Sprogo: A Reflection of Strategic Planning and Implementation

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1 The following prepared remarks are an excerpt from Synopsys Fourth Quarter and Fiscal Year 2009 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 first quarter earnings call in February Certain statements included in these prepared remarks relating to Synopsys business, products and technologies, including statements regarding projected financial results, are forward-looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 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 in general and weakness in the semiconductor and electronics industries; failure of customers to pay license fees as scheduled; lower-than-expected research and development spending by semiconductor and electronic systems companies; competition in the market for Synopsys products and services; 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; the terms of a final settlement, if any, with the IRS regarding the returns; and difficulties in the integration of the products and operations of acquired companies or assets into Synopsys products and operations. In addition, Synopsys actual expenses, earnings per share and tax rate on a GAAP and non-gaap basis for the fiscal quarter ending January 31, 2010 and actual expenses, earnings per share, tax rate, cash flow from operations and other projections on a GAAP and non-gaap basis for fiscal year 2010 could differ materially from the targets and guidance provided for a number of reasons, including, but not limited to, (i) a determination by Synopsys that any portion of its goodwill or intangible assets have become impaired, (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) integration and other acquisitionrelated expenses including amortization of intangible assets associated with future acquisitions, if any, (iv) changes in the anticipated amount of employee share-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, including new guidance related to business combinations, (viii) general economic conditions, and (ix), other risks as detailed in our SEC filings, including those described in the Risk Factors section in our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, Furthermore, Synopsys actual tax rates applied to income for the first quarter and fiscal year 2010 could differ from the targets given in these prepared remarks as a result of a 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 first quarter and fiscal year 2010 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 and the extent of Synopsys stock repurchase activity. The information contained in these prepared remarks represents Synopsys expectations and beliefs as of December 2, 2009 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

2 measures are included in the fourth quarter and fiscal year 2009 earnings release and financial supplement, each dated December 2, 2009 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 December 2, ****************************** INTRO Good afternoon. I am happy to report that we executed well in Q4, and in fiscal 2009 we delivered revenue growth, margin expansion, strong cash flow, significant customer momentum, and numerous new technology roll-outs. RESULTS Given the extraordinary nature of the year for the overall economy, let me comment on our financials, mostly from a fiscal 2009 perspective. The bottom line is simple we met or exceeded almost every goal we set at the beginning of the year, and most importantly we enter 2010 with a great deal of strength. Specifically, with 33 cents in the quarter, we delivered non-gaap earnings per share of $1.75 for the year. That s 5% or 9 cents above the midpoint target we communicated at the beginning of 09. With Q4 revenue of $338 million, we grew our business 2% to $1.36 billion for the year. Through disciplined expense control and focus on efficiency, we improved non-gaap ops margin over last year from 23% to 24%. These results were achieved under our predictable business model, with more than 90% time-based revenue. We exited the year with $2.2 billion in backlog and $1.17 billion in cash. In summary, over the past 18 months, Synopsys has undergone a remarkable transformation, with 2009 representing a turning point for our business. Our many years of technology development are now clearly making a difference with customers. ENVIRONMENT/OUTLOOK Turning to our customers, the recession sped up their alignment with fewer key suppliers. What began as a technological necessity the integration of flows and platforms for better and faster design accelerated for intense cost reasons, as customers were driven to rethink their expense structures and make meaningful changes. These changes are still on-going, so let me briefly address the economic environment. Semiconductor markets are rebounding from a very tough first half, with semi revenue now expected to be down 10-15% from last year a welcome improvement over previous expectations. Looking forward, there is still a good amount of uncertainty regarding holiday sales and stable business levels for next year. While rush orders are

3 driving up volumes and prices, the lack of visibility and macro uncertainty cause continued frugality and streamlining of operations. As some of you know, in an ad-hoc fashion, I ve been polling executives around the world about their outlook on the recovery. Their perception of the economy is remarkably uniform: They all express some optimism regarding a gradual return to growth. But they also think there is almost a 50/50 chance of a more challenging outlook, or even potential W pattern that is, another downturn before a sustained recovery. What this tells me is that although our customers are orienting their companies towards returning growth, they will remain quite careful in terms of their expenses. OUTLOOK Looking forward into fiscal 2010, we are therefore setting conservative expectations, as we account for the uncertainty around us. From a planning perspective, we enter the year with an overall business run-rate that is roughly flat, a testament to our strength in the face of considerable customer stress in the first half of the year. Our backlog is strong we have over 80% of targeted 2010 revenue, and more than 90% of Q1, already in hand. Without factoring in any future acquisitions or stock buybacks, we expect non-gaap ops margin to remain steady on slightly lower revenue, and non-gaap earnings to be slightly down due in part to tough year-to-year comparisons of tax rate and OI&E. We also expect cash flow to be strong, orders to increase, and several new technology rollouts to extend our innovation lead. Brian will give you more specifics on both the past and coming year, but looking back, Synopsys executed extremely well in 09 and is poised for 2010 with momentum and strength. TECHNOLOGY AND INVESTMENTS From a technology perspective, we drive three objectives. First, deliver best-in-class technology across all our products to enable customers to create differentiation in their chips. Second, deliver solutions integrated across tools, IP, design flows, and methodology, to enable our customers to achieve higher productivity and predictability. Third, provide top-notch, global engineering services and support to help our customers reduce their overall design costs and risks.

