Mentor Graphics Corporation F2Q09 (Qtr End 07/31/08) Earnings Call Transcript

Mentor Graphics Corporation (MENT)

Q2 2009 Earnings Call

August 20, 2008 8:30 am ET

Executives

Joe Reinhart – Director IR

Walden Rhines – CEO

Gregory Hinckley – President

Maria Pope – VP & CFO

Analysts

Jay Vleeschhouwer – Merrill Lynch

Rich Valera – Needham & Company

Matt Petkun – DA Davidson

Terence Whalen – Citigroup

Presentation

Operator

Welcome to the Q2 2009 financial release conference call. (Operator Instructions) As a reminder, this conference is being recorded. I’ll now turn the meeting over to our host, Mr. Joe Reinhart; please go ahead sir.

Joe Reinhart

Good morning everyone. Welcome to Mentor Graphics’ fiscal second quarter 2009 conference call. I’m Joe Reinhart, Director of Investor Relations and Corporate Development. I joined Mentor on June 26^th and have over 20 years of corporate development and IR experience, most recently with Electro Scientific Industries, ESI. Since joining Mentor I have had the opportunity to meet many of Mentor’s shareholders. I look forward to getting to know more of you and getting to know those that I have met better.

This morning, Walden Rhines, CEO and Chairman will open with a discussion of key trends in our business. Gregory Hinckley, our President will then discuss operational highlights and Maria Pope, our CFO will follow and provide highlights and guidance. Walden, Gregory and Maria 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 risk and uncertainties that could cause actual results to vary. In addition to factors noted later these risk factors can be found in our most recent 10-K, 10-Qs and Annual Report. For reconciliation from GAAP to non-GAAP measures used in this presentation please refer to today’s financial release. This information is available online at the Mentor website.

Walden Rhines

Thanks Joe, our conference call today will focus on the operating results of the fiscal second quarter and not on the recently withdrawn acquisition proposal by Cadence. Despite the uncertainties that the Cadence offer created among our customers and employees, as well as the time required for Mentor management to evaluate the proposal and regularly communicate with Cadence management and their banking and legal representatives, our results came in well above guidance and our customers strategic engagements continued without significant disruption.

We continued to maintain our focus on growing shareholder value and believe that whether this value is realized through mergers and acquisitions or through growth of our revenue, profit and cash flow the development of a growing base of satisfied customers is critical to that shareholder value enhancement.

While providing new technology and expanding into new markets provide the greatest opportunity to grow the revenue and profit, we’re mindful of the need to improve profit through cost controls. Gregory will provide more detail on our recent progress with our major cost reduction initiatives.

Despite the deterioration in the macroeconomic outlook the semiconductor industry showed surprisingly good results in the first and second quarter with 5.5% first half growth, 3% sequential Q1 to Q2 growth and a very strong June at 8% which incidentally would have been 18% if semiconductor memory was excluded.

On the other hand, silicon [foundry] showed weak bookings. While there’s little doubt about the forthcoming or probably ongoing recession, the severity is uncertain. Meanwhile, new technologies option continued at the same rapid pace as in the past as shown in the wafer capacity ramp up data from VLSI research one of the leading semiconductor industry analytical companies.

New, 45nm technology adoption will inevitably offset some of the overall weakness in demand for traditional EDA software. Mentor’s strategy remains the same; focus on design platforms, where we can achieve the industry’s number one market share by, one, targeting discontinuities as we did with the Calibre and test compress families of products, when new technical challenges caused a broad replacement of existing design tools and platforms.

Two, by identifying totally new emerging markets for electronic design automation and building products and a franchise ahead of competition, and three, by growing revenue in areas where we already have the number one market share as we’ve done in the printed circuit board business.

Progress in Q2 was notable in all three of these strategic areas. In the first area the targeting of technical discontinuities, the change to 45nm technology is driving expanded adoption of our Olympus SoC place and route platform. In the second area of the newly emerging markets, our automotive thrust produced outstanding results and in the third area, the growth of established number one market positions, the acquisition of Flomerics for thermal simulation allows us to grow in existing number one market share position in thermal simulation.

