Mentor Graphics Corporation F1Q09 (Quarter End 4/30/08) Earnings Call Transcript

| About: Mentor Graphics (MENT)

Mentor Graphics Corporation (NASDAQ:MENT)

F1Q09 Earnings Call

May 22, 2008 8:30 am ET

Executives

Ryerson Schwark – Director of Public & Investor Relations

Walden C. Rhines – Chairman of the Board & Chief Executive Officer

Gregory K. Hinckley – President & Director

Maria M. Pope – Chief Financial Officer & Vice President

Analysts

Jay Vleeschhouwer – Merrill Lynch

Sterling Auty – JP Morgan

Rich Valera – Needham & Company

Tim Fox – Deutsche Bank Securities

Matt Petkun – DA Davidson

Terence Whalen – Citigroup Investment Research

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Q1 09 financial release conference call. At this time, all participants are in a listen only mode. Later we’ll conduct a question and answer session and the instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I’ll now turn the meeting over to our host, Mr. Ryer Schwark, Director of Public and Investor Relations.

Ryerson Schwark

Good morning everyone. Welcome to Mentor Graphics’ first quarter 2009 results conference call. 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 operating highlights. Maria Pope, our CFO will then give financial highlights and guidance. Mr. Rhines, Mr. Hinckley and Ms. Pope will then take your questions.

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 [inaudible] these risk factors can be found in our recent 10K, 10Qs 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.

Walden C. Rhines

As we’ll discuss today, Mentor’s first quarter of fiscal 2009 came in about as planned with better bookings and revenue than forecast. The overall world economic outlook as well as the electronics industry environment have not changed materially over the last three months and continue to offer a high degree of uncertainty for our customers. As a result, we continue to execute on our plan for the year with emphasis on cost control and the expectation of modest growth driven by contract renewals in the back half of the year. Our outlook for the year, is therefore unchanged.

We also continue to follow a strategy that has produced significant market share gains during this decade by focusing our resources on design platforms and new markets where we can achieve a position with best in class products and number one market share. We’ve done this in three ways; first, by targeting discontinuities and design methodology as we did with the Calibre family when growing chip complexity mandated a move to [inaudible] multi feted architectures. This allowed Mentor to become the leading supplier in a $500 million market which we grew in to 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 automization and building products in a defacto industry standard ahead of competition. Electronic system level design and automotive electrical analysis and wiring are examples. And third, by growing revenue in areas where we already had leading technology and market share as reported by Dataquest, now Gary Smith EDA, such as printed circuit board design, digital logic simulation and mixed signal design.

Now, as evidenced by the EDA industry statistics, the leader in each of the nearly 55 product segments of EDA, averages about 66% market share. Since this advantage for the leader in a product segment tends to increase over time, it’s important for an EDA company, whether large or small to invest where it’s already number one and to identify new emerging product segments where it can become number one. During the quarter we continued to make progress in this consolidation of number one market share positions. As Greg will discuss, the Calibre, design to silicon platform was purchased by two new top 20 semiconductor companies. The Calibre platform is the standard physical verification tool at 21 of the top 25 semiconductor companies. The number one market share position that the Calibre platform has achieved in design for manufacturing or DFM was also strengthened by the addition of Ponte Solutions through acquisition of assets to compliment Mentor’s DFM flow.

Solid State Technology Magazines summarize the acquisition with a quote from Gary Smith, the EDA industry leading independent analyst as follows, and I quote, “From a strategic market perspective buying Ponte cements Mentor’s claim as the top EDA DFM firm with access to both keystone DFM tools, its own design world checking engine and likes Synopsis, Cadence and Magna, an IC router.” Solid State Technology goes on and I quote, “Chances are good that one of them will drop out. This said, one the other three EDA firms with the survivor left to try to take market share in design world checking. I would Mentor would have to screw up pretty badly to lose this one and they haven’t been screwing up much this century.”

