Synopsys, Inc. (SNPS) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Synopsys Earning Conference Call for the First Quarter Fiscal Year 2012. [Operator Instructions] Today's call will last one hour. 5 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. I would now like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Tricia. Good afternoon, everyone. With us on the call today are Aart de Geus, Chairman and CEO of Synopsys; and Brian Beattie, Chief Financial Officer. Today's conference call will include commentary regarding our Q1 results and also the closing of the acquisition of Magma Design Automation, which we announced this morning. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts and targets and will make other forward-looking statements regarding the company and its financial results, and about the potential benefits of the combination. 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 annual report on Form 10-Q for the year ended October 31, 2011, our earnings release for the first quarter of fiscal year 2012 and our press release announcing the closing of the Magma acquisition issued this morning. 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 current report on Form 8-K that we filed today, our first quarter earnings release and our financial supplement. All of these items are currently available on our website at www.synopsys.com. With that, I'll turn the call over to Aart de Geus.

Good afternoon, and thank you for joining us. Today, I'm happy to report excellent Q1 results and raised guidance for FY 2012, as well as the closing of the acquisition of Magma Design Automation, announced this morning. Let me begin with the summary of our results. Our business in Q1 was strong across the board. We met or beat every target we communicated last quarter, including revenue of $425.5 million and non-GAAP earnings per share of $0.56. We are well on track to meeting our non-GAAP operating margin and cash flow targets for the year. As a result, we're raising our outlook for the year, independent of the Magma acquisition, to a new earnings per share guidance range of $1.97 to $2.03. Brian will provide more financial detail in just a minute. Regarding Magma Design Automation, we have much work to do as the acquisition literally closed a few hours ago. We're enthusiastic about the prospects for the joint company, as the merger will allow us to accelerate delivery of technology to customers at a time of very rapid system and silicon evolution. As we work through the detailed planning and integration, our priorities are the following: first and foremost, maintain complete focus on the continued success of our joint customers and their in-progress designs; second, immediate consultation with our joint customers, as we evolve and/or revise our technology and product roadmaps. We plan to take the next 90 days for this effort, which we'll communicate further details. And third, rationalize the 2 organizations. Our intent is to move quickly and diligently to optimally integrate the companies with the clear objectives of: one, customer success; two, technology acceleration; and three, continuity in delivering high-value solutions, while achieving economic efficiency. Rajeev Madhavan, Magma CEO, will not join Synopsys, but has graciously agreed to be available to advise us as we transition the company. We thank him for his efforts to date towards making this merger a success. Roy Jewell, Magma's President and COO, will work with Synopsys management team to ensure a successful integration. From a financial perspective and based on our initial view, we reiterate that we expect the acquisition to be modestly accretive to our 2012 non-GAAP earnings per share. Due to antitrust-related restrictions in effect until this morning, we have only just begun the detailed planning and integration process, and we expect to provide specific guidance related to the impact of the Magma acquisition when we report Q2 earnings in May. Moving to the overall market picture. Semiconductor and systems companies are very aggressively developing and producing advanced new products, particularly in the mobile, cloud infrastructure and 'Smart Everything' market segments. The great potential of these end markets has driven a renewed emphasis on technology, visible from the rapid adoption of the 28- and 20-nanometer silicon nodes, to the focus on new transistor structures such as FinFETs, all the way to system design with an increased focus on broad verification strategies and system prototyping. The EDA industry is absolutely central to enabling this wave of end market opportunities, and the fact that these are technically challenging is precisely why our industry will do well. The high level of complexity and the need for our customers to differentiate themselves are driving tremendous demand for state-of-the-art technology, product and support. All of these are fundamental