Synopsys Inc. F4Q09 (Qtr End 10/31/09) Earnings Call Transcript

| About: Synopsys, Inc. (SNPS)
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Synopsys Inc. (NASDAQ:SNPS) F4Q09 Earnings Call December 2, 2009 5:00 PM ET


Aart de Geus - Chairman & Chief Executive Officer

Brian Beattie - Chief Financial Officer

Lisa Ewbank - Vice President of Investor Relations


Raj Seth - Cowen & Company

Matt Petkun - D.A. Davidson & Co.

Rich Valera - Needham & Company

Ryan Goodman - Bank of America/Merrill Lynch

Sterling Auty - J.P. Morgan

K.C. Rajkumar - RBC Capital Markets


Ladies and gentlemen thank you for standing by and welcome to Synopsys Inc.’s earnings conference call for the fourth quarter and fiscal year 2009. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

Today’s call will last one hour. Five minutes prior to the end of the call I will announce the amount of time remaining in the conference. As a reminder, today’s call is being recorded.

At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Lisa Ewbank

Thank you, Doug. Good afternoon everyone. With us today are Aart de Geus, Chairman and CEO of Synopsys; and Brian Beattie, Chief Financial Officer. During the course of this conference call Synopsys will make forecasts, targets and other forward-looking statements regarding the company and its financial results.

While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our quarterly report on Form 10-Q for the fiscal quarter ended July 31, 2009, and in our earnings release for the fourth quarter and fiscal year 2009 issued earlier today.

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

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

Aart J. de Geus

Good afternoon, I’m happy to report that we executed well in Q4 and in fiscal 2009 we delivered revenue growth, margin expansion, strong cash flow, significant customer momentum and numerous new technology roll outs.

Given the extraordinary nature of the year for the overall economy, let me comment on our financials mostly from a fiscal 2009 perspective. The bottom-line is simple, we met or exceeded almost every goal we set at the beginning of the year and most importantly we entered 2010 with a great deal of strength.

Specifically, with $0.33 in the quarter, we delivered non-GAAP earnings per share of $1.75 for the year, that’s 5% or $0.09 above the midpoint target we communicated at the beginning of ‘09. With Q4 revenue of $338 million, we grew our business 2% to $1.36 billion for the year.

Through disciplined expense control and focus on efficiency we improved non-GAAP ops margin over last year from 23% to 24%. These results were achieved under our predictable business model with more than 90% time based revenue. We aggregated the year with $2.2 billion in backlog and $1.17 billion in cash.

In summary, over the past 18 months, Synopsys has undergone a remarkable transformation with 2009 representing a turning point for our business. Our many years of technology development are now clearly making a difference with customers.

Turning to our customers, the recession set up their alignment with fewer key suppliers. What began as a technological necessity, the integration of flows and platforms for better and faster design, accelerated for intense cost reasons. As customers were driven to rethink their expense structures and make meaningful changes. These changes are still ongoing, so let me briefly address the economic environment.

Semiconductor markets are rebounding from a very tough first half with semi revenue now expected to be down 10% to 15% from last year, a welcome improvement of our previous expectations. Looking forward, there is still a good amount of uncertainty regarding holiday sales and stable business levels for next year. While the rush orders are driving up volume and prices, the lack of visibility causes continued frugality and streamlining of operations.

As some of you know in an ad hoc fashion I have been calling executives around the world about their outlook on the recovery. Their perception of the economy is remarkably uniform. They all express some optimism regarding a gradual return to growth, but they also think there is almost a 50-50 chance of a more challenging outlook or even potential W pattern that is another downturn before a sustained recovery.

What this tells me is that although our customers are orienting their companies towards returning growth, they will remain quite careful in terms of expenses. Looking forward into fiscal 2010, we are therefore setting conservative expectations as we account for the uncertainty around us.

From a planning perspective we entered the year with an overall business run rate that is roughly flat, a testament to our strength in the phase of considerable customer stress in the first of the year. Our backlog is strong. We have over 80% of targeted 2010 revenue and more than 90% of Q1 already in hand.

Without factoring in any future acquisitions or stock buybacks, we expect non-GAAP ops margin to remain steady on slightly lower revenue, and non-GAAP earnings to be slightly down in parts due tough year-to-year comparisons of tax rate and OI&E.

We also expect cash flow to be strong or to increase and several new technology rollouts to extend our innovation leads. Brian will give you more specifics on both the past and coming year, but looking back Synopsys executed extremely well in ‘09 and is poised for 2010 with momentum and strength.

From a technology perspective, we drive three objectives. First, deliver best in class technology across all our products to enable customers to create differentiation in their chips. Second, deliver solutions integrated across tools, IT, design flows and methodology, to enable our customers to achieve high productivity and predictability. Third, provide top notch global engineering services and support to help our customers reduce their overall design cost and risk.

To that end, in ‘09 we invested assertively in R&D and in our technical support resulting in a strong product roadmap and broadened customer relationships. Key semiconductor companies such as Juniper, Sunplus, Intel, Marvel, Panasonic, Renesas and more than a dozen others are counting on us as their primary EDA partner.

