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Synopsys (NASDAQ:SNPS)

Q3 2012 Earnings Call

August 22, 2012 5:00 pm ET

Executives

Lisa Ewbank

Aart J. de Geus - Co-Founder, Chairman and Co-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

Thomas Yeh - BofA Merrill Lynch, Research Division

Thomas Diffely - D.A. Davidson & Co., Research Division

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the Synopsys Earnings Conference Call for the Third Quarter of Fiscal Year 2012. [Operator Instructions] Today's call will last 1 hour. Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's conference 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, Dave. 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 plans, forecasts and targets and will make other forward-looking statements regarding the company, its business 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 the call, important factors that may affect our future results are described in our most recent quarterly report on Form 10-Q and today's earnings press release. 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 8-K, the earnings press release and the financial supplement that we released today. 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 Q3 results, an increase in non-GAAP earnings and cash flow guidance for the full year, an excellent progress on our product roadmap and acquisitions integration. Let me begin with the summary of our results.

Our business in Q3 was strong, with revenue of $444 million, non-GAAP earnings per share of $0.55 and excellent operating cash flow. For the year, we are raising the mid-point of our non-GAAP EPS outlook by $0.05 to a range of $2.09 to $2.11. We're also raising our operating cash flow outlook to approximately $450 million, and we reiterate our target of high single-digit non-GAAP EPS growth for 2013. Brian will provide more financial detail for the current quarter and year in just a moment.

Let me briefly comment on the current landscape. Looking at our overall business, we see our customers continued to drive design as aggressively as they can. Even in the context of an uncertain economy, they are focused on accelerating the innovation required to stay competitive. In this context, EDA and IP are increasing in importance, enabling designers to achieve the necessary power, performance and cost specs of each wave of new products within the tight schedules dictated by challenging end markets.

Synopsys is at the forefront of this design wave. Our financial strength has enabled us to invest in innovation and global support consistently over many years. Our technically deep and complete solutions are hard to beat in benchmarks, and our corporate stability makes us an ideal partner in any phase of the business cycle. So regardless of fluctuations in the overall economy, we expect Synopsys to continue to do very well.

From the perspective of our customers, we continue to see rapid migration to ever more advanced technology nodes, an area in which Synopsys is particularly well qualified. Migration to the very advanced 20-nanometer node is progressing rapidly as we now track approximately 80 active 20-nanometer designs. We're also supporting intense efforts in the development of FinFETs, which are the fundamentally new vertical transistors that are needed to keep Moore's Law on track.

Here, Synopsys is at the forefront through our TCAD offering, which is used to do 3-dimensional simulations of these new devices. Our latest IC Validator physical verification solution also supports emerging FinFET requirements and is already demonstrating success with customers. Leading-edge customers such as Samsung and STMicroelectronics have been taping out 20-nanometer designs using our solutions for more than 2 years now. At this summer's Design Automation Conference, ST, GLOBALFOUNDRIES, Samsung and Oracle highlighted remarkable 20-nanometer design successes using IC Compiler.

Moving to 28- and 32-nanometers, which we consider the mainstream leading-edge node, we're seeing rapidly broadening adoption. While the designs are complex, the design rules are now stable, and recent yield progress has improved the availability of manufacturing capacity. Approximately 80% of 20- and 28-nanometer designs use Synopsys physical design and approximately 70% use Synopsys verification.

To achieve this, 20-nanometer alignment with foundries and with ecosystem partners such as ARM, GLOBALFOUNDRIES and Samsung are vital. At DAC, these 3 partners described our excellent collaboration with Synopsys as essential to help mutual customers address leading-edge challenges.

In Q3, Samsung announced qualification of Synopsys Galaxy Design Platform for their 20-nanometer processes, and TSMC announced Phase I Certification of Galaxy for their 20-nanometer. I should add that, although less in the limelight, 45- and 65-nanometer design can be very challenging as well. While the technology is clearly well proven, and our tools have been honed over thousands of designs, our customers still push for maximum functionality and performance and minimum power and cost.

It's interesting to note that many of our tool innovations, aimed at the advanced nodes, also greatly benefit the more mainstream technologies and thus, directly improve the economics of our customers in those nodes.

Let me now give a brief update on the integration of Magma, the acquisition which closed in February. As we had planned, within 30 days, we have fully integrated our teams, retaining the great majority of their technologists. 30 days later, we have completed our listening tour of the key customers. And our 30 days after that, we shared roadmaps with those customers.

Overall, the response has been very positive as customers saw us, first and foremost, support their existing designs. Secondly, build on those Magma tools that they thought were strong. And third, immediately begin accelerating the joint long-term roadmaps.

With this enhanced confidence, we've seen a number of customers migrate to Synopsys faster than originally anticipated. A key part of that roadmap is analog/mixed-signal, an area with particular strength for us in verification and opportunity in custom design.

In verification, the addition of Magma's FineSim solution, which had especially good success in memory companies, has been very well received by the broader Synopsys customer base. In custom design, we continue to build a more and more differentiated solution and have seen the number of tape outs with Custom Designer continue to grow.

