Filed by Synopsys, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Subject Company: Avant! Corporation
Commission File No. 0-25864
The following is the transcript of the question and answer period that followed
the conference call hosted jointly by Synopsys, Inc. and Avant! Corporation on
December 3, 2001. The transcript of the conference call was filed pursuant to
Rule 425 of the Securities Act of 1933 on December 5, 2001.
Question and Answer Period
A. de Geus Let's now open up for Q&A. Operator, please poll for
questions.
Moderator Thank you. Our first question comes from the line of
Rajid Seth from SG Cowen. Please go ahead.
R. Seth Hi. It's Raj Seth from Cowen. Aart, I wonder if you can
talk about what it was that compelled you to go after
Avant! Now. Obviously, a lot of the strategic rationale
has existed for some time. What is it that got you to
make this transaction happen right now?
A. de Geus Raj, as you said, it has made sense for a long time. It
has also always been clear to us that we would not do
anything while there was a criminal lawsuit pending, and
as this came to a somewhat rapid end another thing
happened, which is quite a number of customers approached
me directly with a strong suggestion that this would be a
good move, that they liked the technology, and that they
would like to see a flow made up of the two companies.
And so we looked at the situation and concluded that this
was a good time.
Secondly, I've learned over the years that when you have
strong technology yourself it is actually very good to be
able to connect this to an install base, because it
reduces the risk to the customer. And so you put all of
these factors together and that brings us to today.
R. Seth And with regard to your integration plans, how long do
you think it takes you post close to actually get real
technology integration beyond the integration that
already exists, that's been in place for your common
customers, and how do you handle the R&D portion of
Avant! that, at least Avant! has described, as portions
of that have moved overseas? How do you handle the
integration here?
A. de Geus Sure, first, I think the integration post closure will be
extremely rapid. The reason is that fundamentally our
customers have done already much of the initial work, and
secondly, Avant! has a database infrastructure that I
think is well suited to add many of the capabilities that
we have.
Regarding the R&D force that is overseas, primarily in
the Far East, we have for a number of years looked
ourselves at expanding in the Far East. We've always felt
that was a part of the world that would see great growth
and great opportunity, and this is both a forcing
function and an opportunity for us to very proactively
look at how we build that as a differentiating asset for
the company.
R. Seth With regard to your channel, what's the strategy there? I
thought it said in the release that you're operating this
as a subsidiary. Do you combine the two channels? What do
you do on the channel side?
A. de Geus Let me clarify. The subsidiary is a construct that has to
do with the financial part of the acquisition. Our intent
is to, upon closure, integrate the company immediately.
The perspective from the field is very simple, they love
this, because they have for a long time observed at the
customer side that the preferred solution for all the
high performance designers is the combination of Synopsys
and Avant!. They know the tools well, and once they will
have access to these opportunities they will run with it.
R. Seth Okay, last question. Physical compiler is synthesis plus
placement. Avant! obviously strong in place and route as
placement and routing. Does this transaction necessarily
mean that you get rid of the placement piece of the
Avant! flow in that domain?
A. de Geus One of the things that has always baffled me is that
transition of technology on the one hand is blindingly
fast and on the other hand takes a long, long time. So I
think what this does for us is that we instantaneously
have a flow that, with physical compiler and the existing
place and route capability of Avant!, yields very, very
good results.
It is clear that from a technology point of view we have
first and foremost a stellar set of technologists on both
sides. The experience that we made with the integration
of View Logic has shown us that, if we take quickly a
joint longer-term perspective, it actually accelerates
the developments of newer software.
R. Seth What is your experience with, View was obviously very
successful, Epic perhaps less successful. What did you
learn from Epic that you can apply here?
A. de Geus Your keyed up server of the reality. I think one of the
reasons View went well was because we had learned a
number of lessons with Epic. One of the lessons we have
learned is that you integrate as fast as you possibly
can, and you make sure that not only the technical people
work well together, you also integrate the fields
rapidly. And I think in this case that is going to be
very straightforward.
R. Seth Thank you.
A. de Geus You're welcome.
Moderator Our next question comes from the line of Jay Bleishaur
with Merrill Lynch. Please go ahead.
