Fourth Quarter and Fiscal year Earnings Call by jolinmilioncherie


									                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

The following prepared remarks are an excerpt from Synopsys’ Second Quarter Fiscal Year 2012
Earnings Call. To review the contents of the entire earnings call, please refer to the official webcast,
which will remain available on Synopsys’ website through the date of the third quarter earnings call in
August 2012.

These prepared remarks contain forward looking statements relating to Synopsys’ business, products and
technologies, including statements regarding projected financial results and financial objectives, and any
statements regarding the impact of Synopsys’ acquisition of Magma Design Automation, Inc. (“Magma”),
the expected effect of such acquisition on Synopsys’ financial results, benefits of such acquisition, and
integration of Magma’s products and employees with those of Synopsys. These statements are forward-
looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those described by these statements
due to a number of uncertainties, including, but not limited to, continued uncertainty in the global
economy and its potential impact on the semiconductor and electronics industries; Synopsys' ability to
realize the potential financial or strategic benefits of acquisitions it completes, including the recent
acquisition of Magma, and the difficulties in the integration of the products and operations of acquired
companies or assets into Synopsys' products and operations; the effect of Synopsys’ acquisition of
Magma on Synopsys’ business, including possible delays in customer orders, potential loss of customers,
key employees, partners or vendors, customer demand and support obligations for product offerings, and
disruption of ongoing business operations and diversion of management attention; increased competition
in the market for Synopsys' products and services including through consolidation in the industry and
among our customers; uncertainty in the growth of the semiconductor and electronics industry; changes in
demand for Synopsys’ products due to fluctuations in demand for its customers’ products; the possibility
of litigation; lower-than-anticipated new IC design starts; lower-than-anticipated purchases or delays in
purchases of software or consulting services by Synopsys’ customers, including delays in the renewal, or
non-renewal, of Synopsys’ license arrangements with major customers; changes in the mix of time-based
licenses and upfront licenses; lower-than-expected orders; and failure of customers to pay license fees as

In addition, Synopsys' actual expenses, earnings per share and tax rate on a GAAP and non-GAAP basis
for the fiscal quarter ending July 31, 2012, actual expenses, earnings per share, tax rate, and other
projections on a GAAP and non-GAAP basis for fiscal year, and cash flow from operations on a GAAP
basis for fiscal year 2012 could differ materially from the targets stated under "Financial Targets" above
for a number of reasons, including, but not limited to, (i) integration and other acquisition-related costs
such as those arising from Synopsys’ acquisition of Magma, including amortization of intangible assets
and costs, (ii) application of the actual consolidated GAAP and non-GAAP tax rates for such periods, or
judgment by management, based upon the status of pending audits and settlements to increase or decrease
an income tax asset or liability, (iii) a determination by Synopsys that any portion of its goodwill or
intangible assets have become impaired, (iv) changes in the anticipated amount of employee stock-based
compensation expense recognized on Synopsys' financial statements, (v) actual change in the fair value of
Synopsys' non-qualified deferred compensation plan obligations, (vi) increases or decreases to estimated
capital expenditures, (vii) changes driven by new accounting rules, regulations, interpretations or
guidance, (viii) general economic conditions, and (ix) other risks as detailed in Synopsys' SEC filings,
including those described in the "Risk Factors" section in its latest Quarterly Report on Form 10-Q for the
first quarter ended January 31, 2012. Furthermore, Synopsys' actual tax rates applied to income for the
third quarter and fiscal year 2012 could differ from the targets given in this press release as a result of a

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                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

number of factors, including the actual geographic mix of revenue during the quarter and year, and
actions by the government.

Finally, Synopsys’ targets for outstanding shares in the third quarter and fiscal year 2012 could differ
from the targets given in these prepared remarks as a result of higher than expected employee stock plan
issuances or stock option exercises, acquisitions, including Synopsys’ assumption of certain equity
awards in connection with its acquisition of Magma, and the extent of Synopsys’ stock repurchase

The information contained in these prepared remarks represents Synopsys’ expectations and beliefs as of
May 23, 2012 only. Synopsys is under no obligation to (and expressly disclaims any such obligation to)
update or alter any of the forward-looking statements made in these prepared remarks, the earnings
release, the conference call or the financial supplement whether as a result of new information, future
events or otherwise, unless otherwise required by law.

These prepared remarks also contain non-GAAP financial measures as defined by the Securities and
Exchange Commission in Regulation G. Reconciliations of the non-GAAP financial measures to their
comparable GAAP measures are included in the second quarter fiscal year 2012 earnings release and
financial supplement, each dated May 23, 2012 and available on Synopsys' website at Additional information about such reconciliations can be found in Synopsys’
Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 23, 2012.