assets for Synopsys, and the timely addition of the Magma strength will only augment our solutions. Which brings me to the highlights for the quarter, starting with our core EDA and manufacturing offerings. In Q1, we did very well and utilization of our complete implementation solution has continued to grow. While advanced customers are now moving their major production chips to the 28-nanometer node, much of our focus is already on helping them at 20-nanometer, where we track 30 active designs. More than 2/3 of these are being done with Synopsys tools. In addition, we're already enabling a substantial number of sub 20-nanometer designs. Clearly, from a silicon point of view, Moore's Law is alive and well, even if success requires great focus and sophisticated collaborations. An example of such collaboration is GLOBALFOUNDRIES, who exclusively used our newest IC Compiler-Advanced Geometry solution for its first major 20-nanometer chip. IC Compiler not only addresses the complicated challenges of managing power, performance and capacity, it tackles all the leading-edge physical obstacles inherent in very advanced designs. In the area of complex mixed-signal design, rapid turnaround between analog and digital is positively impacted by our recently announced integration of IC Compiler and Custom Designer. Evaluation requests are increasing, as designers see hard evidence of significant time-to-market and performance advantages. With the move to smaller geometries, the connection to manufacturing is even more critical, both for device design and yield optimization. Our key cap solution is integral to both traditional advanced designs and the new 3D transistors, or FinFETs. While being used today by nearly every leading semiconductor manufacturer, we're also seeing a number of add-on deals and new logos. Our yield optimization solution is also doing very well, particularly at 28-nanometer, as yield is now clearly affected by not only manufacturing or design, but most importantly by the interaction of the 2. This is an area where Synopsys is uniquely equipped to make a positive impact. The other ramification of smaller devices, of course, is more devices, and with it the continued high pressure on verification. In this area, too, we not only continue to see great technical progress, but we also saw good business growth in 2012. In verification, speed is essential, and our analog and digital solutions continue to lead. Our flagship VCS product is used for 70-plus percent of advanced designs, from processors to graphics to SSEs. Another positive highlight is our IP business. The trend continues unabated to outsource IP, or chip building blocks, that are very sophisticated, but may be non-differentiating for our customers. Synopsys is the leading supplier of interface, memory and analog IP blocks. With around 1,300 engineers and more than a decade of investment, we have the resources and expertise to ensure that customers can rely on the highest levels of quality, reliability and support. The quarter was strong across the board for IP. For example, USB interface sales were excellent, as the market migrates to USB3.0. We expect more than 1 billion chips containing USB3.0 to ship in the next 18 months, as the protocol supports the speed needed to tackle tasks such as downloading videos. Synopsys was the first IP vendor to demonstrate USB3.0 in 28-nanometer silicon and has been consistently at the forefront of technology development. This applies to a number of other protocols as well. We expect adoption of Synopsys IP to continue to be a significant driver of growth for us this year. At the systems level, we're making excellent strides with both software- and hardware-based rapid prototyping as well. Driven by the increase in complex IP blocks, including on-chip processors and graphics and DSPs, the verification tasks, especially as they relate to hardware-software interaction, are becoming central to product success. In that regard, our newly integrated virtual prototyping solution, Virtualizer, is showing great promise, with adoptions by key customers during the quarter. This is particularly encouraging, as the prototyping of the hardware is used to accelerate the software development. Thus, forming the basis for a multidimensional growth business in the future. On the FPGA-based side of prototyping, we saw excellent demand for our HAPS solution in Q1, as some keystone systems companies broadened the proliferation of our boards through their organizations. In summary, we're off to a very strong start for the year. We delivered better-than-expected Q1 results and are raising guidance. The customer landscape remains solid and the demand and momentum around our technology is strong across the board. With the addition of the Magma technology and technologists, we are poised to move even faster on delivering best-in-class products. I'll now turn the call over to Brian Beattie.