We’ll be conducting a special session for analyst and editors at the Design Automation Conference in a few weeks to describe what we’ve done to provide unique physical design capabilities through the integration of Mentor’s Calibre platform with the Olympus place and route flow. As part of being qualified for the 40 nanometer process node at TSMC, Olympus was used to route three complex designs. TSMC expected the router qualification would take three to four months, instead we finished it in less than three weeks. We continue to be very pleased by the Olympus place and route performance in all of our ongoing benchmarks.

In addition to building upon our number one market share positions, Mentor’s strategy relies upon identifying new emerging markets where there are no established competitive positions. We’ve done this by going after applications that have been overlooked by other EDA companies such as the automotive market and embedded software, or targeted only by small EDA companies such as ESL or electronic system level design. Progress during the quarter was good in these areas with healthy sales to automotive customers driven by growing numbers of smaller orders. Our announcement of Questa inFact Intelligence Test Bench and Questa Multi-view during the quarter offers our customers the opportunity for orders of magnitude improvement in verification speed and coverage. Also in line with this strategy Mentor has announced the tender offer in the UK for Flomerics Group for $100.4 pence per share which values the company at $25.5 million pounds. We currently own 29.84% of the company. Flomerics is the world’s leading provider of software for thermal analysis of electronic systems. Because of legal restrictions on public discussions of such offers and because the offer is not valid outside of the registered jurisdiction we will not be able to comment further.

In summary, Mentor’s market share growth during this decade has been driven by the development and growth of number one market share positions for design platforms like physical verifications, design for manufacturing, printed circuit board design, design for test, functional verification and DSL. Despite the uncertainties of the economy we believe we can continue to grow that strength through good times and bad.

Gregory K. Hinckley

Let me touch a little more in what has been going on in operations during the first quarter. Last year when we forecasted guidance for 2009 we stated that based upon our renewal portfolio the first half of the year would be weak and the second half strong. In fact, levels of business activity, while weak by any objective standard came in better than our expectation. Mentor bookings were down 25% from last year but they were still ahead 15% from the level that was embedded in our forecast. Renewals were modest, as expected, but on an weighted average basis increased 40%, and I repeat 40% in value over the prior contracts.

Revenues came in ahead of guidance, $179.2 million versus the forecasted $170 million. That strength was in services, up 7.5% while product was down 18%. Gross margin reflected an almost 9% shift in mix from product to services, declined over three points to 83.2% eliminating most what normally would be expected in revenue drop down to the bottom line. Operating expenses, net of currency effects and these currency effects were unfavorable $1 million sequentially and $5 million since the first quarter last year, essentially came in line with guidance. So, non-GAAP EPS was $0.10 as guided.

During the quarter Mentor commenced, as promised, as series of programs to contain costs in fiscal year 09. Total headcount dropped about 140 people or about 3% of total as we shuttered our intellectual property business, took steps to reduce expense within our European sales and worldwide customer support organizations. Cost reduction will continue through the second and third quarter, again largely centered in Europe where we expect further reductions in sales headcount and a sharp drop in G&A personnel as we consolidate those G&A responsibilities in Shannon, Ireland. During the quarter, we shut down three facilities. I am pleased to announce the restructuring of our sales organization, the change to identified account base organization from a territorial based organization with increase reliance upon distribution is complete. Qualitatively, Q2 09 was an excellent quarter for our newly expanded design to the silicone product group which now includes the Olympus place and route products and the test compress designed for test tools as well as the Calibre line of products for physical verification, resolution enhancement technology and design for yield and manufacturing.

During the quarter Calibre DRC was newly, and I repeat newly purchased, by the last two of the five largest DRAM companies. These bookings were important because DRAM was once a semiconductor vertical in which Calibre had only a minor presence. This was a significant breakthrough. Mediatech, a large Taiwanese fabless company, again standardized on Calibre for DRC replacing a relatively new Mentor competitor. A large California semiconductor company recently completed its benchmark and reaffirmed caliber as plant of record for physical verification. ST Micro adopted Calibre LFD for litho variability analysis at 65 nanometers and below. Place and route is proving for us to be an area of intense, intense benchmark. Olympus SoC, our place and route product won two new customers during the quarter and we are optimistic that Mentor will book meaningful, although not forecasted place and route business in the coming quarter. Lastly, Mentor assumed engineering for NXP’s DFT tools with the charter to migrate the company to commercial tools over the next several years.