During ‘09, a number of companies successfully migrated to Synopsys and are achieving the increase in effectiveness that they had hoped for. Let me provide some technical highlights from the year starting with our Galaxy implementation platform.

IC Complier, our product is the cornerstone to designing the most advanced chips in the world. This year, in addition to an advanced router that delivers 10x performance and better quality of results, IC Complier has been significantly enhanced with multicore and low power features. Multicore capabilities were also expanded to our entire sign off solution thus completing the migration of Galaxy to the most modern compute infrastructure.

With IC Validator we then introduced a new physical verification solution that took both technology and integration a significant step forward. What’s unique about IC Validator is that physical verification can now be accomplished within the implementation flow long before sign off thus considerably reducing turn around time and the number of iterations. This is a meaningful productivity advance and customers such as Toshiba, Nvidia and the common platform alliance are already recognizing the power of IC Validator in their advanced applications.

We also made excellent progress in bringing together tools and flows with the introduction of our links design system, the result of many years of internal development and testing Links is a differentiator for Synopsys. Developed for 65 nanometer and below, Link features a complete, open, production proven digital design flow with built-in methodology, foundry ready checks and an advanced management cost base. Links has direct impact on total cost of design and gives customers instantaneous entry into a proven low power design flow.

Another major accomplishment in ‘09 was the introduction of custom designer for analog mixed signal design. Not only did we deliver a very strong first product in an area previously dominated by another vendor, but customers have already completed a number of production tape outs including the latest by Digital Imaging Systems. An expert in analog system design for the mobile market, Digital Imaging completely replaced its old flaw and was able to tape out this custom designer in less than a month.

While newer companies with little legacy infrastructure were the natural initial targets, we are now seeing incremental acceptance at a number of larger customers. At One we have seen substantial lead in terms of acceptance. As a result of One Group’s success this company’s CAD group is now willing to provide Custom Designer across their company. Another very large customer has made Custom Designer plan of record for its latest advanced chip.

Turning to verification, our Discovery platform continues to perform very well in both digital and analog mix signals. In digital in ‘09 we extended our multicore capability to VCS resulting in a 2X improvement in speed. Given the increasing cost of verification speed improvements of this magnitude significantly impact overall design time and reduce the compute infrastructure cost as well. In fact our tracking clearly shows that the majority of the advanced designs in the world use VCS as their main simulator.

In analog verification, our key introduction in ‘09 was CustomSim, a single multicore solution for analog mix signal simulation. By complaining the speed and accuracy of what used to be three separate tools we developed a flexible easy to deploy solution that has strengthened our offering.

Moving up into systems, we delivered several key enhancements to our former rapid prototyping platform including the acquired technology from CHIPit. Most chips today are in fact complex hardware-software systems, thus the breadth of our solution ranging from high level system simulation to virtual platforms to FPGA based prototyping, all the way to broad functional and analog mixed signal simulation put Synopsys at the forefront in dealing with one of the most pressing issues system level design.

Closing off with our IP business. We made excellent progress in ‘09 here as well. IP is a powerful component of our portfolio especially as an intense focus on reducing cost, drives companies to accelerate the outsourcing of non-differentiating projects.

For example, we estimate that every other day a chip is taped out using a Synopsys USB core. In addition, we have substantially grown our collection of cores into many new technology notes expanding protocols beyond USB such as PCI Express, SATA and HDMI. In ‘09, our portfolio was further broadened into the analog mixed signal space through the acquisition of the analog business group for mixed.

The integration has gone very well and the customer reaction has been especially positive. All of this adds up to a very strong year in a difficult economy. A number of customers are putting their trust in Synopsys for their future and are in the process of migrating to our solution. Financially, the impact will occur gradually but we can feel that Synopsys has excellent momentum entering fiscal 2010.

With that, I’ll turn the call over to Brian Beattie.

Brian Beattie

Thank you Aart and good afternoon everyone. In my comment today I’ll summarize our financial results for the quarter and fiscal year 2009 and provide you with our 2010 guidance.

As a reminder, I will be discussing some GAAP and non-GAAP measures for our financial performance. We have provided reconciliations in the press release and financial supplement posted on our website. In my discussions, all of my comparisons will be year over-year-year unless I specify it otherwise.

Now, as Aart mentioned, we executed well against our targets in wrapping up an outstanding year. In a challenging environment we achieved growth in both revenue and non-GAAP earnings, generated considerable operating cash flow and expanded our non-GAAP operating margins, which position Synopsys very well for 2010 and beyond. Let me now provide some additional details on our financials.

Q4 revenue was $338.3 million, a decline of 4% compared to a year ago, but well within our target range. Annual revenue was $1.36 billion, a 2% increase over our revenue for all of 2008. The IP system space did very well for the year while consulting services declined as customers focused on reducing cost by delaying some engagements especially in the first half of the year. One customer accounted for slightly more than 10% of Q4 and fiscal year revenue.

