SNPS

Synopsys, Inc. (SNPS)

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Synopsys, Inc. (SNPS)

September 28, 2011 9:00 am ET

Executives

John Chilton - Senior Vice President of Marketing Group & Business Development Group

Deirdre Hanford - Senior Vice President of Global Technical Services

Joseph W. Logan - Senior Vice President of Worldwide Sales

Aart J. de Geus - Co-Founder, Chairman and Chief Executive Officer

Lisa Ewbank - VP, IR

Brian Beattie - Chief Financial Officer

Joachim Kunkel - Senior Vice President and General Manager of Systems Group

Analysts

James Pan

Paul B. Thomas - BofA Merrill Lynch, Research Division

Evan Bloomberg - Sigma Capital Management, LLC

Saket Kalia - JP Morgan Chase & Co, Research Division

Raj Seth - Cowen and Company, LLC, Research Division

Unknown Analyst -

Thomas Diffely - D.A. Davidson & Co., Research Division

Presentation

Lisa Ewbank

Good morning, everyone. I wanted to welcome, all of you here to New York at the Waldorf Astoria and also welcome all of you in the webcast. We're very happy that you came all this way. We've actually had -- we have a couple of people here from San Francisco, one person who flew in from London. So we're very pleased about that. And before we get started with our presentation with 6 members of our management team, I wanted to just go over a couple of logistical things.

First, many of you have probably found the wireless login information on your table. There's also a power strip, either on top or underneath each table if you need it. The facilities are quite a hike. If you turn right out of the room, go pass the elevator bank, turn left, go all the way down the ramp and the men's is all the way at the end and turn left, and the ladies' is a little bit closer.

We do have some evaluation forms at your side, so please let us know what you think and let us know maybe what we can do better, what you liked, what you didn't like. We'd love to hear from you. If everybody could please silence their phones. That would be great. I can see many people scrambling. Good. And we do have a mix of familiarity levels here. So we hope that we're going to provide a little bit for everyone, those who have been following the industry and the company for a long time and those who are fairly new.

So our agenda today. We'll start off with our Aart de Geus, Chairman and CEO, and he'll talk about the markets we serve, the market dynamics and how we're strategically managing the company. John Chilton will follow and will discuss how the market dynamics translate into demand for our products and will also highlight core EDA and manufacturing. Joachim Kunkel is Head of our IP and Systems business so he'll do a little bit of a deep dive on IP systems, which have grown to a meaningful scale in our company. We'll have a short 10-minute break and we'll come back with a view from the field, which I know everybody is looking forward to hearing. We'll start off with Joe Logan, who's Head of Worldwide Sales and we will follow that with Deirdre Hanford, who heads up our Global Technical Services area. And we will end with CFO, Brian Beattie, who will give a financial update, including some preliminary commentary on 2012. And then we will have a lunch with management.

So this is our Safe Harbor statement. We will be making forward-looking statements and we encourage you to look at our SEC filings for risks and uncertainties that could cause our results to differ materially. We also have some statements at the end of the presentation. And we will be talking primarily about non-GAAP numbers. The reconciliation of GAAP to non-GAAP numbers are on our website and also included at the back of this presentation. So with that, Aart de Geus.

Aart J. de Geus

Well, thank you, and good morning. Welcome to our session here. It's a pleasure to be able to talk about Synopsys and why we should be considered for investment, because we have, all in all, a very vibrant markets that we're playing in, notwithstanding the fact there's a lot of changes in the bigger market around us. We actually touch a part of the economy that almost, no matter what the rest of the circumstances are, will continue to do quite well. Within that, we provide a number of key technologies and we are market leader in that. And last but not the least, we think that we have a picture of a very strong financial present status and ability to invest going forward.

For those of you that may not be completely familiar with Synopsys, let me give you a very quick snapshot. And many of you are quite familiar with the numbers but in round numbers, we are about $1.5 billion in revenue. And you see the non-GAAP earnings numbers that we've given you guidance for this year. And by the way, our year finishes in October, so we have about 5 or 6 weeks to go. What is unique about Synopsys? We have pioneered a business model and software that essentially rents the software in 3-year increments and thus have allowed us to build a large backlog, has allowed us to have a very high degree of stability. And by the way, we have build a very international company as a bit over around 50% of our revenue is coming from abroad.