In functional verification Mentor recorded a large order for multiple emulators from a large European semiconductor company that has standardized on the Veloce platform. Lastly, I am pleased to announce that Mentor’s cash flow from operations was $45 million for the quarter, the second highest for any quarter in the company’s history and by far a first quarter record. I’ll also tell you parenthetically that over the last four trailing quarters our cash flow from operations is in excess of $130 million. More and more of our customers are prepaying lease contracts and so far we have had no difficulty factoring lease receivables on terms we see favorable to our shareholders.

For the second quarter we see results in little change from the first quarter and consistent with our guidance of last year. A loss of about $0.10 non-GAAP on similar revenue. For the entire year we are reaffirming guidance at $915 million and non-GAAP EPS at $1.05 to $1.10.

Maria M. Pope

As Greg highlighted the results for the company’s first quarter included revenue of $179 million, lower than last year but ahead of guidance by $9 million. Non-GAAP earnings were on guidance, a loss of $0.10 per share. The change in revenue towards low margin services combined with the effects of a large emulation order resulted in a significant drop in gross margin, three percentage points or $6 million. Of total revenue, about 60% was routable compared with 50% a year ago and 40% last quarter. This reflects the increased proportion of services revenue rather than any change in our business practice. Bookings, which were ahead of expectations were down 25% from an all time record in Q1 last year. IC design to silicon representing a larger segment of bookings was down 35% as was integrated systems design, scalable verification and new and emerging were each down 15%.

Geographically Europe increased 15% while the balance of the regions each declined. Services which includes consulting and training were also down. Percentage of bookings recognized as routable was largely the same as revenue. Book-to-bill was less than one, typical for our first quarter. Deferred revenue changed only modestly and was $153 million on April 30th. For the year, new customers excluding Pads, were down 10% in average contract value and 30% in number. In total, average contract life was about 3.5 years, longer than most quarters but not indicative of any trend given the statistically small number and value of deals closed in the quarter. The company’s top 10 customers represented 45% of bookings, consistent with last year’s first quarter.

Operating expenses excluding the adverse effects of foreign exchange which totaled $5 million in first quarter and a million since last quarter, grew 1% an improvement over our guidance. The negative bottom line effect of foreign exchange was $4.5 million since last year’s Q1 and just half a million since last quarter. Headcount shrank 3% from year-end from 4,222. Other income improved between periods and interest expense was down reflecting lower debt balances and overall lower costs. Special charges which primarily resulted from business restructuring was about $10 million in the first quarter, about double last quarter and almost the same as last year. In total, Q1 non-GAAP earnings was a loss of $0.10 and in line with our guidance. Operating cash flow of $45 million, an all time record, improved as we experienced better collections and an increase in upfront payments. Our collection improvements are all part of our consolidation of European financial functions, an effort on pushing to gain efficiencies and lower costs.

Compared to Q4, trade account receivables improved over $60 million to $113 million. Short term receivables were $149 million, a decrease of $8 million offset by a minor change in deferred revenue. Total days sales outstanding were 57 days, an increase of two days from last quarter and down four since last year. Total DSOs were 132 days up from year-end and up slightly from the first quarter of last year. As part of our focus on cost reduction, we are carefully scrutinizing capital expenditures which were $9 million for the quarter. The recent centralization and leveraging of our purchasing function to lower costs for all Mentor’s engineering equipment is bearing fruit as we aggressively pursue discounts and take advantage of scale.

Around the end of the first quarter we amended our senior unsecured credit facility extending the term for an additional two years to 2011 and increasing our borrowing capacity by $20 million to $140 million, adding HSBC to our bank group. There were no changes in fee or our favorable covenants package. Today, our undrawn fee is 25 basis points and our drawn rate would be LIBOR plus a percent. Factory receivables were $4 million in the first quarter, consistent with last quarter. Cash and equivalents totaled $142 million at quarter end.

