Mentor Graphics Corporation (MENT)
F2Q2011 Earnings Call Transcript
August 19, 2010 5:00 pm ET
Joe Reinhart – Director, IR and Corporate Development
Walden Rhines – CEO and Chairman
Greg Hinckley – President
Rich Valera – Needham & Company
Tom Diffely – D.A. Davidson & Co.
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Ladies and gentlemen, thank you for standing by; and welcome to the Mentor Graphics second quarter 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. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Mr. Joe Reinhart. Please go ahead.
Good afternoon, everyone; and thank you, Cathy. Welcome to Mentor Graphics fiscal second quarter 2011 conference call. I am Joe Reinhart, Director of Investor Relations and Corporate Development. This afternoon, Walden Rhines, CEO and Chairman, will open with a discussion of key trends in our business. Greg Hinckley, our President, will then provide operational and financial highlights, along with guidance. Wally and Greg will then take your questions.
As a reminder, this conference call contains forward-looking statements. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary. In addition to the factors noted later, these risk factors can be found in our most recent 10-Q, 10-K, and Annual Report.
For reconciliations from GAAP to our non-GAAP measures used in this presentation, please refer to today’s financial release. This information is available online at the Mentor Graphics website.
Thanks, Joe. The fiscal Q2 2011 revenue of $187.9 million and non-GAAP earnings per share of $0.01 exceeded guidance and provide positive indicators of future growth. As Greg will cover in detail, all of our leading indicators of future business were strongly positive, and we are therefore raising our outlook for revenue and earnings for the current fiscal year.
Growth of annualized revenue for the contract renewals in our top 10 bookings was exceptionally strong. After two quarters of 25% growth, the renewals in Q2 grew 45%. This indicator of renewal growth has steadily strengthened over the last five quarters, and indicate that customers are anticipating substantially increased use of EDA software in the coming three years.
We have also experienced strong performance from the acquisitions we made a year or two ago, especially Flomerics and LogicVision, both of which have substantially exceeded our expectations, and both of which have expanded their business with significant new customers.
Fundamental to the strength we have seen this year, is the growth of non-traditional EDA business in adjacent markets. Like others, we expect the growth of traditional EDA software revenue will lag behind any semiconductor recovery, as electronics companies bring R&D back in line with revenue. And Mentor's approach provides growth that is independent of that semiconductor recovery. Our strategy focuses upon developing number one market positions, particularly in newly emerging markets, where application of EDA technology can provide new capabilities and reduce costs. For Mentor, the best example of this has been in the area of system design.
Our mainstream integrated system design business grew well this quarter at 10%. But the biggest impact continues to be in the rapidly growing new application of EDA to the transportation market, particularly automotive and commercial aviation. In the first quarter of this year, our total automotive business grew 80%. Second-quarter, it was 95%.
There are several major trends that are fueling Mentor's growth in system design for the transportation industry. First, there is a ramp-up of the use of EDA software among transportation companies that have been integrating EDA into their design processes for many years. Major automotive orders this quarter included companies like Hyundai Kia, Mitsubishi, Fiat, Chrysler, and Mazda. Hyundai Kia is a typical example. They are the sixth largest automotive manufacturer in the world, and the second largest in the Japan and Korea region, behind Toyota. They made a corporate enterprise software decision three years ago to adopt the Mentor cable and wire harness methodology called CHS throughout their design and manufacturing process. All their new vehicle designs are based upon Mentor automotive software, and they have increased their usage with their first large term contract order this quarter. The significant share of the hundreds of suppliers to Hyundai must have CHS software to develop and test their subassemblies.
Similarly, four commercial aircraft companies have committed to CHS enterprise software during the past year. This quarter, one of the leading suppliers of business jets made significant purchases of CHS software as they roll out their automated design methodology. Like the automotive companies, aircraft companies have broad supply chains and must keep their design processes in step with their customers, like purchasing the same automation software.
The second trend in the system's business is the growth of the Chinese market, with system design automation software. While China has been slow to grow the domestic semiconductor industry, other than the wafer fabs and the operations of multinational companies, they are aggressively growing a domestic automotive and aerospace industry using the latest technology. This quarter, Mentor received our first author from FAW, securing the top three Chinese auto companies as users of Mentor automotive software. Another eight China-based automotive companies use Mentor automotive design software. Similarly, seven Chinese aircraft companies are using Mentor's system design software.