Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Second Quarter of Fiscal Year 2015. At this time, all participants are in a listen-only mode. And later, we will have a question-and-answer session, instructions will be given at that time. Today's call will last one hour. Five 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. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Lori. Good afternoon, everyone. Leading today's discussion are Aart de Geus, Chairman and Co-CEO of Synopsys, and Trac Pham, Chief Financial Officer. 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. 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 the call, important factors that may affect our future results are described in our most recent quarterly report on Form 10-Q, and today's earnings press release. The reconciliation of the non-GAAP financial measures discussed on this call to their most directly comparable GAAP financial measures and supplemental financial information can be found in the 8-K, the earnings press release, and financial supplement that we released earlier today. All of these items plus the most recent Investor Presentation are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call. With that, I'll turn the call over to Aart de Geus. Aart J. de Geus - Chairman & Co-Chief Executive Officer: Good afternoon. I'm happy to report that our second quarter results were very strong and solidify our outlook for the full year. We delivered revenue of $557 million, non-GAAP earnings per share of $0.68 and $155 million in operation cash flow. We're raising the midpoint of our revenue guidance, with a range of $2.210 billion to $2.235 billion, and our non-GAAP EPS objective to a range of $2.76 to $2.81,…

Thanks, Aart. And good afternoon, everyone. As reflected in our excellent Q2 financial results, we are seeing good momentum and strong execution in our business. We met or exceeded all quarterly financial targets provided last quarter. We delivered growth in revenue and non-GAAP earnings and generated considerable cash flow. Based on the strength of the first half and our confidence in the rest of the year, we are raising our 2015 outlook for revenue and non-GAAP earnings and reaffirming operating cash flow. Now to the numbers. As I talk through Q2 results and targets for the rest of the year, all comparisons will be year-over-year unless I specify otherwise. Total revenue increased 8% to $557 million, reflecting solid organic and acquired-company growth. Greater than 90% of Q2 revenue came from beginning-of-quarter backlog, and one customer accounted for more than 10%. The weighted average duration of our renewable customer license commitments was about 2.5 years. Duration will vary depending on customer requirements. We expect full year duration to be close to three years. Total GAAP costs and expenses were $481 million. Total non-GAAP costs and expenses were $420 million, at the lower end of our range, due largely to some delayed hiring. Non-GAAP operating margin was 24.7%. Aligning with the multi-year strategy Aart outlined, we'll continue to drive company-wide operational discipline in order to fund our higher-growth initiatives. GAAP earnings per share were $0.35 and non-GAAP earnings per share were $0.68. Turning to cash flow. We generated $155 million of operating cash flow and continue to target approximately $450 million for the year. We ended the quarter with total debt of $220 million. This includes $160 million from our revolver, which we used to fund the $180 million accelerated share repurchase in Q1, and $60 million from our term loan. As…

We'll go to Rich Valera with Needham & Company. Please go ahead. Rich F. Valera - Needham & Co. LLC: Thank you. Question on ICC II. Thank you for the update there, it sounds like there is a lot of momentum in the market. Just wondered if you would address some chatter out in the market about some maybe initial versions of ICC II having some QoR issues that needed to be cleaned up by ICC I runs. It sounded like if you had those, you are beyond them, but wondering if you would address those or not? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well, this is mostly noise that is related to any transition that you have. ICC II at this point in time is doing very complex chips extremely well and does not need any – I guess is supported by its older brother so to speak. At any point in time, people like to compare results from one tool to another, they like to see if it behaves in the same predictable fashion as they are accustomed to and IC Compiler II is just doing fabulously well in those comparisons. And more often than not, we get actually response from customers that involve quite a bit of surprise on their part. So having said that, it's a very complex product and we are in an intense move to get customers to move into production design with it that takes some effort and well on top of that. Rich F. Valera - Needham & Co. LLC: That's great. And then, with respect to the acquisition I wanted to clarify – is that baked into the guidance? It wasn't exactly clear to me if that was in the guidance or not in the guidance, that Codenomicon?