For guidance, as Greg mentioned, total FY09 we continue to expect revenue growth of about 4% and $915 million, further expansion of operating margin to 15% and growing non-GAAP earnings per share by 5% to 10% to $1.05 to $1.10. As was highlighted on the last call and mentioned earlier, we expect business to be skewed towards the second half of the year. Consequently, second quarter revenue is expected to be $173 million with a non-GAAP loss of about $0.10 to $0.15 per share. Our second quarter gross margin is expected to be consistent with the first quarter however, operating expense in total dollar terms are planned down sequentially as well as down versus the second quarter last year as the effects of our cost saving efforts are realized. We believe that this is conservative and has room for upside.

Walden C. Rhines

In conclusion, the year is progressing as expected with a weak first half and an outlook for a strong second half driven by major contract renewals. We made significant progress in our cost control program during the quarter and finally benchmarking and initial design activity with the Olympus place and route tools is intense. There are considerable opportunities to close business this year but we’re not ready to forecast them yet. Now, let’s take some question.

Ryerson Schwark

Let’s open it up to questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jay Vleeschhouwer – Merrill Lynch.

Jay Vleeschhouwer – Merrill Lynch

First question for Maria on the expense side, at the meeting in San Francisco you hosted last month, you indicated that you were aiming for about $26 million in savings this year. So, the question is are you going to meet or exceed that number in terms of savings? And, as you look in to fiscal 10, would you expect to add back most if not all of that number to grow the business next year? And number two, for Wally and Greg, with respect to your bookings and revenue outlook for the year, do you expect that all of your product groups will grow? Or, can you make your numbers with just two or three of the groups being up? Then, a couple of follow ups.

Maria M. Pope

Jay, with regards to your first question, we are right on target if not ahead of our savings goal of $26 million. Most of those will begin to take place in the second and third quarters as they flow through the P&L. In terms of how that will be realized next year, we’re really targeting permanent savings. We do not expect to have sort of a bounce back, if that’s what you’re implying. In terms of growth expectations, certainly we’re encouraged by our Ponte acquisition and look forward to more acquisitions in the future.

Gregory K. Hinckley

Jay, in terms of bookings and revenue for the entire year, we actually expect our business to be strong pretty broad based. We had a particularly strong year last year with our Calibre offering so it will probably be the most challenged in terms of growth. But, today it will depend upon what our success is, which we’re quite optimistic about with the place and route business.

Jay Vleeschhouwer – Merrill Lynch

With respect to your comments on the restructuring, you mentioned Europe a couple of times, can you explain why you chose that region in particular for the sales restructuring? I understand on a G&A side but why that sales structure especially. And then, just to wrap up on the product side, you suggested you’re seeing good orders for Veloce but however in terms of deliverability are you in fact able to meet the demand for units better than a year ago?

Gregory K. Hinckley

Veloce deliveries, the issues that we had before are behind us. We can now in fact accommodate turns business reliably in any quarter. European sales, one of the trends that has been going on over the last decade is that more and more engineering is being done in [Pakrim] China, Asia. Europe has been disproportionally effected by that and if we’re trying to get our sales efficiencies the booking per field head in line with what we achieved it just for better or worse proved that Europe was the best target to work on.

Operator

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

Sterling Auty – JP Morgan

You mentioned a couple of areas of strength in the quarter but just in the comment that you felt that your bookings were better than expected, where did you see the greatest degree of outperformance in the quarter from a bookings perspective?

Walden C. Rhines

Sterling it came particularly in some of the ones I mentioned, the automotive was particularly strong. We had the high level system design, tools almost across the board. We had a whole variety of strengths that came from the orders from the DRAM companies that Greg mentioned so that effected pieces of our business, well particularly for verification in that area.

Sterling Auty – JP Morgan

Then on the services side and good services revenue can you give us more color in terms of what the focuses of the services are that you’re seeing the demand for?

