Synopsys Inc SNPS
Q2 2013 Earnings Call Transcript
Transcript Call Date 05/22/2013

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Second Quarter Fiscal Year 2013. 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.

Today's call will last one 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 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 L. Ewbank - IR: Thank you, Laurie. 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 this call, important factors that may affect our future results are described in our most Quarterly Report on Form 10-Q and today's earnings 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 release, and the financial supplement that we released today. All of these items are currently available on our website at

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

Dr. Aart J. de Geus - Chairman and co-CEO: Good afternoon and thank you for joining us. Synopsys again delivered strong business, technology and customer results in Q2 meeting or beating every target we communicated last quarter.

We achieved revenue of $499 million, non-GAAP earnings per share of $0.66, and considerable operating cash flow. As a result, we're raising our non-GAAP earnings per share outlook for fiscal 2013 to a range of $2.37 to $2.42, representing solid double-digit growth for the year. We're also raising our operating cash flow target to $375 million to $400 million. Brian will provide more financial detail in just a minute.

Before discussing some highlights, let me comment on the customer landscape, which I would characterize as steady. Semiconductor companies continue to face significant competitive challenges, and while cognizant of ongoing uncertainty in the macro environment, the race for differentiation in time-to-market, product functionality, and advanced technology continues unabated.

Synopsys has collaborated closely with market leaders for many years. With the high value, but also great technical challenges of the latest silicon technologies, more and more customer executives are sharing their future direction with us, and how Synopsys is needed to get them there. As a result, we see continued successes and business strengths across key customer segments; the foundries; top IDMs; and key fabless customers, particularly in mobile and cloud-related systems companies.

Let me provide a couple of examples. First, during the quarter, we renewed a significant multi-year agreement with Intel. Second, we've made excellent progress with a large semiconductor company who had been a competitor's stronghold for more than a decade. For a number of years, we have worked closely with them on their most advanced designs. This quarter, with a substantial long-term commitment, they moved to Synopsys as their main partner because of our technology excellence and dedicated support.

The common denominator driving the largest semiconductor and systems companies in their unrelenting demand for still faster, lower power, and broader functionality chips. There is increasing commitment to the most advanced processes, as the growing group of customers join the leaders in migrating to 20-nanometer, 14 and 16-nanometer and even below.

The race to 3D FinFET design is very promising as it has opened another decade of Moore's Law. Specifically, the low power characteristics of FinFET transistors will impact end-product differentiation and is enabled by Synopsys' leading-edge design tools and IP. With a rapidly growing set of engagements with customers desiring to migrate to FinFETs, production delivery of FinFETs designed with Synopsys' tools has already passed 100 million chips.

Our clear and long-standing focus on advanced technology not only positions us well for the future, but has already driven significant design and customer successes. To date, 90% of 20-nanometer and below tape-outs have used Synopsys implementation, and we're already engaged all the way down to 10-nanometer. Because of the breadth and maturity of our tools, we believe that we have at least a year head-start over any competitor. To support this assertion, let me comment that we have been working on FinFET enablement for half a decade, and almost every FinFET design to date has relied on Synopsys. Our solution is truly comprehensive, ranging from TCAD to design tools, to IP, to sophisticated support. TCAD is used by foundries for simulation at the earliest stages of technology and FinFET development, giving us six to 12 months early access to foundry models. The resulting information feeds into the foundational technologies of HSPICE and extraction, where Synopsys tools are the gold standard. From there, our IC Compiler, which is clearly the most advanced and production-proven FinFET physical design system, creates the layout of the chips. In addition, our analog/mixed signal design and verification tools are well ahead in terms of readiness and qualification for FinFETs.

We have been engaged in developing FinFET-based IP for several years now, and have production-class memory and interface IP ready to integrate into our customers' SoCs. We are engaged with five foundries on developing a full range of production-ready IP for them.

Lastly, our IP design engineers have taped-out multiple FinFET test chips for several customer processes. One example of our leadership is the announcement last week that FPGA provider Achronix has standardized on IC Compiler and IC Validator, and has taped out the industry’s first commercial FinFET-based SoC, using Synopsys tools.

At our Silicon Valley User Group meeting in March, more than 600 engineers attended a standing-room-only FinFET panel featuring Samsung, Qualcomm, Cavium and GlobalFoundries sharing their early experiences and collaboration with Synopsys. In addition, you may recall that already in December, we announced a successful tape-out of Samsung’s first 14-nanometer low power test chip. Samsung chose Synopsys as their FinFET partner because of a successful collaboration history, and the comprehensive capabilities throughout our portfolio.

