Mentor Graphics Corporation F4Q08 (Qtr End 01/31/08) Earnings Call Transcript

Mentor Graphics Corporation (MENT)

F4Q08 Earnings Call

February 28, 2008 5:00 pm ET

Executives

Ryerson Schwark - Director of Public and Investor Relations

Walden C. Rhines - Chairman and Chief Executive Officer

Gregory K. Hinckley - President

Maria M. Pope - Vice President, Chief Financial Officer

Analysts

Jay Vleeschhouwer - Merrill Lynch

Rich Valera - Needham & Company

Sterling Auty – JP Morgan

Matt Petkun - D.A. Davidson & Company

Terence Whalen - Citi Investment Research

Presentation

Operator

Welcome to the fiscal 2008 financial results conference call. (Operator Instructions) I’ll now turn the conference over to our host, Mr. Ry Schwark, Director of Public and Investor Relations.

Ryerson Schwark

Welcome to Mentor Graphics’ fiscal fourth quarter 2008 results conference call. We have restructured our approach of this call to streamline it for you. Many of the financial numbers we have previously provided during this call have been broken out as schedules and provided to you in the earnings release.

Walden C. Rhines, our CEO and Chairman, will open with a discussion of key trends in the business. Gregory K. Hinckley, our President, will then discuss operational highlights. Maria M. Pope, our CFO, will then give financial highlights and guidance. Dr. Rhines, Mr. Hinckley, and Ms. Pope will then take your questions.

The company has also done a reclassification of interest income on term receivables. Maria will address this in her comments. This reclassification has less than a 1% impact on revenue growth and has no impact upon net income or earnings per share. There is a reconciliation schedule attached to the press release. The fourth quarter was a record on revenue and earnings irrespective of this accounting change.

As a reminder, 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 in our 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 mentor.com/investor_relations.

Walden C. Rhines

Well, as planned, Mentor completed an all-time record revenue and profit quarter, and despite an uncertain market outlook for fiscal 2009, we expect to continue to grow profits on a modest revenue increase. We can do this because of a strategy that has produced number one market share products in our areas of focus, coupled with cost control.

First, a word about the strategy, over the last 14 years, we’ve focused our resources on design platforms and new markets where we could achieve a position with best in class products and the largest market share in the industry. We’ve done this in three ways.

First, by targeting discontinuities in design methodology, as we did with the Calibre family, when growing chip complexity mandated a move to hierarchical multi threaded architectures. This allowed Mentor to become the leading supplier in a $500 million market, which we grew into an entire design platform for physical design verification, optimization, and yield improvement through design for manufacturing.

Second, by identifying totally new emerging markets for electronic design automation and building products and a franchise ahead of competition, electronic system level design and automotive electrical analysis and wiring are example of this.

Third by growing revenues in areas were we already have the leading technology and market share such as in the printed circuit board design area.

As Greg goes into detail of our success in fiscal fourth quarter, it should become apparent that we are in the early stages of yet another important market discontinuity, the change of place and route to architectures that can handle multi-corner multi-mode optimization.

Our Olympus family of place and route products is ramping faster than Calibre did at this point in its discontinuity. And the purchase of the Olympus family products in fourth quarter by three new leading semiconductor companies in addition to large orders from four existing customers allowed us to achieve nearly double our forecasted bookings.

Strength in the automotive market also contributed to fiscal fourth quarter and the full year results with all time records for Mentor’s revenue in automotive. Both the enterprise wiring harness design platforms and our electrical analysis and optimization tools are driving the growth of adoption in an industry that has worked largely without the benefit of electronic design automation through its history but is now confronted with complexity problems that demand the kinds of productivity, quality and predictability that EDA can provide.

A quote form the Hansen Report on automotive electronics said,

“Contributing to Mentor’s automotive growth is the success of its CHS wiring design and implementation tool suite which has been adopted by all the major wiring harness suppliers and at least five major car makers. Wiring harness design is critical in ensuring the reliability of today’s increasingly complex vehicle systems. A faulty design can make or break a successful new vehicle launch. The wiring harness represents approximately seven percent of the total cost of today’s average vehicle and while it may not get a lot of mainstream press coverage, it is a vitally important component not only for reliability but also in terms of weight, and fuel economy, packaging, product differentiation, warranty cost and safety.”