To further accelerate innovation in this area, we recently acquired Ciranova and announced a definitive agreement to acquire SpringSoft. In addition to some excellent shape-based routing and optimization technology from Magma, Ciranova brings strong placement and a number of other key pieces.

SpringSoft, which is the world's second-largest provider of custom design tools, contributes not only great products but also an expanded geographic reach. Headquartered in Taiwan, SpringSoft broadens our analog/mixed-signal product offering, while strengthening our position in the growing Asia Pacific market. SpringSoft is also the technology leader in functional debug tools, which are increasingly critical for complex designs. Their tools are frequently paired with our simulation solution and are perfectly complementary to our offering. Here again, we expect the acquisition to accelerate our future roadmaps and drive good business growth in an area of great customer need.

To round out the SpringSoft comments, we are currently executing tender offer and Taiwan regulatory approval processes, which can take several months. We will then move to SpringSoft shareholder approval. We expect the transition to close in our fiscal -- in our first fiscal quarter and anticipate the SpringSoft addition to be slightly accretive to 2013 non-GAAP EPS.

Now let me turn to IP and systems, both of which are growing in importance and essential to meeting schedules on complex products. Similar to our core tools for business, we have been systematically investing in both areas for many years.

In IP, we have built a large lead in terms of portfolio of titles, reliability and quality and customer commitment to us. Today, we are second only to our business partner, ARM, and our focus is to be the leading provider of connectivity, analog and memory IP. IP revenue grew nicely again this quarter, and we saw continued momentum with numerous customer wins in PCI Express, USB3.0 and memory compilers, among others.

In systems, to complement our historically strong presence in the mobile market, we are methodically expanding our reach in the automotive market with virtual prototyping. Recall that prototyping can accelerate embedded software development by 6 to 12 months, and was nearly 100 million lines of code in today's premium cars, virtual prototyping is a must use technology.

Consequently, we are seeing good momentum in the automotive space with companies such as Renesas and Infineon, further adopting Virtualizer to enable their customers to develop software earlier. During Q3, we also launched the industry's first hybrid prototyping solution, which seamlessly integrates software-based virtual prototyping and FPGA-based prototyping approaches. Even at this early stage, we are already seeing strong and growing customer interest.

In conclusion, we delivered excellent Q3 revenue, earnings and cash flow. As a result, we are raising cash flow and non-GAAP EPS guidance for the year. The EDA and IP industries are doing well. And Synopsys, in particular, is executing on all fronts with strong demand for our technology across the board. Looking forward, we remain committed to deliver continued solid growth and profitability in the years to come.

I'll now turn the 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, provide you with our guidance for Q4 and the full year and provide some financial details of the SpringSoft transaction. As a reminder, we will not be breaking out the impact of Magma as the company is now deeply integrated. In my discussions, all my comparisons will be year-over-year, unless I specify otherwise.

Now Synopsys delivered a great quarter, highlighted by strong business levels, increased run rate, double-digit growth in both revenue and non-GAAP earnings and considerable free cash flow generation.

Total revenue was $444 million, an increase of 15% compared to a year ago and within our target range. We delivered growth across all product groups with particular strength in IP and systems. Greater than 90% of Q3 revenue came from beginning-of-quarter backlog, and one customer accounted for slightly more than 10% of third quarter revenue.

The average length of our renewable customer license commitments for the quarter was about 2.5 years. We continue to expect average duration in fiscal 2012 to be about 2.8 years, which is very similar to last year.

Now turning to expenses. Total GAAP, cost and expenses were $380 million, which included $26 million of amortization of intangible assets, $17 million of stock-based compensation and $3.7 million of acquisition-related costs.

Total non-GAAP costs and expenses were $335 million, an expected year-over-year increase due to increases of headcount and expenses from our recent acquisitions, but at the low end of our guidance range. This was driven primarily by timing of expenses, such as some hiring and other expenses that shifted out of Q3 into Q4.

Non-GAAP operating margin was 24.5% for the quarter and about 24% for the first 3 quarters of the year. For all of FY '12, we are still on track to expand non-GAAP operating margin by more than 100 basis points over FY '11 levels.

Turning now to earnings. GAAP earnings per share were $0.50. Non-GAAP earnings per share increased 20% to $0.55, above our target range.

Now turning to our cash and balance sheet items. Our balance sheet remained strong with $964 million in cash and cash equivalents. Of our total cash balance, 22% was onshore at quarter end and 78% was offshore. We paid back the outstanding $100 million of our revolving debt, along with $7.5 million of our term loan, leaving only the $142.5 million term loan outstanding. Additionally, we made 2 small acquisitions during the quarter.

We generated $296 million in cash from operations, including an expected payment from a large customer in the quarter. We are raising our operating cash flow target for the year to approximately $450 million to reflect increased collections, driven primarily by strong business levels.

DSOs declined 10 days sequentially to 40 days, and we ended Q3 with approximately 7,525 employees with about 1/3 at low-cost geographies.