Now let me turn to verification, which is the largest bottleneck in system and chip design today. Synopsys has been developing verification solutions for many, many years, and is the clear leader in both leading-edge digital verification, with about 70% of advanced designs utilizing Synopsys; and circuit simulation where 19 of the top 20 semiconductor companies rely on us. Verification is rapidly evolving as chip complexity moves into its next phase. Two principles remain; tool performance is key, and a complete, honed solution is increasingly a must. Today, our VCS simulator and Zebu emulator both have the fastest runtime in their respective categories. In combination with Virtual prototyping and our FPGA-based prototyping system, we cover the entire hardware-software verification space. With the addition of the most comprehensive open debug system Verdi, and our next generation verification IP offering, we now address the entire verification market with outstanding tools.

During the quarter, we delivered the first product release of Verdi under Synopsys, the first in an aggressive roadmap of advanced SoC debug technology. Our integration is progressing very well, and customer reactions to our complete verification solution have been very positive.

The third area I would like to highlight is IP and Systems, which represents about a quarter of our revenue and continues to see strong business. Synopsys is the second largest IP provider in the world, with 1,700 engineers designing commercial IP blocks that give us the number one position in interface, embedded memories, and analog IP. According to Gartner, Synopsys is the largest provider of physical IP, more than double the nearest competitor. We expect this area of our business to continue to yield double-digit growth.

Top 20 semiconductor vendors continue to outsource more IP to Synopsys, trusting us to deliver high quality blocks into their critical chips. The amount of IP these companies consume has increased by 5x over the past few years and now represents almost half of our DesignWare IP revenue. This quarter we also surpassed our 3,000th USB design win. Last year, our USB solutions shipped well in excess of 500 million units. And finally, our PCI Express solutions are well ahead of the competition. We are approaching 1,000 wins in our PCI Express family and recently passed compliance with 20-nanometer silicon.

In Systems, we had our strongest bookings quarter ever for FPGA-based prototyping, with broad-based demand by some of the largest semiconductor and systems companies in the world. The promise of earlier development of software, as well as robust hardware/software verification, is driving continued demand for our outsourced solution.

In Automotive, as software content and complexity continue to grow, our customers are taking advantage of our leading virtual prototyping technology so they can start their software development earlier and accelerate system integration, test and validation.

Finally, our partnership with ARM continues to bear fruit as we released an ARM Cortex A57-based Virtual Design Kit enabling our customers to create software for ARM v8-based designs up to one year before silicon is available.

In summary, as we reach the halfway point of the fiscal year, Synopsys continues to execute very well. Demand for technology is strong, customer momentum continues, and we again delivered very solid financial results. Consequently, we're raising our non-GAAP earnings per share and operating cash flow guidance for the year.

I'll now turn the call over to Brian Beattie.

Brian Beattie - CFO: Thank you, Aart and good afternoon everyone. In my comments today I will summarize our financial results for the quarter and provide you with our guidance for Q3 and the full-year. In my discussions, all of my comparisons will be year-over-year unless I specify otherwise.

Synopsys delivered an excellent quarter, meeting or exceeding all of the quarterly financial targets that we provided in February. Q2 financial results were highlighted by strong business levels, double-digit growth in both revenue and non-GAAP earnings, and considerable free cash flow generation. In addition the revenue run rate is positive.

Now some additional detail. Total revenue was $499 million, an increase of 15% compared to a year ago and at the high end of our target range. Greater than 90% of Q2 revenue came from beginning of quarter backlog and one customer accounted for slightly more than 10% of second quarter revenue.

The weighted average duration of our renewable customer license commitments for the quarter was greater than four years, reflecting a mix of contracts, including the impact of a large contract renewal. As a result, we now expect average duration for fiscal 2013 to be greater than three years.

Turning to expenses, Q2 total GAAP costs and expenses were $420 million, which included $32 million of amortization of intangible assets and $16 million of stock-based compensation. Q2 total non-GAAP costs and expenses were $365 million an expected year-over-year increase, due primarily to increases in headcount and expenses from our recent acquisitions.

Non-GAAP operating margin was 27% for the quarter and 26% for the first half of fiscal 2013. As we mentioned last quarter, we expect total non-GAAP expenses to be skewed towards the second half of the year. This is simply due to timing of expenses, such as employee compensation, some hiring that shifted to the second half, and traditionally higher Q4 expenses. However, for all of FY '13, we are still on track to expand our non-GAAP operating margin by approximately 100 basis points over FY '12 levels. Our ongoing goal continues to be a focus on operational efficiency with annual operating margins moving solidly into the mid-20s.

Turning now to earnings, GAAP earnings per share were $0.44. Non-GAAP earnings per share increased 25% to $0.66, slightly exceeding our target range, driven by expenses at the lower end of guidance and higher than expected other income. We are raising our annual EPS guidance to reflect our strong second quarter results and our confidence in the rest of the year.

