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Mentor Graphics (MENT)

Q4 2011 Earnings Call

February 24, 2011 5:00 pm ET


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

Walden Rhines - Chairman of the Board and Chief Executive Officer

Joe Reinhart - Director IR


Saket Kalia - JP Morgan Chase & Co

Paul Thomas - Roth Capital Partners LLC

Thomas Diffely - D.A. Davidson & Co.

Richard Valera - Needham & Company, LLC



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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 '11 Earnings Release. [Operator Instructions] I'll now turn the conference over to your host, Joe Reinhart. Please go ahead, sir.

Joe Reinhart

Thank you very much, Kathy. Good afternoon, everyone. Welcome to Mentor Graphics Fiscal Fourth Quarter 2011 Conference Call. I'm Joe Reinhart, Director of Investor Relations and Corporate Development for Mentor. This afternoon, Walden Rhines, CEO and Chairman, will open with the discussion of key trends in our business. Greg Hinckley, our President, will then provide the 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 judgments, 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-K, 10-Q, annual report. For a reconciliation of 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.

Also, earlier this month, Mentor received Director nominations from Icahn Capital and Casablanca Capital. The board's nominating and corporate governance committee comprised of independent directors, who will review and consider the individuals proposed to determine whether they would improve the composition of our board. We've also received an unsolicited conditional offer to acquire the company from Icahn Capital. The company's Board of Directors will review the Icahn Capital conditional offer, and make a recommendation to shareholders in due course. Mentor Graphics shareholders are advised to take no action at this time, pending the review of the conditional offer by the Mentor Graphics board.

With that said, the purpose of this call is to discuss our fiscal fourth quarter and full-year results and outlook. We will not be making comments regarding Icon Capital or Casablanca Capital or their activities. Wally?

Walden Rhines

Thanks, Joe. Well, Mentor's Q4 '11 and fiscal year set all-time record in almost every category. Bookings in the fourth quarter grew 45% and for the year, 30%. Revenue grew 30% in the fourth quarter and 14% for the year, the fastest growth rates of the big three EDA companies. The established customers continue to purchase more Mentor products than ever, with growth in the annualized run rate of our 10 largest contract renewals at 30%.

Non-GAAP earnings per share for the year increased to 49%, after a 135% increase the previous year. In Mentor's position as the second-largest provider of EDA software and support as reported by Gary Smith, EDA, continued this year and likely improved. Well, the past year has shown very broad strength in bookings, revenue, cost control and earnings, it's just one step in the continuing payback for the Mentor strategy of the last decade, but it's fundamentally different from other major EDA companies. What's the difference and why does it allow us to continue to grow revenue without proportional increases in operating expense? The strategy has been based upon focused investment in the areas at EDA, where in Mentor has the number one or near number one market share.

In addition to growing existing strengths, it's mandated early investment in new emerging areas of need like design for manufacturing, electronics system level design and embedded software that's on totally new applications of EDA in new markets like automotive and aerospace. Mentor's strategy of investing heavily in the businesses where we have number one market share has caused us to prioritize investments in system design, including new applications in transportation industries, which now comprises more than 1/3 of Mentor's revenue. Through most of the last decade, we invested in these Systems business at a higher rate than our overall footprint and R&D spending. Today, the Printed Circuit Board business generates office operating profit that's nearly twice the level of the overall company.

Bookings for total Integrated System Design grew 85% in the fourth quarter, and 40% for the year. The transportation part of our new and emerging segment was an area of significant investment throughout the last decade, both in R&D and in the development of a whole new distribution channel. Bookings through our Cabling and Wire Harness products, were 110% this past quarter, and 95% for the total year in this profitable business.

Throughout this decade, Mentor's market share of the Systems business has grown, hitting 45% in fiscal 2010, and continuing the growth momentum this past year. Customers for our System Design Software are also experiencing strong growth in their businesses. Contract Assemblers grew 33% in calendar 2010, and are continuing to grow at a faster and more stable rate than the semiconductor industry. That's evidenced by both the growing popularity of consumer electronics products like tablet computers and smart cell phones, and by a strong recovery in the automotive industry.

Mentor's System Design business strength has also been an important factor in making Mentor number one among EDA companies in the important, fast-growing China market, where Mentor has 45% share of EDA revenue according to the EDA Market Statistics. Mentor's substantial internal investment in emerging design technologies has also had an increasing impact as these new technologies become necessary for leading-edge design. The chip design world has headed this continuity in verification that has become increasingly evident. The companies designing large chips at 45 nanometers and below could no longer perform function verification without hardware acceleration or emulation. This has caused a dramatic increase in emulation revenue throughout the industry, which shows every sign of continuing in the coming year and accelerating far into the future. After significant investments through more than a decade, Mentor's Hardware Acceleration bookings more than doubled this past year. At the same time, total industry growth in emulation had been so rapid that the major companies are scheduling new orders into the second quarter of calendar 2011. And while Full-Chip Verification at the leading edge has transitioned to hardware acceleration, even the major blocks that make up the design are straining the limits of simulation technology. For that reason, adoption of advanced verification technique like formal methods and intelligent testbenches has accelerated, nearly doubling over the last three years the percentage of designers using these technologies. This was evident in Mentor's Scalable Verification segment, with 100% year-to-year growth in bookings in the fourth quarter, and 65% growth for the year. It's not just the design verification of chips that's hitting the limits, but also the ability to test them. Mentor's number one position in design for tests grow soaring demand that grew bookings 55% this year after a 100% growth last year.

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