Before moving onto guidance, let me provide some of the financial details of the SpringSoft transaction. The value of the transaction is expected to be approximately $305 million, net of cash acquired or USD 1.90 per SpringSoft share, which we intend to fund with our existing offshore cash.

Subject to the terms of the tender offer agreement, Taiwan regulatory approvals and other customer closing conditions, we expect the transaction to close in the first fiscal quarter of 2013. Now in Taiwan, this is a 2-step process. Step 1 is the tender offer. Step 2 is the subsequent shareholder vote. If 51% of the SpringSoft shares are tendered during the tender offer, our Q4 2012 financials will include our portion of SpringSoft's net income as of October 3 at the earliest and November 3 at the latest.

We do not expect the consolidated numbers to be material and have not included that impact in our guidance. We continue to expect the combinations, once closed, to be slightly accretive to FY '13 non-GAAP earnings per share. However, until the transaction is closed, we have limited ability to comment on our specific plans going forward.

Now let's address our fourth quarter and fiscal 2012 guidance, which excludes the impact of SpringSoft and any other future acquisitions on the targets.

For the first -- for the fourth quarter of FY '12, our targets are revenue between $440 million and $448 million. Total GAAP cost and expense is between $387 million and $403 million, which includes approximately $17 million of stock-based compensation expense.

Total non-GAAP cost and expense is between $345 million and $355 million. Other income and expense between 0 and a negative $2 million. A non-GAAP tax rate of approximately 24%. Outstanding shares between 150 million and 154 million. GAAP earnings of $0.22 to $0.28 per share and non-GAAP earnings of $0.46 to $0.48 per share. And we expect that greater than 90% of the quarter's revenue will come from backlog.

Now our fiscal 2012 outlook. Revenue between $1.742 billion and $1.75 billion. Other income and expenses between $1 million and 3 million. A non-GAAP tax rate of approximately 24%. Outstanding shares between 148 million and 152 million. GAAP earnings per share between $1.25 and $1.31, which includes the impact of approximately $72 million in stock-based compensation expense. Non-GAAP earnings per share of $2.09 to $2.11, and we are raising our guidance range by $0.05 to reflect our Q3 overachievement. Capital expenditures of approximately $55 million, and we're now targeting cash flow from operations of approximately $450 million.

So as Aart mentioned, we're also reiterating our objective of high single-digit non-GAAP EPS growth in FY '13, even when factoring in the extra week that contributed $0.05 in FY '12.

In summary, we're pleased with our excellent third quarter results, highlighted by top and bottom line growth, solid operating margin and strong cash flow generation.

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

Question-and-Answer Session

Operator

[Operator Instructions] First, we'll go from the line of Richard Valera with Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

Just a question on the revenue guidance. Small change, but you did bring that down a little bit at the mid-point. Anything you can ascribe to that change?

Aart J. de Geus

I don't think there's so much meaning to that. We managed for the year, and so if you look at the overall numbers for the year -- I forgot the exact number, but we must be growing about 14% or so. And so everything else sort of falls in place gradually during year as the reality of transactions get executed. And it's all -- as far as I recall within the same range that we had before.

Richard Valera - Needham & Company, LLC, Research Division

And nothing like, perhaps, related to Magma being different than expected or anything specific?

Aart J. de Geus

Oh, I think Magma and all of our own business is always a bit different than expected. The -- I'm, frankly, always a little bit baffled at the number of digits that we have in accuracy in giving guidance a year ahead of time. And so -- but in general, the picture actually is very, very solid. And actually, we're executing quite well with Magma. As said, the companies have been completely integrated. And so how all of these arrangements with customers actually play out over time is actually very difficult to predict exactly. But fundamentally, I think, no, there's no change to the business picture.

Richard Valera - Needham & Company, LLC, Research Division

Fair enough. Just with respect to business levels, which seems to be your sort of terms for bookings, you had apparently very strong business levels in the first half. And then that seem to be reflected in higher-than-expected sales and marketing expense. This quarter, sales and marketing was actually better than we had modeled at least. I'm not sure if that actually is reflecting maybe less strong core business levels. So I'm just wondering if you could say anything about the sort of the bookings or business level [indiscernible] ranks as you've moved through the year?

Aart J. de Geus

Yes -- by the way, and I can see why that would be slightly confusing. But when I said business levels, really, what I always think of is really how's the run rate of the business developing because we're certainly very clear that high or low orders can be significant or completely insignificant. It's all a function of how they roll out in the backlog over time. And so in this case, actually, the combination of both orders and run rate were positive. And so I didn't mean to obfuscate things. It's just a general term for actually business feeling good.

Brian M. Beattie

Rich, just to add some clarity around -- we did have a very good quarter, as you could see from cash collections, and it allowed us to raise our cash forecast for the year. And it does relate to a number of those elements, just saying that the business is coming in stronger. The payment terms that we typically see actually were also more favorable relative to the amount of cash collected in the first year of the roughly 2.8-year deals. And we're also seeing lower disbursements as well. So all that contributed to good cash flow in the quarter and our ability to raise, fairly significantly, our cash flow for the year. And then the last thing is, again, we always highlighted, it does move quite a bit. It's tough to forecast and track our EBITDA numbers over time. So we're again happy with the output on cash flow for this year.

