FILED BY AVANT! CORPORATION PURSUANT TO RULE 425 UNDER THE SECURITIES ACT OF
1933. IN ADDITION, AVANT! CORPORATION DEEMS THIS COMMUNICATION TO BE FILED UNDER
RULE 14a-12 OF THE SECURITIES EXCHANGE ACT OF 1934. SUBJECT CORPORATION: AVANT!
CORPORATION, COMMISSION FILE NO. 0-25864.
FORWARD LOOKING STATEMENTS
The transcript below contains forward-looking statements within the
meaning of the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, including statements regarding the expected date of closing the
acquisition; future financial and operating results; and timing and benefits of
the acquisition. These statements are based on Synopsys' and Avant!'s current
expectations and beliefs. Actual results could differ materially from the
results implied by these statements. Factors that may cause or contribute to
such differences include the successful closing of the acquisition; changes in
both companies' businesses during the period between now and the closing date;
litigation relating to the transaction or the businesses, including the outcome
of litigation between Avant! and Cadence Design Systems, Inc.; the successful
integration of Avant! into Synopsys' business subsequent to the closing of the
acquisition; timely development, production and acceptance of products and
services contemplated by the merged company after completion of the proposed
acquisition; increasing competition in the market for design implementation or
design verification software; the ability to retain key management and technical
personnel; adverse reactions to the proposed transaction by customers, suppliers
and strategic partners and other risks described in Synopsys' report on Form
10-Q filed with the Securities and Exchange Commission (SEC) on September 18,
2001 (pp. 21-23), and on Avant!'s report on Form 10-Q filed with the Securities
and Exchange Commission (SEC) on November 14, 2001 (pp. 21-27). Synopsys and
Avant! are under no obligation to (and expressly disclaim any such obligation
to) update or alter their forward-looking statements whether as a result of new
information, future events or otherwise.
ADDITIONAL INFORMATION
In connection with the proposed merger, Synopsys and Avant! will file
a joint proxy statement/prospectus with the SEC. INVESTORS AND SECURITY HOLDERS
ARE URGED TO READ THE JOINT PROXY STATEMENT / PROSPECTUS REGARDING THE PROPOSED
MERGER WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION.
Investors and security holders may obtain a free copy of the joint proxy
statement / prospectus (when available) and other related documents filed by
Synopsys and Avant! with the SEC at the SEC's website at www.sec.gov. The joint
proxy statement / prospectus (when it is available) and the other documents may
also be obtained for free by accessing Synopsys' website at www.synopsys.com or
by directing a request by mail or telephone to 700 E. Middlefield Road, Mountain
View, CA 94043, Attention: Company Secretary, (650) 584-5000, or by accessing
Avant!'s website at www.avanticorp.com or by directing a request by mail or
telephone to 4671 Bayside Parkway, Fremont, CA 94538, Attention: Company
Secretary, (510) 413-8000.
Synopsys, Avant!, and their respective directors, executive officers
and certain other members of management and employees may be soliciting proxies
from their respective stockholders in favor of the merger. Information regarding
the persons who may, under the rules of the SEC, be considered participants in
the solicitation of the Synopsys stockholders, or the Avant! stockholders, as
the case may be, in connection with the proposed merger, will be set forth in
the joint proxy statement / prospectus when it is filed with the SEC.
---------------------
On December 3, 2001, Avant! Corporation and Synopsis, Inc. jointly hosted a
conference call. The communication filed herewith is a transcript of that call.
SYNOPSYS CONFERENCE CALL, 12.3.01
Operator: Ladies and Gentlemen, thank you for standing by, and welcome
to this special conference call. At this time all participants
are in a listen-only mode. Later we will conduct a
question-and-answer session. Instructions will be given at
that time. If you should require assistance during the call,
please press "0," followed by "star." As a reminder, today's
conference is being recorded.
During the course of this conference call, Synopsys and Avant!
