefully, all the numbers that you get from us now are vetted through the practices that you have seen us have for a decade or so.

Operator

[Operator Instructions] We have a follow-up from Sterling Auty.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Just a couple more. First, Aart, let's talk a little bit about the co-CEO. Just to answer the question because I'm sure there's going to be some discussion. Is this the first step in the transition for yourself out of the CEO position and onto something else? I know you mentioned that nothing's changing from an organizational perspective. But I still expect people to ask the question.

Aart J. de Geus

It's a completely legitimate question, so I can answer it head on. No, it is not a change in status or planning of change of status for me. On the contrary, it is actually both maybe a recognition and a highlighting of what has been a fabulously good working relationship. But even better than that, I think it is also the signing up for now really working on the next phase of growth of the company. And this is a particularly good time because I think we had very good results. We have actually very, very solid outlook for this year. And so our energy is entirely focused on '13, '14 and '15, and what better time to make these changes as now as we are working together as a team. One more comment, we also have a much larger company today than half a decade or 1 decade ago. And that includes, also from a geographical point of view, and the very fact that we can both speak with full authority for the company to very different geographical locations is actually a very good thing. And I don't think we ever question what the other says. It works very well as a team.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. Brian, the jump in shares for EPS calculation in the quarter, was there anything more than just the higher stock price impacting your Treasury method?

Brian M. Beattie

Yes, plus the fact that given a significant acquisition that our primary focus was on that acquisition, putting the debt structure in place to complete the transaction, and given that, we did not buy back any stock in the second quarter, combined with a higher price point that you mentioned. But overall, for the year, we look at relatively flat share count compared to where it was last year. And we'll continue to evaluate all the other options going forward.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

And lastly, when you look at the gross margin, it came in very nicely for the quarter. How much of that was just a mix issue in terms of revenue versus any other items that may have been benefacted it?

Brian M. Beattie

Well on a gross level, primarily what you see there is some of the services to deliver in the field. There's really nothing fundamental to it. Sometimes, there's a little bit of a hardware mix for our little hardware business that we've got. So really no fundamental shifts at gross levels and on the operating level. I think we've covered that earlier. That's really our prime focus.

Operator

There are no further questions. Please continue.

Aart J. de Geus

Well at this point in time, I thank you very much for attending the meeting. Hopefully, you took away that not only did we have an excellent quarter, but we have a very strong outlook for the year, are focusing very much already on the further out future, and our sense is that our industry and our position is quite healthy. So in the context of many of the other moving parts in the world, hopefully, we are a beacon of stability and worthy of your interest. Thank you very much for your interest.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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