Well, thank you, Aart, and good afternoon, everyone. In my comments today, I will summarize our financial results for the quarter, provide you with our guidance for Q2 and the full year and give you more detail on the Magma transaction. And as a reminder, I'll be discussing certain GAAP and non-GAAP measures of our financial performance, and we've provided reconciliations and explanations in the press release, 8-K and the financial supplement, which is posted on our website. In my discussions, all of my comparisons will be year-over-year, unless I specify otherwise. Now Synopsys delivered a strong quarter, meeting or exceeding all of the quarterly financial targets that we provided in November. Q1 financial results were highlighted by strong business levels and double-digit growth in both revenue and non-GAAP earnings. Today, we are also raising our full-year outlook for revenue and non-GAAP earnings, excluding Magma. Let me now provide some additional details on our financials, and as a reminder, Q1 of FY '12 included an extra fiscal week, affecting both revenue and expenses. Total revenue was $425.5 million, an increase of 17% compared to a year ago and well above our target range. Even without the impact of the extra week of approximately $26 million, revenue growth was 10%. We delivered growth across all of our product groups, with particular strength from our IP and systems products. One customer accounted for slightly more than 10% of first quarter revenue. Greater than 90% of Q1 revenue came from beginning-of-quarter backlog, while upfront revenue was 7% of total. This is well within our target range of less than 10% upfront. The average length of our renewable customer license commitments for the quarter was about 2.6 years, larger contracts averaged close to 3 years, while the duration of a number smaller contracts brought the average down slightly. We continue to expect average duration in fiscal '12 to be between 2.7 and 2.9 years. Now turning to expenses. Total GAAP costs and expenses were $355 million, which included $17 million of amortization of intangible assets and $16 million of stock-based compensation. Total non-GAAP costs and expenses were $318 million, an expected year-over-year increase and well within our target range. This increase was mainly due to the extra week, approximately $16 million, and timing of quarterly expenses. Excluding the extra week, total non-GAAP costs and expenses would have declined sequentially. Non-GAAP operating margin was 25% for the quarter. For all of FY '12, we expect non-GAAP operating margin to increase over FY '11 levels. Turning now to earnings. GAAP earnings per share were $0.39. Non-GAAP earnings per share increased 27% to $0.56, exceeding our target range, driven primarily by stronger-than-expected top line growth and operational execution and, to a lesser extent, better-than-expected OI&E and a slightly lower-than-expected tax rate. We are raising our annual EPS guidance, reflecting our strong first quarter results and our confidence in business levels for the rest of the year, independent of Magma. Our non-GAAP tax rate was 24% for the quarter. For modeling purposes, we think that a non-GAAP tax rate of approximately 25% is a reasonable estimate for fiscal 2012. Now turning to our cash and balance sheet items. Our balance sheet remains strong with $943 million in cash and short-term investments at the end of the quarter, which, of course, was prior to the Magma acquisition we closed earlier today. Of our total cash balance, 21% was onshore at the end of the quarter, and 79% was offshore. As expected, there was a net operating cash outflow of $39 million in the quarter. This was due primarily to the timing of prior year annual incentive compensation payments. Continuing on with our cash and balance sheet items. Capital expenditures were $11 million for the quarter. And for the year, we expect capital spending of approximately $50 million. During the quarter, we spent $40 million in cash, as part of a multi-quarter accelerated share repurchase strategy. We have approximately $272 million remaining on our current share repurchase authorization. Q1 fully diluted share count declined 6.5 million year-over-year to 147.1 million, as a result of our share repurchases. We also completed one small acquisition during the quarter. Continuing on with balance sheet items. Q1 net accounts receivable totaled $214 million and DSO was 46 days, reflecting the high quality of our AR portfolio. Deferred revenue at the end of the quarter was $723 million, and we ended Q1 with approximately 6,850 employees. Before moving on to guidance, let me provide some additional commentary around our acquisition of Magma. As Aart highlighted, we're pleased to have closed the acquisition today. It was an all-cash deal, valued at approximately $523 million, net of cash acquired. The transaction will ultimately be financed with existing cash and up to $400 million of debt. As Aart discussed, due to the anti-trust restrictions we have not had sufficient time to gather and analyze all of the relevant information we need to provide specific guidance beyond our organic numbers. Nevertheless, we remain confident that this combination can be modestly accretive to 2012 non-GAAP earnings per share. We will provide updated guidance when we report Q2 results in May, as we complete the detailed integration activities. Now let's address our second quarter and fiscal 2012 guidance, which excludes the Magma acquisition and any other future M&A. Our GAAP targets also exclude any future acquisition-related expenses that may be incurred in Q2 and beyond. For the second quarter of FY '12, our targets are: revenue between $412 million and $420 million; total GAAP costs and expenses between $332 million and $348 million, which includes approximately $15 million of stock-based compensation expense; total non-GAAP costs and expenses between $303 million and $313 million; other income and expense between $0 and $2 million; a non-GAAP tax rate of approximately 25%; outstanding shares between 146 million and 150 million; GAAP earnings of $0.37 to $0.43 per share; and non-GAAP earnings of $0.54 to $0.56 per share. We expect greater than 90% of the quarter's revenue to come from backlog. Now our fiscal 2012 outlook, again, excluding the Magma acquisition and any other future M&A. We're raising our revenue range with our new target between $1.655 billion and $1.675 billion, a growth rate of approximately 8% to 9%. Other income and expense between $0 and $4 million; a non-GAAP tax rate of approximately 25%; outstanding shares between 146 million and 150 million; GAAP earnings per share between $1.33 and $1.48, which includes the impact of approximately $62 million in stock-based compensation expense; non-GAAP earnings per share of $1.97 to $2.03. We've increased both the low and high end of our guidance range by $0.04. And we're targeting cash flow from operations of approximately $300 million. So in summary, we're very pleased by our strong first quarter results, highlighted by top and bottom line growth and continued solid operating margins. And with that, I'll turn it over to the operator for questions.