J. Bleishaur Thanks. Good afternoon. First question about the core
business, and then I'd like to ask about the transaction
as well. First, Aart or Brad, outside of the large
contract renewal you referred to in the quarter, and feel
free to put a name and number on that, can you talk about
any trends in the other portion of the business
sequentially or year over year? Was there anything in the
fourth quarter to suggest a broader base of momentum, at
least through the end of fourth quarter outside of the
renewal?
On the transaction, you refer to the strategic sense that
has been around for a while, yet on the other hand,
you've at times expressed reservations about this
combination technically, competitively, even culturally,
and that there really wouldn't be a need to make a formal
combination, but that you could continue to partner in
sort of a de facto way. So again, following up on Raj's
question, why not just pursue the relationship as you had
it before, informal though it was, instead of this?
B. Henske Let me take your first one. Firstly, unfortunately the
realities of many of our relationships with our customers
include confidentiality, so we cannot put either a name
or a number on the deal we did in the quarter.
As we look at the rest of the business, I think the thing
that was most striking was not so much the composition of
it, because it was a broad mix of our tools. It was a
broad mix of renewals, new contracts, add-on purchases.
But the thing that struck us the most was the volatility
and visibility of how it came in.
We keep track throughout a quarter in some considerable
detail all of the opportunities that we're chasing, and
as a general matter, the visibility that is usually
pretty good throughout the quarter, because in many cases
these are opportunities that the particular sales staff
have been working on for months. That sort of thing
generally gets closed as expected.
The thing we saw new this quarter was an enormous amount
of volatility. Things that we would have in the ordinary
course been highly confident would get done, actually
didn't. Actually surprisingly enough, things that we
didn't think were going to get done all of the sudden
show up and are quite urgent from a customer's
perspective. It's that change in visibility and
predictability, which was the largest driver of the
change we made in our view going forward.
A. de Geus Jay, following up on the second part, which is so why now
and is this a change of strategy for the company? First,
what was our strategy? Our strategy has been clearly that
starting from a front-end position we were going to
gradually move into the physical domain, and actually we
are both very happy and satisfied with how well the whole
physical effort has moved forward. It's become one of our
star products, and as I've said before, I think it's
going to be the fastest growing product in the history of
EDA.
At the same time, instead of thinking about it in terms
of does this change our strategy, we asked ourselves the
question, can this accelerate our strategy? The single
thing that has always been a big hurdle is the criminal
lawsuit. This came to a somewhat unexpected end for most
of us more rapidly at the end of the spring than most had
thought. At that point in time we re-examined the
question of changing strategy versus accelerating the
strategy, and it became very clear that, if we could
connect well our new physical synthesis efforts, and I am
including not just physical compiler in that, but many of
the other things we are doing there as well, with what
Avant! has, that this would be a very strong solution and
thus an acceleration of our strategy.
The input from the customers, which was very uninvited,
sort of confirmed that in a very strong fashion. The
people that I've spoken to since the announcement
absolutely ascertained that this will be good for them,
and will help them move forward in their technologies as
well.
J. Bleishaur Was the customer insistence, Aart, a more recent
phenomenon? Do you think it might in part be attributable
to their concerns about the viability of Avant! without
your taking it over? Secondly, Brad again with your 10%
forecast for bookings for next year, could you talk about
the mix of the renewals expectations in that bookings
outlook versus your unscheduled or pipeline business?
A. de Geus The customers, they have formulated this over many years,
but you're correct that during the summer the level of
concern went up as the level of uncertainty around Avant!
went up. But the concern was very much one of there is a
need for a next generation design flow, and this would be
a combination that would really allow the joint company
to build this.
B. Henske With respect to next year, it's always hard to peg
exactly what are renewals, given the relationships we
have with our customers. As I think you know, virtually
everyone who designs integrated circuits today is a
customer for one or another of our products and has been
on an ongoing basis. So we tend to see contracts that get
redone in the middle, they get added on to, they get
amended. The bulk of our business next year obviously
will be from customers that we've done business with
before and will continue to do business with again. It's
hard for us to pick anything in particular as a renewal.
J. Bleishaur Okay. Aart, one last one. You've argued that over the
course of this technology upgrade cycle or retooling
cycle that pricing ought to be better or you ought to be
better able to capture the value of the new technology.