Now as Greg and Maria will discuss, we are planning for only modest growth in the EDA market in fiscal 2009 and better growth for Mentor Graphics specifically. There are certainly a number of positive indicators such as the reported results of semiconductor companies through the fourth quarter of calendar 2007, the rapid growth in demand for Mentor consulting and training and the growth in dollar volume from totally new customer logos.

But the electronics industry in general, is covered by a cloud of uncertainty and an expectation of a recession in the US. Despite a strong demand funnel, the leading semiconductor foundries have substantially cut their capital budgets for calendar 2008, because of this uncertainty. Our analysis of the slower growing semiconductor R&D spending versus EDA expenditure shifted by one year suggests a growth rate for EDA spending of only about 2%.

So we too are being cautious in our revenue forecast and placing tight controls on our own spending. Why should Mentor grow faster than the overall EDA industry? Well, first our focused strategy has allowed us to grow faster than the overall EDA industry over the last five years. It has made us the fastest growing of the big three EDA companies over both the last five and the last ten years.

Second, our current position with unique industry leading technology in the specific areas of place and route, simulation, and automotive electronics offers the opportunity for growth in these areas at substantially higher rates than the overall EDA industry.

Finally, other areas of the industry were we have leading market position like design for manufacturing, electronic system level design, functional verification and physical verification, are in phases of growth that suggests that they will be more recession resistant than the overall EDA markets.

We had a record year in fiscal 2008, and expect to set another record in fiscal 2009. Our competitive product position is the best in our history and we are well positioned to drive shareholder value in the coming year.

Gregory K. Hinckley

Mentor concluded fiscal year ‘08 with sound execution and excellent performance. Revenues for the fourth quarter were up 14% modestly ahead of guidance to a record $284.8 million. Product revenues were up a very healthy 17%, and services which included an unexpected 25% jump in consulting and training were up 7%.

Gross margin was modestly affected by the unexpected increase in consulting and training revenue. Operating expenses came in line with guidance down 5% of revenue from the prior fourth quarter and 1% of revenue from the prior year. Non-GAAP operating income broke $100 million for the second time in Mentor history climbing by more than 100 basis points of revenue for the year. EPS non-GAAP was $1.00, 17% up from last year’s $0.86.

Mentor’s strength this quarter was notably centered in Asia and in our design to silicon and automotive product categories. Japanese bookings on the strength of strong growth in base business, compounded by success with introductions of Olympus place and route climbed almost three and a half times.

We swept most of the non-Japanese Asian foundries with Calibre RET, resolution enhancement technology, and DFM, design for manufacturing. We also had great success with several of the Korean and Chinese automotive companies, which led to an 80% increase in PacRim bookings.

Our design to silicon product category which includes Calibre was up 25% largely as a result of the dramatic success of our place and route offering. Automotive bookings as Wally said were also up 25% to a record and a very meaningful 10% of total bookings.

Olympus though was the dramatic success of the quarter. Two quarters ago, we set the expectation that we thought the product was comfortably positioned to secure $12 million in bookings in all of our fiscal year ‘08. Actual results were much, much better than that at almost two times our target as we closed contracts with eight of the top 20 semiconductor companies.

We added three new logos, one fabless and two integrated device manufacturing companies. Two additional companies committed to us that Olympus place and route is plan of record for designs 45-nanometers and below. Once again plan of record for designs 45-nanometers and below.

Olympus, we thought was very well positioned to deal with IC challenges at 65-nanometers and below because of its unique multi-corner multimode capabilities. But we are also learning that its capacity to deal flat with large chip designs is particularly appealing to companies tasked with the challenges of graphics, multimedia and microprocessors.