Hey, Rich. This is Trac. The Codenomicon is not backed into the guidance we've provided. But the impact should be immaterial and we won't be changing guidance as a result. Rich F. Valera - Needham & Co. LLC: Okay. Now, when you had announced that, you'd said you thought it would close in 30 days, which is about where we are now. Anything we should know about? Why that hasn't closed in that timeframe? Aart J. de Geus - Chairman & Co-Chief Executive Officer: No, not really. These are just – there is certain amount of work that have to be done with the authorities locally and long track to execute on that. Rich F. Valera - Needham & Co. LLC: And so, I guess since that hasn't closed, that implies that Coverity will be slightly diluted in the second half of the year. Is that as expected? Aart J. de Geus - Chairman & Co-Chief Executive Officer: No. Actually, you probably remember that, when we originally acquired it, in our initial plan, we expect it to be breakeven in the second half of the year that – now, that we know much more and now that we've also decided to make some additional investments specifically in broadening the language coverage that is why we specifically communicated at the end of the second half it would be slightly dilutive. But it's very small and we essentially embedded this in the rest of the business for the company. So from that perspective, we still raise guidance. Rich F. Valera - Needham & Co. LLC: Got it, that makes sense. Aart, I just wanted to make sure that I heard you right. I thought you said you had a very strong emulation quarter; was that correct, in your prepared remarks? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Yes, that was exactly what I said. Rich F. Valera - Needham & Co. LLC: And I was actually going to ask you if the sales of emulation had been affected at all by the lawsuit, that I guess you lost at least initially, at this point, with Mentor. And I'm guessing the answer that would be that they have not been adversely affected, but I'll let you answer that question. Aart J. de Geus - Chairman & Co-Chief Executive Officer: Sure. And I will minimize my comments on this, after the verdict of course there was a set of issues we have to deal with, the version that's on the market today does not violate any of that. And so, we see that our business is doing well. Rich F. Valera - Needham & Co. LLC: Thanks very much, Aart, I appreciate it. Aart J. de Geus - Chairman & Co-Chief Executive Officer: You're welcome, Rich.

We have a question from the line of Sterling Auty with JPMorgan. Please go ahead.

Yeah. Thanks. Hi, guys. I apologize, I got cut off for a part of the call, so if you said this in your prepared remarks, I do apologize. But around ICC II, I imagine most of the traction is with the existing customers. I'm just wondering – any commentary in terms of not-Synopsys teams that are starting to adopt this for some of their advanced chips? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well. As you would imagine, Synopsys has been serving the most advanced designers in the world pretty much a 100%. And so while there is always one or two hold outs, our first objective, obviously, is to make sure that's the hardest driving design groups that need it most, that do the largest chips, and by the way that also the most demanding are successful first, and I think we are doing remarkably well with that group of people. There are number of maybe less advanced designs or let me put it more – in the 28-nanometer, 40-nanometer category designs that are sometimes advanced but on less evolved silicon technologies that are also using the tool extremely effectively. And so, we have an opportunity here to broaden to companies that maybe before did not look at us as their primary provider for (26:13).

Okay. And then, on the guidance for next quarter, specifically to the EPS, is the only increase in operating expenses the slight dilution the you are talking to, or is there some sales hiring or other operating expense investments that you are making, given where the range of EPS is coming in, relative to consensus?

I'm sorry, Sterling, you're asking about the expense increase from Q2 to Q3? Is that right?

That's correct.

Yeah. So, what you're going to see in the quarter-to-quarter comparison is the delayed hiring that we saw in Q2, as well as the merit increase for the second half of the year.

Okay, great. Thank you.

You're welcome.

We've a question from Tom Diffely with D. A. Davidson. Please go ahead. Bryan Andrew Masuda - D. A. Davidson & Co.: Yeah, hi. This is Andrew Masuda calling in for Tom. You guys mentioned that you guys had 15% of your cash onshore. I was just wondering if there was a minimum threshold that you would like to maintain for acquisitions and/or share repurchases?