(pronounced Ah-VAHN-tee) Corporation may make forward-looking
statements regarding the performance of the companies before
the proposed merger and the combined company after the
proposed merger, and, in Synopsys's case, regarding the future
financial result. While these statements represent each
company's best current judgment about its future performance,
each company's actual performance is subject to significant
uncertainties that could cause actual results to differ
materially from those that may be projected, including the
risk described in the two press releases issued earlier today
describing the proposed merger and Synopsys' fourth quarter
and Fiscal Year 2001 results. In addition to any other
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 2
risk factors that may be highlighted during this conference
call, listeners should also review each company's most recent
10-K, 10-Q, and 8-K reports on file with the Securities and
Exchange Commission, as well as the [collection] materials
that will be filed regarding the proposed merger for important
factors that could cause actual results to differ materially
from those that may be projected.
At this time I would like to turn the conference over to the
Chairman and Chief Executive Officer of Synopsys, Dr. Aart de
Geus. Please go ahead, Sir.
Aart de Geus: Good afternoon. I have with me Paul Lo, President of Avant!,
Chi-Foon Chan, President and COO of Synopsys, and Brad Henske,
our CFO. We have moved our earnings conference up because we
have some great news to announce. Synopsys has signed a
definitive agreement to acquire Avant! Corporation. This is
exciting news for many reasons.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 3
First, for our customers, the merger instantly brings together
the best front-end and the best back-end design tools under a
single roof. Many top executives from the largest
semiconductor and system companies have personally suggested
to me that they would welcome such a move.
Second, both Avant! and Synopsys employees see the power of
this combination. Our employees have a tradition of strong
technology innovation, delivery, and support. Combining
expertise in our complementary areas opens the door to
providing a complete IC design solution that is unmatched in
the industry.
Third, our shareholders have viewed it as a very strong move.
At a time when customers are reducing their number of
suppliers, Synopsys emerges as a provider of the strongest
technical solution in the industry. In addition, both Synopsys
and Avant! have a solid track record of sound financial
execution and growth.
The bottom line is that this merger is a bold move that
instantly puts up in the leadership position for IT design
information.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 4
What everyone knows, is that Avant! has had significant legal
troubles. I want to move forward here. Some bad things
occurred, some people were caught, they pleaded no contest,
some individuals received sentences and Avant! paid the price.
A huge price. Not only did they make a very large restitution
payment upon closure of the criminal case, but they also
suffered for years under a cloud of doubt and distrust. This
is especially unfortunately in light of the outstanding new
technology that their engineers have produced over the years.
But let me be very clear, we have not condoned what happened
in the past. We have done our homework and we are convinced
that what we are acquiring today is clean. In addition, we
will put forth our best effort to practically seek a
reasonable and fair settlement with Cadence on any outstanding
issues effective on the closing of the merger. Cadence and
Synopsys leadership in resolving these issues will open a new
chapter to a more mature and healthier in, industry going
forward.
This is an important time to strengthen our industry,
especially in light of the economic situation around us. In
the last three months
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 5
the outlook for semiconductors and electronics in general have
become significantly bleaker as hopes for an earlier recovery
have been replaced with an almost complete lack of visibility.
Our customers have forced to take action. After initially
cutting the obvious things, they are now re-examining even
their key projects and, if necessary, cutting into what was
previously considered untouchable. Even R & D budgets are no
longer immune and EDA expenses are increasingly scrutinized
and/or delayed. I hasten to say however that compared to our
customers our EDA industry has so far performed remarkably
well and will continue to do so. For Synopsys, we completed a
solid quarter and met expectations. Nonetheless, good
management discipline clearly prescribes that we forecast more
conservatively, that we manage expenses aggressively, and that
we correct up or down as visibility returns. We will manage
the business in fiscal '02 to yield earnings of at least $2.00
a share. Brad will give detail about that in a moment.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 6
No matter what the economic situation looks like though,
Synopsys as a company is very strong. We expect to gain market
share through growth of the combined company as our customers
reduce the number of their suppliers, and we will make bold
moves to maximize the situation. From that perspective, the
acquisition of Avant! compliments our existing position in a
remarkable way.
