Mentor Graphics (MENT)

Q1 2012 Earnings Call

May 27, 2011 8:30 am ET

Executives

Gregory Hinckley - President, Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Executive Director

Joseph Reinhart -

Walden Rhines - Chairman of the Board and Chief Executive Officer

Analysts

Saket Kalia - JP Morgan Chase & Co

Paul Thomas - Roth Capital Partners LLC

Thomas Diffely - D.A. Davidson & Co.

Richard Valera - Needham & Company, LLC

Jay Vleeschhouwer - Merrill Lynch

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the Q1 earnings release for Mentor Graphics. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Joe Reinhart. Please go ahead.

Joseph Reinhart

Thank you, Greg, and good morning, everyone. Welcome to Mentor Graphics Fiscal First Quarter 2012 Conference Call. I'm Joe Reinhart, Director of Investor Relations and Corporate Development at Mentor Graphics. This morning, Walden Rhines, CEO and Chairman, will open with a discussion of key trends in our business. Greg Hinckley, our President, will then provide some 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 the actual results to vary. In addition to factors noted later, these risk factors can be found in our most recent 10-K, 10-Q and annual report. For a reconciliation from GAAP to non-GAAP measures used in this presentation, please refer to today's financial release. This information is available online at the Mentor website.

Wally?

Walden Rhines

Thanks, Joe. Well, fiscal Q1 2012 set an all-time Mentor revenue record for our first quarter at $230 million, the 10th consecutive quarter that Mentor has met or exceeded guidance. Revenue grew 27% versus last year. Growth of bookings from the contract renewals among our 10 largest orders grew 35% in annualized run rate. This 35% growth in run rate exceeded our very high average of 25% for all of last year and 25% for the first quarter of last year. Overall bookings grew more than 5%.

We continue to have confidence in our revenue and profit growth for the year, and we're very close to the 45%/55% distribution of revenue in the first versus the second half of the year that we previously forecasted.

Traditional leading indicators were positive. New customers, not including our PADS business, which almost always provides large numbers of new customers, grew 20% in number and 40% in dollars. And services bookings grew 85% versus the same quarter last year.

Our strategy is to focus on the areas where we can be number 1. Last year, 87% of our revenue came from products where we already have the number 1 market share or are the primary contender for the number 1 position. This strategy requires us to focus on one or more or more of the following 3 approaches: number 1, building upon product positions where we already have the number 1 market share; number 2, being prepared for technical discontinuities that require major architectural changes in existing tools and therefore, may displace an incumbent de facto design tool; and number three, being first with new and emerging technologies or the application of EDA to new problems or to customers who haven't previously used EDA.

The strength this quarter came from the first and the third approaches. System Applications, where Mentor already has a #1 market share position and totally new applications of EDA, provided most of the growth, although helped by bookings growth of 15% in our Scalable Verification segment. Weakness in the physical verification part of our Design-to-Silicon segment, where we also have the #1 position, was caused by the lumpiness of major contract renewals, which this year, will be concentrated in the latter part of the year. We expect a strong second half for this business.

As seen last year, the Integrated System Design continues to be a highlight, with 45% growth in bookings this quarter after a year of 40% growth last year, growing from our already-strong #1 position. Our very profitable PCB business now represents 50% market share for last year, as reported by the EDA Market Statistics. New and emerging products grew almost as fast as Integrated System Design, with 40% year-over-year growth in bookings. These products are examples of the third strategic approach I mentioned. The Capital Wiring Harness product line is an example of the application of EDA to totally new markets like automotive and aerospace. Electronic system level design is an emerging technology for traditional chip and system design, and embedded software is a non-traditional market for EDA where application of our technology brings new or improved capabilities. All 3 of these areas grew strongly in the quarter.

The third strategic approach of bringing EDA capabilities to the automotive and aerospace industries continues to provide growth with new applications and totally new customers. Capital family bookings for electrical system and wire harness tools were particularly strong during the quarter as they were last year.

As we develop these new applications and customers, we also have the opportunity to achieve #1 positions in emerging specialties within the application areas. Examples of these specialties include: one, electrical systems for trucks, where many of the leading OEMs use Mentor's Capital products. Examples include Daimler Truck Group, where initial deployments at Mercedes-Benz and Mitsubishi Fuso are now spreading to multiple sites globally. Paccar, where production orders have just been received. Isuzu in Japan, Foton in China, Eicher in India and Iveco in Europe. Number two, Chinese transportation companies where 9 automotive companies, including 3 of the 4 largest, and 7 aircraft manufacturers, have chosen Mentor's automotive wirings or networking products. Another specialty application of EDA within system design has been Mentor's thermal analysis tools, where we have the largest market share by quite a large margin. Once again, the strategy of growing an existing #1 market position has proved very productive. This past quarter, our newest FloTHERM product was 1 of 2 design products that won Design News Magazine's Golden Mousetrap Award for the year. New applications continued to emerge in this business, driving about a 35% growth rate. New business deals contributed 75% of our thermal analysis bookings.

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