[Operator Instructions] And our first question comes from the line of Rich Valera with Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: Congratulations on closing the acquisition so quickly. I was wondering if you'd be willing to say anything about how you're looking to integrate that, specifically with respect to expense levels. Presumably, I think you'd want to keep R&D pretty well intact based on your motivation for doing the deal, and perhaps the same holds true for a lot of the field sales support. And I would think maybe G&A is an area where you would be fairly aggressive. But any color at all on -- just thoughts around how you might be thinking of expense levels going forward for Magma?

Sure. Well, in many ways, you just gave exactly the right color in the first place which is, there's obviously some efficiency to be gained by virtue of dealing with the overlap of the companies. It is also very clear that top priority for us is going to be very much the customer. And there are really 2 aspects to that, which is making sure that they are well served today and that all of their existing projects are safe. And that, of course, touches, first and foremost, the field support, but also some of the R&D forces. And secondly, the long-term, being able to take the wealth of technology that is joining our force and evolving our mutual products, or combinations thereof, going forward. We will stand away a little bit from giving too much detail, at this point in time, for a couple of reasons: a, because we are still putting together the overall business picture, and b, because, obviously, our first priority is to interact with the employees, get to know the key people and as many as possible of the whole team and, then, make decisions that are wise and also where our own employees are informed first and foremost. Richard Valera - Needham & Company, LLC, Research Division: Okay, that's helpful. Aart, so it sounds like business in general was very healthy in the quarter and you did, sounds like, beat all of your metrics. I was just wondering how you were thinking about the bigger picture for EDA. You've talked in the recent past, I think about a low single-digit type of growth rate for core EDA. Is there anything you're seeing that might make you change that opinion to the upside?

Well, we ourselves are in the low -- actually, in the mid to mid-high right now for this year already. And I'm always a little bit careful before changing opinions too quickly on something that is, all in all, very, very stable and moves gradually. Having said that, though, I think we have told you now for a number of quarters that we see an intensifying of the pressure for our customers to really compete on the basis of very complex technologies. And this is complexity both towards smaller silicon and towards the systems area. And so I think their needs to count on EDA to make that actually possible is increasing very rapidly. Therefore, I'm not surprised that a number of the key EDA vendors are reporting good results. And I think that is very positive because it feels like there is a bit of strength in our industry at a time where we, of course, are strengthening our company even further. Richard Valera - Needham & Company, LLC, Research Division: That's helpful. And then, Brian, just to be clear, so your second quarter guidance does not include any contribution for Magma but, of course, will include some contribution. Do you plan to reconcile that when you report the second quarter so we can kind of understand the underlying business relative to the guidance you just gave?

Yes, we said we would break out the guidance in our next earnings call, but it'll require 90 days or so, as you can imagine, of going through very detailed contract-by-contract analysis and getting the team ready to go and run with it. So that's effectively how we're looking at it. We'll give the guidance. It'll be included in our next guidance for the full year, as we wrap up Q2 and integrate all of the Magma elements around the revenue. The deferred revenue haircut that goes into the purchase accounting piece, the expense management and then some of the one-time costs associated with the deal structure will have to get brought in. Richard Valera - Needham & Company, LLC, Research Division: Understood. I was actually referring specifically to the actuals for Q2, not sort of forward-looking. But when you report Q2, will you provide us that sort of the breakout of Magma contribution in the quarter?

Yes, Rich, we don't know yet what the details end up looking like. But again, as you get ramped up for this, we'll -- I believe we're going to break it out for you so can see what the impact is going to be.

And our next question is from the line of Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Just to follow-up on Magma first. So can you just walk us through, in terms of the timing of the close, why you didn't necessarily have the time to give a little bit of a better look, or a least give some rough ranges as to what it might contribute for the year?

Sure. Well, we do have rough ranges, otherwise we wouldn't be able to tell you that we expect it to be accretive in the first year. But realize that in account-competitive landscape, until you pass the hurdles of government approval, you can essentially not share any knowledge about anything that could impact the competitiveness of either of the entities. And so the closure with the government was just very, very recent. And so, we decided to move right ahead with the closure, and now we will go into much more detail in understanding their business model. Now, having said that, we're not seeing any surprises. As some of you have already recognized, their business model is quite different from ours. We have communicated to you for now quite a number of years that we're in the high or in the mid-90s percentage ratable, and their business is actually quite a bit different from that. Actually, if you look at their latest 10-Q, you'd see that about half of their business is upfront. And so we will need to work through a model shift to align that with our business practices. And these things are just complex to do and will require a detailed understanding of every contract. And these contracts are actually very complex, so that takes some time. But fundamentally, we don't expect any big surprises, we just understand that the details will come together as we work through all the details, literally. Sterling P. Auty - JP Morgan Chase & Co, Research Division: But again, just to be absolutely clear, the next time that we should hear an update on guidance including Magma will not be until the second quarter earnings call?

That is exactly what we have just said, yes. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. I just wanted to make sure. And then, Brian, when you report, is the intention -- I think we talked about this at the time of the question, but is it your intention to actually report revenue, adding back what you would have to write down for deferred revenue write-down?