Our non-GAAP tax rate was 24% for the quarter and we continue to think that a non-GAAP tax rate of approximately 23% is a reasonable estimate for FY '13, reflecting the benefit of the R&D tax credit for FY '12 and '13. As a reminder, the reinstatement of the R&D tax credit has an impact of approximately $0.09 to FY '13 non-GAAP earnings.

Turning now to our cash and balance sheet items. During the quarter, we generated $134 million in cash from operations and are raising our operating cash flow target for the year to $375 million to $400 million. We paid back $7.5 million of our outstanding term loan, leaving a remaining balance of $120 million. We also purchased 1 million shares of Synopsys stock for $35 million and have approximately $237 million remaining on our current share repurchase authorization. As a result, we ended the quarter with cash and cash equivalents of $681 million, with 39% onshore and 61% offshore. We'll continue to optimize the use of our strong cash flow, whether on M&A, debt reduction or stock buybacks.

DSO declined 6 days sequentially to 46 days and we ended Q2 with 8,195 employees, with about one-third in lower-cost geographies.

Now, let's address our third quarter and fiscal 2013 guidance, which excludes the impact of any future acquisitions. For the third quarter of FY '13, our targets are; revenue between $475 million and $485 million, a year-over-year increase of 8% at the mid-point. As a reminder, we do expect some increased variability in quarterly revenue going forward, driven by factors such as growing hardware business in emulation and prototyping, but continue to expect a 90% time-based revenue model. Total GAAP costs and expenses between $411 million and $428 million, which includes approximately $16 million of stock-based compensation expense; total non-GAAP costs and expenses between $365 million and $375 million; other income and expense between $1 million and negative $1 million; a non-GAAP tax rate of 24% to 25%; outstanding shares between 155 million and 159 million; GAAP earnings of $0.28 to $0.34 per share; and non-GAAP earnings of $0.53 to $0.55 per share and we expect about 90% of the quarter's revenue to come from backlog.

Now our Fiscal 2013 outlook. Revenue between $1.955 billion and $1.975 billion, a growth rate of approximately 11% to 12%, or 13% to 14% excluding the extra week in 2012. We've been able to maintain our revenue targets even in the context of the yen depreciation this year.

Other income and expense between $5 million and $9 million; a non-GAAP tax rate of approximately 23%; outstanding shares between 155 million and 159 million; GAAP earnings per share of $1.48 to $1.56, which includes the impact of approximately $67 million in stock-based compensation expense; non-GAAP earnings per share of $2.37 to $2.42 which represents solid double-digit year-over-year growth; capital expenditures of approximately $70 million and as I mentioned earlier, we are targeting cash flow from operations of $375 million to $400 million.

So, in summary, we're pleased with our strong Q2 financial performance and continued execution, just highlighted by top and bottom line growth and solid operating margin. We're also pleased to provide increased EPS and cash flow guidance for FY '13.

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

Transcript Call Date 05/22/2013

Operator: Rich Valera, Needham.

Richard Valera - Needham & Company: Brian, a question with respect to one of the comments you made. I think you said the revenue run rate was positive on the quarter and I wondered if that also applied to the bookings run rate versus the prior years on average?

Brian Beattie - CFO: That's in fact how we do measure the revenue run rate. So we're looking at the bookings and compare that to the beginning of the year, looking at revenue that we'll be expecting to get in the deals as we go forward.

Richard Valera - Needham & Company: So that exactly is your sort of standard measure of run rate?

Brian Beattie - CFO: Yeah.

Richard Valera - Needham & Company: Okay, that was positive on an aggregate. Great, thank you. And then Art, just wanted to ask couple of questions on the IP business which is clearly a big focus and a nice growth driver for you guys. I wanted to try to understand where the margin of that business is today. I believe it's below the corporate average, but where you see it today, and where you see it going and does that require any meaningful upfront investment for the move to FinFET to sort of crank out all of the different FinFET versions of these products which obviously you would benefit from down the road?

Dr. Aart J. de Geus - Chairman and co-CEO: Okay, in general, that business is strong and we have continued our push to improve its profitability at the same time balancing it I think well with the amount of continued investment in creating the product available for next year. The good news is on the FinFET side, we have actually invested already quite a while ago and so I think we're going to start to see the benefits of that as the early investments will start to turn now into growing revenue from that. So, I actually see it as a very positive outlook for that business.

Richard Valera - Needham & Company: And with respect to the Intel renewal, a couple of questions, first was it really exclusively the Intel deal that drove up to the average duration for the quarter, whether it was the rest of the business kind of in line with your norm? And two, we would’ve thought all things equal, your deferred revenue would've gone up sequentially with that renewal in the quarter, but it actually went down a bit, just wondered if you could comment on and of those couple of items.