Gregory K. Hinckley

It really is Sterling, it is largely these days in our maintenance business. That’s just a natural fly wheel effect of having several years of good product shipments.

Sterling Auty – JP Morgan

Last question is, the acquisitions that you’ve done and are hopefully about to close, what have you included in to your full year outlook at this point from those?

Gregory K. Hinckley

Nothing for Flomerics, we’re still in the process of attempting to close that. For Ponte, it will offset other expenses that we had expected to incur during the year and so it will be budget neutral in terms of expense and there may be some upside in revenue.

Operator

Your next question comes from the line of Rich Valera – Needham & Company.

Rich Valera – Needham & Company

I’m just trying to understand what you’re baking in to your forecast for Olympus this year. Obviously, you had a very strong finish to the year last year and yet it sounds like you’re not baking in a lot in terms of potential wins there this year. I was just hoping to get some clarity on sort of what you’re expecting there from Olympus this year.

Walden C. Rhines

Yeah, we’re being relatively conservative. As you know, we had quite a burst of new activity last year, most of the nine of the top 27 semiconductor companies that have adopted it came on during last year and we were looking for some consolidation of those orders. But, what’s happened is that there’s a lot of benchmarking activity going on and the results are coming out astoundingly well and so we believe there is upside opportunity as soon as the coming quarter but too uncertain to forecast it so we just didn’t put it in the plan.

Gregory K. Hinckley

I think it’s fair though Sterling that [inaudible] what we have in guidance is less than last year’s actual. We have lots of opportunities so it is not that we’re not optimistic, in fact, we become increasingly optimistic quarter-by-quarter, it is we’re just not in a position to forecast it yet.

Rich Valera – Needham & Company

So just to be clear the bookings in your guidance are probably down last year but you’re seeing lots of opportunity and the potential to beat that?

Gregory K. Hinckley

That’s correct.

Rich Valera – Needham & Company

Could you just give us some help on the timing of the Flomerics situation? When does your tender expire? When will you be open to close that deal?

Walden C. Rhines

Rich, we cannot say anything about the Flomerics deal, legal restrictions.

Gregory K. Hinckley

[Inaudible] of the tender documents if you’re interested Rich.

Rich Valera – Needham & Company

In terms of the back half obviously it seems like a lot scheduled for the back half in terms of renewal. Anything you can say about timing? Historically you’ve seen some pull forward, you don’t call it pull forward but you’ve seen some deals renewal early, some things happen in 4Q that were maybe scheduled for 1Q the next year. Is there any reliance on that in your back half forecast? Or, is it really all things that were sort of schedule for 3Q and 4Q this year to see that strong renewal surge?

Gregory K. Hinckley

We have a very strong backlog of renewals that are schedule for the third and fourth quarter. We also have a strong backlog of renewals for the first quarter of next year. And, our historical experience has said that sophisticated companies usually renew before the termination of their contracts, at least one or two quarters early.

Operator

Your next question comes from the line of Tim Fox – Deutsche Bank Securities.

Tim Fox – Deutsche Bank Securities

Just a follow up on Rich’s question there around the back half. I know you haven’t had significant amount of renewals early in the year but has there been any push outs at all at this point around renewals given the environment and looking in to the back half being quite heavily loaded? Is there any risk to some of these larger deals being pushed out at this point given the environment?

Gregory K. Hinckley

In the first quarter Tim, we had absolutely no slip deals. In fact, it was the other way, we had transactions that we weren’t expecting to close in the first quarter actually closed in the first quarter and the contracts that we closed, renewals, were up 40% in value which is on the high side of the increases that we typically have been seeing the last year or so for our renewals. So, from that perspective the business seems to be quite strong.

Tim Fox – Deutsche Bank Securities

Just on the 40% upside there, can you characterize where that is coming from? An expansion of seats for the most part? Or, is it an expansion of the actual tools and solutions customers are adopting?

