Synopsys Earnings Call Insights: Vendors, Margins

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

Vendors

Richard Valera – Needham & Company: Just like to start out Aart with something you referred to in your prepared remarks about 28 nanometer where it saw a lot of activity and some issues with respect to yield and I guess capacity. Can you talk to how sort of that’s potentially benefiting Synopsys? What are the opportunities there, perhaps also below 28 nanometer at this point?

Dr. Aart de Geus – Chairman and co-CEO: The 28 nanometer node has been in the works for a long time both from a technology development as well as from a design perspective and I think the reality is that the two are coming together now all at the same time with both market opportunities designs that are ready to go and applications that really would like to take advantage of this node. As you pointed out correctly, there is definitely the perception of lack of capacity and maybe even some yield issues that cause a lack of capacity. Now nothing that drives capacity grows more rapidly and yield improvements more rapidly than customers that are eager to buy, but we are clearly seeing that all the suppliers of silicon are working very hard to try to take advantage of this opportunity. Simultaneously it’s an opportunity for us because the chip design itself has influence on the quality and the yields that one can get in the implementation. So product such as our Yield Explorer allows people to look at their design and look at the manufacturing and identify more easily issues that could reduce yield, and therefore work more closely with the foundry rapidly to fix those. We are definitely seeing upswing on that specifically around that node. In general, I think it’s encouraging that 28-nanometer is doing well, because it indicates that the wave of moving to this node is now really becoming very real from a production point of view, and of course a few companies are already well ahead of that, but this indicates that’s a lot of – I would say advanced, if not super advanced chips are now migrating there, and so that demands a lot of tools, a lot of handholding which is some pressure, but a lot of opportunity for us.

Richard Valera – Needham & Company: Then with respect to your discussions with customers that have – that were both Synopsys and Magma customers. I think one concern is that to the degree that those customers wanted a dual vendor strategy now they’re effectively a single vendor strategy. What can you do to prevent them from effective – to try to prevent them from going to another vendor to sort of create a dual vendor strategy and how are those talks going?

Dr. Aart de Geus – Chairman and co-CEO: Well, first of all, we don’t want to prevent them from doing anything because if people really want alternatives, then they are free to do so. I think what the bringing together of the Magma Technology and Synopsys Technology does for start to actually accelerate the over offering that we have. It makes it more solid for the coming node of 20-nanometer, which is a node that requires a large amount of technical investment and support dedication. So in that sense I think we are a much more and even better bet I should say because of combining those things. At the same time we have been very clear to the customers that certainly for all of their ongoing projects, we don’t want to jeopardize where they are heading there and will continue to support the former Magma tools. So I think the customers have a lot of choice but the customer is also very, very focused on figuring out which solutions really work and actually try to reduce some of its applications.

Richard Valera – Needham & Company: Finally for Brian can you state what the interest rate is on the debt that you took out?

Brian Beattie – CFO: It’s effectively today at about 1.375%.

Richard Valera – Needham & Company: Is that a floating rate?

Brian Beattie – CFO: It does, it floats on a LIBOR, we’ve been using the 30 day LIBOR rates and the premium on top of that the spread is about 1.1%. So LIBOR rate now is very inexpensive we continue to expect the rates will stay low for the foreseeable future.

Richard Valera – Needham & Company: Is it your intent to maintain that that debt for some period or would you consider, paying that off rather quickly as you generate cash in the balance of the.

Brian Beattie – CFO: I’d say our goal is to obtain really the maximum optionality that we can with the resources that we’ve got, it’s a balancing item there between our operations and repaying that debt, also the M&A opportunities that still may be in front of us and also the buyback scenario. So we look at all four of those areas as areas that we need to address and use the cash in the appropriate way.

Margins

Raj Seth – Cowen and Company: Brian, first a question for you. Your annual guidance suggests that we’ll see sequentially lower operating margins into Q4. I mean, there was the same trajectory pre-Magma. Can you remind me what the reason is for that and I’m just curious if there’s some residual LAVA costs in there that one might expect to go away as you moved into the next year? I mean, fundamentally I guess I’m curious how to think about margins into next year. You mentioned high single digit growth expectation. Do you think that margins ought to expand in the next year or stay about where they are? How do I think about that? Thanks.

Brian Beattie – CFO: Sure Raj, you bet. Yeah, as we look at margins, first thing we’d say is again we are focused on improving the efficiency and driving margin up and we anticipate that for this year, we’ll be up approximately 100 basis points over the numbers that we had seen last year in 2011. Relative to the Magma costs and the margin pressure, again we anticipated that back at the last quarter, that the earnings contribution from Magma would be modest, and in fact, we came out at $0.03, so for this year, the operating margins aren’t quite up to the standard as you’d anticipate from the transition costs that we have for integrating the products, and again, anticipating that to improve as we drive profitability up from Magma well into ’13. Then the last point I’d say is that again our – as you see us already being close to 23% to 24% operating margin, that our goal continues to be achieving the mid-20% levels over the next few years as well. So again, just recall that on a quarter-to-quarter basis it does move around a little bit based on the timing of the expenses and how things work. I recall the extra week we had in the first quarter, which happens every five to six years, and you’ll see a bit of movement but overall again about 100 basis points improvement in 2012 over 2011, inclusive of our acquisition.

Raj Seth – Cowen and Company: Great and a question if I might for Aart. Aart, on the IP business you talked about a good momentum there. Can you talk briefly about sort of what the margin trajectory is there? As you balance I suppose the desire for breadth in the portfolio. How do you balance that against and you tell me if this is true or not, but the fact that you probably have some hit products within the portfolio that probably generate, I’m guessing a lot of the disproportionate amount of the revenue. Just talk a little bit about how you are going to build that out over the next 12 months or so?

Dr. Aart de Geus – Chairman and co-CEO: Raj, I think you gave most of the answer in your question, which is precisely a balancing act between growth, profitability, and broadening the portfolio for the short and the broad term. In that context of A, we are clearly seeing continued growth. The business is doing well and we think it’s an important one going forward. B, without giving specifics, I think we’ve commented started may be roughly four to six quarters, that that we were gradually improving the operating margin of that business, largely because as the business becomes larger it should become more and more profitable. C, you saw some of the results of that overall in the results for the corporation. Brian just mentioned that this year we will be moving up the operating margin by roughly 100 basis points. Well that is the result of all those things including this business. So I think we are well on track in every domain. Now from a broadening point of view at any point in time, yes some of the products are ‘hot’ because when somebody needs it, their competitor needs it and before you know everybody needs it and that is by the way also the nature of many of those standards. But it’s also true that they evolve constantly. They constantly have to be mapped into other technologies and so there’s actually quite a distribution of efforts over a broad portfolio and that is actually one of the Synopsys’ strengths.

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