Richard Valera - Needham & Company, LLC, Research Division

Understood. And just one final one, if I could, with respect to SpringSoft. You noted that the DeBussy debug stuff is sort of perfectly complementary, which is great. I agree there. Obviously, the Laker stuff would appear to be somewhat overlapping with your current Custom Designer offering. I'm just wondering how you think about those 2. Do you look to integrate Laker with IC Compiler as you have with Custom Designer? Do you think those 2 sort of sit side by side, or how they -- how you think they play out?

Aart J. de Geus

Well, this is a little bit always to the dilemma commenting before one actually has closed and most importantly, really have the teams work together on this. And so I can't really make many comments about this. But I can tell you one thing, which is what we do is, we try to take the best people that we have from -- on the acquisitions. And in this context, actually multiple acquisitions that play together, and ask them the question, what's the best thing for the customer today meaning to make sure that they fair well, and what's the best thing for the customer 2 years from now? And then you have to build a bridge trajectory. And having just done that with the Magma tools, I think we are well versed in that. And there may be some overlap, but I think there's a lot of complementary capabilities and strengths. And so I don't foresee any big problems there.

Operator

Next, we will hear from the line of Raj Seth with Cowen and Company.

Raj Seth - Cowen and Company, LLC, Research Division

Just a couple of follow-ups on a couple of things Rich was talking about. Brian, on SpringSoft, I know there's not much you can talk about vis-à-vis integration, et cetera. But I'm curious if you can comment on the model that they were running and whether or not you're going to need to twist that model towards a much more ratable model like you're currently operating in, whether or not that's likely to be dilutive at the beginning of the year, admittedly, if you've talked about accretion for the full year, but maybe you can talk a little bit about what kind of model they were operating?

Brian M. Beattie

You bet, Raj, yes. They are expected to be slightly accretive, as I said, for all of FY '13. Of course, what will happen is that we will take their business model, which was more upfront, again under their local accounting standards and so on, that's all totally appropriate. And they're looking at how we then would go through on a contract-by-contract basis, just as we did with Magma. And then reprofile -- excuse me, we'll reprofile that revenue under the Synopsys business model, which has that 90% minimum ratability curve to it. And then we'll extend that again out over time. Their deferred revenues at the last financial statements were not very significant, with a little bit more revenue being taken upfront. And again, we'll go back and when we get into the details of the contract, break out the deferred revenues, apply the appropriate revenue haircut and purchase accounting and then integrate that. And again, our intent would be on the next earnings call, where we would give a guidance for 2013, that we could identify more of the details, only if the transaction closes by that time. If it doesn't, we'll give you an update at the end of the first quarter when we expect all of it to be fully complete.

Raj Seth - Cowen and Company, LLC, Research Division

Right. A couple of other follow-ups, if I might. You pointed to increase in cash flow guidance rather substantive. Deferred revenues also jumped materially. How much of that is just the payments off a renewal from one of your biggest customers? Is that the majority of what drove those increases, or is it broader than that?

Brian M. Beattie

It's specifically to each third quarter. We have a significant customer with an annual payment that does come through. So you've seen over a number of years now quite a nice growth in the deferred revenue accounts. And that is reflected again in this third quarter, as we expected. And again, anything relative to backlog and other things, we'll give you more details at our year-end call, as we typically do. Overall, just the message being very strong, broad-based growth and strength in our business levels and have to be able to pass that through in terms of increased earnings per share guidance for '12.

Raj Seth - Cowen and Company, LLC, Research Division

Right. When you guided cash flow last quarter, did you presume the payment from that large customer as you usually see in Q3, or do you sort of wait till you get it to guide for it?

Brian M. Beattie

No, it's fortunately very tightly tracked and aligned and very tight payment schedules against that. So no surprises; exactly as expected. And we factored in the growth in cash flow guidance from last quarter was related to the strong business levels, better terms and conditions and lower disbursements, as our expenses are coming in lighter for the year.

Raj Seth - Cowen and Company, LLC, Research Division

That's great. Last one for me. It looks like maintenance -- your service maintenance line popped sequentially, looks like it's probably maintenance. What's going on there?

Brian M. Beattie

Well, actually, maintenance in itself does not move a lot for us. It's fairly consistent. The delta from our prior quarters is in the service piece, which is what we call business unit consulting, which does tie into either milestone-based revenues or percentage of completion revenues. And in Q3, there was a number of specific deliverables in our IP and systems group that contributed to that growth in the quarter.

Operator

Next, we'll hear from the line of Sterling Auty with JPMorgan.

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

First, you mentioned that you had the typical customer just over 10% of revenue. But can you comment did you have any deals that were over 10% of bookings in the quarter?