To explain this better let me paint a picture that describes
the post-merger Synopsys. It is helpful to think of the IC
design process as having three main functions. Design
creation, functional verification, and design integrity.
Let me start with design creation. This is the process that
implements a high-level chip description written in a language
such as Verilog, VHDL, or C into a detailed layout.
Traditionally, this was done in two main steps. First:
Synthesis; and second, Place-and-Route.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 7
Synopsys is clearly the technical and market leader in
synthesis. Avant! is the strongest place-and-route solution
where it competes most directly with Cadence, among others.
In the last two years, driven by small geometries, a new
discipline has emerged at the intersection between the two
steps. This new discipline is aptly named physical synthesis.
Synopsys far and away leads in this emerging area with over 75
percent bookings growth in fiscal '01 over last year, ending
the year with 103 million in orders, well over 350 tapeouts,
and over 150 customers. This does not include approximately 11
million in orders from customers who bought our design
compiler product and then upgraded to physical compiler within
the year. Those numbers will bring the tally to 114 million
for Physical Synthesis.
It was also rewarding to see that orders in aggregate for the
design compiler family grew approximately 50 million this year
as customers currently find that a mix of design compiler and
physical compiler meets their need.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 8
The quality of our customer base in this area is impressive.
For example, just last quarter we announced a variety of
physical synthesis endorsements from IBM, TSMC, NEC, and
Scientific Atlanta. I have no doubt whatsoever that the
combination of Synopsys synthesis and physical synthesis with
Avant!'s place and route, and database, is the best in class
design flow today. More than that, it is also the basis for
delivering leading solutions for .13 and .10 micron in a very
short time frame.
The second area is functional verification. The objective in
this area is simply stated as: "does my design perform the
function that I intended?" Meaning for example, "does my
multiplier actually multiply?" Since the early days of EDA,
this area has been anchored by simulation. With VCS, our
Verilog simulator, Synopsys has a star product. Around VCS we
have half a dozen connected products ranging from models to
test bench language to formal verification techniques. Avant!
adds a crucial piece to this picture: a leading circuit
simulator. This position significantly strengthens our
competitive position in a mixed-signal verification, which is
needed for chips in the wireless, automotive, and consumer
domains.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 9
"The third area is design integrity" where you make sure that
the chips will actually work. Here you check for errors
ranging from signal integrity to timing, to manufacturing
defects. Synopsys has an extremely strong position in this
area. Our design for test solution is very well integrated
into the design flow and primetime is the de facto standard
timing verifier in the industry.
In addition, we have recently grown these capabilities with
leading edge signal integrity analysis.
The Avant! acquisition fills a major hole for us in the design
integrity arena, a complete physical verification, extraction,
and mask synthesis solution. These terms may not mean much to
the uninitiated but they allow customers to verify that the
chip can truly be fabricated and will work at the correct
speed.
Furthermore, in all the areas, design creation, functional
verification, and design integrity, the highly regarded Milky
Way database from Avant! will be a key asset in connecting all
these pieces together smoothly.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 10
The bottom line of this is powerful. In all three areas, but
especially in design creation and design integrity, Synopsys
and Avant! are an almost perfect complementary match. Our
customers have long known this and have done their best to
glue our products together in their own flows. But coming
together into one company now will provide a solution that
fulfills the requirements of the most demanding designers.
At this point I would be remiss not to mention two other
highlights from the past quarter. It's no secret that most
consulting businesses are feeling the brunt of the economic
downturn, ours included. However, we continue to invest in
this business, anticipating that the combination of tools,
services, and state of the art system-on-chip requirements
will bring good business opportunities.
Confirming that investment, we recently announced a very
significant relationship with Intel, who is entering the ASIC
business with our support. Together with Intel, we are
offering a complete concept to
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 11
manufactured part solutions to mutual customers. Two large
contracts with US systems companies have already been closed.
The second area that I would like to highlight is our
intellectual property business. We have always believed that
the reuse of IP is a key influencer of methodology and tools,
and vice versa. As you know, we have substantial designware
business, which up until now has consisted mainly of basic IP
business blocks. Last quarter we announced agreements with
ARM, MIPS, NEC, Infineon and Gain to distribute much of their
higher level IP through our DesignWare channel.