Do you think that this combination might generate a new
wave of price competitiveness, however, within the
industry, and you don't quite capture as much value as
you would otherwise hope from a new technology?
A. de Geus You know, I think it's always difficult to predict
exactly what happens, but in general new technology is
driven by the desire of the technologists to do much more
demanding tasks, and their pricing is not the main issue.
I think, especially in the present market, what is a much
bigger issue is a risk of being able to complete your
chip. A lot of people are looking very carefully at the
projects that they're engaged in, and are continually
coming back with the question of how can they reduce the
technical risk as they embark on projects that are very
pricey.
J. Bleishaur Thank you.
Moderator Thank you. Our next question comes from the line of
Jennifer Jordan with Wells Fargo. Please go ahead.
J. Jordan Good afternoon. Congratulations on what I think is a
really interesting deal. I was wondering if you might
comment a little bit on how you go about integrating
these sales forces, and also addressing what's been a
really different culture at Avant! in terms of the way
the business had been led in the past versus the way
things have been done at Synopsys. And then if you could
emphasize again the other areas where you see this
combination really having strength? It seems to me that
extraction becomes a big role, and that helps really fill
out your offerings in verification and synthesis.
A. de Geus I think in many ways all three questions boil down to
what is the impact of the customer, because if you start
there that sort of tells you how to engage with the field
force. The opportunity I see here for us as a joint
company is that we will simultaneously start focusing on
a broader sales initiative where our role with the
customer becomes more than just tool supplier. We're now
very much sort of a vital ingredient that they rely on
for their business success. And so as we merge the sales
forces we will look at how to structure that most
effectively.
The culture has essentially the same answer, which is as
long as you drive your cultural outlook backwards from
what is good for the customers, you quickly find common
points. And if there's one thing that we do have strongly
in common with the folks at Avant!, it is a strong belief
that technology leadership is an absolute essential
ingredient to not only stay alive, but to thrive in the
high tech field. And I think that will be the nucleus
around which we will assemble the management strategy.
And third, again looking from the customer, if you look
at the areas that are around the traditional place and
route, you are correct to observe that the extraction,
the various tools that essentially translate the data
from the layout back into analysis information is
extremely valuable, and it's especially valuable at a
time where signal integrity is becoming a major challenge
as you go to smaller geometries. So in that sense, again
the combination of what we have, I think will provide for
a very strong solution. So I hesitate to be too
repetitive, but as long as we stay customer driven I
think we'll be alright.
J. Jordan Okay. Aart, if you don't mind I just have a couple other
questions. The next one is just about consolidating
resources. Avant! has a very large campus down there in
the Valley area. I'm wondering if you're looking at
consolidating more people to the Synopsys campus and what
impact that might have? And then, if you can cover that,
then I'll come up with the next question.
B. Henske As we look to put the companies together, we'll clearly
try and sort out how to rationalize our real estate
footprint in this area. There are, and I suspect what
will happen is we go through and think about what teams
need to be integrated. Some of the Avant! people it will
make sense to move here. It may very well make sense to
move some of the Synopsys people there, but as we go
through group by group, and figure out, and we've done
some of this work already, and figure out which of the
various organizations should be put together, we'll
figure it out that way. But it's clear that between us we
have surplus real estate.
J. Jordan Okay. The last two questions are a number of the most key
R&D professionals at Avant! had been given compensation
bonuses that were cash bonuses rather than being tied to
the stock price. How do you address any concerns of those
customers or those engineers who are used to getting
cash? Secondly, have you heard anything about the
progress of the Astro product, and any tape outs for that
new product that really addresses signal integrity
issues?
A. de Geus Whenever you merge two companies there's a whole set of
infrastructure questions and behaviors that have to be
aligned. In our experience, there are some things that
you align very quickly, others that you do over some
period of time. But fundamentally one should never
violate the belief that the people that provide most of
the value to a company should be rewarded most, and that
can take many different forms. So, I think we both follow
that belief, and it will probably take a little bit of
time to align exactly how we do it, but if you have
strong people the business will be good.
P. Lo Jennifer, this is Paul. Let me comment on the momentum of
Astro. Last time we talked, we said there are about three
customers in production, and recently we checked. There
are six customers in production now and we expect a tape
out very soon, many in the next month. Overall, I think
the engagement has gone along very well and we expect
good booking from Astro in this quarter.