Turning to expenses, Q4 GAAP costs and expenses where $313.4 million which included $11.6 million of amortization of intangible assets, $14.1 million of stock-based compensation, $4.5 million of facility restructuring charges and $1.2 million of in process R&D. For the year, GAAP costs and expenses were $1.152 billion, which included $45.5 million of amortization of intangible assets, $56.9 million of stock based compensation, $4.5 million of facility restructuring charges and $2.2 million of IP R&D.

Total non-GAAP costs and expenses were $279 million in Q4 and $1.034 billion for fiscal 2009, up very slightly from $1.026 billion in 2008, but below our original 2009 expense budget even with our recent acquisitions.

As expected, Q4 and non-GAAP operating margins declined sequentially to 17.5% due primarily to traditionally higher Q4 expenses. For the entire year we exceeded our non-GAAP operating margin commitment by achieving 24% an increase of approximately 100 basis points over 2008.

Now entering 2009, our management team was fully prepared to react quickly on expenses should the environment materially change. As a result, when the EDA and semiconductor industry was becoming increasingly turbulent we proactively aligned expenses with moderating revenue growth.

By diligently managing vendor and contractor costs, compensation and headcount related expenses and discretionary spending; total expense growth was less than the revenue growth for the entire year. With a continued focus on operational efficiency, we currently expect to maintain our 2009 non-GAAP operating margin as well as operating income for all of 2010 even with slightly lower revenues.

Turning now to earnings, GAAP earnings per share were $0.13 for the quarter and a $1.15 for the year, down from $0.32 for Q4 of last year and a $1.29 for all of 2008. As you recall, FY08 earnings included a one time $17.3 million tax benefit or $0.12 per share associated with the IRS settlement for fiscal years 2000 and 2001.

Non-GAAP earnings per share were $0.33 for the quarter and a $1.75 for the year. As Aart mentioned, our yearly achievement is considerably above the mid point of our original targets primarily as a result of our lower than expected tax rate and higher than expected OI&E. Our non-GAAP tax rate was 21.8% in Q4 reflecting a more favorable geographic mix and 25.4% for the full year. For modeling purposes we think that a 27% non-GAAP tax rate is a reasonable estimate for 2010.

Our revenue visibility remains strong with 95% of Q4 revenues coming from beginning of quarter backlog. Upfront revenue was approximately 5% of total for Q4 and all of FY09, well within our target range of less than 10% even with the inclusion of hardware sales. The average length of our renewable customer license commitments for the quarter and fiscal year was about three years as customers continue to have a high degree of confidence in the strength of our technologies position over the long term.

As expected, backlog declined due primarily to the timing of the large contract renewals. Recalling that 2008 ending backlog included a notable positive impact from currency benefits it did not recur in 2009. While not material, we also saw several customer bankruptcies during the year resulting in the removal of less than $50 million in backlog. With bookings of about a $1 billion in 2009, our total backlog at the end of the year was $2.2 billion as customers continue to wait until closer to the contract exploration to renew.

Our model affords us the ability to be flexible in the timing of contract renewals, so they make sense for both parties. Our solid run rate at the end of the year is a testament to the effectiveness of that flexibility. And finally as Aart mentioned we have greater than 80% of our target revenue in hand for the coming year and more than 90% for the coming quarter.

So turning to our cash and balance sheet items, we ended the year with $1.17 billion in cash and short term investments. Of this balance, 52% is held within United States. We generated $61.5 million in cash from operations in the quarter which included a one time $19 million tax prepayment to the IRS as part of our tentative settlement for years 2002 and 2004 resulting in $236.7 million in operating cash flow for the full year.

While we are still awaiting final approval of our IRS settlement, I would like to reiterate that if the tentative settlement becomes final, there will be no material non-GAAP P&L impact. It is expected to result in a decrease in GAAP income tax expense as a result of the new FAS 141 accounting rules which take effect in 2010.

2009 operating cash flow exceeded our original expectations due primarily to expense management and improved customer collections environment in the second half of the year and lower tax disbursements due to some one time benefits.

At this time, we are targeting operating cash flow of approximately $200 to $220 million in FY10. We also expect our operating cash flow quarterly profile to be similar to last year with a net operating cash outflow during the first quarter of 2010 due primarily to timing of our annual incentive compensation payments.

So, continuing on with our cash and balance sheet items, our capital expenditures were $12.1 million for the quarter and $36.7 million for the year, down from $38.9 million last year. For 2010 we expect capital spending to increase to approximately $45 to $50 million due primarily to some additional expenditures as we consolidate our bay area facilities to reduce some long term expenses. We did not repurchase stock in the quarter and had approximately $500 million remaining on our current authorization.

Our intend is to continually evaluate the best uses of cash each quarter, including company operations, investments and stock repurchases. We believe again here we were disciplined in our deployment of cash in 2009 while retaining maximum flexibility in a tough economy.

We are well positioned in 2010 to increase our strategic uses of cash as the economy begins to improve. Q4 net accounts receivable totaled a $127 million and our industry-leading DSO declined 2 days sequentially to 34 days reflecting the high-quality of our AR portfolio and the timing of invoices. Deferred revenue at the end of the quarter was $588.7 million.

