Mentor Graphics (MENT)

Q2 2013 Earnings Call

August 23, 2012 5:00 pm ET

Executives

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

Walden C. Rhines - Chairman and Chief Executive Officer

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

Analysts

Thomas Yeh - BofA Merrill Lynch, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Zachary R. Ajzenman - 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, and welcome to the Mentor Graphics Second Quarter Earnings Release. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to Joe Reinhart, Vice President, Investor Relations. Please go ahead, sir.

Joseph L. Reinhart

Thank you, Cathy, and good afternoon, everyone. Welcome to Mentor Graphics’ Fiscal Second Quarter 2013 Conference Call. This afternoon, Walden Rhines, CEO and Chairman, will open with the discussion of key trends in our business. Gregory 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 to the 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 C. Rhines

Thanks, Joe. The fiscal Q2 was a very strong quarter for Mentor Graphics with all-time records for revenue and profit, both GAAP to non-GAAP. Revenue was $240.8 million, up 13% from last year, which was the previous Q2 record. Earnings were more than 30% higher than the previous Q2 record. And bookings were also stronger than anticipated at the second highest level for a Q2 in our history, although down 10% from last year's record year. We continued to buy back our stock, purchasing 1.4 million shares this quarter at an average price of $14.07.

Mentor's not alone with this revenue and profit momentum, as the entire EDA industry continues to benefit from the growth and demand for software for the 28- and 20-nanometer transitions, the increasing use of design automation in systems companies and the emergence and growth of totaling new design methodologies.

During the first decade of this century, the total market for EDA software grew only 1%, as the major electronics companies who fueled the dotcom boom underwent restructuring. Beginning in 2001, electronics-related startup activity declined dramatically, and major system and semiconductor companies either shut down design activities or downsized them, some of them offshore.

More than 100% of the industry growth in the decade came from totally new design methodologies, primarily, resolution enhancement for semiconductor manufacturing, high-level ESL design, thermal verification and IC analysis tools, including power analysis.

The contraction in 2008 and 2009 was very different from the one in 2001. There were very few major shutdowns in design operations and semiconductor excess capacity was minimal so that when the recovery did come in 2010, there was a critical need for new capacity and new design capability to address the emerging 28-nanometer needs and growing system design requirements.

The leading indicators we monitor suggest that not only is the current environment showing record demand but the outlook is strong. Consulting and training bookings in the second quarter grew 20% compared to Q2 last year. New customers, that is, companies with whom we've never before done business, grew 10% in number and 20% in dollars.

We experienced a strong increase in the number of new startups purchasing our EDA software with the highest number since before the 2008 recession and about double the running rate of the calendar 2009 period.

There are other key factors that are causing EDA companies, especially Mentor, to have a positive outlook in coming quarters. Most importantly, the large semiconductor manufacturing capital investment trend will provide pressure for an acceleration in design activity in the 2 years ahead. In 2010, capital investment by silicon foundries doubled to $14 billion compared to the flat level of the previous decade. In 2011, it increased another third to $19 billion. This year, there are still shortages of 28- and 20-nanometer capacity, and foundries are predicting capital investment only modestly below last year's record level. As this capacity becomes productive manufacturing output, the availability of 28- and 20-nanometer wafers will increase to make it the largest production generation in semiconductor history. This will drive increased design activity, not just to take advantage of the new capabilities and complexity provided by 28- and 20-nanometer technology, but redesigns of existing products will accelerate to take advantage of the cost reduction opportunity created by the aggressively low pricing of what will be a plentiful supply of advanced wafers. The 28- and 20-nanometer families of processes will be the workhorses of the decade, and they will require upgrade and expansion of EDA design tools.

The increased complexity of these 28- and 20-nanometer designs has already driven an industry-wide wave of growth in emulation, as more and more chip and system companies find that they can no longer verify entire chips through simulation and this complements simulation with emulation.

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