Dr. Aart J. de Geus - Chairman and co-CEO: Well, as you know, in general we are very shy to comment about anything regarding a specific customer and that includes Intel. Needless to say, this is an important customer for us and a significant agreement. Let me now break it up further given that we don't want to comment about the specifics of the transaction.

Brian Beattie - CFO: And to your question on the deferred revenues, Rich, just recall that increases in deferred revenue happen only when we are able to invoice the customers.

Richard Valera - Needham & Company: So, could I take it that maybe you didn't yet invoice for that particular large deal?

Brian Beattie - CFO: Same comment in terms of providing, we don't provide the details of the individual accounts.

Richard Valera - Needham & Company: And I understand you don't want to provide the duration of that specific deal, but can you say if we should be expecting any change in duration going forward, any other change in your average duration other than that one deal?

Brian Beattie - CFO: What we do is look at the total weighted average renewal lengths that we have been able to close in the quarter. And the impact as we said for our Q2 is that it became greater than four years, and then the impact as we look at bookings perspectives for all of FY '13 will be just over three years as well.

Operator: Krish Sankar, Bank of America Merrill Lynch.

Krish Sankar - Bank of America Merrill Lynch: Art, in the past, you have spoken about growing your IP business in the double-digit range or the low double-digit. Is it still the target for this year? And can you talk a little bit about the competition now that Cadence has Tensilica?

Dr. Aart J. de Geus - Chairman and co-CEO: Yes, we have not changed our outlook. We think that this is a part of our business that is growing in double-digit range. We foresee it to continue to be there, and of course, at any point in time, we're dealing with variety of competitors and I think that is more an indication that it's a healthy business than anything else.

Krish Sankar - Bank of America Merrill Lynch: Then on the emulation side of the market, after you guys purchased EVE, can you talk about what kind of trends you're seeing there? I know that everyone believes in it being a secular grower. Are there any cyclical trends within that because two of your competitors have two different views at least for this year on how the emulation revenue is going to trend? And along the same path when I look at your operating margin or the margin profile, you are going to improve your margins with IT business. How is the margins on the emulation business and where do you think it can get to?

Dr. Aart J. de Geus - Chairman and co-CEO: Well, let me go backwards. We actually do not break out the margins of any of the individual businesses, partially because there are some fluctuations as we decide to invest or not. The key objective of course is to manage the overall profitability of the Company to be in line with our even higher level objective, which is to grow the earnings per share in high-single-digit range. And so all of this fits together nicely in that regard. As we look at EVE particularly, we are now in the very interesting phase of integrating it while we simultaneously are integrating the debugging capability acquired from SpringSoft. And so our aim and objectives is really to now take what is a fabulous collection of really best-in-class technologies and deliver a well thought-out integrated platform. And EVE absolutely is a key piece in that, and so far I think it's going very, very well.

Krish Sankar - Bank of America Merrill Lynch: Then the final question, on the FinFET side, clearly you guys have a lot of experience on the FinFET design. When you interact with the foundries, most foundries are expected to start manufacturing FinFET-based chips sometime next year. I don't think there's any specific timing quite yet. But when you look at it, is the challenge in FinFET more on the design side or do you think it's more on the manufacturing side?

Dr. Aart J. de Geus - Chairman and co-CEO: Well, I don't want to be not humble and say, well, this hindsight we have it sort of under control, but the reality is, I think it is both. Meaning that these are new structures that are simultaneously being introduced with much, much smaller node, so that's sort of squaring the complexity of the problem and simultaneously achieving much higher density of transistors which brings a lot of challenges for the tools. The only reason that I speak with I think a fairly high degree of confidence is we have already held customers tape our chips that are on the market today with this technology and in that sense the proof of concept is beyond concept that is absolutely in production. Now, having said that, there is no question that there are multiple players that are all racing forward to deliver their own version of this technology and that requires adjusting to their specific technologies, adjusting to how they would like to see the designs come together and we are extremely engaged with all of them which from my perspective is a really, really positive sign because I think that FinFET is one of the enablers for truly a next-generation meaning a decade or so of advanced design. And I think this is moving at super high speed.

Operator: Sterling Auty, JPMorgan.

Sterling Auty - JPMorgan: I was wondering if we can approach it this way. If you take out your largest couple of deals, was the duration of the rest of the contract below three years or above three years?

Dr. Aart J. de Geus - Chairman and co-CEO: I think let's not go too much into trying to reverse-engineer all the numbers. Fundamentally, our business has not changed and in aggregate, we have always said that the balance of transaction that we do is in this three year range. In the last few quarters, it was a bit lower. Before that, it was a little higher. But fundamentally, there is nothing that would indicate to me that our business is changing. Everything else, I think we're not going to go into further, if you don't mind. Thank you.