We ended the quarter with approximately 5930 employees, this was an expected year-over-year increase due primarily to the acquisition of the Analog Business Group from MIPS Technologies, but down slightly from our Q3 headcount.

Now, let me address our first quarter and the fiscal 2010 and guidance, which as Aart mentioned, is a base case that does not assume any future acquisitions or stock buybacks. For the first quarter of FY10 our targets are revenues between $325 and $333 million. Total GAAP cost and expenses between $206 million and $286 million which includes approximately $15 million of stock-based compensation expense, but does not include any impact of the IRS tentative settlement.

Total non-GAAP cost and expenses between $245 and $255 million, down from $279 million in Q4. Non-GAAP other income and expenses between zero and 3 million, a non-GAAP tax rate of approximately 27%, outstanding shares between $148 and $153 million, GAAP earnings of $0.23 to $0.28 per share and non-GAAP earnings of $0.38 to $0.40 per share. We expect greater than 90% of the quarter’s revenue to come from backlog.

Now our fiscal 2010 outlook. Based on what we know now we expect revenues between $1.33 and $1.35 billion. Non-GAAP other income and expense between $4 and $8 million. our non-GAAP tax rate of approximately 27%, outstanding shares between $150 and a $155 million, GAAP earnings per share between $1.01 and a $1.20 which includes the impact of approximately $60 million in stock based compensation expense, but do not include any impact of the IRS tentative settlement.

Non-GAAP earnings per share of a $1.52 to $1.62, slightly down from 2009 earnings driven primarily by a higher tax rate, lower OI need and higher share count. And again, cash flow from operations were approximately $200 to $220 million.

Finally, to help you with your modeling, let me provide you some brief 2010 expense commentary. At this time we are expecting a fairly linier non-GAAP quarterly expense profile throughout the year with Q4 showing a slightly sharper sequential increase which is very typical for our business.

So, in summary, Synopsys had a very successfully year despite the many challenges in the global marketplace. We entered 2010 in a stronger competitive position from a financial, technology and customer standpoint by being fiscally conservative and investing responsibly. As a result, we were able to deliver strong profitability while expanding our technology leadership.

With that I’ll turn it over to the operator for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Raj Seth - Cowen & Company.

Raj Seth - Cowen & Company

Brian, in Aart’s prepared remarks suggested that your outlook, your guidance was a bit conservative given the environment. I am curious if you can talk a little bit about what assumptions you have made on run rate renewals which I guess this year was slightly less than par, in your guidance what sort of assumption are you making? Because Aart also talked about orders increasing, I’m just trying to figure out what exactly that means.

Brian Beattie

Well, you are right. As we looked at our 2009 rates, and we were signaling during the year as you recall that we thought slightly down run rate coming in terms of our revenue profile as we went through the year.

So then, as we look then at the 2010 profile itself, we did modify the revenue outlook very slightly just taking into account the profile of the transactions we had, the fact that we anticipated our services business to come down in one of those areas that in 2009 with our customers preferring to reduce rather than investing in third parties outside the services. So, effectively, we have seen a flat run rate in 2009 and then build our plan on top of that for 2010.

Raj Seth - Cowen & Company

So, just so I am clear, your 2010 plan assumes flattish run rates or does it assume growth in those renewals, I wasn’t quite clear.

Brian Beattie

Well, as you know we have already got 80% of the revenue from F4 2010, so a very significant amount that is already factored into guidance that we built in. And apart from that we will have to see how it goes for the new deals as we approach a contract. We do anticipate we noted that we do expect orders to increase this year, and we factor that into our revenue guidance.

Raj Seth - Cowen & Company

Brain, one more and then one for Aart. You mentioned backlog which came down $400 million, obviously some of that is large contracts like Intel that roll off before they get renewed. You mentioned a currency impact last year, some bankruptcies etc accounting for maybe $50 million, less than $50 million, how much was that currency impact that you talked about, how big an impact was that?

Brian Beattie

Well it’s fairly significant, it was about $80 million. At the end of ‘08 that was factored in our backlog, as you know our one currency is not US Dollar based, for revenue is the Yen, and that’s a pretty significant ramp up during 2008 of course.

So, you are right, as we look at the backlog for this year, we did indicate right upfront that we anticipated a moderately lower book-to-bill ratio and then of course we did have a number of deals that we thought bankruptcy is occurring, we took all of that out of our backlog.

Then I think the last point as well is that there were a couple of deals that we had scheduled up for the end of ‘09 that moved into 2010 and in fact on of those has already been signed for the year, and that’s pretty typical where you see deals and that’s the beauty of our business model where deals will come up for renewal and we have already had on of those significant deals that wasn’t closed by the end of ‘09 but closed already this quarter.

Raj Seth - Cowen & Company

Okay, thanks. Hey Aart, can you talk a little bit about growth here? I mean the big question people always asking is does EDA really grow. If you assume that the semiconductor industry and I think this is consistent with our last conversation grows, I don’t know, 6%, whatever your number is, does EDA grow more or less than that and why. What’s your view on what growth? It’s hard year to year to tell, but given model shifts etc. but perhaps you could talk a little bit about that.