To conclude this portion of the call I would like to reiterate
my enthusiasm about the merger. And with that I would like to
now turn the call over to Paul Lo, President of Avant!, who is
here with us today as well.
Paul
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 12
Paul: Thank you Art. Good afternoon everyone. This is Paul,
president of Avant!. Today for the first time I'm joining
Synopsys in their conference call to talk about Synopsys's
purchase of Avant!.
This merger opens a new chapter in the history of EDA
industry. Two acknowledged industry leaders are now joining
forces to form what we believe will soon be the pre-eminent
supplier in the EDA business. I'm happy and proud to be a part
of it and I have high hopes for the future.
Although Synopsys and Avant! have built their business
independently over the past several years, we have some of the
same basic values. Both Synopsys and Avant! have always
focused on technology development, and have pride in the
technologists who created it.
I know what it takes to create the most competitive chip
design systems in the world. I have also observed Synopsys
technology and product development over the years as well. I
have great respect for Synopsys and I have come to know
Synopsys as a
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 13
company that knows what the customer wants and is persistent
in delivering it. I think that Synopsys and Avant! are soul
mates when it comes to technology development.
I believe that this merger creates great value for the
customers. Semiconductor manufacturing technology has
continued to advance and customers have come to depend on both
Synopsys and Avant! to deliver ever more advanced chip design
solutions. Products from both Synopsys and Avant! are now used
in the world's most advanced chip design flow. For years our
customers have asked us to work more closely with Synopsys and
now their wish has come true. In this combination our
customers will get the best technology available today along
with the best engine of innovation in the business.
I want to take a moment to reflect on the accomplishments of
Avant! as an independent company. Avant! began in 1991 as a
supplier of standard sale systems. Even today customers
recognize Avant! as the leader in this large and growing
product category, but we have become much more since our
humble beginning. We
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 14
initiated and nurtured a company culture based on customers,
technology, and people. Avant! had grown to offer over 45
different products including the powerful single path SOC
design flow and Milky Way database which offers customers the
most productive chip design process in the world.
Avant! has also had its big challenges, but thanks to the
fighting spirit of hundreds of Avant! employees we not only
survived, but flourished. I think that the last six years of
Avant!'s history illustrates the tough character supreme
determination of Avant!. I'm convinced that this will not be
lost as we join forces with Synopsys.
I have personally visited over 30 customers in the recent
month. In all these visits not a single customer has told me
that they are abandoning us. Instead they have high hopes for
new products that we recently introduced. Over 90 percent of
our top customers are actually engaged in the evaluation of
one or more of our new products. We have strong tradition of
loyalty to our R and D engineers. As a result our turnover
rate among this group has been
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 15
very low. We bet that our team of technologists will be happy
and proud to join Synopsys because of their passion for great
technology.
Overall I think that this combination creates a great new
team, a team that I know I will be proud of. In my opinion
this merger teams the best with the best. It is great for
customers and great for the industry overall. I think that
creates the very best company in the EDA business.
Thank you. Now I turn the call to Brad.
Brad Henske: Thanks Paul. Aart and Paul have described some of the
benefits of the transaction and the terrific fit between the
two companies. Let me briefly talk about some of the details
of the transaction and then I'll review our quarter and
guidance.
The deal itself is pretty vanilla. It's a straight stock for
stock deal in which each Avant! share will be exchanged for
.371 shares of Synopsys stocks at closing. There are no caps
or collars. At
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 16
today's closing price of Synopsys of 55.39, the aggregate
consideration based on Avant!'s fully diluted shares is
approximately 830 million dollars. We expect to effect a
tax-free reorganization. Outstanding Avant! options will be
converted into Synopsys options at closing, based on the
exchange ratio.