I quote a senior engineer at a large fabless company,

“We never, ever could do a full chip timing analysis of such a large chip because no EDA tool could load the whole design. Olympus enabled us to load the design and in addition analyzed it and optimized it for multi-corner, multimode. This is exciting stuff.”

I couldn’t phrase this any better, exciting stuff because the addressable market for place and route at large semiconductor companies is greater than a half a billion dollars.

Automotive customers also represented a hotbed of activity for the quarter, up 25% in bookings and were exceptionally strong business for virtually all of our product categories. Mentor closed contracts with 17 auto OEMs, five heavy equipment OEMs, and about 200 ground transportation suppliers in North America, in Europe, in Japan, Korea and China.

Cable and wire harness design, in-vehicle network software, and electromechanical simulation software all of which are relatively new initiatives for Mentor, booked meaningful business at many geographically dispersed companies including Caterpillar Tractor, Bentley, Kia, Chon Gang Motors in China, Mitsubishi Fuso and Leoni.

Increasing sophistication of transportation electronics, the promotion of the AUTOSAR automotive network standard and the need to upgrade CAN networks to the new FlexRay protocol leads us to believe that the momentum that Mentor experienced in 2008 will continue and possibly accelerate in 2009.

With our expectation of slowing both within the general electronics market and more specifically within the EDA industry, Mentor has taken a series of programs to reduce and contain costs in fiscal year 2009. First we have again reviewed our various product programs, identified those most speculative in a more challenging economic environment and begun shutdowns of those programs.

Intellectual property once called the IPD division is an example of an area where Mentor has adjusted strategies multiple times to poor economic results and will now exit.

We have a large and highly confident sales organization that has grown with acquisitions largely proportional to sales. We have decided to migrate from a territorial based organization to an identified accounts based organization, turning over smaller accounts to distribution. This, we believe, will ultimately lead to more sales cost efficiency, which will be leveraged by several specific and targeted expense reductions through fiscal 2009.

Finally, we will reduce marketing related expenses during the year. Based upon published forecasts, we believe that there will be no, and I repeat, no more aggressive cost containment program than ours within the EDA industry in fiscal year 2009.

Maria M. Pope

I will summarize our financial results for the quarter, provide guidance for fiscal year 2009 and as well as the first quarter. I will also discuss an accounting change that we have implemented to simplify our reporting of term business and to conform with prevalent industry practices.

As Greg highlighted the results for the company’s fourth quarter included revenue up 14% from a year ago to a record $285 million exceeding our guidance. For the year revenue was $880 million, an all time record, exceeding last year by 10%.

Product revenue was up 17% for the quarter and 11% for the year. Support and services were up 7% and 6% respectively. Of total annual revenue, about half was ratable. Bookings for the year were up slightly but were down 6% as last year’s fourth quarter included significant business closed that quarter but which shipped in fiscal year ‘08.

Geographically, Japan and the PacRim had all time record quarters. Japan more than tripled its business, while PacRim almost doubled over last year’s Q4 bookings. Europe was up 15% and North America declined by 45%, reflecting the 2006 year end issue that I noted previously.

Services, which include consulting and training, showed growth of 25%. Book-to-bill was greater than one for the quarter. Deferred revenue increased 40% to $155 million, reflecting several large prepaid term contracts.

For the year, new customers excluding PADS, were up 25% in average contract value but were down 5% in number. In total, average contract life was around three years. The company’s top ten customers represented 50% of bookings and the average renewal grew over 10% as the renewal mix included a number of customers whose business has declined over the past three years.

Non-GAAP operating margin was 29% compared to 24% for the fourth quarter of ‘06. For the year it was 14%, up over a percent from last year.

Operating expenses after the adverse effects of foreign exchange which totaled $4 million in the fourth quarter and $14 million for the year grew 3% in the fourth quarter and 6% for the year. Year-end headcount grew 3% to 4,360. Almost all of the increase reflects our investment in place and route and Calibre DFM.

Other income changed only modestly between periods. Interest expense is down reflecting lower debt balances and overall lower costs. Special charges which primarily result from business restructuring were $5 million in the fourth quarter and $10 million for the year.