Aart de Geus

I think it’s a good point that it’s hard to tell, largely because semiconductors fluctuate greatly up and down, and certainly these part of EDA industry have a high degree of stability by virtue of having multi year models.

So, if you look at our numbers for example between ‘08, ‘09 and ‘10, you essentially see that during this massive fluctuation we are essentially flat. That’s the way to look at those two and half years. And after that I think we will be right in tune with sort of the average of the semiconductor industry.

If you look at the semiconductor projections, obviously the year is not quite finished, but people would say probably minus 10 to minus 15 down this year probably up from next year, and so an aggregate over that same period of time, the semiconductor industry will be down. And so, relatively speaking, we are actually doing well compared to the industry that feeds us.

Now, having said that, I think the thing that is not visible in all of these numbers is that during this very difficult time around us we have been able to maintain extremely high degree of stability of our financial model and continue to invest and invest and invest in many technologies and position, and because of that we are entering 2010 in a landscape that I think in my opinion is still very questionable around us with an ability to take quite a number of actions.

So in that sense, I think we will come out of the overall recession a very strong company, and I think that is actually the interesting story under the story here.

Raj Seth - Cowen & Company

Last quick one, would you consider a dividend given the stability of the business cash flow generation etc?

Aart de Geus

Not at this point in time, and off the school never say never, but I think we have a large number of opportunities in the coming year, and there is a good reason why we have been sitting on our cash all of ‘09, we are happy that we did that. We think that the landscape is changing in 2010 and we want to look at now substantial opportunities to invest in growth. And so, I think a dividend does not accomplish that, there are other ways of cause to return cash to the shareholders, but one of them is clearly to drive for substantial additional growth.

Raj Seth - Cowen & Company

I know you can’t be very detailed on across my last one, but you’re implying, you are obviously looking at M&A increasingly this year. Are there any particular adjacencies that are interesting, is there any think you can give us around the kinds of areas where you might look?

Aart de Geus

Your opening sentence was correct; we can’t give you much detail here. I think what one should think about it is that as a company we’ve been able to position ourselves very strongly in what we do, and I think that the opportunity for us is to start looking at things that are on the adjacency as you said, meaning in areas to grow our [TAM] not just a stronger penetration of the [SAM], and so I think there are many opportunities because we are a company that have connections to many customers that need a lot of technology.

So, I won’t go into too much detail now, but I want to look at 2010 as certainly a year where we should reap some of the benefits of the capital management we’ve had in the past years, and just to make sure I am complete, there are a number of people that have also asked about buybacks that is also a possibility and we are very careful in looking at what are the financial ramifications on any one of these approaches, and there is a reason why we were very cautious in ‘09 and you only have to open the Wall Street Journal to see what the reasons were.


Your next question comes from Matt Petkun - D.A. Davidson & Company.

Matt Petkun - D.A. Davidson & Co.

A couple of questions; first Aart, just kind of to continue down the same path, I think we all understand how you viewed your technology position and product portfolio to improve your market position with your customers through this downturn. But do you believe that you have used your balance sheet at all to improve your position with your customers over this last 12 months period, because that was one of the things I think we were really focused on relative to your peers, as a competitive advantage and I’m not sure how that’s helped.

Aart de Geus

Well, so, I think fundamentally we have not used our balance sheet. On the contrary we have build up our balance sheet. There are a couple of small exceptions, maybe the one exception that stands out as having been very valuable is the acquisition of the analog mixed signal business from MIPS that has really been a very, very good move, but in general we have very purposefully build our balance sheet precisely because in the midst of a storm you are very careful, and at some point in time the opportunities will show up.

Secondly, I would want to highlight that we have spent substantially in R&D, so that’s in the P&L, and we have been able to maintain 30% or so expenditure there, and one of the reasons that we feel very confident and the technology roadmap and technology being prepared for 2010 is because of those investments. And so, you put all of those things together and you say, well, what we have really done is strengthened and solidified our position, our traditional position I would almost say, and prepare the company for taking advantage in a landscape that has changed a lot.

Now, last but not least, a number of customers have sold us in the very fact that we are financially solid as they have decided to team up with us for the long term. And so, I think all of these puzzle pieces have the potential to really come together in 2010 assuming that there is no major additional economic disruption.

Matt Petkun - D.A. Davidson & Co.

Okay great. And then, if you take a look back over the last 12 months, what do you think has happened to the total available engineering seat count that you sell into?

Aart de Geus

Well, fundamentally I think the seat count has not changed because a number of engineers has not really changed all that much. However, the word seat count is a little bit misleading, because there are a number of seats that are perfectly capable of triggering a lot of tools.

So, if you take made the extreme example of Verification, where engineers literally spawn off dozens of projects or have run simultaneously, the utilization of software overall is massively up. And so, from that perspective there is no doubt in my mind, whatsoever that our technology is smack-dab in the middle of what is needed in semiconductor land, it’s also clear that our customers are facing quite a bit of pain and so during ‘09 is not the time to go ask them for lot more money, but those things will rectify themselves in the not too distant future.

Matt Petkun - D.A. Davidson & Co.

