Synopsys Earnings Call INSIGHTS: Revenue Guidance, SpringSoft Model

On Wednesday, Synopsys (NASDAQ:SNPS) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Revenue Guidance

Richard Valera – Needham & Company: Just a question on the revenue guidance, small change but you did bring that down a little bit at the midpoint. Anything you can ascribe to that change?

Dr. Aart de Geus – Chairman and co-CEO: I don’t think there is much meaning to that. We manage for the year, and so if you look the overall numbers for the year, I forgot the exact number, but we must be growing about 14% or so. So everything else sort of falls in place gradually during the year as the reality of transactions get executed and it’s all as far as I recall within the same range that we had before.

Richard Valera – Needham & Company: So nothing like perhaps related to Magma being different than expected or anything specific?

Dr. Aart de Geus – Chairman and co-CEO: I think Magma and all of our own businesses always a bit different than expected. I am Frank. Customers actually play out over time is actually very difficult to predict exactly, but fundamentally I think no, there’s no change to the business picture.

Richard Valera – Needham & Company: Fair enough. Just with respect to business levels which seem to be your sort of terms for bookings, you had apparently very strong business levels in the first half and then that seems to be reflected in higher than expected sales and marketing expense. This quarter sales and marketing was actually better than we had modeled at least, not sure if that actually is reflecting maybe less strong core business levels, but just wondering if you can say anything about the sort of the bookings or business level, Frank, as you move through the year?

Dr. Aart de Geus – Chairman and co-CEO: By the way, and I can see why that would be slightly confusing, but when I said business levels really what I always think of is really how is the run rate of the business developing because we’re certainly very clear that high or low orders can be significant or completely insignificant, it’s all a function of how they rollout in the backlog over time. So in this case actually the combination of both orders and run rate were positive and so I didn’t mean to obfuscate things. It’s just a general term for actually business feeling good.

Brian Beattie – CFO: Rich, just to add some clarity around. We did have a very good quarter as you can see from cash collections and it allowed us to raise our cash forecast for the year and it does relate to a number of those elements just seeing the business is coming in stronger. The payment terms that we typically see actually were also more favorable relative to the amount of cash collected in the first year of the roughly 2.8 year deals and we’re also seeing lower disbursements as well, so all that contributed to good cash flow in the quarter and our ability to raise fairly significantly our cash flow for the year. Then the last thing is again we always highlighted, it does move quite a bit. It’s tough to forecast and tracks our EBITDA numbers over time. So we’re again happy with the output on cash flow for this year.

Richard Valera – Needham & Company: Just one final one if I could with respect to SpringSoft, you noted that the (Bucee) debug stuff is sort of perfectly complementary which is great. Agree there is obviously the Laker stuff would appear to be somewhat overlapping with your current custom design or offering, just wondering how you think about those two. Do you look to integrate Laker with IC Compiler as you have with customer designer? Do you think those two should sit side-by-side or how you think they play out?

Dr. Aart de Geus – Chairman and co-CEO: This is a little bit always the dilemma commenting before one actually have a closed-end and most importantly really have the teams work together on this and so I can’t really make many comments about this, but I can tell you one thing which is what we do is we try to take the best people that we have on the acquisitions and in this context, actually multiple acquisition that play together and ask them the question what’s the best thing for the customer today meaning to make sure that the farewell and what’s the best thing for the customer to use from now and then you have to build the bridge trajectory and having just on that with the Magma tools I think we are well versed in that. And there may be some overlap, but I think there’s a lot of complementary capabilities and strengths, and so I don’t foresee any problems there.

SpringSoft Model

Raj Seth – Cowen and Company: Just a couple of follow-ups on a couple of things Rich was talking about. Brian, on SpringSoft, I know there’s not much you can talk about vis-a-vis integration etc, but I’m curious if you can comment on the model that they were running and whether or not you’re going to need to twist that model towards a much more ratable model like you’re currently operating in, whether or not that’s likely to be dilutive at the beginning of the year? Admittedly you’ve talked about accretion for the full year, but maybe you can talk a little bit about what kind of model they were operating?

Brian Beattie – CFO: Yeah, they are expected to be to slightly accretive, as we said, for all of FY ’13. Of course, what will happen is that we will take their business model, which was more upfront, again, under their local accounting standards and so on. It’s all totally appropriate and they’re looking at how we then would go through in a contract by contract basis just as we did with Magma and then we’ll re-profile that revenue under the Synopsys business model, which has that 90% minimum ratability curve to it and then we’ll extend that again out over time. The deferred revenues at the last financial statements were not very significant. It was a little bit more revenue being taken upfront and again we’ll go back and when we get into the details of the contract break out the deferred revenues, apply the appropriate revenue haircut and purchase accounting, and then integrate that. And again our intent would be on the next earnings call where we would give guidance for 2013 that we could identify more of the details only if the transaction closes by that time. If it doesn’t, we’ll give you the update at the end of the first quarter when we expect all of it to be fully complete.

Raj Seth – Cowen and Company: Couple other follow-ups if I may. You pointed to increase in cash flow guidance rather substantive. Deferred revenues also jumped materially. How much of that is just the payment off of renewal from one of your biggest customers, is that the majority of what drove those increases or is it broader than that?

Brian Beattie – CFO: It’s specifically to each third quarter we have a significant customer with an annual payment that does come through. So you’ve seen over a number of years now quite a nice growth in the deferred revenue accounts and that is reflected again in this third quarter as we expected. Again anything relative to backlog and other things we’ll give you more details at our year-end call as we typically do. Overall, the message being very strong, broad-based growth and strength in our business levels and have to be able to pass that through in terms of increased earnings per share guidance for ’12.

Raj Seth – Cowen and Company: When you guided cash flow last quarter, did you presume the payment from that large customer as you usually see in Q3 or do you sort of wait till you get it to guide for it?

Brian Beattie – CFO: No, it’s fortunately very tightly tracked and aligned and very tight payment schedules against that. So no surprises, exactly as expected and we factored that in the growth in cash flow guidance from last quarter was related to the strong business levels, better terms and conditions and lower disbursement as our expenses are coming in later for the year.

Raj Seth – Cowen and Company: Last one from me. It looks like maintenance, your service maintenance line popped sequentially, looks like it’s probably maintenance. What’s going on there?

Brian Beattie – CFO: Actually maintenance in itself does not move a lot for us. It’s fairly consistent. The delta from our prior quarters is in the service pierce which is what we call business unit consulting which does tie into either milestone based revenues or percentage of completion revenues and in Q3 there was a number of specific deliverables in our IP and systems group that the contributed to the growth in the quarter.