Yes, let me talk about that. The -- as we looked at the preliminary balance sheet coming over this morning from their very recently completed Q3 -- as you know, Magma would have announced tomorrow -- we have about $23 million of deferred revenue. And then, there will be approximately -- they way we've typically done it, and again, we've got to get into all the details about cost-to-implement and so on, but we'd anticipate about $18 million of that $23 million is a typical revenue haircut that will go out of the revenues over the next 12 months or so. So it's the first pass at what the impact we expect from that. So relative to how much we're going to see for the impact, I think it's about $18 million. As I look at, then, what the quarterly profile is, which we have get into and work that, it wouldn't be a big problem to say, it could have been -- it could have been higher if we identified what that would be. But it typically is a 12-month reduction in the revenues that are taken, but the specific quarter, it's, again, looking at when the anticipated revenue and delivery of the products were going to happen, and that will help give some visibility to the impact in the quarter. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. Let me ask one more now and I'll get back in the queue. You can use up to $400 million of financing to finance the deal. What are your kind of factors in determining how much debt you're going to pull down to finance this? And when would you anticipate making that decision by?

We've made that already, Sterling. When we looked at -- again, looking at our cash balance, we have about $200 million in the U.S. A majority of this transaction will come out of U.S. cash. We have an upgraded credit agreement in place that we filed, up to $350 million. And one of the -- very light on covenants, but one of them is that we maintain $300 million in total for the company in cash, both onshore and offshore. So effectively, the way we see it, we'll use about $100 million of our U.S. cash to complete the transaction, which has already happened. And then the balance of, as I've said, about $400 million, is coming from the debt side of it in the U.S. And we're leaving a majority of all the cash offshore and not repatriating that. And so that debt is in place. We have both a term loan that's structured for $150 million, and then a regular line of credit, which we can pull down and put back up at any point in time. And that's the way we're going to be managing cash between now and the end of the year is just having the minimum amount of debt on hand to finance both our ongoing operations, to pay for the anticipated debt with the close, and that's already happened, and we'll just keep that balance on hand. But it will be about $400 million and then we'll be coming down.

And the next question, excuse me, is from the line of Krish Sankar with Bank of America-Merrill Lynch.

This is Thomas Yeh calling in for Krish Sankar. Looking at the broad-based strength in the first quarter, can you provide some additional commentary on what drove the strength in bookings during the quarter? Are you still seeing some customers coming back for early renewals mid-contract, like you did last year? And how should we think about how revenue flows through for the next few quarters?

Okay. Well, in general, what you're saying is correct. It is mostly customers that need more capabilities, more of our existing tools or that are growing more aggressively in reusing IP. And so, it is a little bit all over the map. But I wouldn't say that it's necessarily early renewal, it's more a broader renewal from the business that we've been doing. So it feels like strength across the board.

Okay, that's helpful. And your competitor highlighted 2 key displacements that they achieved in their digital business in 2011. I know there is historically some back and forth among competitors, but can you provide some details in relation to any shifts that you have seen at your top 10 semi customers? And any specific areas where you might be targeting share gains for the coming year?

To be honest, not really. I'm sure there are, at any point in time, many shifts one way or another throughout the customer base as people continually readjust what they use. I'm not aware that there would be any major dislocation or shift where we lose a massive market share or gaining massive market share. These things are relatively stable. I can only say that we did very well in the last quarter. And so from that perspective, I think it's more a picture of there may be individual skirmishes, but so far, we're growing just fine.

And finally, can you talk a little bit about how you see new technologies, specifically trigate devices and UV lithography. How could that impact the EDA industry in general and the timing around that?

Well, anything that touches the very small dimensions, first and foremost, has ramification to what we would call the manufacturing side of things. And so there lithography is certainly very pointed, so are the new transistor structures and so is, by the way, all the issues that touch the yield, which is now increasingly are due both by how design is done and how the manufacturing come together. Now some of these areas are very pointed, such as double or even triple patterning, very complex, but the good news is, our tools can support this in such a fashion that the design community does not need to know about those details, except a few specialists that tune the tools. And so we expect that, notwithstanding whatever transistors are used or whatever geometries are used, the design community will just continue to see this as an opportunity to get more transistors in lower power and in smaller area. And that is fundamentally the job of EDA, is to isolate the manufacturing from the design.

And our next question is from the line of Tom Diffely with DA Davidson. Thomas Diffely - D.A. Davidson & Co., Research Division: Aart, I had a couple just quick questions on the industry itself. When you look at the strength you see in core EDA, do you have a sense of what node is driving the majority of that business right now?

Absolutely. I can absolutely tell you that most of the heavy-duty production design is moving to 28-nanometer, that is where most of the spending is because those are the hard, difficult nodes, while being in production, right? So you have a combination of difficulty and volume. Now there is quite a bit of spending, as far as EDA is concerned, going into 20-nanometer, but that is really preparing the landscape for the next wave of designs. And then, really, the third bucket is all the people that design at older nodes which, by the way, does not necessarily mean that it's slouchy design, not at all. It's people that actually can squeeze an enormous amount of value out of something that's already more proven. And there, the tools are essential, but the tools also are very mature. And so we look at all 3 of these camps as being of high importance to us. But clearly, the leadership in most advanced nodes gives us the best position for the long-term future. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. So is it normal to see the most EDA business in the currently ramping node then, as opposed to the next-generation node?