Sterling Auty - JPMorgan: As we think about the collections through the year, you do have a seasonality to it. During the increase in cash flow for the year, would you say that your second half collections are going to be above seasonal as compared to the past?

Brian Beattie - CFO: You're right on it. They are typically higher in the third quarter is what we've seen every year, and still expect then we will have a second half which is stronger than the first half and with the confidence we had and the business activity we had increased confidence in cash flow, primarily RAM collections. And so that is looking better this year and allowed us to raise guidance.

Sterling Auty - JPMorgan: You mentioned the FX impacts. You've been able to hold the revenue guidance. As you look at the pipeline for the back half of the year, is there any concentration in terms of either bookings in the pipeline or other that we should think about being coming out of Japan?

Brian Beattie - CFO: I think let's just align on the question there. It's really a perspective for foreign exchange is that we typically hedge off all the expenses as we operate around the world. But in this past six months or so, we have seen a notable devaluation in the yen. It affects the revenues, most of the revenues out of Japan, not all of them. And as we look for the year, we have been able to offset that impact. We have not had a material impact to any of the key line items, in particular, in terms of earnings per share, and just been able to offset that with good operational performance. We've been able to hold our revenues for the year. And just good hedging and the natural hedging and managed it to have a very minimal impact to the year and even allowed us to raise guidance. So, this year has been very good from a yen perspective. We typically don't have any fluctuations to the budgets we set for the year because of all of these programs that I just went through. And you know at the end of the day with Japan and the economy is expected to pick up as a result of this devaluation in the long run. We think that’s good for our customers as well.

Sterling Auty - JPMorgan: Last question, Art, can you just kind of maybe characterize where we are in the transition. It seems like 20-nanometer might be a little bit of a transition node. Do you agree with that and kind of where are we in the move to the next big node in terms of tooling?

Dr. Aart J. de Geus - Chairman and co-CEO: We are definitely seeing the number of designs growing in the 20, 22-nanometer node. I conquer with the general feel of somewhat of a transition from 28 to 14, 16. And the reason that’s a little bit of a misnomer is because the transition to FinFET is actually the important driver, not necessarily the node size, although the two of course, interact. And the reason that the transition to the FinFET is so enticing is that it really changes the performance power nature of the transistor and that is being one of the increasingly difficult bottlenecks in semiconductors. And so that being the opener to (indiscernible), so to speak, the race is obviously on. But it is also fair to say that a number of customers will land at least temporarily on the 20, 22-nanometer just because they want to part clean their design flows, they want to sort of minimize the risk in the transition and that makes a lot of sense, but we definitely see both behaviors.

Operator: Tom Diffely, D.A. Davidson.

Tom Diffely - D.A. Davidson: Brian, looking at the operating or I guess the margin expansion, the 100 basis points this year, perhaps a little bit more in the out year. Is that driven by kind of the ramp in IP and better margins in IP or just overall revenue growth in the company that's driving the operating margin expansion?

Brian Beattie - CFO: Well, Tom it's all of the above. It's really that our revenues are up very nicely this year. We're looking at revenue growth in the range of 11% to 12%. Spending is not growing as fast as that, and we are seeing good improvements across the board in the operating margins of the Company. At the same time, we've got to retain dollars to invest in leading-edge technology. So, again, still on track for the commitment for the years to see approximately 100 basis points improvement in the margins.

Tom Diffely - D.A. Davidson: When you look at the – I mean, all acquisitions last year, is there an opportunity to have operating expense improvements as integration happens over the next few quarters or are we pretty much at the ongoing level at this point?

Brian Beattie - CFO: No. There's still in a number of the product lines, still some of the integration activity is underway, getting best-in-class performance features out of all of the various products and bringing those to market as quickly as we can. So again, there could be some opportunities there. But again, overall, the Company does need to stay invested in leading-edge technologies and continue to drive EPS at the same time.

Tom Diffely - D.A. Davidson: What was the actual impact of the yen during the quarter?

Brian Beattie - CFO: Really not very material at all, as you saw from an impact through the yen on the revenues because of our hedging and the other activities and overachieving, as well as other income and expense where we are able to recognize some of the non-hedge accounting impacts to the Company. So, bottom line to the Company was really minimal, nothing almost.

Tom Diffely - D.A. Davidson: And then you talked about tax rate of 23%. That includes I guess the $0.09 impact of the R&D tax credit already fully embedded in your guidance?

Brian Beattie - CFO: Absolutely. Yeah, that's factored in. That came through in our first quarter. There was about a $0.04 impact related to FY '12 as a retro catch-up that we had in Q1 and then we had forecasted an additional $0.05 to come through in earnings per share for the balance of FY '13 which again we're just building on. So, we saw the $0.09 increase in Q1, primarily coming from tax and then we're adding on another $0.02 improvement in EPS coming from operational improvements this quarter.