With regard to the 45nm discontinuity that’s been driven by the shift to multi corner, multi mode design, production of 45nm technology wafers is on the same rapid growth path as previous technologies with a virtually identical slope of the ramp of wafers as was experienced with 65nm two years ago, and with 90nm two years before that.

We have seen the affects of that with the rapid proliferation of Olympus SoC place and route at leading edge users where the discontinuity has caused replacement of the primary place and route methodology with a totally new physical layout flow.

The last time this happened was at the 130nm level when Magna seized the leading edge momentum from Avanti with a new architectural approach to place and route. Two companies that we believe are among the top five in the world in number of completed 45nm tape-outs have now moved Mentor Olympus SoC into their plan of record status this quarter for 45nm and below.

These are companies with only limited purchases of Olympus SoC to date who will be fanning out the methodology broadly over the next few quarters. In the area of emerging markets, automotive revenue from Mentor hit an all time high this quarter at approximately 20% of bookings. Gregory will address in more detail how that was achieved but it was very broad and it involved not only our cabling business but also our automotive networking, and our automotive simulation products.

Finally Mentor completed its acquisition of Flomerics this quarter. Flomerics is the technology leader in fluid flow simulation and has greater then a 75% market share in thermal analysis of electronic systems.

This acquisition is consistent with our strategy of focusing in growth areas where we can provide the leading technology and market share. With the current design emphasis on power reduction and green initiatives Flomerics provides yet another leading platform for Mentor’s best-in-class design platform strategy.

I want to thank our employees for their focus on business results and our customers worldwide for their loyalty during this past quarter. Despite the potentially disruptive affect of the Cadence proposal our employee turnover since June 17 has been nearly 10% lower then the comparable period last year and none of our strategic customer engagements was affected.

We are executing well on our cost reduction programs and we have a strong funnel of renewal business in the second half of the year. Lastly, I want to assure our shareholders that we’re working actively with our bankers and advisors to determine the next steps to address enhancement of our share price.

Gregory Hinckley

Thanks Walden, on balance we were very pleased with our execution during a quarter of many challenges including a weakening economy, [apposity] of renewals and the distraction within our sales ranks caused by the overhang of the Cadence offering.

Bookings were up low single-digits from last year paced by extraordinary strength in our automotive business as well as recovery in Japan and Europe. Revenues while down 13% from the prior year appreciably exceeded our forecast.

Actual revenues were $182.4 million well up from our $173 million forecast. Gross margin was also 1.4% better than our guidance, partially an affect of higher volumes but also an affect of better mix.

Operating expenses, we promised would drop both sequentially and year-over-year; we delivered on that promise. Despite the pressure of the appreciating Euro, total non-GAAP OpEx was $153.7 million compared to $157.8 million in Q1 2009 and $159.9 million last year.

Non-GAAP loss per share was $0.02 compared to our $0.10 to $0.15 forecasted loss. Expense control remains a Mentor priority and our target programs are making good progress. The transition from a territorial base to an account base sales organization with an increased emphasis upon distribution is up and running.

The consolidation of European-wide G&A functions to a single site in Shannon, Ireland, is now largely behind us. As a result, our G&A and sales headcounts, I’m pleased to report, are both down about 5% since the same quarter last year.

And this was accomplished with no loss in Mentor capability. Finally a systematic review of facilities worldwide led to meaningful reductions in our ongoing rental expenses. Mentor I assure you is committed to delivering the most affective cost control program within the EDA industry.

Q2 was a very promising quarter for our automotive and general transportation initiatives. In 2002 we recognized that the automotive industry was the fastest growing consumer of advanced integrated circuits and we began targeted programs to address [mechatronic] analysis, cable and wire harness layout, and network simulation and controls.

We have been making steady progress and slowly extending that effort to aerospace opportunities. In most recent quarters automotive bookings have run about 5% of total. This quarter automotive activity exploded. Automotive bookings were up 4x, I repeat four times, to about 20% of total bookings.