Okay. And then just one final question for Brian. Brian, so you can avoid having to put out an 8-K maybe tomorrow morning, you guys commented that orders would be up next year, do you expect orders to grow more than 10%.

Brian Beattie

Yes, we just want to indicate that the growth in orders is going to go up from 2009 levels, you saw our performance during the year. I think we indicated leading into ‘09 that we came in at about a $1 billion of orders, and anticipate that to grow, but that’s really all we can say. So it’s going to go up.


Your next question comes from Rich Valera - Needham & Company.

Rich Valera - Needham & Company

I guess following up on that, last year your were good enough to talk about the book-to-bill you expected specifically that you expected I guess less than one for the year and that proved out. Can you talk about what you expect the book-to-bill to be less than one, one or greater than one this year?

Aart de Geus

No, I don’t think we want to comment on that, and probably shouldn’t have commented last year. But in all certainty last year, the year was radically different than anything could have expected from the outside.

Let me give you maybe some other insight, which is, clearly if there is one thing that has changed in 2009 on bookings, is the approximate time line when things get close, but has not changed to us, it may have changed for others, not changed for us is the length of the deal. It tends to be three years and that our run rate was flat.

What has changed is that the time to closure tends to be much closer to the ends of the contract, and that makes complete sense, because in a massive disruption the first thing people do they do nothing and that’s what we saw in the first couple of quarters of the year, and then they remained cautious unless they see that the future is more assured. That is not a bad thing for us, that is precisely why we have a good backlog and why that is useful.

Now, in 2010, the situation may change and therefore actually to know exactly what the book-to-bill is hard to predict. The reason we can still say that we expect orders to be higher than this year is because we obviously have quite a number of targets for our sales team on the basis of things that are in the reasonable timeframe of what should be renewed. But aside of that I think we are managing in an environment that is much more turbulent and precisely because we have both the mechanism and the controls we can be very comfortable in managing efficient environment.

Rich Valera - Needham & Company

Okay. And I guess just to follow up a little bit, but it sounds like if your orders are just up a little bit relative to last year, and I forget, Brian, did you say it’s roughly a billion or a $1.1 billion, I’m not sure, but that would imply a significantly less than one to one book-to-bill, sort of eat more backlog and I’m just wondering at what point that would tend to imply I would think a lower revenue run rate than exiting the year in 2010 than you started the year with.

So just trying to get my hands around, how we should think about, because most people at this point really want to think about you guys in terms of 2011 really, I know it’s a long away, but this year is sort of a down year based on a tough 2009, I think we understand that. But I think people want to try to get their hands around whether in 2011 there is a reasonable chance of seeing some growth, not perhaps a lot but not another down year.

Aart de Geus

Rich let me take that. First to, just on terminology, Brian said quite a bit up in terms of orders, but that’s actually not the relevant thing, it was another part of your question which was the run rate, we do not see the run rates go substantially down, the only question mark on that really would be if there was another way of companies going either bankrupt, which we don’t expect or a number of companies recombining or being acquired, disappearing.

So all in all, we actually think that 2010 will be a strong year for us and we have been able to replace revenue from those companies that have disappeared quite well in 2009. I’m actually amazed at the fact that even after a number of substantial bankruptcies we were able to manage a flat run rate.

So, I don’t think that that is going to get much worse in ‘10, again I don’t want to keep repeating this caveat, well, what if there is a major downturn in ‘10, I don’t think it’s super likely but it’s not impossible.

Rich Valera - Needham & Company

Sure. And then Brian, just wondering if you could just talk about the longer term cash flow from ops trends. You have talked in the past about how that should trend, I think sort of towards your operating income or sort of higher than the current level, is there anything you could talk about to give us a sense of where we should see cash flow from ops trending over time in a more normalized environment?

Brian Beattie

Yes absolutely. We are really proud of the achievements this year, of course driving $237 million of operating cash flow in the year and the model is mature enough that we see ourselves continuing to generate in that kind of level. Specifically for 2010 we put in $200 million to $220 million and it really kind of lines up with the operating income, but takes into account that we do have an increase in our tax rate effecting for next year.

We’ve done all we can on the net income if you go back to the operating level we have kept that operating income flat year-over-year even with a slight reduction in the revenue so we’ve got expenses coming done year-over-year. And then you look at other elements sort of below the operating line, such as OI&E which is coming down here just based on some of the FX gains we got in ‘09 based on reduced interest rates of course in the market.

So, from an operating perspective, we are in good shape that’s flowing through in the cash flow. There is a couple of the one-time below the line items which aren’t as good at this point as we outlook to 2010, and all of that flows through very close for us in terms of the operating cash flow which we would anticipate again being over $200 million in 2010 as we approach it. Moving beyond that it does track very closely to an EBITDA metrics less our taxes, our cash taxes that we pay, and that will tend to track along with EBITDA over the next few years.


Your next question comes from Ryan Goodman - Bank of America-Merrill Lynch.

Ryan Goodman - Bank of America/Merrill Lynch

I had a question on the FY10 guidance, just speaking on that a bit, I think you mentioned that about 80% of that is going to be coming from the backlog, which makes sense that represents about half of backlog right now. Maybe you could just add some color on that remaining 20% piece. It seems a bit high if you assume that comes entirely from bookings in the year just given the 1910 model, what other pieces are there that I need to be thinking about there?