Tom Diffely - D.A. Davidson: And your long-term view without the tax credit going forward in the out years is still around 25%?

Brian Beattie - CFO: Yeah, 25% to 26%, because when you look at us at 23%, it's a roughly 3 percentage points change. So, 25% to 26% is a good long-term planning model for us.

Tom Diffely - D.A. Davidson: And then I guess just finally on the technology side, is the move to some of these advanced technologies for memory like the 3D NAND, are they big drivers as well? I mean, it sounds like FinFET and the fact the established guys are and conglomerate all of your biggest customers, per se, are you going to see much of an impact once the industry moves to some of these memory technologies?

Dr. Aart J. de Geus - Chairman and co-CEO: Absolutely. Although they are not completely linked. There is a key reason for that, which is that the largest portion of the industry that sees the biggest benefit in changing the performance power segment is clearly the mobile side of the industry. Now, the power equation is starting to impact the cloud side as well because these very large centers of servers are definitely eating up too much power, but that's going to be a little slower. So mobility is driving this, and mobility is just incredibly hungry for even more performance, essentially limited by batter power, and since most of the computational energy goes into the core processors, that is where the emphasis on FinFET is going to be first. Now memories are following their own track of technology development, but they have the very same need of being – in this case, being very, very price sensitive. And so we are going to see more and more push there as well in parallel to the processors. By the way, when I say processors, I should clarify that I mean not just the apps processors but any other form as well, the graphics processors are key, the DSP processors as well.

Tom Diffely - D.A. Davidson: And so, once again, it really comes down to just battery life as the main driver of the mobile consumer today.

Dr. Aart J. de Geus - Chairman and co-CEO: Yeah, in many ways, largely because I think battery improvements, and don't quote me on the number, but I think it's maybe in the 10% to 15% per year, which is woefully insufficient versus what we wish our phone could do. And therefore, I think any advances in semiconductors are going to be of very high value. And by the way, I think this is going to continue in years to come, because the demand for more compute power will if nothing else accelerate with the type of applications that are possible. Therefore over time, I certainly have hopes that we will see some more migration of capital and money flow into the semiconductor industry precisely because there's such a high leverage on being able to improve the performance power ratio of number of these chips.

Operator: Jay Vleeschhouwer, Griffin Securities.

Jay Vleeschhouwer - Griffin Securities: Brian, I'll start with you, just to reconcile some revenue numbers here. You had an unusually large increase in your Asia Pacific revenues both year-over-year and sequentially. But your upfront revenues declined sequentially by a fair amount. So, was the increase in Asia Pac largely tied to the increase in TBL revenues generally and was IT and or services the main driver to that increase in Asia Pac?

Brian Beattie - CFO: Yes, let's go through a couple of your points here. One is that APAC did have a very strong quarter and when we look at trailing 12 months is doing very, very well as well. So, very strong region for the company. In terms of the mix of products of course, it fluctuates from quarter-to-quarter. When we look at now that of course we have an increased hardware business. We have more business coming in the areas of percentage completion or milestone based accounting for our revenues. And also that we see from time-to-time royalties coming through in a quarter-to-quarter basis. So, there will be some natural fluctuations from quarter-to-quarter, and I don't link it specifically to the region but overall for the company. But APAC is very strong for us and looking at very strong year-over-year growth.

Jay Vleeschhouwer - Griffin Securities: So, just to clarify on that, so it was a variety of things, it wasn't necessarily a single large schedule to TBL payment or anything like that?

Brian Beattie - CFO: Right. That’s correct.

Jay Vleeschhouwer - Griffin Securities: For Art, let's see how far we can take the Intel discussion. When you last publicly disclosed a renewal with them which was August 2007, there was some comments you made at the time with regard to technology collaboration and work with them. So, perhaps you could comment in what ways the arrangement now might in any way be different from what you talked about back then. Also at that time in 2007 your quarterly revenue run rate with them that you disclosed was roughly, let's call it, $34 million a quarter, and now based on recent disclosures we are up to over $50 million a quarter. Some of that's inorganic of course, but would you foresee a prospect of further material increases in the run rate with them as we have seen over the last five to six years?

Dr. Aart J. de Geus - Chairman and co-CEO: Nothing else Jay, you are keeping a very good note. But unfortunately, I'm not going to add much to the notes because we don't comment about the business relationship we have with our customers. Intel is and obviously visibly so an important technology driver and has been a very good partner to us and all I can say is that that that relationship continues on that basis.