Good afternoon and thank you for joining us. Today I’m pleased to report excellent Q2 results, very rapid
progress on the integration of Magma Design Automation, and raised guidance for FY 2012. Let me
begin with a financial summary. Our business in Q2 was strong across all metrics, with revenue of $433
million and non-GAAP earnings per share of 53 cents, which includes a penny of dilution from Magma
that was not included in our previous guidance range. For the year, we are raising our outlook based on
increased visibility and confidence and the progress made on the Magma integration, to a range of $2.03-

From the perspective of our long-term financial management, you may recall that in 2010, we
communicated to you a high-single digit EPS growth objective, based on five pillars: One, organic
revenue growth in core EDA of low-to-mid single digits. Two, double-digit organic revenue growth in IP
and Systems. Three, continued M&A. Four, efficient allocation of resources. And five, keeping share
count roughly flat at approximately 150 million shares. Clearly we continue to deliver against these
objectives, and are already well on-track to achieve double-digit EPS growth again this year. We will
provide 2013 guidance in our December earnings release, but I will say already now that our objective is
to achieve high-single digit EPS growth for next year as well. For the present quarter and year, Brian will
provide more financial detail in just a minute.

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                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

Before addressing the product highlights, let me comment on the current landscape. Whereas the
economic ups and downs are readily visible in the press on a daily basis, the electronics and
semiconductor industries are racing forward from a technology point of view. While electronic
consumption is staying high, the battle for share among the providers is quite intense, resulting in some
consolidation, an accelerated push towards the 28nm production of advanced chips, and substantial
investments into the next generations of technology. For our industry, this clearly means additional
pressure as we support challenged and very competitive customers; but also a solid landscape of renewals,
add-on purchases, and emphasis on value selling. We expect that going forward, customers will rely
more on EDA for improved design efficiency and product differentiation, which bodes well for our
sustained growth prospects.

In that sense, EDA feels healthier than it has been in a number of years. These dynamics are particularly
positive for Synopsys. For many years we have focused on building a set of complete solutions, ranging
from system design, to chip implementation, to manufacturing. In addition, our time-based business
model, supported by a substantial multi-year backlog, lets us continually invest in R&D and support in
virtually any phase of the economic cycle. Consequently, it’s not surprising that the majority of the state-
of-the-art designs are done with Synopsys tools, and rely on the skills of our global support teams.

Which brings me to the highlights for the quarter, starting with our Core EDA and manufacturing
offerings. One of the advanced areas in which both stress and excitement are visible on a daily basis is in
the design of processors, graphics and SoCs. Clearly our customers aim to achieve highest performance
at lowest power. In this area Synopsys shines. One example is with Samsung, who completed the first-
ever production tape-out of a high-speed ARM Cortex A-15 processor – relying exclusively on IC
Compiler and Galaxy for physical design. Simultaneously, the acceleration to 28nm saw the number of
active designs and tape-outs grow 15-20% this quarter. The vast majority of these use our Galaxy
solution. For the even more advanced 20nm node, we estimate that Synopsys is being used in ~80% of
designs and tape-outs.

In this context, links to manufacturing become even more important. Our two-pronged strategy features
integrating manufacturing elements into design tools for faster and better results; and developing
manufacturing tools to attack the most difficult challenges at the next advanced processes. Our Proteus
mask synthesis solution, for example, continues to gain share. During the quarter we announced that
Renesas has adopted Proteus LRC for lithography verification. Also in the quarter, yet another major
manufacturer adopted Proteus for 20nm.

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                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

In parallel to implementation, verification continues to be a crucial part of the design flow, with 70-plus-
percent of advanced designs – from processors, to graphics, to SoCs – being verified using Synopsys. A
particular highlight for the quarter was our success in expanding our Verification IP offering. We
introduced ground-breaking technical advances in this area, yielding competitive wins at several large
companies. For example, last week we announced that AMD has selected Synopsys as its verification IP

Let me briefly also comment on our excellent progress in integrating Magma and working with their
customers. In the last 90 days since we closed, we integrated all of the teams. While keeping the critical
core of technologists and technical support, we were able to recognize considerable expense synergies by
eliminating overlapping infrastructure positions. We are progressing swiftly to rationalize facilities and
other longer-term expenses as well. Focusing immediately on our joint customers, our combined teams
conducted very insightful face-to-face worldwide listening tours. In parallel, our R&D teams did detailed
cross-training and analysis to assess where strengths could be leveraged from each product line.