I'm sorry. In general, we tried to keep our U.S. cash flow at around $100 million, but keep – I should note that we did close our revolver yesterday and we increased that to from $350 million to $500 million. So the combination of the onshore cash right now of $150 million plus the increase revolver gives us a lot of flexibility. Bryan Andrew Masuda - D. A. Davidson & Co.: Okay. Thank you. And then, Aart, just a question on the software quality and security. Can you remind us how much that increases Synopsys' overall TAM? Aart J. de Geus - Chairman & Co-Chief Executive Officer: It's difficult to remind you, because I always struggle with that question. The reason I struggle is that the space of software productivity tools, software quality tools and then security is highly fragmented and sort of continually evolving. Our own sense initially is that the TAM probably grows by another $500 million or so. But I'll be the first one to say that depending on how one look at it can be much larger. I don't think it will be much smaller. But the security space is a little bit the wild west right now. Bryan Andrew Masuda - D. A. Davidson & Co.: Okay. And then just last question on IP and systems, I noticed that it just ticked down modestly in the April quarter. Can you talk about your expectations on that segment for the full year? Aart J. de Geus - Chairman & Co-Chief Executive Officer: From a quarter-to-quarter, it's hard to have very precise expectations. In general on a trailing-12 months basis, which is sort of what we mostly look at, it's up quite a bit. And the IP business by definition is somewhat lumpy, because there are number of deals that are large and ship immediately, there are some that require work to be done on a contract. And so, it can vary quite a bit. And last year for example was lower business growth than this year. So having said that I think the business is in good shape. Bryan Andrew Masuda - D. A. Davidson & Co.: Thank you. Aart J. de Geus - Chairman & Co-Chief Executive Officer: You're welcome.

And we have a question from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Yeah. Thank you. Good evening. Aart, I would like to ask about IC Compiler II as well. Just to clarify the business impact that you're seeing from its adoption, I believe you said, there are 32 customers now using it. Is it the case that most, if not all of them are paying you more now for its use versus what they would have paid you for the, let's say, equivalent number of licenses of its older brother, IC Compiler I? And if you could help us understand the incremental bookings and/or pricing or revenue implications of its adoption? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Sure. Well for starters, the product itself is priced at a higher level than IC Compiler I. It has dramatically better capabilities, and of course is superefficient. Secondly, a number of customers as part of their multi-year contracts with us have an opportunity to remix into the next version, at which point in time, they use up more of that contract. And then lastly, as contracts come up for renewal, that is an excellent time to establish what's their level of commitments to Synopsys place and route is and IC Compiler II is doing extremely well with that. And so, having a history of fairly substantially new products in the past, not that we have something like IC Compiler II every few years or so, we nonetheless can absolutely see that the rate of business growth is excellent for it.

Okay. And a couple of questions for Trac. You mentioned hiring in an answer to, I think, Sterling's question earlier. In doing a spot check on your website, the number of open positions that you now have. And I know it's sometimes not the best reading of a company's plans, but you do now have largest number of open recs in about a year and a half, since the end of 2013. Could you help us understand how much of that intended hiring, or the people you are looking for, are in a more traditional core EDA business versus the new Software Integrity business?

We definitely hire – are looking at to grow our investments in the Software Integrity Group as well as the IP and systems side. As we said, we will commit to growing in those spaces. Keep in mind that the head count at the end of Q2 is roughly flat with where we exited last year. So and for two quarters, now we've been behind our hiring so we should expect that to ramp up a little bit. But with that hiring in mind, I would just refer you back to the full year guidance, we still are at the midpoint of EPS, we're still looking to grow EPS by 10% and then we're still looking to increase operating margins by about 100 basis points year-over-year. So while we're hiring to support our business, we're mindful of the financial impact.

Okay. A couple more for you, Trac. Your core EDA business was up pretty nicely sequentially for first quarter to second quarter, or larger than usual increase. If we think about that in geo terms, would it be fair to say that most of that sequential increase would have been in Asia-Pac, and perhaps secondly in North America?

It lines up because you do see that the growth in, the trailing 12 months growth for North America and Asia-Pac was pretty strong.

Yes. Okay. And your cost of revenues per product was actually down sequentially, in-spite of the fact that you had a strong emulation quarter. Perhaps you had a really nice increase in the margin on emulation, but should we perhaps read into that, that the HAPS business, also hardware of course, might have been down sequentially? And from a cost perspective might have offset the increments from emulation?

