Mentor Graphics (MENT)

Q4 2012 Earnings Call

February 28, 2012 8:30 am ET

Executives

Joseph L. Reinhart - Vice President of Corporate Development and Investor Relations

Walden C. Rhines - Chairman of the Board and Chief Executive Officer

Gregory K. Hinckley - President, Chief Operating Officer, Chief Financial Officer and Executive Director

Analysts

Richard Valera - Needham & Company, LLC, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Thomas Diffely - D.A. Davidson & Co., Research Division

Saket Kalia - JP Morgan Chase & Co, Research Division

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the Q4 '12 Earnings Release Conference Call. [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 L. Reinhart

Yes, thank you, Greg. Good morning, everyone. Welcome to Mentor Graphics' Fiscal Fourth Quarter 2012 Conference Call. I'm Joe Reinhart, Vice President, Corporate Development and Investor Relations. This morning, Walden Rhines, CEO and Chairman, who will open with the discussion of key trends in our business; Greg Hinckley, our President, will then provide operational and financial highlights, along with the 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 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 discussion, please refer to today's financial release. This information is available online at the Mentor website. Wally?

Walden C. Rhines

Thanks, Joe. Well, Mentor Graphics set all-time record across a wide range of operating parameters for our business in fourth quarter, including exceeding $1 billion of revenue for the year for the first time, and more importantly, achieving record earnings. Bookings growth of 15% for the quarter and for the year, as well as growth in the annualized run rate of our largest contract renewals, at 20% for the quarter and 29% for the year, reflect the strong momentum we see as we move into fiscal 2013.

Why the record-breaking momentum for Mentor? Well, 2 reasons predominate. First, adoption of 28- and 20-nanometer technology is driving extremely strong growth in functional verification and physical verification and leading to some fundamental changes in the way chips are designed. Second, Mentor's diversification into new applications has provided new businesses that are growing at 2 to 3 times the rate of the EDA industry. Now, as Greg will discuss in detail, bookings for Scalable Verification and Design-to-Silicon subflows both grew 15%, reflecting the importance of both physical and functional verification in ever more complex chip designs. Physical verification is not a surprise because the complexity of 28- and 20-nanometer design node is growing exponentially, and verification has been extended to design for reliability, as well as design for manufacturing. Resolution enhancement technology continues to be a strong contributor to growth, as the rollout of 28- and 20-nanometer processes, along with the development of 14-nanometer ones, demands increasing amounts of Calibre software. And this growth in usage will continue to increase even with the eventual adoption of new forms of optical lithography like extreme UV.

Also, our functional verification grew partly because of the Mentor's early lead in SystemVerilog, OEM and UVM for simulation, the largest growth came from the emerging transition of the industry to emulation for an increasing share of the verification to 28-nanometer chips required.

For leading edge designs at 28 nanometers and below, simulation could be used to verify design blocks for the verification of the entire chip, including the embedded and application software, increasingly requires emulation. The multi-million dollar customer list for emulation reflects the who's who of semiconductor industry, and more recently, of the systems companies too. Half of the emulation orders this quarter came from systems companies. What used to be a technology limited to the developers of graphics chips has become widespread among the 28-nanometer design crowd. And the verification cost of emulation has decreased, so this -- it's now about 2 orders of magnitude less expensive than simulation on a cost-per-verification-cycle basis and 3 orders of magnitude lower power.

The other area contributing strongly to Mentor's records this year is the rapid growth of new EDA applications, such as design of system electronics and interconnect or automotive and aerospace applications, development and verification of embedded software and the software required for manufacturing automation. Bookings in need areas grew at almost double our overall bookings growth rate. Embedded software bookings grew strongly, fueled by the growing need of chip design and system companies to provide development, compilation and debug environment of software developers using their chips and systems.

Mentor's acquisition of Valor in fiscal 2011 extended our complete solution for system development from design to design for manufacturing, and software to set up, automate and monitor equipment on the factory floor. And one of the fastest-growing parts of Mentor's Systems business is in thermal analysis of electronic systems, which continues to reveal new opportunities with high-growth potential, like the characterization of light emitting diode-based systems and the thermal analysis of electronic packages.

Growth of Mentor's core EDA business, the diversification to adjacencies, such as embedded software, automotive and aerospace, and new applications in system design, such as thermal analysis, all point to continuing momentum in the future.

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