J. Jordan Great. Thank you, Paul.
P. Lo Thank you
Moderator Our next question comes from the line of Greg
Wagenhauffer with Credit Suisse First Boston. Please go
ahead.
G. Wagenhauffer How does the acquisition of Avant! affect the timing of
your ability to offer that fully integrated flow, and
within that how does that change the roadmap, if at all,
for route compiler? Then if you could also take us
through the stages of integration. When do you get
physical compiler integrated into MilkyWay, and then
eventually how does Astro or Apollo get integrated into
physical compiler flow?
A. de Geus Greg, we actually would rather not give that out right
now, because one of the key things in doing a good
integration is to make sure that you involve the key
people on both sides. And as you can imagine, as much as
many people in both companies now know about this, we
have not involved most of our R&D folks in this. The
great opportunity I think we have here is on one hand to
stay on track with what we're doing, because both
companies are making good strides in their respective
strategies, and at the same time take the time with some
of the leaders to plot a strategy that would be more
aggressive in technology.
It is already clear, though, that the MilkyWay database
has many very positive strong attributes that would allow
us to make very quick headway, and I would imagine that
within three to six months after closure already very
practical and tangible results will be visible.
G. Wagenhauffer With Synopsys really owning pretty much the front-end
design with 80% and 90% market share, Avant! in the back
end probably with the leading technology, but more like
35% to 40% market share, how do you leverage the
front-end dominance to bring up the share in the back end
but not look too dominating to your customers?
A. de Geus At the end of the day every point tool in the collection,
I believe, has to compete on its own merit. And so we
should never think that by having a complete solution
that that is good enough. This is a mantra that we'll
keep repeating to ourselves for every product.
Simultaneously, it is clear that customers would like to
remove risk, and the risks very often are not, well are
the tools just connected well to each other. The big
risks are when you do a design at the front end, and you
make assumptions on what will happen in the physical
domain that are erroneous. So those feedback moves are
extremely high value to customers, and so we will focus
on providing the technology that makes that possible.
G. Wagenhauffer Brad, you talked about the level of accretion we can
expect or dilution next year. As you shift Avant! to your
business model and more of the 75% - 85% ratable
subscriptions; first of all how long does that take? Then
second, where do you think operating margins can go?
B. Henske Firstly, I think that's the thing that will happen quite
rapidly. All of that mixes on, if you will, the
incremental business that's done, and even in the first
quarter of integration the customers that post the
closing we're dealing with on a joint basis. My guess is
on average we'll look pretty close to our mix.
Secondly, as I've said before and I continue to believe,
this is a business that should generate low 30s operating
margins. Synopsys on a standalone basis had been planning
on being at that point as we exited 2002. I expect that
some of the transition expenses will probably push that
out a little farther. But remember, fundamentally with
the ratable license model, the underlying economics of
the business, which is the orders you're taking in less
the money you're spending on expenses, on that basis both
we and Avant! today are in excess of 30% and we'll
continue to be so on an ongoing basis.
G. Wagenhauffer Okay. Lastly, one clarification on Avant!'s relationship
with some of their distributors. Was there, I think you
said the MainGate would become part of Avant!. Was there
any cash payment? I think you said net that cancelled out
to a neutral acquisition. Is that meaning the purchase
price was the same as the severance payment or could you
just explain that again?
B. Henske The basic arrangement, without getting down into all the
nits, is that the purchase price, and Avant!'s going to
execute this in the next month, the purchase price for
the remaining outstanding shares will be a number less
than the cash in MainGate that they will get at the
closing of that transaction.
G. Wagenhauffer Okay. Thanks, Brad.
Moderator Our next question comes from the line of Jessica Curacas
with Goldman Sachs. Please go ahead.
J. Curacas Good afternoon, everybody. Congratulations on the
acquisition. Can you talk a little bit, two things: one I
want to just go through again the logistics of the
insurance policy and understand the collar around that.