Four of our top ten customers in the quarter were in fact automotive companies. We did business with about 40 different companies. OEM and Tier 1 suppliers in North America, Europe, Japan, China, and elsewhere notably included Australia. We have imbedded content in the next generation mid range platform for the largest automotive OEM in China.

We received significant orders for our cable wire harness product from Tier 1 suppliers including Yusoki, Guangzhou, Delphi and Leoni, and I am pleased to report that this product is in active use in the design of the Bombardier L85; its next generation commuter aircraft airline.

A great quarter for automotive business which will inevitably fall back but to a much higher base run rate. Outside of automotive and aerospace within the semiconductor and general electronic industries Mentor did less well then last year but better than forecasted.

Bookings were down about 10% in each of integrated system design, IC design to silicon, and scalable verification. The initial integration between Calibre and Olympus SoC was completed in the quarter and demoed at DAC.

Clearly multi corner multi mode remains the key issue at 45nm design but it is equally clear that the effects of predictable variability in manufacturing will be critically important at 32nm and below. Mentor is uniquely position to solve both the problems of multi corner multi mode and design for manufacturing.

And we expect meaningful place and route business in the third quarter. In the second quarter Mentor received an initial order for Olympus SoC from a top five Japanese electronics company.

Leading indicators for the EDA industry and its outlook were mixed during the second quarter. Our renewals while few in number, increased a modest 6%, well below the 25% to 40% we are accustomed to.

New customers excluding PADS were down a third in number and down 50% in total value. Our emulation business was also weak. Most of the smaller EDA companies reset guidance in the quarter 10% to 20% less then calendar 2007 actuals.

On the other hand, our consulting business is exceptionally robust. Bookings were up 25% in the second quarter and revenues are at the highest level seen since 2000. This is important because I believe that improved consulting orders are indicative of improved EDA demand. We are also seeing meaningful improvement in pricing.

Prices for our software when leased, are a product of the sum of the quantities of software titled at unit price multiplied by a lease factor, the access rate. All negotiations with customers focus on the access rate and this quarter our average access rate for semiconductor companies was up 20% above the rate imbedded in the expiring contracts and 40% for automotive companies.

I’ll repeat that, our average access rate for semiconductor companies was up 20% above the prior rate and for automotive companies up 40%.

Clearly we are giving value and getting value from our customers and clearly the business environment is more choppy and uncertain then it has been until this quarter but is still reasonably sound.

During the quarter we acquired the assets of Ponte Solutions, a leading developer of IC design for manufacturing products focused on critical area analysis with headquarters in Yerevan, Armenia, and Flomerics, the market share leader in thermal analysis for electronics and a technical leader in engineering fluid dynamics.

Flomerics is headquartered in Hampton Court, UK. The two companies should contribute about $15 million to revenue this year and run breakeven. Next year the two companies should contribute $0.10 to $0.15 per share to EPS.

Special charges arose from cost reduction efforts and in process R&D associated with the Ponte Solutions acquisition and with the acquisition of advanced 22nm lithography intellectual property. The acquisition of this lithography technology is strategic in scope.

We will provide further details of this importance in the near future.

Maria Pope

Thank you Gregory, I’ll summarize our financial results and provide guidance for the third quarter. As Gregory highlighted, the results for the company’s second quarter included revenue of $182 million, lower then last year but ahead of guidance by $9 million.

Non-GAAP earnings were also ahead of guidance; a loss of $0.02 per share. The GAAP loss per share was $0.19 compared to earnings of $0.02 in the second quarter of last year.

Bookings were up 2% from last year. Japan and Europe increased 135% and 20% respectively. North America and Pac Rim both decreased 30%. Services, consulting and training increased 15%. By products category, new and emerging grew 30% driven by an all time record quarter in automotive.

IC design to silicon, integrated systems design, and scalable verification were each down about 10%. Book-to-bill was approximately one. We have not had a better Q2 book-to-bill ratio since 2003.