From an operational point of view, Avant! will be integrated
into Synopsys after closing. No Avant! board members will join
the Synopsys board, and Gerry Hsu will resign all positions
with the company effective on the closing date. We expect the
fees and expenses at closing will be approximately 420 million
dollars, including 335 million for insurance--which I will
talk about in a minute--55 million to pay pre-existing
employment agreements, and 30 million dollars in investment
banking, brokerage and other fees and expenses. We expect
additional severance and facility consolidation expenses in
the first operating quarter.
In connection with the merger agreement, by December 31st
Avant!'s Japanese distributor, Main Gate, will become a wholly
owned subsidiary of Avant! with no remaining individual
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 17
shareholders at approximately no net cost to Avant!. Avant!'s
other principal distributor agreements have been modified to
remove the distributor's right to receive large lump sum
payments upon a change of control. Avant! will file an 8K with
the SEC which will provide the details regarding these
transactions.
As I mentioned, we have obtained a binder of insurance,
effective after the closing with a triple A rated insurer to
pay all damages, penalties, and costs arising out of the
litigation with Cadence. The total premium will be 335 million
dollars. The policy coverage limit is 500 million dollars plus
accrued interest on the first 250 million dollars of the
premium. In the event that amounts paid out on the policy are
less than 250 million plus accrued interest, Synopsys will be
entitled to a refund of the difference. While we cannot
guarantee the outcome of the case, based on our assessment of
the probabilities which was developed with the assistance of
two outside law firms, we believe that we have more than
adequately provided for the liability. For financial reporting
purposes, 250 million dollars of the premium will be held on
the Synopsys balance sheet as a long-term restricted asset and
the interest from that
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 18
amount will be included in other income. The remaining 85
million dollars will be expensed when the policy takes effect.
The transaction is subject to approval by both company
shareholders, regulatory approval, and other customary closing
conditions. While always hard to predict, we expect the deal
will close within three to six months.
Let me now give you the details on what was, given the
environment, a successful fourth quarter for fiscal 2001,
followed by some commentary on our outlook going forward and
the impact of the proposed merger.
For Q4 our revenue came in at the middle of our guidance
range. We outperformed on expenses, and earnings before
goodwill per share was 39 cents, at the top of our target
range. We also built considerable backlog, deferred revenue,
and cash. Q4 was the highest orders quarter in Synopsys
history. Orders in aggregate grew approximately 14 percent in
fiscal 2001 over fiscal 2000. Q4 product orders divided
between approximately 86 percent, technology subscription
licenses or TSLs, and 14 percent perpetuals
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 19
which we believe is an abnormally low level and was driven by
the large number of aggregate orders in the quarter. The
average duration of TSLs in Q4 continued to be between three
and half and four years.
Orders linearity for Q4 was consistent with the prior quarter
and while not as good as we would have liked, was still better
than that experience prior to our license change. Q4 revenue
was 183.6 million dollars, which represent 38 percent growth
from the same quarter a year ago and is in the middle of our
guidance range. Product revenue, which is primarily comprised
of our perpetual licenses, was 47 million dollars. Ratable
license revenue was 55 million dollars this quarter. TSL
revenue continues to grow as our backlog flywheel continues to
build. Services revenue totaled 82 million dollars this
quarter, down six percent from the same period a year ago and
flat when compared to last quarter. We continue to see the
migration of the old TBL maintenance into the TSL revenue
screen.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 20
Overall growth margin was 81 percent of revenue, flat when
compared to the prior quarter. Product gross margin was 91
percent for Q4-01 compared to 85 percent for the prior
quarter. Ratable license gross margins equaled 82 percent for
Q4 as compared to 87 percent for Q3.
We have started this quarter to allocate product cost-of-goods
based on product order mix rather than product revenue mix as
we had in prior quarters. This will be effective for all of
fiscal 2001. The aggregate cost-of-goods is unchanged. The
change in margins from Q3 to Q4 was driven by the large
increase in TSL orders in proportion to revenue in our
seasonally strongest quarter of the year. Service gross
margins came in at 76 percent, flat as compared to the prior
quarter.
Our aggregate EBG operating expenses, including cost-of-goods,
were 166 million dollars, at the bottom of our guidance range.