This week, we started to roll out customized roadmaps to our customers, responsive to their stated needs.
From the start, we have been very clear that we will support the former Magma tools to make sure that
our customer’s projects will not be jeopardized. It is also clear that in a number of areas there are very
good technologies that will integrate with other Synopsys tools – creating even better solutions and
providing interesting upgrade opportunities. We see some of these capabilities becoming available as
soon as year-end or early next year. Since the roadmap discussions have just started, it’s too early to
comment on the specifics, but in general, the customer interactions are going very well.

Now to IP, where Synopsys is the second largest vendor in the world, leading in interface, memory and
analog IP blocks. Given the high time-to-market pressure for most consumer applications and the
enormous number of sophisticated IP blocks used in the key SoC chips, the “build versus buy” trade-off
for IP continues to evolve to the benefit of commercial solutions. Q2 was another strong business quarter
for our IP and we continued to expand our portfolio both organically and through acquisition. For
example, during the quarter we acquired 10GB Serdes technology from Mosys, further expanding our
high-speed Serdes offering. With increased attention on the advanced technology nodes, adoption of our
IP blocks for advanced 28 and 20nm designs is ramping steadily. We expect Synopsys IP to continue to
be a good driver of growth for us this year.

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                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

In systems, our FPGA-based and virtual prototyping product lines are doing well also. The ability to
accelerate embedded software development by six-to-nine months is a compelling value proposition for
project managers. Given that most prototyping systems are still built in-house today, we see increased
outsourcing to commercial solutions from Synopsys as a driver of growth here as well.

Bringing IP and system solutions together, last month we introduced the SoundWave Audio Subsystem; a
complete, integrated hardware and software audio IP subsystem for system-on-chip designs. This first-of-
its-kind solution is designed to save customers years of integration and verification effort and supports
popular audio standards such as Dolby, SRS and DTS.

Overall, be it in low power design, in complex system verification, or in sophisticated IP re-use, all of our
products are supported by a world-wide team of experts that our customers greatly rely on for their
differentiation and success.

Before I conclude, let me briefly comment on today’s announcement that Chi-Foon Chan has been
appointed to join me as Co-CEO. Many of you know that Chi-Foon and I have been working in this
manner for over a decade, and while this is formal recognition of the success we’ve had in co-leading the
company into its present leadership position, there are no major changes in structure or responsibilities. I
will continue as Chairman and CEO, being the main face to Wall Street, and Chi-Foon will continue as
President and Co-CEO, shouldering much of the operational responsibilities for the company. I’m
extremely pleased that we are recognizing Chi-Foon’s hard work and talent in this way and look forward
to together conceive and drive the next phase of growth of Synopsys.

In summary, we delivered excellent Q2 results and are raising yearly guidance based on both intrinsic
strength in our base business and the addition of Magma. The environment for EDA and Synopsys is
robust, and demand for our technology is strong. We are making rapid progress in integrating Magma
and expect to deliver even better technology going forward. I’ll now turn the call over to Brian Beattie.


Thanks, Aart. 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 this first quarter following
our recent Magma acquisition, I will also address the related Q2 financial impacts and will outline the
revenue trends of the Magma business leading into FY13. Going forward we will not be breaking out the
impact of Magma as the company becomes fully integrated. In my discussions, all of my comparisons
will be year-over-year unless I specify otherwise.

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                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

Synopsys delivered an excellent quarter, highlighted by strong business levels, double-digit growth in
both revenue and non-GAAP earnings, and considerable free cash flow generation. Additionally, we are
raising our full year outlook for revenue, non-GAAP earnings and operating cash flow. Let me now
provide some additional detail on our financials.

Total revenue was $433 million, an increase of 10 percent compared to a year ago and well above our
target range. As expected, revenue contribution from Magma was modest at $14 million, primarily
reflecting the standard purchase accounting haircut that was applied to deferred revenue. We delivered
growth across all product groups, with particular strength from our Core EDA platform. One customer
accounted for slightly more than 10 percent of second quarter revenue. Approximately 90 percent of Q2
revenue came from beginning-of-quarter backlog, while upfront revenue was 5 percent of total. This is
well within our target range of less than 10 percent upfront. The average length of our renewable
customer license commitments for the quarter was about 2.7 years. We expect average duration in fiscal
2012 to be about 2.8 years.

Turning to expenses, total GAAP costs and expenses were $415 million, which included $29 million of
amortization of intangible assets and $21 million of stock-based compensation. We also had $31 million
of acquisition-related costs that primarily related to Magma. Total non-GAAP costs and expenses were
$332 million – an expected year-over-year increase also due mainly to our Magma acquisition. Excluding
Magma, total non-GAAP costs and expenses would have declined sequentially.