Brian M. Beattie

Now we wouldn't give you the details of the bookings activity. Recall, that we'll provide the amount of 3-year backlog at the end of each year. We track the revenues, of course, and go through contributors. We address the fact that we had nice run rate growth in the deals we did sign during the quarter. And again, anticipating very strong business levels through the second half to generate that ability, again, as last quarter as we're doing today, reiterating high single-digit EPS growth for '13.

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

Can you add a little bit more color? You've mentioned on several quarters in a row the idea of run rates, better business levels. But there hasn't really been any kind of quantification behind it. Can you just put a little meat on that in terms of what you're seeing maybe on renewal run rates compared to the last contract, or something else that can quantify that we can kind of get a handle on?

Aart J. de Geus

Well, it is actually quite difficult to quantify because it's always a little bit hidden in between the organic growth that we have, and of course, the M&A that we're doing. And you could say, "Well, why don't you segregate the M&A out?" But from an operational point of view, we are mostly doing exactly the opposite, which is as quickly as possible integrate the acquisitions. And so at the end of the day, the only metric that passes the -- the sniff test of time is the revenue over time, which you can see growing this year at about 14%. And I think we did better than we had planned last year as well. And while we're not really commenting about revenue yet, we have said that we expect to be on the same plan of commitments as last year in terms of the earnings per share growth. And so fundamentally, I think we're managing a very stable, well-growing business right now that is in a phase that is quite solid.

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

No, I think that's fair. And along the lines of the treatment of the M&A, I guess we understand in terms of the integration. And I frankly think, strategically, Magma was a great deal. But do you and the board have a measuring stick in mind in terms of financially, how you'll measure the Magma acquisition success, either at a one year or some point in the future, either an IRR or something else that you can share with us?

Aart J. de Geus

Well, we won't share the actual numbers with you. But the fact is we do have a great number of these metrics. And I'll be the first one to say that they are very important to work through prior to an acquisition and look at to what extent they were roughly right afterwards. But I'll be also the first one to say that they are often not as meaningful as one would want to because the very nature of success is for these metrics to disappear and become part of the Synopsys overall metric. And therein lies the challenge and having been on other boards, I see the problem in many of these situations where you really would like to track for the next 5 years if it was a great decision. And the reality is, they're part of the family and the products are integrated and one builds on it in different ways. And so at the end of the day, it ends up being executive judgments to see which ones were well done and well not. Now just to give a little bit more color, we do look back on the acquisitions, and there's always the test of fire, which is, would you do it again? And would you do it again differently? And would you not do it at all? And in the very, very majority, we never arrive at the question, we'd not do it at all, but we use each one of those look backs, which we do periodically as a way to learn and how to do it better going forward.

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

All right. And last question around SpringSoft. You mentioned using offshore cash. Is there any tax implications? In other words, do you have enough cash in that jurisdictions, or is there going to be some either transfer payments or other things that we should think about in terms of how we're considering your cash flow as you close that deal?

Brian M. Beattie

Yes, I would say that there would be a minimal tax impact on the transfer. The major jurisdiction is the U.S. versus offshore, if you like. And that is where, again, a pretty significant charge if you had to bring funds back to the country. So in a way, this is an excellent use of the cash that is offshore. The fact that it's offshore allows a lot of flexibility in which country and which subsidiary it's associated with and then bringing it into Taiwan to actually close the tender offer and the full share buyouts. So minimal impact from a tax perspective since the cash is already offshore.

Operator

Next, we will hear from the line of Krish Sankar with Bank of America.

Thomas Yeh - BofA Merrill Lynch, Research Division

This is Thomas Yeh calling in for Krish Sankar. Within the context of the photomask business, recently talking about some weakness in leading-edge IC design. Have you seen any signs of increased caution from your semi customers? And if not, what kind of scenario would it take for customers to really pull back on their R&D spending?

Aart J. de Geus

Well, I think we have seen caution for the last 2 years. And that is mostly due to the up and down of the economic picture. But interestingly enough, that caution as one aspect that tends to accelerate things, which is that people are even more conscious that if there is any economic challenge, you need to be very, very competitive. And if nothing else, I would say that the utilization of the advanced geometries and that touches certainly everything that has to do with lithography as well, has been very, very strong and very demanding. Now these new nodes tend to be actually fairly difficult to design in, and we can see that by just watching the amount of support and hand-holding required, but we can also see it by the level of interest in having tools that are ready for these advanced nodes. So interestingly enough, this is a clear situation where the overall, let me call it, caution in the global markets has had no negative impact on the R&D side of things at all, on the contrary. It may bring additional caution to the volume management side of these companies, but we have very little to do with that.

Thomas Yeh - BofA Merrill Lynch, Research Division

That's very helpful. And then a quick one on SpringSoft. You'd mentioned that SpringSoft is more upfront than Synopsys in terms of the Synopsys 90-10 ratable model. Is it safe to assume that SpringSoft's revenue recognition is potentially more ratable than Magma's previous split, which is around 50-50?