I would say that the -- actually, I don't -- I can't say exactly where the economics come down. My guess would be that, if you look at the 3 buckets, it's sort of 1/3, 1/3, 1/3, would be a pretty good approximation. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay, great. And then when you look at the memory market, in the past they haven't been huge users of EDA on a relative basis. Are there any changes at the 2X or 1X node that might require them to use more EDA going forward?

Well, the memory market is highly specialized because, by definition, it's sort of, excuse me, on one hand, all about the transistor. How can you maximally optimize a single memory cell? But on the other hand, increasingly, memories are very sophisticated subsystems because they have to self-correct, as invariably some of the transistors don't work when you have a very large collection of them. So the ability to put the logic around that, to make that work, requires very, very high sophistication, in timing, for example. And so we have seen that in the last few years, the memory market, as a consumer of EDA, has gradually grown and we think that there's more opportunity there. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay, great. And then, looking at the IP market, what's your sense, when you look at your served market inside the IP market, with memory and interface, what percent of the market do you think that is? And how much -- what percent of the market are you and how much growth is left for you in that space?

Well, the reason this is actually, in practice, a pretty difficult question is because what we are absorbing is really a market that has been completely internal. And as much as people say they want to do reuse, the reality is, they tend to do not that much reuse for old stuff that was designed previously, partially because nobody has time to revisit these things, partially because, let sleeping dogs lie, so to speak. If it works, it's amortized and don't touch it. For all the new generations, though, I think that picture is very different. And it's different not only because, economically, it's a much better deal to reuse commercial IP, it's also different because some of these new cores are much more difficult to design. And now you have to make a decision, if you want to use your own top designers for something that's difficult, but not differentiated, or can you use them on something that will differentiate your product. And I think we are absolutely seeing that many of the design managers are very conscious of this choice. Having said that, I think we are still far below the 50% point of outsourcing of IP and we certainly see a number of years of excellent growth there. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then, Brian, when you look at the tax rate of going slightly down to 25%, is that just based on geographic mix? Or is something, kind of a long-term reason for that?

Yes, it is the geo mix, the products. It's just effectively about a 1% drop from the range we had anticipated last quarter. So it's just fine tuning with some of the way the Q1 results have come through and then the geo mix of the products. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then, finally, for LAVA, at this point, there's no requirement for the report, their January quarter?

That's correct, yes.

Your next question comes from the line of Raj Seth with Cowen and Company.

Aart, you and I have talked about systems companies beginning to do their own IC design. I mean, some are moving, perhaps. Cisco is a good example of somebody moving the opposite way. But I'm curious if your view is similar to that of your major competitor, which is that this is a net expansion of the market rather than system companies just beginning to do what their ASIC suppliers historically did. Is this a big, material trend for you? Can you talk a little bit about what you're seeing?

I think it is an important trend, but not just as an expansion. It is also a trend that illustrates that the necessity of multiple companies to work well together to get an end result that works, is becoming more and more important. And let me give you a specific example that -- where we see literally systems companies working straight with foundries and design companies. It is all around the term, yield. For many, many years, yield was mostly the result of the manufacturing prowness (sic) [prowess] and cleanliness of the fab, et cetera. Well, the dimensions now are so small that the variability on physics and on small deviations in manufacturing rival the variability of timing on a chip. In other words, depending on how you design the chip, you will get different yield results on a given technology. Well this is a perfect example where technology and economics meet head on, because if one can understand that and bring these parties together, they have a chance of ramping up the yields much faster than if it's sort of throw it over the wall and hope that the other party will do the right thing. And this is, of course, particularly true, also another dimension around the systems guys, which have the challenge of not only delivering the hardware, but making sure that the hardware is ready at the same time as the software, or vice versa. And so, to me, these are all good examples of what I call systemic complexity, in contrast to scale complexity, which is just more transistors, call it Moore's Law. And systemic complexity demands for the different partners to understand enough of what the other parties are doing in order to be able to work well together. And that, in my opinion, is the key reason why a number of system companies that absolutely invested in having increasingly high competence teams within their own house.

So you -- just so I'm clear, you view that as, therefore, an expansion of the market, not just taking from one bucket and putting it to another, because it's an increased capability the systems guys need, regardless, even if they're engaged with third-parties to help do some of the ASIC-like work. Am I reading you correctly?