Quarterly revenue of $182 million was down $28 million or 13% from Q2 last year. Product revenue was $96 million, maintenance revenue $77 million and services revenue was $9 million. Product revenue was down 25% from last year’s Q2 while support and services combined were up 6%.

Revenue mix by geography was 35% for North America, 30% for Europe, 20% for Japan, and 15% for Pac Rim. Of the total quarterly revenue including maintenance and services was nearly 60% ratable. The company’s top 10 customers represented 50% of bookings compared to 45% the prior year with one customer exceeding 10%.

Average deal length was largely unchanged at approximately three years. Typically semiconductor contracts are three years or less in length, while [mill aero] contracts average four years. As Gregory mentioned, Mentor acquired two businesses in the second quarter, first Ponte Solutions was acquired on May 12 for $6 million extending the company’s Calibre DSM product line.

Second, Flomerics, the company providing electronic design automation tools for thermal analysis was purchased for $41 million net of their cash balances of $12 million. The accumulation of Flomerics shares through a tender offer took place over June and July and as such the company has been consolidated on Mentor’s books for the last three weeks of the quarter and reflected as cost base investment prior to July 9; the day we gained a controlling position.

The remaining 5% of shares outstanding are currently being taken up. As has been discussed Mentor is committed to cost reductions. We are on target to meet or exceed our $26 million goal. In Q2 total operating expenses on a non-GAAP basis were $153.7 million, down approximately 4% from both second quarter last year and Q1 this year.

Quarter end headcount was 4,500, up 3% from year end. However excluding the 247 people acquired as part of Flomerics and the 43 people associated with Ponte Solutions, headcount decreased 150 from year end.

We exited or reduced office space at 14 locations for an annual savings of $3.5 million. Additionally we continued to make progress on our sales and finance systems projects, purchasing initiatives, and achieved meaningful reductions in travel and industry tradeshows.

We have even extended PC replacement life, an indication that stones are not being left unturned. Other income on a non-GAAP basis of $1.1 million was modestly lower then last year’s second quarter as a result of minor fluctuations in hedging activity. Interest expense of $3.98 million was down reflecting lower debt balances and overall lower costs.

Special charges totaling $3 million were related to cost cutting initiatives as well as investment banking and advisory fees. In process, research and development charges of $15.3 million were primarily the result of reserving for an acquisition of 22nm lithography IP. The technology has not yet met feasibility tests required under accounting standards and as such has been entirely expensed in the quarter.

Additionally we wrote off in process R&D associated with the Ponte Solutions acquisition. Operating cash flow for Q2 was a negative $2 million compared to $17 million last year’s second quarter. Working capital decreased $19 million as improvements in collections, and lower overall accounts receivable were offset by an income tax receivable of $27 million.

The company used $32 million in the quarter to acquire Flomerics and Ponte Solutions. Capital expenditures were $11 million similar to last year. The amount of $14 million in cash was generated from the company’s employee stock purchase plan and the exercise of options. This compares to $10 million last year.

In total cash and short-term investments were $108 million. Trade, day sales outstanding, were 47 days, up six days since last year’s second quarter. Total DSOs were 118, an increase of two days. The quality of receivables remains strong with nothing past due over 90 days’ netted reserves.

Factored receivables were $15 million in the second quarter. On an administrative note relative to the 8-K filed last Thursday, August 14, Mentor’s Board of Directors approved the retention bonus plan as described. However the agreements have not been entered into with any employees.

I will now turn to guidance, for total FY09; we continue to expect 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.

Third quarter revenue is expected to be $220 million with non-GAAP earnings of approximately $0.15 to $0.20 per share. Our third quarter gross margin is expected to be consistent with Q2 and operating expenses are planned up as a result of normal course annual increases and the affects of acquisitions.

Walden Rhines

Thanks Maria, so in conclusion my thanks to customers and employees for helping up maintain our focus this quarter. We’re executing well on our cost reduction programs; we have a strong funnel of renewal business in the second half of the year. And we’re working actively with our bankers and advisors to determine the next steps to address enhancement of our share price.

Now let’s take some questions.