And then if you can talk specifically about, you know, to
what level of due diligence do you do? You mentioned I
think you had two lawyers that you guys used for doing
the due diligence on the deal. Can you tell us who those
were, and I guess what reasonable assurance you have in
terms that the code is essentially completed scrubbed of
Cadence code? Then lastly, you mentioned that I think you
had longer terms on your subscriptions this quarter. How
much of those longer terms were skewed this quarter by
one or two very large deals, multi-year deals? What terms
are you anticipating when you're giving out some of the
forecasts that you've been giving out for next quarter
and just going forward?
B. Henske Okay. Let me see if I can work through all of this.
Firstly, the basics of the insurance policy: it is
essentially $500 million in insurance for a premium of
$335. It's worth thinking about in a couple of parts.
The first $250 million Synopsis will accrue interest on,
paid by the insurer. It will remain as an asset on our
balance sheet. It will be used to pay expenses,
liabilities and judgments, and the like. To the extent
that the aggregate of all costs are less than $250
million, we'll get the remainder back.
The remaining premium of $85 is for an incremental $250
million of insurance, for a total of $500. Because the
first $250 accretes by interest, actually the policy
limit will accrete at a small rate over the period.
In the diligence, as I'm sure the Avant! people would
tell you, we did quite extensive due diligence. We had
two law firms, but many more than two lawyers involved,
and we had actually Cleary and Morrison Forrester with
us. We went through all of what's available on the case
and on the issues, and I think again, as we said, while
there's no guarantees as to how litigation comes out,
we're comfortable that we have adequately provided for
the liability.
With regards to orders in the quarter, the duration was
generally not one or two large deals, it was relatively
broad based. The guidance we've given out going forward
is based on an expectation of an average duration of
three years.
J. Curacas Three years?
B. Henske Yes.
J. Curacas Ok. All right. Thank you.
Moderator Our next question comes from the line of John Barr with
Robertson Stephens. Please go ahead.
J. Barr I wondered, Brad, if you could detail the $55 million in
fees, and does that cover the $34 million to Jerry Sue
and John Sue and other management for their severance
packages?
B. Henske Yes. The $55 million are in employment agreements, it
covers all of that. The incremental fees, hang on, I'll
detail it for you, it's mostly investment banking and
brokerage fees.
J. Barr Beyond the $34 million that's disclosed in the Avant! Q,
what gets you up to $55?
B. Henske So there are more individuals involved, and the cost of
Jerry's arrangement is inclusive of the value of his
options.
J. Barr What is the total cost of Jerry's package there?
B. Henske It depends on exactly where our stock is at closing, but
it's on the order of $40 million.
J. Barr Okay. Then just to be clear, on the MainGate and the
other Asian distributors you're not paying any of the
terms that were described in the Q for the severance of
those agreements?
B. Henske Correct. Leaving aside MainGate, those agreements have
generally been amended to take those terms out. As I
said, Avant! will actually repurchase MainGate for a net
cost, essentially of zero, sometime before the end of the
calendar year.
J. Barr Okay. Then you own it, so you will fold it in to your
Japanese sub or do whatever you wish with it?
B. Henske Yes. So Avant! will own it and, therefore, we will own
it. In some fashion that makes sense, will get integrated
with the operation that we have in Japan.
J. Barr Will any of the employees or assets stay behind with
Jerry?
B. Henske No.
J. Barr Okay. Then finally on route compiler; does this mean that
you stopped development on route compiler or does that
continue to move forward?
A. de Geus It continues to move forward. This is a great technology
with a strong team and a strong emphasis on single
integrity. So some good capabilities will come out of
this.
J. Barr One last question. Avant!'s business of late was their
book to bill last quarter was significantly below one, we
believe. How do you see that going forward during this
interim period and then once you've got control?
A. de Geus During the interim periods, Avant! will manage its own
business, and based on what we hear from customers they
will do fine. Once we take over, of course, we will
integrate all of the efforts within the company, and at
that point in time I think we will be able to give you a
better forecast on where the business is at.
J. Barr Okay, great. Thank you.
Moderator Our next question comes from Garo Tumisanian from RBC
Capital Markets. Please go ahead.
G. Tumisanian Thanks. Just a couple of questions. First on guidance
going forward, I'm curious if there are any particular
product areas that you've started to see a slowdown in or
are there any particular product areas that might be
producing the reduction in visibility, or is it more of
an across the board thing? I think in general the
expectation is that there is still some technology that
customers have to have, and I'm curious what is it that
they're choosing to forego?