Gregory K. Hinckley

I think it was both, what we had was we gained share both in terms of more different product and accounts and more seats within those accounts. So, in one particular case it is a prominent analog mix signal company that has been consolidating others within its space. As it does that, we are the tool provider of preference and they have been causing the companies they acquire, their employees to adopt a Mentor flow.

Tim Fox – Deutsche Bank Securities

A question on emulation, somewhat related to the environment, as you look in to the last half of the year on emulation, are you planning, has your plans changed at all around your forecast around emulation given the largest ticket item that these things carry and given the tightening environment. Do you think you’re on plan for emulation so far this year?

Walden C. Rhines

The answer is yes, we’re on plan. As mentioned earlier, we did not put in an aggressive forecast, both place and route and emulation are forecast at a reasonable, possibly even conservative levels on the assumption that emulation is a product that requires a fair amount of application engineering to ramp up before the fan out spreads it more broadly. We are expecting follow on orders from our two largest customers. We have active benchmarks from several top 25 semiconductor companies. There are mid tier accounts and even Chinese accounts in the queue and as we mentioned there was major European company that standardized on Veloce and entered a large order. So, there’s lots of activity but to your specific question we’re on plan but it’s not an aggressive plan.

Tim Fox – Deutsche Bank Securities

One quick question on auto, you suggested Wally that the orders were actually larger in number but smaller in size which might indicate a bit of a broadening of adoption. Can you just give us a little bit more color on what’s happening spreading from tier one down to the supply chain and if that might be driving this business?

Walden C. Rhines

Absolutely. That is in fact the character of the business. You win a major OEM, like a Ford or someone like that [inaudible], whatever and then they have a whole supply chain and in reality the revenue achievable or bookings achievable from the supply chain far exceeds the OEM because it means initially dozens and then hundreds of suppliers, all of whom have to have copies of the software and that’s actually what we saw. There, as well as our other products in the automotive space particularly in simulation. Here again, if the OEM says that they’re going to do their simulations around a particular product then the whole supply chain has to buy it and that’s exactly what we saw. Just a fan out to a large number of smaller companies but all driven by the standardization of the OEMs.

Operator

Your next question comes from the line of Matt Petkun – DA Davidson.

Matt Petkun – DA Davidson

Most of my questions have been asked but I wanted to focus a little bit more on the cost structure. So, Greg and Maria, the sales costs, SG&A in Q1 were up on a pro forma basis about 4%, 5% year-over-year. Is that just accruals that you’re taking for your expectations for full year sales? Or, why are we seeing the sales costs up when the actual product sales were down 18% year-over-year.

Maria M. Pope

Certainly there are some effects of accruals and true ups in that line item. In addition, the vast majority of the actions that we’ve taken were the sort of tail end of first quarter and some of those, as Greg mentioned, or many of those were actually in Europe and it takes a fair lead time in terms of people’s departures.

Gregory K. Hinckley

I’ll add just one more thing Matt which is some of the shipments we made during the first quarter, in fact, a significant portion related to bookings that we booked the prior year and we had a very strong year last year so we had higher commission rates because many of the account managers were in over quarter rates and that rolls out during the first quarter.

Matt Petkun – DA Davidson

Then looking at the Q2 guidance and comparing it to your prior Q1 guidance and maybe this is nitpicking, you previously guided Q1 to be $170 million and a loss of $0.10 and now you’re saying that you’re going to do $173 million but a loss of $0.10 to $0.15 so do we need to wait a few quarters to see the full impact of your cost reductions? Are you seeing a higher mix of emulation again in Q2? What’s causing the relatively weaker profitability?

Maria M. Pope

You’re absolutely right, as we discussed and as you can see in our gross margin line, we do have some adverse effects of mix. It was roughly about $6 million and we are carrying that forecast for our gross margin percentage line roughly through to Q2. And in addition, I did note that it was maybe a little bit on the conservative side but that’s what we are forecasting.

Operator

Your next question comes from the line of Terence Whalen – Citigroup Investment Research.