Question-and-Answer Session

Operator

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

Jay Vleeschhouwer – Merrill Lynch

On the $915 million revenue forecast for the year which is unchanged, but you’re now including the $15 million from Ponte Solutions and Flomerics so the question is has there been any change in your revenue assumption for the base business ex the acquisitions or are you perhaps anticipating you might be able to build some backlog for the base business ex the acquisitions. On geographic results, I think you said Japan was up over 100% in bookings, which I could see since it was an easy compare against the 30% decline in Japan a year ago, but maybe just give a little more insight into what happened in Japan and similarly in Europe you were up 30% a year ago, so that was a hard compare so maybe talk about what drove strength in Europe.

Gregory Hinckley

Japan was a beneficiary of a large contract, in fact our largest customer worldwide for our cable and wire harness software and we had some success with other automotive accounts in Japan. Europe was where we had our single largest piece of business this last quarter; the piece of business that represented the in excess of 10% of our bookings.

In terms of the $915 million and the effect of Flomerics and Ponte Solutions, the Flomerics acquisition was only completed in July. We are now going through the steps of really understanding the business. Historically they have been running somewhere around $30 million with the revenue a year so it’s logical that over a six month period of time that that we should do somewhere half of that in the last six months of our fiscal year 2009.

But we’re not far enough in our understanding of their business to deal with what it does to our total revenue for the year but we forecasted breakeven results for this year and meaningful accretion for next.

Jay Vleeschhouwer – Merrill Lynch

But just to be clear, you’ve not changed your bookings assumption or about potential backlog assumption for the base business ex the acquisitions?

Gregory Hinckley

That’s correct.

Jay Vleeschhouwer – Merrill Lynch

What’s the cash flow forecast for the year?

Maria Pope

So we’re looking at, as you remember in our prior call, we’re looking at about $100 million in cash flow. We are concerned that in the current economic environment that we could be getting lower percent of upfront cash payments jeopardizing some of that $100 million. And additionally our back ended year may result in AR collections that could be pushed into fiscal 2010 so while we haven’t forecasted a new number we are concerned that we would reach that full amount.

Jay Vleeschhouwer – Merrill Lynch

Finally at DAC you depicted the [Sierra] and Calibre integration roadmap you mentioned its demoing, when do you think that will actually contribute to incremental bookings or run rate for those combined products and as well at DAC there was a lot of talk about technology issues that all seemed to begin with the letter M, multi core, mini core, of course multi corner, multi threading, how do you see all of those perhaps flowing through your technology roadmap over the next couple of years in terms of increased capacity and capability?

Walden Rhines

On the first question as we noted, we actually did have a good quarter for design for manufacturing this quarter but I don’t think it was materially affected by the rollout of the new products. The [Sierra] Calibre collaboration has exceeded our expectations in terms of what we’ve been able to achieve in terms of capability. The DAC demonstration is just the beginning and I’m personally very excited about the potential there but I don’t think it has significant impact for several quarters at least because we’re ramping up the Olympus SoC right now and people typically get the place and route installation going before they start the integration.

And the other part is that it’s really targeted for the step up in variability that comes as you move to 32nm or in some cases 45nm shrink. The problem becomes significantly worse and like the multi core and multi corner things you mentioned, any time there’s a technical problem, it becomes more difficult and that become opportunity.

So as far as multi core goes its both and opportunity to provide tools that help our customers and that’s particularly good for Mentor in the number of high level design tools, hardware software co-verification, and things like that where the issue of developing applications depends upon a lot of imbedded software and monitoring that software and its also important to our own development in the sense of providing multi threaded capabilities that go the level beyond what we’ve had before and in the multi corner case, for the place and route, that one is unquestioned.

Sanjay Jha at Motorola, gave the keynote at DAC this year and he just led off with multi corner, multi mode, this is the way you’ve got to go to do 45nm and 40nm and just sent a message to the world that if you haven’t discovered is you really need to bring it on board because if you don’t have it you’re just not going to be able to attack those nodes.