B. Henske So, first and foremost, the thing they're choosing to
forego is consulting services. After that it's pretty
broadly based. I think that those products that at the
margin were highly focused on time to market stuff, like
for example very large quantities of simulators, I think
probably see a little more effect. But other than that
it's pretty broadly based.
G. Tumisanian Okay. One of the things I'm curious about is whether you
anticipate, I trust you don't anticipate, but regarding
anti-trust issues. May be if you could walk us through
what the next steps would be in the acquisition that
might be helpful?
B. Henske The next steps, obviously, are to file with the
anti-trust authorities. You never can know for sure, but
as we look at the fact that the product set at Synopsys
and the product set at Avant! are generally almost
completely complementary as opposed to overlapping, we
believe that we will get through the anti-trust issues
without significant problem.
The second thing, obviously, is we will file with the SEC
on the deal, and when that gets cleared we will hold the
two shareholder votes.
G. Tumisanian Okay. Other than that are there any other risks that you
can identify that might prevent or delay the closing of
the deal?
B. Henske Other than the usual things like somebody passes a law
that says you can't or lawsuits that prevent it, no.
G. Tumisanian Okay, great. Thanks a lot.
Moderator Our next question comes from the line of Benay Shaw with
Morgan Stanley. Please go ahead.
B. Shaw Just a couple of questions. In terms of the dilution,
Brad, can you just talk about whether that's all really
just top line assumptions you've made in terms of the
transition or if you've also made some expense
assumptions, and is that a full year number or are you
assuming the deal closes within three months and then
it's a $0.30 dilution.
Second, on the deferred revenue, which looked like it was
pretty strong, can you just help reconcile some of the
weakness you're expecting versus the strength in
deferred. Then finally, if there are any particular
timeline of events on Avant! litigation you guys would
highlight in the next three to six months? Thanks.
B. Henske First on the dilution. The revenue issues I talked about.
We have done so far some work, although much to go yet to
sort through what happens on expenses. Our early view is
that there are at least $50 million of synergies between
the combined companies.
I think that the assumption I made on dilution presumed a
middle of our Q3 closing, and as you can imagine in this
kind of thing, in part depending on when in Avant!'s
quarter and when in our quarter it closes, exactly how it
comes out is quite time sensitive in this fiscal year.
With respect to the deferred, I'm sorry I missed your
question on deferred.
B. Shaw It looked like it was up over last quarter. I'm just
trying to reconcile what you're seeing in deferred
revenues versus the outlook and some slowing.
B. Henske It's up because this Q4 was our largest orders quarter in
history.
Then lastly on the litigation, I think at the moment
there is a question related to the scope of the release
from 1994 between Cadence and Avant! that's been picked
up by the California Supreme Court. If you ask three
lawyers you get three different answers, but most people
expect that very little will happen in the next three to
six months.
B. Shaw Okay, great. Thanks.
Moderator Our next question comes from the line of Alex Buana with
UBS Warburg. Please go ahead.
A. Buana Yes. Thank you. I know you've already addressed this to
an extent. In terms of renewals and you not giving a
percentage for next year; I understand the difficulty in
calculating it. But if you were to put aside the industry
trends, macro conditions that are weighing on you right
now, putting that aside can you look back with say a
three-year average renewals rate and give us a sense on
how you would expect the year to play out
seasonally-wise? Is that possible?
B. Henske Well. Yes. Our quarters, if you look back from a seasonal
basis, tend to be quite back-end loaded. What we do at
the beginning of each year, and actually renew every
quarter, is literally for our top hundred customers, and
then sort of on average for everybody else, roll up
quarter by quarter what we expect. As I said, the
quarters tend to be quite seasonally back-end loaded. In
this particular year, if all goes to plan Q3 will be
better on balance than we've seen in the last couple of
years, which is purely an artifact of a couple of large
customers that renew in that quarter.
A. Buana Are we looking back to the '99 time frame in terms of how
they might be expected to come on three years later?
B. Henske Absolutely. Part of what we do in forecasting our
customers is look to see what agreements are in place and
when they roll through.
A. Buana I apologize if I missed this, but in terms of renewals,
with all the new product cycles that are coming up right
now, what sort of average selling price increases might
we expect to see this year over say a three-year time
frame?
