Synopsys Earnings Call Insights: Business Levels and Non-GAAP Operating Expenses

Synopsys (NASDAQ:SNPS) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Business Levels

Richard Valera – Needham & Company: So Brian you referenced higher than planned business levels yet you really slightly tweaked down your revenue guidance for the year. Is that just due to the what you mentioned sort of higher expected volatility around hardware sales in those timing of consulting deals?

Brian Beattie – CFO: Again, we are very, very strong business levels and we referenced that last quarter and again this quarter and as a result of that we were able to confirm very solid revenue growths for the year. We are looking at that 12% write down. It is right within the range we set at the very beginning of the year. It’s within the range that we set at the last quarter. As a result of that too we are now able to raise the midpoint of our EPS guidance by about $0.03 from last quarter. So again we are in good shape. We are actually – you see us now shooting for over $500 million of revenue in the fourth quarter, which is a record achievement for us as well that we are planning.

Richard Valera – Needham & Company: Maybe I could ask it another way, are there any geos or product areas that are bit lighter than expected and I guess, you had called out Japan in particular, that’s been down high single digits to double-digits for the last three quarters, is that a headwind that’s sort of had some cumulative impacts here and any thoughts on any of those?

Brian Beattie – CFO: Well, yeah. We do see as I mentioned even in the last quarter, we anticipated the results we’d have this quarter. We do see some variability just based on the timing of the elements like our emulation hardware products and our boards, our prototyping activity, where all that revenues move within the quarter, so again seeing very good strong growth. The consulting part of the business is doing pretty well and again timing of that is based on, Richie, the percentage completion or when the cash comes in from a customer. So, we just tune it into the actual expectations based on the type of business, but overall, it looks like we had very strong year again that we’re putting up.

Richard Valera – Needham & Company: One final one for me with respect to your analog and custom design initiative. I just wanted to talk about how that’s going in the market, how the Laker product is doing, that was a well-respected product, but a very small revenue base relative to the total market, wondering if you feel like you are having some success there in trying to crack into that sort of analog custom design market based on those Laker tools?

Brian Beattie – CFO: As a matter of fact, yes, Laker was a very good acquisition and the combination of Laker and the efforts that we had in CD are quite complementary and we are still in the process of integrating all of that, but one of the other things that we inherited with Laker, of course, is a very strong presence with a number of customers and while one goes for the uncertainties of an initial acquisition, I can report that the customers are very positive about what we’re doing and have been very stable with us. So, we can build on that. In addition, we’re finding also that the ability to do co-design with the obviously very strong digital offering that we have is growing an opportunity, so I think Laker was a great addition to what we have and the integration is progressing very well with what is truly also a stellar team in the form of SpringSoft people.

Non-GAAP Operating Expenses

Krish Sankar – Bank of America Merrill Lynch: I had a couple of them. One, Brian on the guidance for the October quarter, what are the reasons for the non-GAAP OpEx going up that much?

Brian Beattie – CFO: Well, the timing of the spending, again it’s just based on when the agreements are put in place and, you know it’s a profile that recognizing salary increases that come in the year. It’s a little bit of variable comp related to again a very strong fourth quarter that’s expected, so really just – that’s a typical Q4 profile that we see. We saw the same thing last year, and then typically, the next quarter and Q1 kind of drops off. So, it really is just a tuning up for all the final years expense activity.

Krish Sankar – Bank of America Merrill Lynch: Aart, the other question for you, when you look at the foundries moving to 20 and below on the FinFET side, I’m just kind of curious, can you help quantify what is the increase in design cost when you go from a 28 to a 20-nanometer planar and then when you go from planar to 16 or 16 FinFET geometry, can you help quantify what the implemental design cost will benefit?

Dr. Aart J. de Geus – Chairman and co-CEO: Well, this actually is quite difficult, because very often people as they move to the next node, and especially as they move into this one, they are simultaneously dramatically increasing the complexity of their chip. So what they are trying to get is roughly what is, the same manufacturing cost because those have tended to be relatively stable over many, many, many years is a much higher degree of functionality. On top of that what complicates your question is to what degree are they pushing the envelope on performance and power. So those people that really want to exceed their competition in that angle will spend more with us and we are clearly seeing that, the first version of any design is a step up in terms of investment, in terms of time and in terms of utilization of tools. I am clarifying that its first version because there is a lot of wrong beliefs in the industry that every chip is just incredibly more expensive. That’s not true. Once you have done the first version of the chip most of the chips are derivatives that then are much lower cost. So at the end of the day the economic equation holds pretty well together and the reason I can say that is because we can see the number of people accelerating their push towards the sub 20-nanometer FinFET generation to actually continue to increase. I think that’s a very good time because as you have heard me say before I think FinFET has opened up another decade of Moore’s law and we are well on our way with that.

Krish Sankar – Bank of America Merrill Lynch: Then when you look at the historic given maybe going back to the 28-nanometer node, what was the time from the time – from the moment they finalize the design to the time they ramped up capacity and do you expect that to be shorter when you go to FinFET because you say that they are accelerating to the FinFET node. Once they finalize the FinFET design when do you expect actual volume output on the factories to happen?

Dr. Aart J. de Geus – Chairman and co-CEO: I think that in aggregate it is not that different on any of the previous nodes because as much as the processing is a bit more complex, it does not add an enormous amount of time compared to previous processing steps and so then it’s more a question of what’s your degree of confidence and the quality of the designs, do you have to do any engineering changes to it and tape it out another round and in general, so far, the evidence is that we are doing just as well as we did with any of the previous generations, but it is a big investment for specifically the foundries to get all of their data together. One more comment with these much larger chips, this chips are the factor of all little supercomputers because they have many processing cores, plus also an increase of the embedded software that goes with it and so as much as your question is pertinent, I do think that the time to market is as much dominated by the readiness of the software as the issues around the hardware.