Aart de Geus

Well, the first comment is we have been able to work now for a number of years with precisely this model, which is coming in with 80% in hand for the year and 90% for the quarter. Actually the number fluctuates a little bit above that typically. But that’s what we have been able to comment on every year.

And so, from that perspective that is a normal model for Synopsys. Secondly, during the year obviously there are a number of deals that get renewed, and so, for those that then go into effect that is additional revenue, that is not in the backlog at the present time. And then on top of that there tend to be sort of a one off or spot deals, things that could be delivered such as services or IP that tend to be renewed fairly quickly after getting the orders.

So, this is actually not only our normal model, but I think especially in the present time incredibly healthy model because most companies do not see this. Notice also that a certain amount of the consulting is not in the backlog until it goes into action.

Brian Beattie

Let me add a little bit. In terms of the numbers here, you can see that we have got over a billion dollars of revenue already built in for orders that we’ve achieved leading up to this. So we enter in with over a billion, and the rest to be closed, what we call the turns, are very normal compared to our prior years. So we feel pretty good about the achievability of this guidance.

Ryan Goodman - Bank of America/Merrill Lynch

Okay, and then one question on the expenses. In this type of environment you tend to see the expenses scale up a bit with the bookings. But actually the outlook that you gave on the expense side seems pretty good. Could you add some color what’s going on there, why? How much scalability do you have with current expense structure, if 2010 actually does turn out to be a stronger recovery than expected? Are we going to feel that in the expense side and maybe see that more in fiscal ‘11 revenue?

Aart de Geus

Sure that’s a good question. If you look at our history we have been steadily managing the ops margin up, and this is I think a great achievement especially that we have continued that even during extremely difficult year 2009. And so, at the present time we are sort of steadily moving towards the mid 20s and we feel okay with that.

Now, the economic uncertainty, as you said, is quite large, and so, with the present planning horizon it makes no sense to speculate beyond that and we want to be careful in setting expectations. But what is clear is that obviously if things look up then there are many ways in which we can either spend money or keep it. And so, I don’t want to close any doors, I just want to make sure that everybody understands that we are still steadily moving towards the mid 20s at this point in time.

Ryan Goodman - Bank of America/Merrill Lynch

Okay. And then one last question just more qualitatively, talking with your peers out there it seems like there is some sort of some hot bids for competition within the overall EDA sector would come to mind, you have a competitor trying to move in a bit more to your implementation. Now, from your perspective where are you feeling the most pressure if anywhere just across the board?

Aart de Geus

Well, interestingly enough, the most pressure comes actually from the customer environment which is a situation where every customer is right now substantially down versus last year, not sure about what’s going to happen next year, and therefore aiming at reducing cost every which way they can.

Now, the good news for us is we have been actually able to help customers do that by virtue of providing a very complete solution that can be leveraged more for them and in the process grow our business a little bit. But I think the landscape right now, although people are absolutely planning and trying to drive towards some growth, they remain very cautious in their expenditures. And that is really the backdrop I think for our entire guidance forward, is to just reflect the fact that we don’t know what 2010 is going to look like.

Now, having said that, I want to reemphasize again that in many ways we have had the good fortune of preparing for many years both technically for this complete solution and economically for having a watch that allows us to move when the time is right, and so, we see a number of areas where we actually have seen good growth such as the IP area, we actually did well in the manufacturing area, we see some very interesting things in the system area. So, there is opportunity space for us and I think the time is upon us.


Your next question comes from Sterling Auty - J.P. Morgan.

Sterling Auty - J.P. Morgan

I want to drill into the cash flow guidance for 2010. I always understood that your collection policies were aimed at collecting or front loading the collections within the contract, and you are trying to collect as much of the contract value in the first half of the contract life, and if that’s still the case, how come cash flow wouldn’t at least be flat year-over-year despite the higher tax rate?

Brian Beattie

Well, as we said, we are fairly close to the number we achieved this year on the plan. The actual cash collection projections relative to the structure of the invoice hasn’t changed significantly either. We see primarily getting cash a quarter in advance, a few customers that are semi annual on advance and just a couple that are annually in advance. So, just based on the mix of which accounts which customers are up for renewal that provides the opportunity.

So, we built in a good recovery relative to the amount of receivables we had year-over-year, we factor in the expense management against that and there is always some small puts and takes to go through to end up with a fairly close cash flow item. Again, our operating income is we are holding that plight year-over-year, but there are higher taxes paid which again you don’t just see in the actual tax rate on the P&L, but where actual tax payments would increase in 2010, and on top of that our operating income expense is slightly lower year-over-year which is contributing to the rest of that slight decline year-over-year.

Sterling Auty - J.P. Morgan

Okay. And Aart, would your comment, which mirrors mentor and cadence that customers are waiting to the end of the contracts to renew. Based on that can you give us some qualitative commentary about how the renewal pipeline, if you will, looks as you move into fiscal 2010, meaning is the renewals get better in the back half, is it more back end loaded, is it linier, is it front-end loaded, how does the renewal pipeline look for you?