Absolutely. And actually, it helps EDA because the reality is, we have delivered, over many, many years, an incredible increase in technical capabilities. The very fact that it's now potentially spread among multiple users, increases our ability to get rewarded for that. And by the way, that also has the potential to increase the number of engineers that touch what we do. And I'm not even going too far here in the whole notion of the software engineers that, by definition, are quite a large number. As a matter of fact, in semiconductor companies, more than half of the engineers now are software engineers. And so I do think that it is an expansion of the space at the same time that you see an increase of the challenges of design. And it's in that context that adding the Magma team is yet another asset in technology moving us forward.

And just -- this is Brian. I just wanted to follow up on Tom's question, too, relative to the Magma revenues in the last quarter. As we said, it's not going to be reported based on the rules of the 10-Q filing requirements. So just let you know as well that as we looked at the results that are just coming in, that it looks very similar to the top line results that the company saw on the second quarter, which were released. So we just wanted to let that known. And EPS came in fairly close, a little bit light, just based on some of the one-time closing conditions and other expenses relative to the transaction that was in play. So again, we're watching the results closely and now it's into our books, as of today, moving forward. So again, no surprises, and it came through pretty straight.

And our next question is from the line of Mahesh Sanganeria with RBC Capital Markets.

Aart, I just wanted to follow up on an early question on multiple patterning and EUV. Just wanted to clarify, did you suggest that, as the customers decide on each layer whether to do multiple patterning on EUV, or they slowly introduce EUV, that your software is able to handle that irrespective of what the final decision is? Or other way, the software basically incorporates both solutions and the customer or designer does not have to worry about what's being used?

Yes, fundamentally I'm suggesting that, because the software that is relevant here is, of course, the place and route and the verification systems that make it possible for people to lay out chips without necessarily having to understand exactly how any form of multi-patterning occurs. Multi-patterning is very complex, from a computational point of view, and there's no way that humans could do this. And certainly not on the sizes of chips. Now EUV, I think, is going to take a little while before it really has a major impact in practice on many chips. And there we are really much more involved at the leading edge of R&D in terms of what is needed for the photolithography. But the people that should be concerned, or should not be concerned, are precisely the designers that use place and route systems where, today, we have double patterning, for example, in utilization. So none of these problems are easy but fundamentally they are solved.

And then the other question on design starts on newer technology. I know that you have always tracked the design start different technology node. Going forward, are you seeing the design starts -- are you seeing a shift, from a historical perspective, that more design start is driven by mobile space relative what you saw in the historically?

Oh, no question whatsoever. I think, if you were to compare the leading edge design starts 10 years ago versus today, you'd see a world of difference because there would be such a large number of design starts coming from the mobile side of the world in sort of the most advanced node minus one. The processors will continue to drive the absolute state of the art technology because they're after raw speed and increasing the raw speed at low power. But the next nodes after that are nodes that invite a high degree of integration. And there, too, of course, speed and power trade off. But the main bulk of the companies that are going there are, today, the mobility companies. And as you know, of course, the world of computation and mobility continues to merge more and more, so I don't expect that to change all that much.

And your next question is from the line of Jay Vleeschhouwer with Griffin Securities.

Aart, if I may, a couple of questions to start about what Magma projected for its results in the proxy filing back in December. I understand, of course, those were bare numbers, you're not beholden to them necessarily, but they had projected through their fiscal '17 some pretty considerable average growth rates, looking out to about 15%, 16% over a 5- or 6-year period for their revenues. In addition to which, they were projecting that their non-GAAP operating margins would be not dissimilar from yours, in the low- to mid-20s, even though their revenue base was quite a bit smaller. So the question is, do you think that, even with the considerable degree of overlap between your products and theirs, that those revenue projections, even if they included some market share gained by them, should, in the end, result in some net acceleration of your growth? That is to say, aside from inorganic effects, do you think that there's something in their portfolio that led them to those kinds of significant growth rates, or in their contracts, so those growth rates, that would have a net incremental effect on the combined growth rates?

Well, 2 comments. First, per your preamble, we do not feel beholden to their projections. We have to make our own. As mentioned earlier, our business model is different than what Magma had. And it's not for me to say which one is better, but we will continue on the business model we had. I highlighted earlier that the quarter they reported, half was upfront. The quarter that was just finished was below the expectations that certainly the market had set. Some of you had highlighted already earlier that the pressure on upfront deals was probably an indicator that it's -- that life was not quite so simple as it looked like. Be it as it may, that is not the key driver for us. The key driver for us is that, notwithstanding the economic challenges that always come with such a transition or with the company, there was also a lot of very good technology and great technologists. And as much as we will be very, very diligent in managing the transition both quickly and efficiently, our objective, clearly, is to precisely aim at the growth opportunities that come with acceleration of technology, with broadening of the need for customer support and the very things that we just discussed one or 2 questions ago, which is that there's an enormous, enormous need for what EDA has to offer today. And that is very encouraging. Meanwhile, of course, we have work through the ratable model changes. And what this also brings for us is going to be an increased broadening toward some analog capabilities. So there's a lot of really good things here, but we need work through the specifics of the numbers before we give you exact guidance.