B. Henske What you tend to see is that list prices for products
grow between 4% and 8% a year. The discount that any
individual customer gets is obviously renewed, is
renegotiated in each deal; some are up, some are down.
A. Buana Okay. Lastly, I did get the out guidance and I was
wondering, maybe I missed it, do you have any
expectations, with the consulting being under pressure,
is that a major part of your concern? Is it possible that
software potentially is still going to be up
sequentially?
B. Henske I think on an orders basis software will absolutely be up
sequentially year over year.
A. Buana But year over year, what about sequentially this quarter
to next?
B. Henske In terms of revenue or orders?
A. Buana In terms of revenue.
B. Henske Yes. Software will be up Q2 over Q1.
A. Buana Okay. Terrific. Thank you very much. Congratulations on
the acquisition.
Moderator Our next question comes from the line of John Barr with
Robertson Stephens. Please go ahead.
J. Barr Just a quick one. The ratable revenues this quarter were
only up $5 million sequentially. They were up more than
that; they were up $11 million in the quarter before
that, and $8 million in the quarter before that. This was
the big quarter; why wasn't it up more?
B. Henske The quarter-to-quarter fluctuations are largely a
function of when orders are booked in a quarter, so if
you think about revenue in any given quarter from ratable
licenses it comes from two things. One is the stuff you
booked in prior quarters, which is obviously the largest
part of it. The second is the revenue impact of stuff you
book in a quarter, which is driven by what month you book
it.
So that's enough to move the numbers around a few million
bucks every quarter, depending on that distribution, and
that's the variations you are seeing.
J. Barr So does that mean this quarter was more back-end loaded
or that the others were more front-end loaded?
B. Henske This quarter was modestly more back-end loaded than Q3.
Both quarters were significantly more back-end loaded
than what we saw in Q1 and Q2. Although again as I said,
much better than what we saw prior to the license change.
J. Barr Okay. Thanks, Brad.
Moderator If there are any additional questions, please press the
one on your touch-tone phone. We do have a question from
the line of Bill Frerick with DA Davidson & Company.
Please go ahead.
B. Frerick Brad, I'd like to run through the cross again. You said
it was a total of $420 million, of which $335 was the
insurance premium, $55 was the employment agreements.
What were the next two categories?
B. Henske Then $30 million for banking brokerage and the other fees
and expenses, which is the bankers, the lawyers; all of
that drag on the deal.
B. Frerick There was some more for future severance or is that the
whole amount?
B. Henske No, there will be, I expect, as we think through
integration, both severance cost and things like
facilities cost and the like, which we'll have a view of
when we closer to the closing.
B. Frerick Okay. Now on the employment agreements, they were
contractually written to be triggered by a change
control, which was defined as Jerry leaving the company,
among other things. I know that Paul was in that group.
Is Paul going to leave or is he going to stay? Has it
become a stick around bonus rather than a severance
bonus?
P. Lo Thank you for asking the question. I think I'm committed
to push the company through the merger and also help the
company for the integration. Then I'll get to know the
people better and decide my future.
B. Frerick Okay. So the money's going to be paid but you're staying.
Then one last thing, Brad. You said that there's probably
about a dollar of share worth of EBG that's going to be
lost as a result of the accounting rules. Essentially how
does that evaporate and not be shown on the financial
statements?
B. Henske So there's two things, two parts to it. The first is, as
I said, I think the combined company will very rapidly
move to the Synopsys orders mix, and that's not revenue
lost. Effectively, we'll see the same phenomenon on those
orders that we saw a year and a quarter ago when Synopsys
moved to a ratable revenue. So all of that stuff will go
into backlog, deferred, and the like .
B. Frerick Got it. So their backlog isn't what it used to be; it's
something else now.
B. Henske No. That's not my point, and I'll come to that in a
second. The notion is that we think about orders that
we take post the closing. A higher percentage of those
will be subscription orders than they would have been
presumably for Avant! standalone, at least if they...mix.
The second thing is a more complicated accounting
question, which is in purchase accounting for mergers of
this type, and this isn't a thing that you need to ...
with the way the purchase accounting rules are written.