Terence Whalen – Citigroup Investment Research

This one actually piggybacks on Matt’s question regarding guidance and the methodology in setting guidance for the second quarter. Why did you set a point estimate of a loss of 10 last quarter but then give a range this quarter? Should we interpret that at all? Is there a little more variance this quarter on the cost side?

Maria M. Pope

Terrance, I wouldn’t interpret too much in to that. We are doing a lot of things looking at our costs, we’re dealing with jurisdictions all over the world as we focus on costs, different rules and regulations and that’s where we ended up in terms of guidance for the quarter.

Terence Whalen – Citigroup Investment Research

Then my second question is regarding the second half business both from I guess a quantitative perspective and then also a qualitative perspective. Is there any assistance you can give us in understanding the relative contribution of third quarter and fourth quarter? Perhaps is the sequential growth that we’re going to get in the fourth quarter based on your renewal pipeline similar to the sequential growth that we got last year on a revenue basis? Or, is there any other assistance you can give in helping us understand the second half ramp between third quarter and fourth quarter.

Gregory K. Hinckley

We have stronger opportunities Terrance in the third quarter fourth quarter of this year than we had last year and as you recall, we had a significant revenue ramp in the fourth quarter.

Terence Whalen – Citigroup Investment Research

Then qualitatively, I think you made a comment that in terms of the product line contribution of the second half renewal acceleration you said actually it would be broad based but maybe Calibre would be a little below some other product lines. Is that a correct assessment of what you said?

Gregory K. Hinckley

That’s a correct assessment.

Terence Whalen – Citigroup Investment Research

Then what would you expect for the early part of next year? Would you expect more of a relative contribution from Calibre?

Gregory K. Hinckley

We haven’t really done any formal analysis of what would be our fiscal 2010 and really we don’t’ have any particular insight right now until we get in to the latter part of the summer months. So, it’s just business continues to be strong. I think it was profound and strategic that we had purchases from two of the at least top 25 semiconductor companies, two DRAM companies that had not purchased Calibre before. So, we are continuing to expand our installed base. The other kind of strategic profound effect during the quarter is we were said by someone else to be under pressure from a new DRC offering and in two of the earlier benchmarks where it was announced that they had had some success we beat them back severely.

Terence Whalen – Citigroup Investment Research

Then I’ve got just a couple more for Maria perhaps. Maria, you mentioned the sales changes and also in terms of some of the R&D rationalization you mentioned the IP division specifically as one unit that gave an ability to drive some cost savings. Are there other segments now that you’ve had more time to evaluate the business that aren’t meeting the growth or return metrics that you’re setting internally so that you’re considering or already have acted to wind other operations down like you did IP?

Maria M. Pope

Sure. Each one of our general managers has taken a very hard look at all of their expenses. There have been some headcount reductions in some of the other areas but at this point in time as we look at the business prospects going forward we’re encouraged with each of the business lines that we’re currently in.

Terence Whalen – Citigroup Investment Research

Last one and I’ll hop off, regarding the cash flow, cash flow was quite strong this quarter. I was wondering if you could give us an update or just remind us what the guidance for cash flow is for the full year?

Maria M. Pope

On the last call and when we met in San Francisco we talked about cash flow being about $100 million or a little bit over. We continue to believe that’s the case. We will not have as strong cash flow in the second quarter as we obviously had a second all time record in Q1 so I’d probably expect $15 to $20 million of cash flow, something like that in Q2.

Operator

We have no further questions so please continue.

Ryerson Schwark

Thank you for joining us today. For follow up calls Greg Hinckley, [inaudible] and I will be available. The best way to reach us is by calling Monte [Coler] at 503-685-1462. She’ll make sure we get back to you in a timely manner. Operator, could you give everyone the replay number please?

Operator

Ladies and gentlemen this conference call will be made available for reply starting today, May the 22nd at 7:30 AM pacific time. The replay of the conference runs until May the 31st at Midnight pacific. You may access the AT&T teleconference replay system by dialing 1-800-475-6701. Please enter the reply access code 921773. 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 921773. That does conclude 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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