4 To that end, in 09 we invested assertively in R&D and in our technical support, resulting in a strong product roadmap and broadened customer relationships. Key semiconductor companies such as Juniper, Sunplus, Intel, Marvell, Panasonic, Renesas, and more than a dozen others are counting on us as their primary EDA partner. During 09 a number of companies successfully migrated to Synopsys and are achieving the increase in effectiveness that they had hoped for. HIGHLIGHTS Let me provide some technical highlights from the year, starting with our Galaxy implementation platform. IC Compiler, our place and route product, is the cornerstone to designing the most advanced chips in the world. This year, in addition to an advanced router that delivers 10X performance and better quality of results, IC Compiler has been significantly enhanced with multi-core and low-power features. Multi-core capabilities were also expanded to our entire signoff solution, thus completing the migration of Galaxy to the most modern compute infrastructure. With IC Validator, we then introduced a new physical verification solution that took both technology and integration a significant step forward. What s unique about IC Validator is that physical verification can now be accomplished within the implementation flow long before signoff thus considerably reducing turnaround time and the number of iterations. This is a meaningful productivity advance, and customers such as Toshiba, NVIDIA and the Common Platform Alliance are already recognizing the power of IC Validator in their advanced applications. We also made excellent progress in bringing together tools and flows with the introduction of our Lynx design system. The result of many years of internal development and testing, Lynx is a differentiator for Synopsys. Developed for 65nm and below, Lynx features a complete, open, production-proven digital design flow with builtin methodologies, foundry-ready checks, and an advanced management cockpit. Lynx has direct impact on total cost of design and gives customers instantaneous entry into a proven low-power design flow. Another major accomplishment in 09 was the introduction of Custom Designer for analog/mixed-signal design. Not only did we deliver a very strong first product in an area previously dominated by another vendor, but customers have already completed a number of production tape-outs, including the latest by Digital Imaging Systems. An expert in analog system design for the mobile market, Digital Imaging completely replaced its old flow, and was able to tape-out with Custom Designer in less than a month. While newer companies with little legacy infrastructure were the natural initial targets, we are now seeing incremental acceptance at a number of larger customers. At one, we ve seen a substantial leap in terms of acceptance: as a result of one group s success,

5 this company s CAD group is now willing to provide Custom Designer across their company. Another very large customer has made Custom Designer plan-of-record for its latest advanced chip. Verification Turning to verification, our Discovery platform continues to perform very well in both digital and analog/mixed signal. In digital, in 09 we extended our multi-core capabilities to VCS, resulting in a 2X improvement in speed. Given the increasing cost of verification, speed improvements of this magnitude significantly impact overall design time, and reduce the compute infrastructure costs as well. In fact, our tracking shows clearly that the majority of the advanced designs in the world use VCS as their main simulator. In analog verification, our key introduction in 09 was CustomSim a single multi-core solution for analog/mixedsignal simulation. By combining the speed and accuracy of what used to be three separate tools, we developed a flexible, easy-to-deploy solution that has strengthened our offering. Systems Moving up into systems, we delivered several key enhancements to our Confirma rapid prototyping platform, including the acquired technology from ChipIt. Most chips today are in fact complex hardware/software systems. Thus the breadth of our solution ranging from high level system simulation, to virtual platforms, to FPGA-based prototyping, all the way to broad functional and analog mixed-signal simulation, puts Synopsys at the forefront in dealing with one of the most pressing issues: system-level design. IP Closing off with our IP business: We made excellent progress in 09 here as well. IP is a powerful component of our portfolio, especially as an intense focus on reducing costs drives companies to accelerate the outsourcing of non-differentiating projects. For example, we estimate that every other day, a chip is taped out using a Synopsys USB core. In addition, we have substantially grown our collection of cores into many new technology nodes spanning protocols beyond USB, such as PCIexpress, SATA, and HDMI. In 09 our portfolio was further broadened into the analog/mixed-signal space through the acquisition of the Analog Business Group from MIPS. The integration has gone very well, and the customer reaction has been especially positive.