It is that liability isn't actually deferred revenue and
backlog. If you think about it for second, our accounting
liabilities are only valued to the extent of costs
incurred. The cost of continuing to deliver the software
on, for example, a three-year license, even if you're
going to get paid over that period and continue to
deliver updates, it is a thing that's open to some
debate. This has become an issue that's shown up with the
demise of pooling, and it's clearly an issue that if you
speak to the SEC and the EITF which is looking at this,
the answer you get is we agree this makes no common sense
and it's a thing we're looking at, but it's how the rules
are written today.
We are somewhat optimistic that we will get a better
answer. In fact, it will be a better answer in the
accounting world generally by the time this deal closes.
Because effectively what happens is that real orders that
Avant! booked and customers will pay us real cash for
will evaporate as revenue out of the universe, a thing
that we don't think makes a lot of sense.
B. Frerick But your cash account will go up.
B. Henske Absolutely. We'll get all the cash that would have
happened otherwise.
B. Frerick Okay. Finally, I presume that the various financial
charges that will ensue will be taken in the quarter you
close?
B. Henske Yes.
B. Frerick Thank you.
Moderator Thank you. At this time I'd like to turn the conference
back to the host. There are no further questions.
A. de Geus Thank you for your questions. Actually, I will return it
back to the operator with some additional legal
statements to make about the acquisition, but we
appreciate your participation today.
Moderator Thank you. In connection with the proposed merger,
Synopsys and Avant! will file a joint proxy statement
prospectus with the SEC. Investors and security holders
are urged to read the joint proxy statement prospectus
regarding the proposed merger when it becomes available
because it will contain important information.
Investors and security holders may obtain a free copy of
the joint proxy statement prospectus when available, and
other related documents filed by Synopsys and Avant! with
the SEC at SEC's Web site at www.SEC.gov.
The joint proxy statement prospectus, when it is
available, and the other documents, may also be obtained
for free by accessing Synopsys' Web site at
www.synopsys.com or by directing a request by mail or
telephone to 700 East Middlefield Road, Mountain View,
California, 94043, attention Company Secretary;
650-584-5000; or by accessing Avant!'s Web site at
www.Avant!corp.com or by directing a request by mail or
telephone to 4671 Bayside Parkway, Freemont, California,
94538, attention Company Secretary, 510-413-8000.
Synopsys, Avant! and their respective directors,
executive officers, and certain other members of
management and employees may be soliciting proxies from
their respective stockholders in favor of the merger.
Information regarding the persons who may under the rules
of the SEC be considered participants in the solicitation
of the Synopsys stockholders or the Avant! stockholders,
as the case may be, in connection with the proposed
merger, will be set forth in the joint proxy statement
prospectus when it is filed with the SEC.
Ladies and gentlemen, this conference will be available
for replay after 11:45 p.m. today through midnight,
December 21, 2001. You may access the replay service by
dialing 1-800-475-6701 and entering the access code
615293. International participants dial 320-365-3844.
This concludes our conference for today, and thank you
for using AT&T Executive Teleconference. You may now
disconnect.
Forward Looking Statements
This transcript may contain forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934.
These statements are based on Synopsys' and Avant!'s current expectations and
beliefs. Actual results could differ materially from the results implied by
these statements. Factors that may cause or contribute to such differences
include the successful closing of the acquisition; changes in both companies'
businesses during the period between now and the closing date; litigation
relating to the transaction or the businesses, including the outcome of
litigation between Avant! and Cadence Design Systems, Inc.; the successful
integration of Avant! into Synopsys' business subsequent to the closing of the
acquisition; timely development, production and acceptance of products and
services contemplated by the merged company after completion of the proposed
acquisition; increasing competition in the market for design implementation or
design verification software; the ability to retain key management and technical
personnel; adverse reactions to the proposed transaction by customers, suppliers
and strategic partners and other risks described in Synopsys' report on Form
10-Q filed with the Securities and Exchange Commission (SEC) on September 18,
2001 (pp. 21-23), and on Avant!'s report on Form 10-Q filed with the Securities
and Exchange Commission (SEC) on November 14, 2001 (pp. 21-27). Synopsys and
Avant! are under no obligation to (and expressly disclaim any such obligation
to) update or alter their forward-looking statements whether as a result of new
information, future events or otherwise.