Okay. Irrespective of the acquisition, there was a conversation before about the role of systems customers. And I'm wondering how, longer term, that might have affected your model, or is affecting your model anyway? I think it was at your analyst meeting that you spoke of your sales and support model having 3 to 4 engineering and field sales support people per sales rep, covering named accounts, for example. And I'm wondering, as the market expands, as you do more with systems-type customers and the foundries for that matter, how does that change that kind of field model and that going forward?

I don't think that it necessarily changes that model all that much. I think that we will continue to see a pressure and, therefore, potentially, opportunity in customers just wanting more and more and more support. And I think this is actually an opportunity for the EDA industry to gradually evolve a business model where the support does not just naturally come with the product, because that's economically not viable. And the reason for this desire to get more and more support is because our customers are very, very competitive with each other today. Many of the markets are very fast-moving. They tend to be a little bit more winner-takes-all. And technology is a differentiator. So I believe for the whole EDA industry, this is an opportunity to evolve the business model going forward and realize that we have a lot of value to add to this competitive landscape. Now how we get there? Just take one step at a time. But the opportunity space feels pretty good.

And we have a follow-up from the line of Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Figured I'd come back around and focus on the business rather than the acquisition. When you look at the contracts that you renewed, can you give us some qualitative color in terms of what you saw on the annual run rates on those renewals?

Yes, the run rates kept going up, so that is a good sign. We saw many -- we didn't have, I think, many very, very large renewals this quarter. That statement itself, incidentally, is not all that meaningful because these things happen whenever they happen. And so we keep moving the entire customer base gradually forward. And so the business was a lot of smaller transactions this quarter and actually quite typical over Q1. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And then, Brian, you had talked about the timing on the expenses, given the 53-week year. Has any of that impacted on sales and marketing? It seems like you got a little bit more leverage there than what I've seen over the last couple of quarters. Was there any change in terms of timing on some advertising or marketing or any other type of items that may have benefited sales and marketing.in the quarter?

Yes, not really. As we said, the expenses would have been lower from Q4 to Q1 if it wasn't for the additional week. And so they're very -- just very typical accruals that are tied to the expenses that we're incurring. And running in a very normal mix. All the expense levels are on track for the full-year budgets we've established. So again a good, I think, very good positioning and lower spending in the last quarter on a year-over-year basis. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And last question, Aart, you talked about large deals, kind of 3-year average duration and shorter, smaller deals with much shorter, so it's kind of hard to roll all that together, but I'm still going to ask anyway. Your 2.6-year average contract duration, we've seen that number across industry shorten up a pretty consistently over the last 18 months. Do you think we're getting to the point of stabilization? Or do you think that can go much further on the shortening side? I understand what you've already implied in your guidance, but just from a high-level, how do you think about what customers are telling you around how long they're willing to commit to these contracts?

Well, I wouldn't overread sort of a 0.1 change here. Our own expectation right now is still that we will do overall year between 2.7 and 2.9 years. In general, I would agree with you that, if you look at it 2 years ago, it's down a little bit. I think that is probably more a reflection of the last 2 years having been economically up-and-down and up-and-down. Greece has sort of become the symbol for economic uncertainty. But I wouldn't read too much into that beyond that. We certainly, in our shop, are not doing super-long contracts. So there's not much of 5 or 7 years. Actually, I don't think there's any. And so in that sense, I think we're sort of at the balancing point. It may go down a little bit, may go up a little bit. I'm sensing I'm meandering because I don't actually have any more value to add to this question.

Sterling, in last year the average -- in FY '11, the average was 2.7 years. And so this year with 2.7, a 2.9, with a 2.6 Q1, is still where we think average comes out. Again, all down to the specifics of which contracts and the duration by customer.

And at this time, I am showing we have about 5 minutes left of the allotted time. And we have a question from the line of Rich Valera with Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: Brian, I was just wondering if you'd be willing to give the ratable verse upfront split in Magma's just completed quarter?

Rich, honestly, I don't have that right in front of me. We just got the P&L's in the last day or so. So I've got the full financial's balance sheet, but we still have to do the analytics on that profile.

There are no other questions in queue.

Well, in that case, let me wrap it up. Thank you very much for the time you spent with us. I think that we had not only a very strong quarter, but a very good outlook for the rest of the year. That is, of course, amended by the fact that the Magma team will now be joining us. We have a lot of work to do there, but we sense that this is actually a great addition, at exactly the right time in our markets. And we will do our best to turn this also into a strong shareholder value-creation opportunity. Thank you very much for your attention today.

Okay. Ladies and gentleman, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.