Q4 non-GAAP earnings per share were up 30% to $0.72 compared to $0.55 last Q4. For the full year, non-GAAP earnings per share increased substantially, 17% to $1.00 from $0.86 in 2006, the highest level since 2000.

Operating cash flow was $59 million for the quarter compared to $22 million last year. On an annual basis cash flow was flat at approximately $79 million compared to 2006. Trade and term receivables in the short term were up $69 million which negatively affected cash flow, offset by $44 million benefit in deferred revenue. The receivables increase is due to a number of collections falling just after year end. Of these, over $30 million has already been collected in February.

Trade DSOs were 55 days, a decrease of 10 days from last quarter and up 13 days over last year. Total DSOs were 105 days, a decrease of 29 days from Q3 and an increase of 9 days from last year.

Capital expenditures were $9 million for the quarter and $38 million for the year. Mentor has opportunistically been repurchasing its floating rate debentures. In the fourth quarter we also repurchased $35 million of the company’s 6.25% fixed rate debt. Combined fiscal year 2008 debt repurchases were $49 million. Factored receivables were $20 million in the fourth quarter and $64 million for the year, similar to 2006 at $60 million. Cash and equivalents totaled $126 million at year-end.

I will now turn to the guidance. As we look to fiscal year 2009, we are expecting revenue growth of about 4% to $915 million, further expansion of operating margins to 15% and growing non-GAAP earnings per share by 5% to 10%, to $1.05 to $1.10. As Greg described, we have targeted specific areas of expense control to deliver earnings growth.

Consistent with prior years, we expect business to be skewed to the second half of the year, particularly the fourth quarter. Consequently, first quarter revenue is expected to be a modest $170 million with a non-GAAP loss of $0.10 per share.

I will now address our accounting change. In an effort to present Mentor’s statement of operation consistent with general industry practice, we have reclassified interest income on term receivables from other income line item to revenue.

Additionally, accelerated net gain or loss on factored receivable has been reclassified from other income to general and administrative expense. These changes will be reflected going forward and prior periods have been restated as is detailed in the schedule attached to the press release.

For the quarter, the net adjustment to revenue was $4.3 million, for the year it was $16.7 million. The adjustment to G&A was de minimis at an additional cost of $300,000 for each of the respective periods. This does not change our net income, earnings per share, or the fact that we set record revenue for the quarter as well as the year.

Walden C. Rhines

In conclusion, our strategy has led to the strongest product portfolio in our history. It’s allowed us to outgrow the industry in good times and bad, so we expect to continue to do so. In fiscal 2009 our sharper focus on cost, plus the good upside opportunities from Olympus family, place and route, Veloce Emulation, automotive and other products will allow us to drive shareholder value.

Now let’s take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) We go first to line of Jay Vleeschhouwer - Merrill Lynch.

Jay Vleeschhouwer - Merrill Lynch

Wally with respect to the industry slowdown you foresee for this year, are there any similarities or dissimilarities, for that matter, between the situation you foresee this year and the situation six to seven years ago in the last semi, and then EDA slowdown or is that not a comparison that you’re thinking of?

Secondly, for Maria, can you be more specific about the extent of the cost cuts within IT and elsewhere? And are there any parts of the company however, where you would be reinvesting any of the cost savings from the reductions you mentioned?

Walden C. Rhines

So in answer to your first question, the slowdown we saw seven years ago was an extremely dramatic one after an incredible bubble where both the EDA industry and the electronics industry had achieved phenomenal levels of growth and I think by consensus even at the time was greatly over extended.

We really don’t see any evidence of that now. In fact in general, our customers say that they have good order books and things look reasonable ahead. But they’re becoming cautious, cutting their capital and R&D just out of the general expectation that that strength won’t continue.

So whatever correction occurs, we would expect to be modest. The downturn seven years ago took the EDA industry into its first year and only year of negative growth. We don’t expect anything like that this time but we do expect some slowdown from the growth rate we saw in the last years.