Jay Vleeschhouwer - Griffin Securities: On the IP business, I think you had mentioned in an earlier call that you do you have something like 11400 engineers now in that business. Could you just remind us what proportion of that headcount is inwardly focused in terms of R&D versus customer engagements where you are doing projects for customers that apart from the internal R&D work that you do?

Dr. Aart J. de Geus - Chairman and co-CEO: Well, the number I mentioned was 1,700 and I'm not quite sure how to answer the question, because these are engineers that are essentially developing IP for customers. Some of the IP is very generic, some of the IP gets tuned specifically for the customers' technology. And whenever an IP is not fully synthesizable you have to do that in order to take advantage of the specific nature of their silicon node. And a node is not only single node, it often has different characteristics being optimized for performance or low power, for example. And so the breadth of the type of these engagements is quite broad, but the number I mentioned is all really fundamentally in the development and delivery of IP to the customers.

Jay Vleeschhouwer - Griffin Securities: Couple of last things. You mention in your prepared remarks, say, no win in Japan. Could we speak about Japan a little bit more broadly because it's been obvious for the last number of years that it's been shirking in importance to EDA as a percentage of EDA spend, and yet we've seen in the last couple of quarters or so, some renewed momentum among other technical software companies. And I'm wondering is this particular win is indicative of all of the reinvestment cycle that maybe occurring in Japan vis-a-vis EDA as a whole and not just this one particular success which you've had there?

Dr. Aart J. de Geus - Chairman and co-CEO: Just for the record, I did not mention any specific win in Japan. But on the general topic of Japan, it is very clear that over the last, now, actually more than a decade but visibly so in the last half decade or so that Japan economy and the semiconductor industry in particular have been under enormous pressure. While we as a Company are doing quite well, I'd like to link to one of the things that Brian said earlier, which is this very change in the valuation of the yen is viewed in Japan as at least the beginning of a ray of hope that they become more competitive on a worldwide basis. And with that, the opportunity for their business to sort of restart themselves beyond the somewhat stale situation that the industry has been in. Now having said that, there are a number of companies that have taken very aggressive steps in consolidating or in streamlining their businesses. And like any other part of the world, these changes are difficult to do, they take some time, but after a while, the positive impact starts to show. So we certainly hope that the industry in Japan in semiconductors will grow again, and potentially also will refocus on some of the newer opportunity spaces. Now, the indications are a little bit better than they were, let’s say just six months ago, but having said that, these are macroeconomic events that are certainly far beyond our control as a company.

Jay Vleeschhouwer - Griffin Securities: And then lastly, would you care to comment on the announcement earlier this week by Cadence of a potentially competitive offering versus (PET)?

Dr. Aart J. de Geus - Chairman and co-CEO: Of course this is that season, and you will see a wave of announcements of products that are all better than what was ever built before; and the reality will sink in over time. So, no, I don’t think that there is anything more to be said right now, we will have to see what the reality is. Obviously we have a strong competitor in Cadence, and we will compete equally strongly back.

Operator: Mahesh Sanganeria, RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets: Aart, can you comment on the design win you talked about this quarter you had was – which product area that was in and what was the driver for your design win?

Dr. Aart J. de Geus - Chairman and co-CEO: I think I mentioned the term design wins when summarizing how far our USB franchise and delivery had gone, because it's quite astounding how the IP business for us has evolved over a number of years. And at some times we work so hard that we don't realize how many designs have actually utilized our IP in that context. I think the 3000 design win of USB was actually I think quite remarkable. Having said that, the other aspect where there were design wins comes in is literally every day, meaning that no matter how good a company we hope we are, we have to prove every day again that we are worthy of the responsibility of being on the top chips for tomorrow and therefore, we do have a very active engagement in the field through our technical support team. And the good news is, I think we are really massively involved in all of the new advanced chips. And in that context everyday there is somewhere in the world some good news of being selected again to continue that journey, but is also the responsibility and the fun challenge to actually have to deliver on chips that are driving the boundaries of what we can do. And so in the context I think these are FinFET efforts be it through the tools that are very much on top of all that I think already. The IP that is in very rapid development and now increasingly the technical skills in our field to support our customers. These are all very positive indicators for the future that we have with the people driving most important design wins.

Mahesh Sanganeria - RBC Capital Markets: Just a follow-up on the FinFET, you mentioned that you have experience designing with FinFET, can you give us little bit more color where is the more profound impact in terms of the different tools, is it more in the device simulation of placement or power closure. Where is the most profound changes you had to make in the tools to enable the FinFET.