6 CONCLUSION Synopsys Fourth Quarter and Fiscal Year 2009 Earnings Conference Call All of this adds up to a very strong year in a difficult economy. A number of customers are putting their trust in Synopsys for their future and are in the process of migrating to our solution. Financially, the impact will occur gradually, but we can feel that Synopsys has excellent momentum entering fiscal With that, let me 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 fiscal year 2009, and provide you with our 2010 guidance. As a reminder, I ll be discussing certain GAAP and non-gaap measures of our financial performance. We have provided reconciliations in the press release and financial supplement posted on our website. In my discussions, all of my comparisons will be yearover-year unless I specify otherwise. As Aart mentioned, we executed well against our targets in wrapping up an outstanding year. In a challenging environment, we achieved growth in both revenue and non-gaap earnings, generated considerable operating cash flow and expanded our non-gaap operating margins, positioning Synopsys very well for 2010 and beyond. Let me now provide some additional detail on our financials. Q4 revenue was $338.3 million, a decline of 4 percent compared to a year ago, but well within our target range. Annual revenue was $1.36 billion, a 2 percent increase over our revenues for all of The IP/Systems space did very well for the year while consulting services declined as customers focused on reducing costs by delaying some engagements, especially in the first half of the year. One customer accounted for slightly more than 10 percent of Q4 and fiscal year revenue. Turning to expenses, Q4 GAAP costs and expenses were $313.4 million, which included $11.6 million of amortization of intangible assets, $14.1 million of stock-based compensation, $4.5 million of facility restructuring charges, and $1.2 million of In Process R&D. For the year, GAAP costs and expenses were $1.152 billion, which included $45.5 million of amortization of intangible assets, $56.9 million of stock-based compensation, $4.5 million of facility restructuring charges, and $2.2 million of In Process R&D. Total non-gaap costs and expenses were $279 million in Q4 and $1.034 billion for fiscal 2009, up very slightly from $1.026 billion in 2008 but below our original 2009 expense budget, even with our recent acquisitions.

7 As expected, Q4 non-gaap operating margin declined sequentially to 17.5 percent due primarily to traditionally higher Q4 expenses. For the entire year, we exceeded our non-gaap operating margin commitment by achieving 24 percent, an increase of approximately 100 basis points over Entering 2009, our management team was fully prepared to react quickly on expenses, should the environment materially change. As a result, when the EDA and semiconductor industries became increasingly turbulent, we proactively aligned expenses with moderating revenue growth. By diligently managing vendor and contractor costs, compensation and headcount related expenses, and discretionary spending, total expense growth was less than revenue growth for the entire year. With a continued focus on operational efficiency, we currently expect to maintain our 2009 non-gaap operating margin as well as operating income for all of 2010, even with slightly lower revenues. Turning now to earnings, GAAP earnings per share were 13 cents for the quarter and $1.15 for the year, down from 32 cents for Q4 of last year and $1.29 for all of As you recall, FY08 earnings include a one-time $17.3 million tax benefit, or 12 cents per share, associated with the IRS settlement for fiscal years 2000 and Non-GAAP earnings per share were 33 cents for the quarter and $1.75 for the year. As Aart mentioned, our yearly achievement is considerably above the midpoint of our original targets primarily as a result of a lower-thanexpected tax rate and higher-than-expected OI&E. Our non-gaap tax rate was 21.8 percent in Q4, reflecting a more favorable geographic mix, and 25.4 percent for the full year. For modeling purposes, we think that a 27 percent non-gaap tax rate is a reasonable estimate for Our revenue visibility remains strong, with 95 percent of Q4 revenue coming from beginning-of-quarter backlog. Upfront revenue was approximately 5 percent of total for Q4 and all of FY09 well within our target range of less than 10 percent, even with the inclusion of hardware sales. The average length of our renewable customer license commitments for the quarter and fiscal year was about 3 years, as customers continue to have a high degree of confidence in the strength of our technology position over the long term. As expected, backlog declined due primarily to the timing of large contract renewals. Recall that 2008 ending backlog included a notable positive impact from currency benefits that did not recur in 09. While not material, we also saw several customer bankruptcies during the year resulting in the removal of less than $50 million in backlog. With bookings of about $1 billion in 2009, our total backlog at the end of the year was $2.2 billion, as customers continue to wait until closer to their contract expiration to renew. Our model affords us the ability to be