Operator

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

Rich Valera – Needham & Company

In your prepared remarks you mentioned that your percent increase on your renewals was only 6% which was well below your historical 25%, 40% level, can you say if you think there’s any near-term pressure on your renewals for the back half, if you think this was just an anomaly or if you think this is really the result of a tougher business environment?

Gregory Hinckley

One quarter is hard to make a trend. We’ve had years of experience of having our renewals in the range of 25% to 40% increase. We think this is aberrant but it certainly bears watching and if it continues it means that we have some pressure on the business which is why I described as one of our mix factors.

Rich Valera – Needham & Company

You also mentioned that auto was exceptionally strong, basically 4x your historical contribution level at 20% versus historical level of 5% and you said going forward you expected a substantially higher base line for auto, can you give us sense of where that is? Do you think it could consistently be closer to the 10% mark going forward or where are you thinking about that as a percentage of the business going forward?

Gregory Hinckley

Again, one quarter doesn’t make a trend so we had a big portion of the quarter was business that we could forecast so for example a large Tier 1 supplier, our largest user of our cable and wire harness product renewed in the second quarter and that turned as expected. What we’re beginning to see now with both the cable and wire harness product as well as the networking product is that we are getting orders from suppliers to our OEMs and those were a meaningful number of the 40 customers that we did business with and all that is as of now, is not forecastable.

And so the news is great that we’re getting that business. We expect to have that continue going forward and I think it’s indicative of that we are having a meaningful traction and success within this industry. We just don’t have enough data to forecast it other then to say that our base business will certainly by higher then it has been in the past.

Rich Valera – Needham & Company

Is it fair to say that most or all of the upside in the quarter was generated by the auto business relative to you plan?

Gregory Hinckley

That’s fair.

Rich Valera – Needham & Company

With respect you mentioned Flomerics and Ponte Solutions expected to contribute $0.10 to $0.15 of accretion next year, can you give us a sense of the revenue you expect to generate? Is it around the $30 million level which is--?

Gregory Hinckley

North of that. And some of it has to do with, which is traditionally they have done short-term ratable contracts and we will move their contract practices into a Mentor practice.

Operator

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

Matt Petkun – DA Davidson

The Flomerics business, will you primarily be recognizing that in the integrated system design business?

Gregory Hinckley

Their customers are really broad based so they do business with IC companies on the system side of the IC companies and they do business with systems companies. In terms of how we will report externally however, you’re correct; we will describe it as integrated systems design.

Matt Petkun – DA Davidson

You commented about the 45nm volumes or more specifically the wafer ramp of 45nm matching that of 65nm do you think that the actual design starts in 45nm and the number of design starts is matching that trend?

Walden Rhines

Yes absolutely. And in fact, what’s amazing is just how many copies of software are required on a single design. I went and met with a customer just recently that is doing mostly 40nm because they’re doing the shrink of the 45nm and they had on their leading edge design, they had 25 copies of our place and route software.

Matt Petkun – DA Davidson

When you look at Calibre more specifically, obviously this quarter’s strength I think speaks to Mentor’s product diversification and some of your new products, but when you look at Calibre and some of your more traditional now EDA tools and you compare that to what your peers are reporting, does that give you any concern about how renewals might look for Calibre in the back half of this year and do you expect 65 or 45 to be a bigger driver for Calibre when we look at the back half of the year?

Gregory Hinckley

The year is unfolding exactly like we expected it to unfold. So we have the preponderance of our renewals are in the second half of the year. When we’ve closed business for the most part, it has happened as we expected. We don’t expect any surprises from the renewals which include Calibre in the third and fourth quarter and I think that as the designs go to more 45nm it represents the opportunity for the consumption of more Calibre licenses.

Operator

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

Terence Whalen – Citigroup

I think you mentioned roughly 60% of sales were from backlog including maintenance and services as well as software sales, could you give us the breakout of orders by upfront versus ratable?

Maria Pope

What I said was is that 60% of the transactions that we did including maintenance and services were ratable of our total revenue. That’s of the $182.4 million. And in terms of, in the press release what you’ll see is that percentages at the bottom on bookings by our business model and revenue by our business model and that is our percentage of our software. So perpetual was about 20% of bookings, ratable about 20% and then upfront of that software percentage about 60%. That’s product revenue.