Dr. Aart J. de Geus - Chairman and co-CEO: It's actually very much across the board, because it starts with really the design of both the technology which, by the way is moving to a very, very small node, 14, 16-nanometer, and with that, there's a lot of lithography type of issues, but there's also lithography creeping into the place and route by virtue of what's called double patterning. Secondly, the entire layout space is highly impacted because the nature of the transistor will change the timing and power calculations, but the layout is also influenced greatly by all the rules that you have to follow to place these things on the chip just right. And when I say rules, we're talking essentially doubling rules of 2,000 to 4,000 rules that you have to follow. And then, indirectly, it really impacts or will impact, I should say going forward, the entire verification space, because all the way down to the (spice) level simulation of the transistor all the way up to the sheer number of transistors and therefore complexity of chip verification from a functional point of view. So, it is quite remarkable the breadth of it. But it's also quite rewarding because that is the very reason that we can see how much impact this will have on design and on electronics going forward. And then summarizing all of that, it also impacts every one of the building blocks, and again, you can look at the transistor as being literally the smallest atomic building block all the way to the large pieces of IP that have to be tuned for these technologies. And as I mentioned in the context of an earlier question, we have been working on IP development be it memories or libraries or building blocks now already for quite a while. And in that sense, I think we are very much in sync with the foundries as they roll out their production-ready solutions.

Mahesh Sanganeria - RBC Capital Markets: Then one more question I want to follow up on the topic that was discussed is the 20-nanometer being a transitory node. Will it be possible for you to give us a quantitative sense at what will be the – what is your expectation for peak design starts on 28, 20, and 14 so that we can get an idea of how big or how small this 20-nanometer is going to be?

Dr. Aart J. de Geus - Chairman and co-CEO: Yeah, let me give you a little bit of sense. For the 28, 32-nanometer node, we actually have stopped tracking. And what that means is, we count the early chips up till 500; after that this becomes completely untrackable. So, that node I think will continue to be a big node in the sense that a lot of design will aggregate there. On the 20, 22-nanometer we have I think about 100 designs and growing on the radar scope. And then we do not communicate the 14, 16-nanometer partially because there's too much confidential information in that. But I can only tell you there are some very hard-hitting folks engaged in both test chips and production chips there.

Operator: Satya Kumar, Credit Suisse.

Farhan Ahmad - Credit Suisse: This is Farhan asking the question on behalf of Satya. Question on the fragmentation on the foundries. Like recently there has been some large companies which have indicated that they are entering the foundry phase. And compared to three, four years ago there are more companies being foundry worth. How does that affect the media world and does that imply that you have greater amount of OpEx nominated because you have to support multiple design flows. And also, is that leading to more design activity because people have to design for different foundries?

Dr. Aart J. de Geus - Chairman and co-CEO: To be honest, acoustically, it was a little hard to understand. So let me try to formulate the question and see if I answer the right one, which is, as the foundry landscape is changing and a number of the foundries are – a number of their users are trying to use multiple foundries, (what all) do you have to support because in that context, the number of nodes sort of multiplies in the dark so to speak, meaning that not only do you have these smaller nodes, but you have variations on each one of those for performance, power and maybe costs? So, it is certainly true that this puts a fairly heavy burden on us, but also on the foundries to have the complete ecosystem ready and the good news on our side is that we have designed our tools to be extremely flexible for a variety of parameters. And therein lies actually one of the differentiating essences of what Synopsys has built literally for the last 20 years all the way starting to synthesis and through the physical implementation which is we can read in the characteristic of different technology nodes and their variations and then optimize the circuit based on that. So if a certain node, let's say, may have some better capabilities and low power, we will take advantage of that automatically in the tools. Now, having said that, the one area where that is sometimes challenged is as you develop IP, that has to be individually optimized, in some cases almost manually for best results because it's going to get reused so much. Now, we need to have working contract with the customers. So, that we can invest the resources to do that, deliver it on time and they have a strong interest that their IP looks really good because that will attract their customers to go to them. And so there is an economic relationship there that has to jive and moreover there is a temporal relationship because they want to have their technology ready at the same time as the tools being ready, at the same time as the IP being ready and at the same time, the support being ready. And of course, you are talking about things that are really (taking free heart) and so predicting the right arrival time is not always trivial. But we are working closely with SET all of the top foundries on that and again I think it's both a privilege and an opportunity to be at the center of gravity of this whole next wave of capability.

Operator: And I will turn it back to our speakers for closing remarks.

Dr. Aart J. de Geus - Chairman and co-CEO: Well at this point in time, thank you for attending the call. I think we communicated to you that we have really an excellent quarter and moreover are making really great progress in many of the technology directions that I believe will profoundly impact semiconductors in the years to come. And so from that perspective as much I'll say the pressure is on us to continue to deliver the privileges here to be part of that right. And we are looking forward at finishing our year well within the targets that we have given you. Thank you so much and we will be available for questions afterwards as usual.

Operator: Thank you. And ladies and gentlemen this will conclude our conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.