Yeah. We're not concerned about that and we actually don't worry about the COGS line on a quarter-to-quarter basis. If you look at it over the last – this quarter as well as the last few quarter trend, it usually bounces around between 82% and 84% and we're well within that range, so, I wouldn't read anything into it.

Okay. And then lastly for Aart, a somewhat technical question, so IC Compiler II, of course, has been on the market now for about a year. One of the things you talked about since you released it or when you released it, was its substantial capacity additions. Could you remind us what you've done for the other products that are closely tied to IC Compiler in implementation, particularly DC and PrimeTime and others, in terms of materially expanding their capacity to keep up, so to say, with the design sizes for IC Compiler II? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well, first taking the step back, the IC Compiler II was out or IC Compiler was somewhat off the bottleneck in the very, very large designs, because far and away the largest amount of data is attached to the physical representation of a design, which does mean that it's not desirable to have higher level of capacity on any of the other tools. And so – at any point of time when one tool solely does a lot better all of the other tools while being happy for the company, immediately realized that the pressure is on them now to continue to improve and, of course, that is exactly what we're doing, and so from time-to-time you will see new capabilities come out on any of the surrounding tools, and the practical situation, always you can't do it fast enough. So they're working hard on it.

Thanks, Aart. Thanks, Trac. Aart J. de Geus - Chairman & Co-Chief Executive Officer: You're welcome.

We have a question from the line of Monika Garg with Pacific Crest Securities. Please go ahead.

Hi. Thanks for taking my question. The first on emulation, Aart, could you talk about – you talked about a strong growth in the emulation segment. What is your expectation for the growth of that business year-over-year and your views on the market as well? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well, I don't think I commented on the market. I said that emulation was strong in the quarter for us. But I put it really in the perspective of our broader mission, which is a Verification Continuum that really contains the cornerstones of simulation and, of course, emulation, but also number of other technology. And the reason that's important is because in reality, most designers use a broad set of tools and one of the things that really helps them is if the tools understand the electronic representation the same way, with other words if it can sit on the same infrastructure and if you can use the same debuggers, even if some of the tools are more appropriate for one thing than another. And so within that context that we have made outstanding progress specifically and making sure that the compilation techniques that we use for simulation and emulation line up very well, and about a year and half or so ago we had flagged that as one of the weaknesses in our offering. And I think right now, it's becoming rapidly a strength.

So is it fair to assume your emulation standalone revenues growing at least double-digit year-over-year? Aart J. de Geus - Chairman & Co-Chief Executive Officer: You know Monika, we said that it's doing very well. We don't disclose the growth rates of individual product. They tend to go up and down, but I would reiterate that we think that we have a very strong emulation solution.

Okay. Then on the Coverity, when it was bought, you talked about it growing at 20% growth rate. Could you maybe share how is that business doing on the growth rate basis? Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well, it's roughly on track. It is slightly differently dimensioned than when we originally acquired it, because we didn't quite know exactly how to read the numbers. We have concluded meanwhile that it is a business that has great opportunity and for that reason we realized after a while that our core strength is really the depths of the algorithms, specifically around the analysis of the languages. And that of course, beg the question, well, so which languages do you do, and we decided to invest in broadening that language sets. So I think there is still a lot of space to be explored here. And then the other broadening that we took on, of course, is to strengthen the security angle. Coverity already have some security capabilities, but they were not really well-known for it. Codenomicon is certainly a brand name, and it allows us to position a little bit better in this emerging space while at the same time, learning quite rapidly, what are actually the things that are most valuable to customers.

Got it. Just a housekeeping question, if you look at maintenance and service line item, the first half of this year, the revenues about $130 million, but last year was about $102 million. So it's something going on there? Or is there some reclassification of revenue in this line item?

Are you talking about service?

Yeah, maintenance and service line item, yes?

Well, those tend to go up and down quite a bit. They are very lumpy because a lot of these are directly related to certain contracts having milestones, and the milestones can be very unevenly spread. And so, the service business is not very large for us. And so, I wouldn't read very much into it. The very fact that I wasn't even unaware of what you just said shows that we are – ourselves maybe we can pay more attention to it, but we didn't.

Okay. Thanks. That's all for me.

You're welcome.