Terence Whalen – Citigroup

So really no change at all to the contract model, just a different--?

Maria Pope

No, we’ve remained very, very consistent over the past three years with no more than about 3% to 5% change between upfront and ratable in our entire mix of revenue.

Gregory Hinckley

Other then our maintenance revenue is currently growing at a faster rate then our product revenue and that in fact is all ratable.

Terence Whalen – Citigroup

It seems like on your cash flow assumptions, you’re showing a little bit more caution related the economic environment and cited receivable collection, I was wondering if you could share also your assumption for securitized receivables for the year for roughly that $100 million number that you’re taking a little bit more cautious stance toward?

Maria Pope

If you look back in our second quarter, our biggest issue in terms of cash flow was actually the $27 million I mentioned in terms of the tax receivable. In terms of our caution we certainly are cautious, it’s a difficult economic environment as we’ve been talking about for several quarters and we are currently analyzing our back ended portion of the year and what upfront cash payments we expect to receive.

In terms of our factoring program, we’re fairly consistent. We’ve been doing about $60 million per year. We don’t have a specific forecast for Q3 and Q4 but we shouldn’t be any more then that and currently are evaluating it.

Gregory Hinckley

We are experiencing no difficulty in factoring receivables at the ranges that we’ve been factoring receivables in the past.

Terence Whalen – Citigroup

That’s what I was looking for. Can you talk a little about the 2009 environment? You’ve given your first indication by talking about the accretion from acquisitions being $0.10 to $0.15 which implies $10 million to $15 million of additional net income from those businesses, so on the order of probably $45 million plus of revenue, if they are generating a third of net margin. Can you talk a bit about in addition to what you’ve already spoken about with acquisition, how you see the 2009 environment and when I say 2009 calendar 2009 but fiscal 2010 and what your expectations are in terms of the renewal funnel versus this year which was a little bit uneven with the very difficult first half but looking to be an accelerating second half?

Gregory Hinckley

We see is next year the renewals are larger in number, larger in size, and much more linear then they have been this year. So our results will be much stronger P&L wise in the first half of the year then they’ve been this year. So other then that, we have the materials to work with to have a very successful year, let’s see what happens with the economy.

Operator

Your next question is a follow-up from the line of Matt Petkun – DA Davidson

Matt Petkun – DA Davidson

So this quarter it looks like you incurred just over $1 million of costs associated with working with your bankers, obviously it’ll be stripped out of the non-GAAP for next quarter but what do you anticipating that number to be for the current quarter Q3 and we were told that those bankers weren’t solely working on the proposed transaction, will you still be engaged with these folks to look for other not necessarily alternatives to sell the business but just in terms of how to structure the business differently or can we conclude that those costs are mostly over now?

Maria Pope

No, we have an agreement with our bankers that spans over a couple of years and in Q3 we will be looking to expense a little bit over $1 million as well on banking fees and then whatever attorney fees we pick up. That will continue for a total of eight quarters.

Matt Petkun – DA Davidson

And then I think I missed it, just the year-over-year increase in the new and emerging bookings?

Gregory Hinckley

New and emerging was up 30%.

Operator

Your final question is a follow-up from the line of Terence Whalen – Citigroup

Terence Whalen – Citigroup

Regarding the renewal value being a little bit below the normalized 25% to 40% rate, what is your expectations and what is your guidance for the second half to assume a reversion back up to that 25% to 40% number or something still at these below normalized levels or even an above normalized level given what you see in your funnel?

Gregory Hinckley

Our guidance is predicated upon we return to the levels that we’ve historically had. We think this quarter was an aberration but it was information that I thought was important our shareholders to receive. We’re trying to be transparent.

Operator

At this time there are no additional questions; please continue.

Walden Rhines

Ladies and gentlemen thank you very much for joining us this morning. Maria, Gregory and I are available for follow-up calls later today.

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