Brian M. Beattie

It's again hard to compare until we dig into the specific details because again, we're under a slightly different local Taiwan GAAP standards to U.S. GAAP standards and the treatment of that. So again, we have a good assessment internally for our due diligence work that's gone on. And again, they will be operated as 2 separate companies until the transaction is completed. And we'll be working during that period to identify each one of the contracts and profiling according to the Synopsys and the U.S. GAAP standards that we will follow. And the end result will be that those revenues will be taken -- that have not yet been taken will be taken over very ratable more than 90% ratability curve. And that will be profiled. And again, expect to give details more on the next earnings call, as we learn more of that ourselves

Thomas Yeh - BofA Merrill Lynch, Research Division

And just a quick one on the average length or duration of the contracts for SpringSoft. Is that something that you have available at the top of your head?

Brian M. Beattie

I don't, but I'll just color it by saying more upfront revenue than what we have. So again, as we get those contracts in place, we will align them, integrate them, report back to you on our new duration if that looks -- we again anticipate it will be very similar. It's all software; just as ours is predominantly software. And we'll give you the details once we integrate it.

Operator

Next, we'll hear from the line of Tom Diffely with D.A. Davidson.

Thomas Diffely - D.A. Davidson & Co., Research Division

First, a quick clarification. The high single-digit growth next year, that's earnings growth and not revenue growth, is that correct?

Brian M. Beattie

Earnings growth, EPS.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. So what is your view then on just the industry growth for core EDA at this point? It sounds like across the board, things are better than they were a year ago. And I'm just curious if you've change your outlook for low- to mid-single digit?

Aart J. de Geus

I think they are better than a year ago. And right now, we have not really changed the outlook. Remember that we were hesitant to comment about the industry, a, because there are fewer players that really matter; and b, because we're on slightly different revenue recognition models. And so it's only for ourselves, we think that this year turned out to be stronger than anticipated so when we did the planning mid last year. And at the same time, I think we're executing well, so that helps. Going forward, in -- all in all, I don't expect to see huge change. But obviously, economy does impact things a little bit. It's just not as much as for most other companies.

Thomas Diffely - D.A. Davidson & Co., Research Division

Yes, okay. And when you look at the revenue growth in the industry, are you seeing higher growth rate at the smaller companies that are moving to these advanced nodes faster than they have in the past? Or is it really the large customers that are driving the pace still?

Aart J. de Geus

I'm hesitant to say yes and yes. It's very individual to companies. There are some large companies that are racing like crazy. It's quite amazing actually how they do that. And then there's some small companies that see an opportunity by racing like crazy to either get acquired or to take a piece out of the height of some of the medium-sized companies. So in many ways, it's the history of advanced high-tech is in full swing here. And with that, I think we're going to see a continual changes in the industry, some positive surprises, some unexpected changes. But I would like to highlight again, there's fairly high degree of concentration on advanced technology. A lot of people betting on getting the next shift to be at the next node and being still faster, still larger and in some cases, also lower power. So that's a race that we absolutely want to participate in.

Thomas Diffely - D.A. Davidson & Co., Research Division

Yes, well it seems like since there's such a large investment at several foundries right now that the mid-tier fabless guy could get access to this advanced technology sooner than they would in the past. And that would...

Aart J. de Geus

Well, I think, generically, that's true. At the same time, it's interesting to observe that in the last 6 months, there were innumerable stories about not being able to get sufficient access to 28-nanometer. And that was a combination of capacity not being in place, but also, the yields not being as good as people would like to have. And so why is that important to us? Well, it's important to us because not only do we have tools that help improve the yield, but we also have design techniques that create higher yield. And so it just closes again the loop that from manufacturing to design, it's really one success ecosystem. And it's to our benefit to help people be as competitive as possible.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then earlier, Aart, you talked about the 80 active designs of 20-nanometers today. How does that compare to the 28-nanometer ramp? And maybe how does that compare to just what the total design activity is at 28 today?

Aart J. de Geus

Okay. Well, to give you a comparison, rough round numbers at 28-32, we lump those things together. We have about a bit over 400 of those active designs.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then so the 80 at 20, is that kind of ramp what you've see in the past, or is it a faster ramp than you've seen in the past?

Aart J. de Geus

No, it's similar. There was a bit of a delay on the ramps, I would say, about 2 years ago. And you can see it on the graphs of the different nodes. But fundamentally, at least at this stage, the shapes look similar. And we certainly know that people are already chasing the next one, too. So, so far, as much as the proverbial death of Moore's Law has been predicted many times, probably including by us, right now, we're defying death and for the next 5 to 10 years, I think there's a lot of work to be done.

Thomas Diffely - D.A. Davidson & Co., Research Division

That sounds good. And then, Brian, back on the cash flow. You talked about $450 million this year. In a typical year, how does that break out between onshore and offshore? I'm just kind of curious how fast you'll be able to build back up your onshore cash.

Brian M. Beattie

Yes, good question, Tom. It's 50-50. It flows if you look where our revenues are split, 50 U.S., 50 outside of the U.S. The cash flow follows that profile as well. So again, relative to SpringSoft, use of offshore cash that will continue to build up there, for the U.S. side where, again, we can look at U.S. M&A, our buyback scenarios and other things, half of the cash will be attributed to the U.S., and good strong balances as well as having both debt capacities and the small amount of current debt currently on the board to really put our -- continue to put our balance sheet to work.