Operating earnings were 17.6 million, up 198 percent
sequentially. Other income was 17 million, and investment
gains were 13.5 million, in line with expectations. Earnings
before good will
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 21
amounted to 39 cents per share, at the upper end of our
guidance based on lower expenses. Diluted share count was 62
and a half million, slightly below expectations, as our stock
price was somewhat lower throughout the quarter than we
expected.
Synopsys's balance sheet is strengthening. Cash and short-term
investments grew substantially, with our Q4 balance ending at
476 million dollars, up 167 million dollars from the from the
prior quarter. Q4 cash per diluted share amounted to seven
dollars and 63 cents. Q4 accounts receivable totaled 146
million dollars. For the quarter, DSO was 73 days, up from 68
days in Q3. During the quarter we factored no receivables.
Deferred revenue at the end of the quarter was 380 million
dollars, up 129 million dollars or 51 percent from the prior
quarter. During the quarter we repurchased no shares under our
stock buyback program.
As a result of our discussions with Avant!, we closed the
trading window for both the buyback and company management.
We'll resume stock purchases in this quarter to the extent
that we find market conditions attractive, while at the same
time planning for
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 22
funding the payments at closing of the Avant! acquisition.
Head count totaled 3,308 employees for the quarter, up 106
from the prior quarter.
Now I'd like to spend a minute discussing the current economic
environment and the impact it's having on our business. As
Aart mentioned, we completed our quarter against the backdrop
of a steadily deteriorating economic environment. The
semiconductor industry continues to be mired in a downturn
that if measured by peak-to-trough of shipments is almost
twice as bad as any downturn in the last 15 years. As revenue
has fallen semiconductor R and D spending as a percentage of
revenue has increased. It has now reached levels not seen in
recent history. Perhaps most striking, very few of our
customers will say they have much visibility into the next few
quarters. As a result, in the last quarter customers hit the
brakes, hard. Therefore both visibility and predictability of
business has abruptly gotten a lot poorer for us, and we
believe in reality for the rest of the EDA industry.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 23
For us on the positive side we have continued to book
significant contracts with both large and small customers,
including in this quarter the largest single contract in
Synopsys history. Our transition to a ratable model has been
largely successful. And we end our fiscal year 2001 with 432
million dollars in deferred revenue and backlog that will turn
into revenue this year.
We're seeing customers starting to pare down their list of
suppliers and we are clearly on the A list. But not even
players on the A list are going to get through this recession
unscathed. During the quarter we saw a number of trends in the
business relating to the recession that caused us to take a
more cautious outlook going forward. First, our consulting and
training business continues to struggle, reflecting the
environment.
Orders, although strong in Q3, were relatively weak in Q4,
causing us to move our expectations for the consulting
business's revenue down by more than 24 million dollars in
fiscal 2002. During Q4 the average duration of TSLs was longer
than we expected. On the positive side, the customers are
willing to commit to our technology
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 24
for longer terms. It also builds long-term backlog, which is
now ahead where we assumed it would be. For the short term,
however, the TSLs booked in Q4 will deliver less revenue in
the next 12 months than we originally expected. As the
realities of the market became more apparent, we began to
focus on a more conservative plan to tighten our own spending,
to curtail hiring and other expenses, thus bringing our
operating expenses in at the bottom of our range.
Let me come now to future guidance. In light of the changes in
the economic environment and with the potential impact of the
merger with Avant! we do not believe that we have enough
visibility to confidently give complete guidance for 2002.
However, for the first fiscal quarter of 2002 we expect
revenue of 174 to 178 million, total expenses of 162 to 166
million, other income and expense of ten to 11 million
including approximately seven million dollars of investment
gains, outstanding shares of 63 to 65 million, and earnings
before goodwill of 24 to 28 cents per share.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 25
We expect revenue to consist of approximately 20 percent
perpetuals, 40 percent ratable revenue, and 40 percent
services. Total revenue will be down sequentially from Q4 as
we expect approximately 11 million dollars less product
revenue from perpetuals in Q1 than in Q4. At this stage in our
transition of ratable revenue, orders for perpetuals still
have a disproportionate impact on total revenue. And Q1 is
historically our lowest bookings quarter. In addition, we
expect other I and E to be down by approximately seven million
dollars based on the planned lower gain on sales and
investments. The impact of these changes, offset by lower
expenses, will produce the sequentially lower earnings.