Last but not the least, we are a very technology-deep company. We enable the development of chips. So we're in the electronics design automation market. We also have a strong position in the IP, intellectual property market, meaning pieces of a pre-designed chips and we work also on the higher end of the systems area. That market overall was about $6 billion or so and serving a quite substantial semiconductor market, which is over $300 billion. Which in terms, of course, is at the heart of the still growing electronics industry.

Why Synopsys? One should ask why not Synopsys, given that we are in a very good position, and starting with the markets that's driving things, has been actually quite remarkable. And it's useful to look at it I think a little bit from a historical point of view, because many of you of course have seen the coming about of computation at that time Moore's Law was coined, and with computation of course, the software world that's developed around that, we're talking really late 70s, 80s. And then in the 90s, mobile communications came about. And you may recall that mid-90s, there was this notion that convergence would be very important. Today, that's completely old have, but what it did bring about was an enormous need for networking and connectivity in the world, and of course, the software equivalent of the worldwide web.

Now you take all of those things and you put them together, there's no question that it has changed the very way in which most of us communicate. And actually, it has completely changed the way in which the next generations communicate. And this is particularly relevant, I think, in markets that's still up and down in general, because our kids will give up on clothing and foods long before they give up on their electronics. And so I think there's a high degree of stability in terms of consumption happening there. And part of that consumption is driven by the fact that the world has gone video. I think about 20% of the bandwidth is already used by just Netflix in New York between 8:00 and 10:00 in the evening. But the very fact that our kids communicate increasingly via Skype, is just an enormous consumer of data and data bandwidth, all things that are excellent for the semiconductor market.

Now if you add to that, that we're going to see a next wave where sensors and actuators essentially will add elements to the Internet that are not necessarily human-driven, it is good news that most of the chips that support this on our multicore, meaning that they are really substantial systems on a piece of silicon. And we will, therefore, be able to enter the age of what I would call the Internet of things, where literally your toaster, your dog, your car and so on will communicate among themselves or in a bigger infrastructure. If we look at that, one can simplify this as saying well, yes, really cloud and mobile are 2 sides of the same coin, the more mobility, the more you need the clouds to connect it and do computation in the background. And then this next wave of really smart everything as products make it possible to absorb electronics in them.

If we briefly zoom in starting with mobile, as this is really the most visible driver, you're very, very familiar with that, but there are 2 products of course that stand out in the last 4 or 5 years, one is the handset market and the other is the tablet market. They both have the characteristics of just enormous growth and specifically enormous utilization of logic silicon capacity. And even if you take these numbers with a grain of salt and all this prediction, we're talking literally 3-Intel size capacities just to deliver on the silicon of this type of product.

Now the more there is mobility, the more there is creation of data, the more there is also manipulation of data. And with the manipulation comes this notion of cloud. And different people think about different things with cloud. There's those that think about the connectivity between the different product. Others are thinking about the large server site that are being built right next to rivers who are cooling and power plant to get the energy. And so Amazon and Google will be great examples of that. These are mega plants of literally tens of thousands or hundreds of thousands of computers. And so the expectation is that as mobile grows, so will the computational cloud.

In addition, with that comes an enormous amount of the transportation of data and where there was an enormous amount of capacity built-in in the early 2000, that is being pretty much used up and now is being amended to 2. And if you look at the prediction for traffic, this is literally measured in exabytes, and of course all of you are familiar with exabytes, it has a lot of zeros. I think 18 zeros on this. While If you look at the storage that's sitting behind that and that's really the fourth component around data, that itself is actually measured in zettabytes, and of course you're already familiar with that, but for those that are not, there you go. In technical terms, that's called a boatload of storage. So this is an area that will continue to grow at a rapid pace.

Moving on to the third one, which is the smart everything, we can see literally how we're talking smart grids, smart building, smart cars, smart toasters and smart kids and animals and so on, meaning even connection to the body in various forms. But it will has the same characteristics, which is that on top of the traditional chips with storage, communication and a processor, we will see sensors and we will see, of course, the software that ties all of these together. And one of the key drivers is going to be how to bring the price down so that literally in not very expensive products let's say your key chain, there should be a vessel that can tell you where they are. And these are just simple examples that are technically imminently possible. And I think over the next decade, we'll see more applications there.