8 flexible in the timing of contract renewals so that they make sense for both parties. And our solid run-rate at the end of the year is a testament to the effectiveness of that flexibility. Finally, as Aart mentioned, we have greater than 80 percent of our target revenue in hand for the coming year and more than 90 percent for the coming quarter. Now turning to our cash and balance sheet items. We ended the year with $1.17 billion in cash and short-term investments. Of this balance, 52 percent is held within the United States. We generated $61.5 million in cash from operations in the quarter, which included a one-time $19 million tax prepayment to the IRS as part of our tentative settlement for years 2002 through 2004, resulting in $236.7 million in operating cash flow for the full year. While we are still awaiting final approval of our IRS settlement, I would also like to reiterate that if the tentative settlement becomes final, there will be no material non-gaap P&L impact. It is expected to result in a decrease in GAAP income tax expense as a result of the new FAS 141 accounting rules which take effect in operating cash flow exceeded our original expectations, due primarily to expense management, an improved customer collections environment in the second half of the year, and lower tax disbursements due to some one-time benefits. At this time we re targeting operating cash flow of approximately $200 to $220 million in FY10. We also expect our operating cash flow quarterly profile to be similar to last year, with a net operating cash outflow during the first quarter of 2010, due primarily to the timing of our annual incentive compensation payments. Continuing on with our cash and balance sheet items: Capital expenditures were $12.1 million for the quarter and $36.7 million for the year, down from $38.9 million last year. For 2010 we expect capital spending to increase to approximately $45 $50 million due primarily to some additional expenditures as we consolidate our Bay Area facilities to reduce some long-term expenses. We did not repurchase stock in the quarter, and have approximately $500 million remaining on our current authorization. Our intent is to continually evaluate the best uses of cash each quarter including company operations, investments and stock repurchases. We believe we were again disciplined in our deployment of cash in 2009 while retaining maximum flexibility in a tough economy. We are well positioned in 2010 to increase our strategic uses of cash as the economy begins to improve. Q4 net accounts receivable totaled $127 million and our industry leading DSO declined 2 days sequentially to 34 days, reflecting the high quality of our AR portfolio and the timing of invoices. Deferred revenue at the end of the quarter was $588.7 million.

9 We ended the quarter with approximately 5,930 employees. This was an expected year-over-year increase due primarily to the acquisition of the Analog Business Group from MIPS Technologies, but down slightly from our Q3 headcount. Now let me address our first quarter and fiscal 2010 guidance, which as Aart mentioned, is a base case that does not assume any future acquisitions or stock buybacks. For the first quarter of FY10, our targets are: Revenue between $325 and $333 million; Total GAAP costs and expenses between $269 and $286 million, which includes approximately $15 million of stock-based compensation expense, but does not include any impact of the IRS tentative settlement; Total non-gaap costs and expenses between $245 and $255 million, down from $279 million in Q4; Non-GAAP other income and expense between $0 and $3 million; A non-gaap tax rate of approximately 27 percent; Outstanding shares between 148 and 153 million; GAAP earnings of $0.23 to $0.28 per share; and Non-GAAP earnings of $0.38 to $0.40 per share. We expect greater than 90 percent of the quarter s revenue to come from backlog. Now our Fiscal 2010 outlook: Based on what we know now, we expect revenue between $1.33 and $1.35 billion. Non-GAAP other income and expense between $4 and $8 million; A non-gaap tax rate of approximately 27 percent; Outstanding shares between 150 and 155 million;

10 GAAP earnings per share between $1.01 and $1.20, which includes the impact of approximately $60 million in stock-based compensation expense, but does not include any impact of the IRS tentative settlement; Non-GAAP earnings per share of $1.52 to $1.62, slightly down from 2009 earnings, driven primarily by a higher tax rate, lower OI&E and higher share count. And again, cash flow from operations of approximately $200 to $220 million. Finally, to help you with your modeling, let me provide some brief 2010 expense commentary. At this time, we re expecting a fairly linear non-gaap quarterly expense profile throughout the year with Q4 showing a slightly sharper sequential increase, which is typical of our business. In summary, Synopsys had a very successful year, despite the many challenges in the global marketplace. We enter 2010 in a stronger competitive position from a financial, technology and customer standpoint by being fiscally conservative and investing responsibly. As a result, we were able to deliver strong profitability while expanding our technology leadership. With that, I ll turn it over to the operator for questions.