On the positive side, however, our forecast for Q1 is slightly
higher than the forecast that we held three months ago at the
end of Q3 2001. Without sufficient visibility for the full
year at this stage, we are modifying our full year 2002
guidance that we gave at the end of Q3 in a number of
significant respects. In light of the current environment, we
have decided to manage our business to deliver
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 26
specific earnings for the year, namely at least two dollars
per share on an EBG basis.
Revenue will be lower than the guidance we provided at the end
of Q3. But at this time we are not providing updated revenue
guidance for the year and are withdrawing our previous
guidance. We are acting immediately to reduce our expected
expenses in 2002 by 30 million dollars versus the guidance
given before, and will reduce expenses further if necessary to
meet our earnings target. While it's possible for one to infer
a revenue number from the guidance we've provided, any such
calculations should not be construed as guidance from us.
We'll reconsider this decision at the end of each quarter and
should conditions change sufficiently we will issue revenue
guidance. We expect other I and E, at the tax rate and
outstanding shares to be consistent with prior guidance.
Although we appreciate that our guidance is lower and less
certain than the guidance we issued three month ago, we feel
it reflects reality in the EDA markets today. For the year, we
expect orders to grow modestly, on the rough order of
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 27
ten percent depending on changes in the economy, and assuming
a three-year average TSL duration. We expect perpetuals to be
15 to 25 percent of orders in any given quarter. We are
broadening the range a bit from last quarter's guidance in
view of the volatility of the market.
None of the foregoing discussion reflects the proposed
acquisition of Avant!. Highly dependent on the timing of the
closing, we expect that the acquisition will be modestly
dilutive in fiscal 2001, on the rough order of 30 cents. This
is primarily driven by the conversion of their business to our
license mix and the accounting difficulty in recognizing in
the future the deferred revenue and backlog that Avant! will
have closing. But for these effects we expect the acquisition
of Avant! would be significantly accretive in the short term.
As we have previously announced Avant! today books
approximately 50 percent of its orders as perpetual licenses
and 50 percent as subscriptions. We expect that the customer
dynamics of an integrated company will rapidly move that to
the Synopsys mix.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 28
Similar to the effect of our business change a year ago, the
mix change will depress reported earnings from the "Avant!
orders" in the short term. In addition, the rules of purchase
accounting for software companies make it difficult to bring
across the deferred revenue and backlog for ratable licenses,
since the future direct "cost to perform" is not clear. This
is an issue that we're currently discussing with the Emerging
Issues Task Force of the FASB and the SEC. It does not impact
the economic substance of this deal since we will still get
the cash payments and still provide the appropriate services.
However, we may not be able to recognize revenue for this
backlog which will affect both reported revenue and earnings.
Based on the forecast we have today, the net impact of both of
these things is on the rough order of a dollar per share of
EBG, which would make the deal significantly accretive in the
short term. In any case, it will be significantly accretive in
the long term. As has been our practice, we will give more
quantitative specifics around the closing. And again as a
reminder, none of these forecasts include the effect of the
closing of the IKOS acquisition, which is expected to occur
sometime in Q4 of 2002.
SYNOPSYS CONFERENCE CALL, 12.3.01
Page 29
Thank you for your attention. I'll now turn it back to Aart
for his closing comments.
Aart de Geus: Thank you Brad and Paul.
In conclusion let me just review the basis for my excitement
about our acquisition of Avant! which is threefold. First, it
brings together the best front-end technology with the best
back-end technology, resulting in the strongest design
solution today. Second, it fulfills a request that our
customers have made for years and they are thrilled that we
are finally merging. And last, in a tough economic climate
winners make bold moves and we believe that we just made such
a winning move.
The question and answer period followed, the transcript of
which is being prepared and once available will be filed as a
subsequent communication under Rule 425.