Gregory K. Hinckley

So why don’t you let me address what we’re doing in cost reduction, Jay. We’ve got basically three different programs going on. One is to reduce our sales costs as a percentage of revenue, secondly to increase our service gross margins and lastly to reduce product R&D and marketing expense.

In this case by reducing the number of actual programs that we are working on and to date we have shut down two programs, one of which is our intellectual property activity. Not prepared to quantify the dollars, but I am prepared to say that the expense envelope, and we’re suggesting that total cost will increase about 3% this year. That 3% would be insufficient to cover the cost of our annual wage increases and the negative currency effects we see as the euro has strengthened adversely against the US dollar.

So we’ve had to take other actions, and quite stringent actions to hold the total cost increase this next year to 3%. We will be making targeted investments, and those will be focused on our place and route where we have been extraordinarily successful in the third and fourth quarter, and our Calibre design for manufacturing product line.

Jay Vleeschhouwer - Merrill Lynch

With respect to Sierra and your comments about outperforming on the original bookings expectation there, that still represents less than 5% of the Pinnacle design market as you quantify it, and I think you’re right. But what is your expectation now for fiscal ‘09 ramp of bookings and your ability to implement the deployments that customers are placing orders for?

Typically, this has been a very labor and support intensive area, and so how do you foresee your ramp in support of that? And then finally, you didn’t say very much about Veloce in terms of bookings there or any kind of ramp expectations for fiscal ‘09.

Walden C. Rhines

As you note, there is a seeding process and a ramp up process. And also as you note, it’s true our revenue today, although double or nearly double our expectations for the year, our bookings at least for the year, still is a small part of a very large market. I would say it is essentially 100% of the market for people who have multi-corner multimode closure problems, but it is a support intensive activity. So once the seeds are planted, it takes support to grow to each stage.

In our experience, we typically go from an initial seed to an order in excess of $1 million, and then a year later a few million, and then we get up into the double digits usually in the fourth year. And so as Maria noted, we have had substantial additions to our infrastructure of application engineers to support that ramp up.

We’ve done substantial seeding as Greg noted with the three new customers and eight of the top 20 semiconductor companies now signing up for the product and we recognize it will be support intensive and that’s why we have made cuts in other areas in order to be able to afford that.

Gregory K. Hinckley

And on Veloce, Jay, we had very, very active benchmarking and proposal activity in the fourth quarter. It was not a quarter where the business that we were working on was expected to close.

I think probably the big highlight of the quarter was that we think we have our, in fact we’re convinced, our manufacturing issues behind us and that we can now deliver hardware reliably and predictably. So we’ve made great progress on our emulation and expect now that it will grow substantially faster than the overall company in fiscal year 2009.

Operator

And our next question comes from the line of Rich Valera - Needham & Company.

Rich Valera - Needham & Company

I know you typically give out your year-ending backlog in your K; can you give that number now?

Maria M. Pope

No.

Gregory K. Hinckley

No.

Rich Valera - Needham & Company

Can you say if it was up or down versus last year?

Maria M. Pope

Yes, we’ll have that information in our K.

Rich Valera - Needham & Company

And when is that expected?

Maria M. Pope

Towards the end of March.

Rich Valera - Needham & Company

The first quarter guidance is obviously fairly light. Can you give any other color about the contour you’re expecting throughout the year? Do you expect profitability in the remaining quarters beyond Q1 or might you have losses in you know the second quarter as well? Just any help at all in terms of the revenue contour. We know the fourth quarter will be big it’d be helpful to have any other color for the quarters in between.

Gregory K. Hinckley

We’re not yet at the point where we’re prepared to provide guidance for the second and later quarters. We have had enough energy as of this moment and enough effort that analyzing our book of business, our renewals that we are quite confident that we can deliver a 4% increase in revenues and deliver our targeted earnings increase of 5% to 10%, just not willing at the moment to break down and provide more detail by the quarter.