If you take one where we've seen this already for a long time, the car, most cars now have a substantial amount of electronics within them. And if you just look at the number of lines of code, you may shiver to know that your car is not powered by 100 million lines of software code designed by software guys. And so I hope you're safe. But the fact is, they have incredibly stringent rules on how to do that.

To make a long story short, if you look at the semiconductor content in electronic products, surprisingly so it has still grown even above the 20%. I was thinking that late 90s it would sort of stabilize at around 20% and move rapidly towards the 25%. And the reality is, what you carry in your pocket instead of chips with some plastic around it and a little keyboard, but the fact is most of the value is actually the chips and the software that brings this together. And so in many way, I think this reflects this electrification of the most of the things that we do.

If we look at these market from a numbers point of view, we mentioned EDA and IP at about $6 billion serving the semiconductor industry, serving the electronics industry and now increasingly the applications industry, as all of these electronic things are really platforms to build additional value on. Well, in order to do that it follows a very simple rule, and this may sound simplistic but is turning out to be very effective, that you have to innovate and differentiate. And differentiation comes really in 3 dimensions. Do something better, do something sooner, do it cheaper. Sounds very simple but in order to understand electronics, we need to understand what better means. And better invariably today means a trade off between performance and power, that's the key theme.

And if you look at the last downturn, it's interesting that in a downturn, immediately a number of people say, "Well, what can I do really better?" And downturn tends to spur a lot of innovation. And you may remember that at that point in time, the iPad was introduced and I always like to highlight that the evening before and the morning of the introduction of the iPad, about 95% of the professional pundits said, "Hey, this thing is not all that great. It's too big to make a phone call with, it's sort of a big phone." And within a matter of weeks, there were thousands of applications on it. And so it illustrate how difficult it is actually to predict which innovation will be successful. But what was clear is, within a matter of weeks, there are whole bunch of people racing to say, well, yes, I'm building one, too. And there are obviously tens if not hundreds of iPads going to the market today. And then today, we're already assuming the Far East in a race to see if one can build things cheaper. And so this innovation wheel is very much characteristic for the field that we're in and we, Synopsys, are absolutely at the center of gravity of helping our customers being able to -- in both innovation and differentiation.

Now if we apply this to the 3 market segments that I illustrated before, mobile is very clear where the push is today. It is a performance power trade-off, but power is mostly fixed. Here's the battery, now how many windows can I open on my thing and how many apps can I have run at the same time. So the push for performance is absolutely one of the key things that Dierdre and her team help our customers work on. If you look at the cloud it's almost the opposite, which is the performance is as high as we possibly can, the fastest possible chips and now the question is, how can you bring down the power because if you have tens of thousands of these processors in a building, you bet they consume a lot of power actually. Most of the cost is now the power consumption.

If you look at the smart, it's a little bit of a combination of all of the above, including the how do you integrate extremely sophisticated systemic problems while making them say, for example, in the car area, or while making them work across different industries such as the electrical grids, smart grids, for example. Now the good news for us is that in all of those markets, this drive for advancement is almost unstoppable. And this is illustrated by looking at some of the economic downturns. So you look at the -- what is it, I think the '89 downturn here, and you can see that R&D expenses kept going in the semiconductor industry. You look at the 2001 downturn, essentially, the same picture. And the most recent one the '95, virtually the same which is R&D does not go down. It keeps continuing.

And we can absolutely see that, because if you look at the number of chip designs -- and for those of you that may never have seen a chip up close, this is actually what one looks like in terms of size. And this can easily contain close to 1 billion transistors and on-off switch. While if you look at those, the number of chip starts in the last decade have really been roughly stable. And I'll go a little bit later into the color scheme, those reflect the sizes of the transistor used, but the size of the transistors keep coming down, meaning you can have more and more on a chip. But the rough size of a chip is sort of the same. What is not the same is what's on it and the complexity has continued. It's an exponential. It's been an exponential for 50 years, amazingly so. And this exponential is the very reason why, when you have a good idea, you have to race forward because if you're late only 6 months or 12 months, you're way back on the exponential versus your competition. And this is our profession. For the last 25, we can honestly say that for the majority of the Synopsys products, we have been at the state-of-the-art. And I'll say it's not all the time, but in general, we are absolutely the technology leader in our field.

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