We'll go to Mahesh Sanganeria with RBC Capital Markets. Please go ahead.

Yes. Thank you very much. Another IC Compiler question, Aart. We estimate that the addressable market for place and route about $600 million growing more at mid-single digit. If you can give your opinion on that? And also if you can talk about comparative positioning, because your competitors also claiming significant design wins in that area. So if you can comment on that, that would be helpful. Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well. I cannot comment about the – what a competitor says. If they're growing, that's good, that means the whole market is growing even more. We are certainly doing very well and have been the largest provider in that segment of the market for quite a while. And so, what makes that market interesting and challenging is that it's the first place where all the new challenges of new technologies come through both in terms of the physics, but also in terms of the sheer complexity off of the chips that have to go through the tools. And in that context, IC Compiler II, I think is passing the test with flying colors and that is why we've seen the business actually do very well around IC Compiler II. And as a matter of fact, the run rate for the whole company is up. And so, IC Compiler was certainly a cornerstone in the things that we wanted to accomplish this year.

And another question, you made a comment on 28-nanometer being a bigger node in your opening statement. I guess you were probably referring that 28-nanometer is staying much longer than – and you're seeing new designs. Does that have any implication on how things progress for your business? Does that imply that advanced technology is slower, but it doesn't matter to you. You'll go by – I mean you're benefiting from a number of designs, not necessarily has to be the leading edge? Aart J. de Geus - Chairman & Co-Chief Executive Officer: That's a very good question. And you may recall that I fairly strongly predicted this. I would say four quarters to six quarters ago already and there is a logic to it, which is no matter what's the difference between 28-nanometer and then the 16-nanometer, 14-nanometer and so on. FinFET is that 28-nanometer is what's called planar transistors or flat, right, whereas FinFET as a name says Fins, they are vertical. And so that is a fairly big physical change, when you think about it. And so there is a reason, one would go after such a change, because the benefits are very large for very sophisticated advanced designs that also need very low-power. So no surprise the people that go there first are the processors and are the people that do a mobility, because they have very complex chips and need low-power. Now, contrary to popular opinion, it's not just two customers or three customers that have gone there. It's a larger number already. But it is also true that for many of the others. They sort of way to see as others have crossed the bridge, how that's going, when are the economics right, where is the yield is really predictable all the things that you do, if you don't see a super high advantage in being in the most advanced nodes. But then now you are right about 28-nanometer, which is a very, very solid node, very high yields, a good cost point and so on. And you say well, I still want to differentiate. And so now you're doing very advanced design on 28-nanometer node, which by the way is just as difficult, it's just the type of difficulty you already know about. And so, it's in that context that many of the benefits of IC Compiler II that we're pioneered with, obviously, the intent to be able to satisfy the FinFET crowd have actually very positive impact on the 28-nanometer, and actually we see a number of people also do very well at 40-nanometer. And you look at that configuration, and you say, hey! that makes sense. It's economics that determines when people go over the bridge, and right now the 65-nanometer and 40-nanometer group is arriving at 28-nanometer and we'll be looking when to cross into FinFET when it makes economic sense.

That's very helpful. Thank you. Aart J. de Geus - Chairman & Co-Chief Executive Officer: You're welcome.

And I'll turn it back to our presenters for closing remarks. Aart J. de Geus - Chairman & Co-Chief Executive Officer: Well, at this point in time, I hope that you heard that we had a very solid and strong quarter with a number of key products that we had invested in for a number of years. These products are doing well. It's early in the comprehensive rollouts, but it is a very promising and it's certainly technology that applies to all the new designs being done. And with that, for those of you that joined us at the individual session, we'll see you later, and thank you very much for your time.

Thank you. And ladies and gentlemen, this conference call will be made available for replay that begins today at 4 pm Pacific Time. The replay runs through the date of May 27 at midnight Pacific. You can access the AT&T playback service by dialing 1-800-475-6701, and enter the access code, 359327. International parties may dial 1-320-365-3844, replay access code 359327. The numbers again, domestic 1-800-475-6701 and international dial 1-320-365-3844, the replay access code 359327. And that concludes the teleconference. Thank you for using AT&T Executive Teleconference service. You may now disconnect.