Operator

And next we'll hear from the line of Mahesh Sanganeria with RBC Capital.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Brian, just on the non-GAAP operating margin. You've been pretty consistent since 2008 in 23% to 24% range. Is that something we've kind of -- at a saturation level, or are you thinking anything? Is there anything that can be done there to push that beyond 24% levels?

Brian M. Beattie

Sure, Mahesh. You can see that in 2012, we are forecasting over 100 basis point improvement in our operating margin compared to 2011. We have said for several years that our goal is, over time, to be in the mid-20s. So just as we're delivering as we have over the past several years, we continue to push for higher operating margin levels and expect that to be in the mid-20 range.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

And where do you think that most potential is? Is it revenue growth or slower cost to increase? I mean, with the M&A, as you can't keep up the cost increase, you cannot slow down the cost increase. But where do you think that level is to go to the 25%?

Aart J. de Geus

Well, it has to be both, of course. At the end of the day, no business can grow its profitability well if it doesn't grow revenue. And obviously, that's got to be our driving consideration. At the same time, the rest is really the discipline of managing your P&L. And that discipline, of course, gets sort of shocked every time we make an acquisition because, at least temporarily, you have a new family member, so to speak, with different P&L configuration. And moreover, a haircut has been applied or is being applied for the first year or so. But having said that, we clearly look at acquisitions also from a perspective of efficiency, certainly for the infrastructure, certainly for part of our field connection to the customers, be it on the sales side or be it on the support side, and even in some of the cases on the R&D side. Although if there's efficiency of the R&D side, we tend to variably use that to really accelerate other capabilities. But fundamentally, there's no reason whatsoever that acquisitions should be negative over longer period of time to our profitability. And as Brian said earlier, we have been on the track to get to mid-20s and mathematically speaking, 24% is not quite mid-20s yet.

Brian M. Beattie

And Mahesh -- maybe, Mahesh, also just to maybe add to that, all of the discussion on operating margins, of course, are vectored towards continued high single-digit EPS growth. I mean, we've put that number out there several years ago. We've been fortunate in the last few years to see double-digit top line and EPS growth. And again, all of the actions we take relative to driving our core business, our IP and systems business, which now, even on a trailing 12-month basis, is over $400 million, driving that on double-digit top line growth, managing our expenses, looking at M&A for continued growth and finally, holding our share count at roughly flat with the FY '12 levels, have been the ways that we have developed our plan on continued high EPS growth. So margin management is just part of that related to both revenue growth and expense management.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And to follow up, just a clarification on the cash flow commentary. I mean, you're increasing the guidance pretty significantly. But you mentioned one time that it was related to one customer coming up at the -- big payment, but that was predictable. So I was wondering if you can give a little bit more color on where the higher cash flow guidance -- the significant increase in cash flow guidance is coming from?

Brian M. Beattie

Absolutely, yes. The first element that you referred to in the question earlier was about our large customer. And that payment was expected, and it's not contributing materially to the growth. Our prior guidance was about $320 million to $340 million. And now based on Q3 results and cash achieved, plus the outlook for our fourth quarter -- based on those stronger business levels, is one reason to show that our cash flow could increase hereby between $130 million and $110 million. The second thing was the profile of those new transactions, which we saw in Q3 and anticipated in Q4, just show that the ability to collect cash within the first year of the 3-year agreement is actually coming in better than we expected and very strong, good terms and conditions being put in place. And then remember, the third point was about the lower spending, lower disbursements and all that contributing. But again, to put it in context, we look at how that relates over time to our EBITDA less the tax -- cash taxes paid. And if you look back on the last 3 years, in '11 -- from '11, '09 and '10, our average operating cash flow is about $340 million. So we'll track that EBITDA over time. And just forecasting it of when a particular contract is signed and whether it's renewed early or renewed on time, those are all the elements we try to forecast each quarter in our outlook. And again, it's just all of it coming in much better than where we saw it a quarter ago.

Operator

In a moment, we'll hear from the line of Jay Vleeschhouwer. [Operator Instructions] And so next, we'll hear from the line of Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Aart, 2 somewhat related questions about EDA customer activity. Historically, the EDA industry was not particularly governed by a large number of licenses installed. Even within the larger revenue categories of EDA, it's not a particularly high-volume industry. And the question is, is there anything now particularly at the newer nodes or the newer applications’ requirements that might suggest that there would be some meaningful increases in the volume of licenses, not that you get paid by customer for their volume, but instead that you -- they would consume more licenses than they might have in the past. Secondly, at the DAC breakfast that you had mentioned earlier, Synopsys highlighted the fact that you have now double patterning enabled many of your tools. There was even some mention of something called triple patterning. But the question there is, are you, in fact, seeing a large usage or increased usage of those newly enabled tools, particularly since the 20-nanometer design activity has gone from the 50 that was quoted at DAC to be 80 now?