It’s fair to say our business more of it occurs in the second half of the year than happens in the first half. That’s been a trend that has happened in the past and we’ll see more of it.

Rich Valera - Needham & Company

Now at the beginning of each of the last couple of years you’ve provided a metric regarding the dollar value of business up for renewal in the current year versus the prior year. Are you willing to update that metric for this fiscal ‘09 year, how much is up for renewal this year versus fiscal ‘08?

Maria M. Pope

Rich, we did provide some of this information in the past and it provided a lot of confusion to people so we are no longer doing it. The renewal pipeline for the year is good and supports our revenue forecast growth of 4%.

Rich Valera - Needham & Company

It sounds like you had a good quarter with Calibre, just wanted to get your take on the competitive situation with Calibre. As I’m sure you know some of your competitors have been making noise in this space and talking about having translators which will facilitate their pursuing your customers and displacing Calibre. Can you just talk about how you feel the competitive situation is do you feel like you’ve lost any benchmarks? Do you feel like you’re being displaced anywhere?

Walden C. Rhines

No, the answer is we feel quite good about the competitive situation; in fact we’ve been winning benchmarks. I think we have very good data from the most recent benchmarks that say we have a substantial performance lead.

The whole design to silicon sector grew 25% in the quarter versus a year ago, of course there was particular strength in resolution enhancement but at any rate the Calibre family looks quite strong and quite strong for the coming year. And so far despite a lot of competitive talk, we believe we will probably pick up additional customers and see no signs of being under particular threat anywhere.

Operator

Our next question comes from the line of Sterling Auty – JP Morgan.

Sterling Auty – JP Morgan

You talked about the bookings for Olympus but can you remind us or give us an idea what the revenue contribution was and how that was relative to your expectations for the year?

Gregory K. Hinckley

The revenue expectations certainly exceeded our revenue expectations but what we actually do, Sterling, is we plan bookings and we plan bookings by product line. We ship for revenue based upon customer requirements and don’t plan revenue at the product level. So we really don’t have indices for that.

Sterling Auty – JP Morgan

What’s now being included in revenue from interest income on receivables, can you give us an idea of how we should think about the contribution to guidance? In other words, of the $915 how much of that is from what’s now being included in revenue?

Maria M. Pope

So, on the schedule you’ll see where we’ve reconciled the changes that we’ve made. And so we’ve just rolled forward the expectation with a 4% increase. So you have comparable periods and comparable information.

Sterling Auty – JP Morgan

Okay, so take what you just did and increase it by the same 4%?

Maria M. Pope

Yes, exactly.

Sterling Auty – JP Morgan

And then kind of following on an earlier question, as you look at, since you’re not disclosing, but the amount of contract renewal that’s there as well as pipeline, how should we think about just the seasonality in the year? Not looking for specific numbers but just in general, how much of it is going to be shaped by the macro environment that you’re in? How much of it is going to be shaped by the contract renewal situation that you’re in? How are you thinking about the seasonality as the year unfolds?

Walden C. Rhines

I would think, Sterling, that the seasonality will be very similar to last year, maybe a point or two percent more of the total shipments and revenue happening in the second half of the year than had happened last year. But again it’s modest but probably slightly increasing. And the macro environment we deal with by what we believe is a cautious forecast on revenue expectations.

Operator

And our next question from the line of Matt Petkun - D.A. Davidson & Company.

Matt Petkun - D.A. Davidson & Company

But wasn’t your prior guidance for the full year just completed $860 million?

Maria M. Pope

Yes, Matt. And when you make the change for the accounting change that we did.

Matt Petkun - D.A. Davidson & Company

That’s 16 million right there?

Maria M. Pope

Yes, exactly the 16.

Matt Petkun - D.A. Davidson & Company

I see that on the schedules. And then just looking at your expectations for SG&A as you run through the year, I understand that there’s going to be an overall 3% rough increase in cost according to what Greg said. But do you expect SG&A as the absolute dollar turn to increase in this year for sales?