Non-GAAP operating margin was 23 percent for the quarter and 24 percent for the first half of fiscal
2012. For all of FY12, we continue to expect non-GAAP operating margin to increase over FY11 levels
by approximately 100 basis points.

Turning now to earnings, GAAP earnings per share were 14 cents, down from 53 cents a year ago. Recall
that Q2 FY11 earnings included the one-time impact of a $32.8 million, or 21 cents per share, GAAP-
only tax benefit associated with an IRS settlement for fiscal years 2006-2009. Non-GAAP earnings per
share increased 18 percent to 53 cents, and include the one cent dilution from Magma.

Our non-GAAP tax rate was 24 percent for the quarter. For modeling purposes, we continue to think that
a non-GAAP tax rate of approximately 25 percent is a reasonable estimate for fiscal 2012.

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                                     Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                     Prepared Remarks
                                                                             Wednesday, May 23, 2012

Now turning to our cash and balance sheet items. Our balance sheet remains strong with $797 million in
cash and cash equivalents. We also had $250 million of debt at the end of the quarter due to the Magma
acquisition. Of our total cash balance, 19 percent was onshore at quarter end and 81 percent was
offshore. As expected, our domestic cash declined as a result of the Magma acquisition. We generated
$127 million in cash from operations in the quarter and we are raising our operating cash flow target for
the year to $320 - $340 million.

Continuing on with our cash and balance sheet items: Capital expenditures were $9 million for the
quarter. For the year, we expect capital spending of approximately $55 million. We did not spend cash to
repurchase stock in the quarter and have approximately $272 million remaining on our current share
repurchase authorization. As always, we will evaluate the best uses of cash each quarter – including
company operations, M&A investments, repayment of debt and stock repurchases.

Continuing on with balance sheet items: Q2 net accounts receivable totaled $236 million and DSO was 50
days, within our target range. Deferred revenue at the end of the quarter was $736 million.

We ended Q2 with approximately 7,475 employees, with more than a third in low-cost geographies.
Approximately 590 of the additional employees were from our recent acquisitions, the majority coming
from Magma.

Now let’s address our third quarter and fiscal 2012 guidance, which excludes any future M&A, including
the impact of future acquisition-related expenses on GAAP targets that may be incurred in Q3 and

For the third quarter of FY12, our targets are:

    •     Revenue between $440 and $448 million;
    •     Total GAAP costs and expenses between $371 and $387 million, which includes approximately
             $16 million of stock-based compensation expense;
    •     Total non-GAAP costs and expenses between $333 and $343 million;
    •     Other income and expense between $0 and negative $2 million;
    •     A non-GAAP tax rate of approximately 26 percent;
    •     Outstanding shares between 149 and 153 million;
    •     GAAP earnings of $0.29 to $0.34 per share; and
    •     Non-GAAP earnings of $0.49 to $0.51 per share.

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                                    Synopsys Second Quarter Fiscal Year 2012 Earnings Conference Call
                                                                                    Prepared Remarks
                                                                            Wednesday, May 23, 2012

    •   We expect greater than 90 percent of the quarter’s revenue to come from backlog.

Now our Fiscal 2012 outlook:

    •   We’re raising our revenue range, with our new target between $1.74 and $1.76 billion, reflecting
            underlying strength in our base Synopsys business and also the addition of Magma. At this
            time we anticipate that Magma will contribute approximately $60 million for the full year;
    •   Other income and expense between $0 and $3 million;
    •   A non-GAAP tax rate of approximately 25 percent;
    •   Outstanding shares between 148 and 152 million;
    •   GAAP earnings per share between $1.04 and $1.16, which includes the impact of approximately
            $71 million in stock-based compensation expense;
    •   Non-GAAP earnings per share of $2.03 to $2.07. We’ve raised the mid-point of our guidance
            range by five cents – three cents of that due to Magma. Our current range represents year-
            over-year growth of approximately 13 to 15 percent, exceeding our beginning-of-year
            commitment to deliver high-single digit earnings growth in FY12;
    •   And we are now targeting cash flow from operations of $320-340 million.

As Aart mentioned, while we are still analyzing the business and planning for FY13, our objective is to
achieve high-single-digit non-GAAP EPS growth. For modeling purposes, we think that a reasonable
estimate for Magma revenue is just shy of $100 million, taking into account the business model transition
under Synopsys, along with the backlog profile acquired.

In summary, we’re pleased with our excellent second quarter results, highlighted by top- and bottom-line
growth, solid operating margin and strong cash flow generation. We’re also pleased to provide increased
revenue, EPS and cash flow guidance for FY12. With that, I’ll turn it over to the operator for questions.

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