Aart J. de Geus

So on the licenses, I assume that you say it's a low-license market, if you compare it to, let's say, design drawing tools and things like that. Certainly, in that sense, we are relatively low license, also a much lower number of customers. However, certainly, in the last decade, we have seen a continual growth of the number of licenses. And the challenge that, as an industry, we have always faced is that customers need many more licenses but don't have many more times the budget that they have before. And so for better or for worse, the reality of that has been that they have gradually grown larger pools of licenses and gradually grown the amounts that they have spent with us. But the spending is unfortunately not proportional to the number of licenses. Now be it as it may, that is just the way this industry functions. And I'm not complaining; it's just an observation. Having said that, I think there's some areas that have seen clearly more license growth than others. And the area that immediately comes to mind is the various forms of simulation. And what you can see is that the complexity of the designs that people are dealing with, that simulation can be at the transitional level all the way to the system level. Those complexities are such that the number of potential errors is very large and growing much more rapidly than the size of the design, therefore, verification continues to grow. And so this is one of the reasons we're spending attention to that area. And I think we will see a continued license growth there. On the double patterning, yes, this is technology that is both very advanced and now very necessary. And for those that are not initiated with that term, what this is all about is that in order to get very, very small devices on a chip, instead of doing a single illumination, a flash of light, you do 2 flashes of light, or even 3, in most cases 2, therefore double patterning. And the combination of the patterns give you sharper lines, so to speak. Now you can quickly imagine that, that becomes very difficult because you're essentially doing 2 designs at the same time that are -- that become 1 design through the interaction of light rays. I've purposely made this story a little complicated because -- and you will appreciate that the tools to make this actually work are very, very sophisticated. The good news is, I think, we're very much on top of this field. We have been investing in this for at least a decade. Many acquisitions that we made in the lithography area over the years have greatly enhanced our understanding from every which way you can think about this. And so for the advanced tools, the answer is yes, this is now in utilization and is actually a point of differentiation when you can point to the fact that you have these technologies and get good timing and good power and all the other metrics of success. So the games continue to become more complex, and that, so far, plays into our hands.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

All right. A couple of follow-ups for Brian, please. First, according to your website, you're listing close to 400 open positions globally, mostly in engineering and R&D, of course. And that number that you're showing is roughly equivalent to 5% of your current headcount. The question is does your margin guidance for the rest of the year and earnings consumption going into next year envision that you would fill most, if not all, of those positions? Then one final one on IP.

Brian M. Beattie

Yes, you got it. The expenses we factored in for the rest of the year assumes some growth in the numbers, but I'd kind of take you away from those open wreck list because in there, again, you've got a number of things. One is, again, we go after very, very specific technical engineering skills around the world in terms of EDA and semiconductor technologies. And those people aren't always available. So we are constantly looking for the best people. Second thing is there are normal industry levels of attrition that go on and happens in different places around the world at different rates. And you always have to have people available to come in and join your team, just taking care of normal attrition levels that we and every other company in the industry have seen. So again, the specific heads coming in, we factor through after -- you look at a significant list of potential hires and then bring that down into specific names and numbers and when would they start, what jobs will they have and so on. All of that is factored in very clearly, into our '12 plans. And again, we're also very cognizant of '13 spending levels. And we're working through some of the internal budgeting activities between now and, of course, our next earnings call to complete the details of how we're going to deliver again high single-digit earnings growth in '13.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

All right. And then lastly on IP, is there an appreciable change in the license mix in your IP and systems business? For instance, sequentially, your IP and systems business was up about $17 million from Q2, but your upfront revenue and total was up only $3 million. So I know that in the past, IP was somewhat more upfront than the software tools business, but has there been then appreciable change at all in that respect, Brian?

Brian M. Beattie

Yes, Jay. What I'd highlight is that again, relative to our organic growth and number of the acquisitions in this area, that we've seen some changes in our slight business model, less upfront revenue generically. We see more revenue related to both percentage completion and milestone based, and that was the discussion of how Q3 had picked up in the service line earlier. And again, many times in terms of some of the IP activities in that, there are commitments that take place over multiple years and the revenue has to be recognized over that period as well. So again, you see very strong numbers in terms of IP and systems. Even on a trailing 12-month basis, we're up about 26% in that area. And as I mentioned, we're now over $400 million trailing 12-month revenues in that area. So we said double-digit growth and clearly, you can see the results reflecting that over the past several years.

Operator

Speakers, we've got about 1.5 minutes before the top of the hour, no further questions in queue.

Aart J. de Geus

Well, thank you very much for attending this earnings conference call. As said, I think we're looking back on a very strong quarter with a strong outlook for the year, which we shared with you, and also a lot of good work already in preparation for 2013. So with that, thank you for joining us, and we will follow up with some of you individually after this call.

Operator

Thank you very much. And ladies and gentlemen, that concludes your conference today. We appreciate your participation and your using AT&T Executive TeleConference. And you may now disconnect.

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