Gregory K. Hinckley

I think what you’re going to see, Matt, is the most profound change will be in the sales and marketing line. Then you will see the next in terms of our services gross margin and then R&D. The G&A we have some programs and they’re actually pretty significant in terms of consolidating some of our administrative activities, but their effect won’t be seen until so late in the year that they won’t have a meaningful effect on our cost structure this year. But they’re in the works.

Matt Petkun - D.A. Davidson & Company

Wally, you highlighted some of the areas of strength. I’m wondering if you’re seeing due to a macro economic slowdown any specific areas of relative weakness in your bookings pipeline both in the quarter just reported and then in the present quarter?

Walden C. Rhines

I think, Matt, as Greg highlighted, the only area where we saw some weakness was in the case of customers who have been losing market shares and have had declining revenue and actually had declines in usage of products. Even so, the average contract did increase in the 10% range.

But in other areas the demand has been strong for the end customers of our customers and in general the negotiations have been no more or no less difficult than they are normally are. And so we did have more of business closed earlier in the quarter than usual but in general I’d say not significant evidence of a change in the market attitude.

Gregory K. Hinckley

I commented last quarter that one of the signs that that I thought were indicative of a more difficult environment was that we had been more difficult closing business with certain of our large customers.

I would say this quarter was interesting in that several of our large customers bent over backwards to make it possible for us to close business in the quarter and in fact it was some of them bent over backwards more so than I’d ever seen in the 11 years I’ve been at Mentor Graphics. So there was a difference there.

Matt Petkun - D.A. Davidson & Company

Olympus, are you booking all of that or attempting to book it all as term business? Or is your goal to also have some subscription business in that mix?

Gregory K. Hinckley

I think some of it’s going to be term, and some that’s going to be subscription. We’re going to accommodate our customers.

Matt Petkun - D.A. Davidson & Company

But given the fact that the competitive offerings in this space are typically more offered on a subscription basis, would you expect that business to match kind of the other elements of kind what your competitors are modeling?

Gregory K. Hinckley

No.

Operator

We have a question from the line of Terence Whalen - Citi Investment Research.

Terence Whalen - Citi Investment Research

My question relates to some of the business impact from some of the sales and marketing changes that you’re making. It sounds like you’re trying to shift some of the smaller accounts to distribution and making a pretty significant change it sounds from region to account-based coverage.

My question is how will that impact in the near term? How will that change in the structure of the sales force impact order rates and business over the next several quarters?

Gregory K. Hinckley

The expectation, Terence, of moving from a regional to an account-based is to focus more sales people on larger opportunities and put more focus on mid level accounts. And there is a very, very large portion of the EDA opportunity, which is in the very largest, the top 50 electronics companies in the world, the top 100 electronics companies in the world.

What we want to do by doing this is put more focus on the 101 to 500 largest companies. And we think that the consequence of this should be for us to grow our book of business. And so it is the thought of the energy and focus we’re putting on larger accounts is more important than the fact that we’re going to distribution for smaller accounts

Terence Whalen - Citi Investment Research

The second question is a balance sheet question. If I heard correctly in terms of some of the debt buyback, you bought back actually the fixed rate debt and not the floating rate debt. Can you comment just around the strategy of doing that and then also comment a little bit about cash flow expectations for fiscal ‘09 and potential for further debt buyback in 2009?

Maria M. Pope

We repurchased both floating and fixed-rate debt in the fourth quarter, $35 million of the fixed rate, and about $3 million of the floating rate. We moved to the fixed-rate debt because of the higher interest rate with the reduction in interest rate made it more accretive to do that. And we are expecting cash flows to remain strong, they were roughly flat this year, as I noted, but should be in excess of a $100 million this coming year.

Operator

We have no further questions, so I’ll turn the call back to Mr. Schwark for any closing remarks.

Ryerson Schwark

Thank you, everyone, for joining us today. For follow-up calls, Greg Hinckley, Maria Pope, Dennis Weldon, and I will be available. The best way to reach us is to call Monte Koller at [phone]. She will make sure that we get back to you in a timely manner.

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