Aart de Geus

I actually don’t know the answer in terms of specifically how it spreads over the year, we told you at a minimum that for us that is less relevant. I can tell you though is the very fact that we say that orders are quite a bit up from, expected to be quite a bit from the past year. Say that there is enough set of renewals so that we have incentivised our sales team to go after those.

The other comment is really, again on the qualitative side is that we are maintaining the run rates just fine, and so that says that even in a very tough economic time, customers seems to value the value we provide sufficiently for us to achieve that result.

So, I expect that as the economic situation gradually betters, the pressure will lessen a little bit although it may take a while for the high-tech segment to suddenly start spending a lot again. But, nonetheless, I think we’ve probably seen, most likely seen the worse in ‘09 by far, and right now we are sort of a little bit back to business as normal.


Your next question comes from K.C. Rajkumar - RBC Capital Market.

K.C. Rajkumar - RBC Capital Markets

You mentioned that the turning of the couple of large contracts was one of the reasons why the backlog is down. My question is as and when these contracts close next year, do you think there is upside to your conservative top-line guidance or is the closing of this contract already folded into your top-line outlook?

Aart de Geus

No, I think I choose the work carefully being, I think I used conservative and cautious for a reason, which is we think that this is a plan that is very executable and this is what we are working again. We factored out all other major actions that we could take and obviously if there is an opportunity to do better on any of these contracts that will manifest itself over time well in the top-line.

So, no, I think we have been very realistic against a landscape that is just very hard to predict where we have learned some interesting lessons in ‘09.

K.C. Rajkumar - RBC Capital Markets

Okay. The primary EDA program, can you give us some understanding of how much do you guys typically see your business or orders of top-line increase or change with a customer versus before they became a EDA partner?

Aart de Geus

It’s a good question; it’s a little bit all over the map. But, in general, I would say it doesn’t change all that much initially for a very simple reason which is many of the customers needs to have time to gradually migrate to us. During that time they still have contracts with maybe other sources, and those contracts don’t go away. And so, especially ‘09 that’s not the time to ask them for more money.

As they do a successful conversion to our tools, they now have the opportunity to either put the savings in their pocket or comeback to us for capabilities, and this is precisely an additional reason why we are feverishly investing in more technology going forward and are looking at other investments so that when the time is right there is an opportunity to build on that very platform.

K.C. Rajkumar - RBC Capital Markets

From a modeling market though, how should we evaluate the press releases which talks about primary EDA contracts.

Aart de Geus

I think the bottom line in press releases are just that, and as much as we would all probably take a lot of pride in having great press releases, some are extremely meaningful and some are complete, well, let me be polite in the word. And so, the thing that matters is really what happens underneath an over time, and I grand you that it’s more difficult for you to observe that because it is a lot of engineering work to help people gradually solidify their position.

One of the indicators that would be meaningful to you is the very fact that we say that our run rates are flat. And so, flat in a year where the entire markets collapse at the tune of substantial percentage. I should tell you that our customers seems to continue to have a strong confidence in what we do. So, time will actually show that these investments on our part and on their part will pay off for both of us. And we certainly feel very comfortable with that, the press releases are just that.

K.C. Rajkumar - RBC Capital Markets

Lastly, you mentioned a couple of times of the changing landscape. Now, although, we can sort of guess what it means I would like to hear what your thoughts on how has the landscape changed over the past 12 to 13 months?

Aart de Geus

Okay. Well, leaving alone the very obvious massive financial changes for many customers, starting with the top-line and then in various ramifications to the bottom-line. In my opinion what is really happening is that we have a major push for substantial increase in efficiency in the entire high-tech industry. Certainly, therefore in the semiconductor industry, certainly therefore in all these supporting industries.

And so, that is accompanied by a gradual but accelerating shift towards the Far East in terms of end markets now growing and on delivery of products they are growing. And so, all of these things spell out the same words, which is how we become more efficient, and part of that is you can see the consolidation of a number of customers, you have seen recently a couple of very large mergers in semiconductors, NCE with Renesas is probably the largest one. In the foundry domain we see global foundries chartered, and then there is a slew of smaller announcements that have followed.

There is one common is theme, efficiency. And so, we are catering precisely to that because we are in the business of providing efficiency tool. So, this is a good time where customers are looking at how can they not only improve by virtue of scale, but also improve by virtue of execution. And one proof point for that would be the success of our IP business, because there is a good example of many customers doing things that are not differentiated where we can provide building blocks that are of high-quality and overall economically cheaper for them if they were to do it themselves.

So, we are in the middle of this massive change and change always has unexpected ramifications but I think we are very well positioned to not only manage well through that change, but to take advantage of some of the opportunities that open up because of that.

With that I’m getting the sign here to wrap it up. It’s past one-hour. I appreciate all the people calling in. There may have been more questions As usual Brian and I will be available right after the call. Thank you very much.


Thank you and ladies and gentlemen that does conclude our conference call for today, we appreciate your participation, you may not disconnect.

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