Mentor Graphics Corp. (MENT)

Q3 2010 Earnings Call

November 19, 2010 8:30 am ET

Executives

Walden Rhines – Chief Executive Officer, Chairman

Gregory Hinckley - President

Joseph Reinhart – Director of Investor Relations and Corporate Development

Analysts

Rich Valera – Needham & Company

Tom Diffely – D.A. Davidson & Company

Saket Kalia – JP Morgan

Presentation

Operator

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Ladies and gentlemen, thank you for standing by and welcome to the Fiscal Third Quarter 2011 conference call. At this time all lines are in a listen-only mode. Later there will be a question and answer session and instructions will be given at that time. If you do need assistance during the call today, please press the star followed by the zero and an operator will help you offline. As a reminder, today’s call is being recorded.

At this time, I’d like to turn the conference over to Mr. Joe Reinhart. Please go ahead, sir.

Joseph Reinhart

Good morning everyone and welcome to Mentor Graphics Fiscal Third Quarter 2011 conference call. This morning Wally 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 to all, 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 factors noted later, these risk factors can be found in our most recent 10-K, 10-Qs, 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. The fiscal Q3 ’11 business was extraordinarily strong with bookings growing 60% versus last year, and major growth in every product sector ranging from 30% to 125%. This resulted in more than 25% growth in revenue and 350% growth in earnings, both well above our expectations.

As Greg will discuss in more detail, fiscal Q3 ’11 set all-time records for a Q3 in virtually every category of Mentor’s financial results. So why did we experience so much strength in the market and how does this relate to our strategic direction? Well first, strength in the EDA market is typically driven by increasing semiconductor research and development spending. After one of the most remarkable semiconductor bust cycles in history, the semiconductor market returned to pre-recession levels of revenue in the fourth quarter of 2009. Semiconductor companies have enjoyed four consecutive quarters of double digit, year-over-year revenue growth as reported by the Semiconductor Industry Association.

Conservatively speaking, semiconductor companies have surpassed their 2008 revenue run rate levels for at least three quarters now and are well positioned to bring their design R&D spending back in line with pre-recession levels. During the frugal recession period, design complexity continued to grow, so there’s lot of pent-up demand for leading edge EDA software.

The broad-based strength in Mentor’s business as well as the whole EDA industry is likely driven by increased willingness to grow R&D spending. EDA spending traditionally lags the increase in R&D spending by about one year.

Another factor driving the increasing demand is the growing importance of emulation in leading edge designs. Mentor’s Veloce accelerated verification product family has hit its stride and is winning most of the benchmarks and major orders for which it competes. While we’ve had difficulty keeping up from a manufacturing capacity point of view, the demand continues to grow rapidly. This is a reflection of technology evolution at the leading edge. Despite continuing improvements in simulation technology, the pressure for more rapid time to market in first pass design success now requires hardware acceleration of both the design and the test bench for more and more applications.

While hardware acceleration used to be a market primarily for graphics and telecommunications, it’s now spread to a significant share of the microprocessor and system-on-chip designs in the industry.

Beyond these factors, the order strength Mentor experienced in fiscal Q3 and in our outlook comes largely from things that make us unique in the EDA industry. Our strategy of focusing on the areas where our market share is number one by a large margin helps a great deal. Businesses like our integrated system design which grew 50% versus last year’s Q3, design for test which more than tripled, physical verification which grew over 50%, and a number of system oriented products like thermal analysis, automotive networking, high-level synthesis, formal verification, and enterprise cabling and wire harness design all contributed greatly to the exceptional growth this quarter.

The other encouraging aspect of the growth this quarter is the level of major design wins influenced by Mentor’s leading position in system design. These wins are generating sales outside the traditional customer base of EDA. Over 30% of our new customers this quarter chose Mentor for applications that have not traditionally been impacted by EDA. Examples include applications as diverse as PING golf clubs, who chose Mentor’s computational fluid dynamics for golf club design, to six new customers who are applying Mentor’s Inflexion embedded software platform that was traditionally limited to wireless handset applications to applications such as smart energy meters and home automation interfaces.

Major automotive networking wins in the quarter included Shanghai Automotive, the largest automobile OEM in China, coming on the heels of a similar win at the number two manufacturer, FAW last quarter.

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