FILED BY AVANT! CORPORATION PURSUANT TO RULE 425 UNDER THE SECURITIES ACT OF
1933. IN ADDITION, AVANT! CORPORATION DEEMS THIS COMMUNICATION TO BE FILED UNDER
RULE 14a-12 OF THE SECURITIES EXCHANGE ACT OF 1934. SUBJECT CORPORATION: AVANT!
CORPORATION, COMMISSION FILE NO. 0-25864.
FORWARD LOOKING STATEMENTS
The transcript below contains forward-looking statements within the
meaning of the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, including statements regarding the expected date of closing the
acquisition; future financial and operating results; and timing and benefits of
the acquisition. 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.
ADDITIONAL INFORMATION
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 the SEC's website 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' website at www.synopsys.com or
by directing a request by mail or telephone to 700 E. Middlefield Road, Mountain
View, CA 94043, Attention: Company Secretary, (650) 584-5000, or by accessing
Avant!'s website at www.avanticorp.com or by directing a request by mail or
telephone to 4671 Bayside Parkway, Fremont, CA 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.
---------------------
The following is the question and answer period of the
conference call hosted jointly by Avant! and Sysopsys on
December 3, 2001. The first half of this transcript has been
previously filed.
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 1
Thank you for your attention. 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
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 2
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.
2
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 3
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.
3
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 4
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?
4
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 5
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
5
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 6
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.
6
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 7
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
7
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 8
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.
8
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 9
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
9
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 10
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.
10
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 11
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.
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 12
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.
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 13
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.
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 14
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
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 15
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?
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 16
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?
16
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 17
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?
17
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 18
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
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 19
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
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 20
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.
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SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 21
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.
21
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 22
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?
22
SYNOPSYS INCORPORATED
HOST: AART DE GEUS
DECEMBER 3, 2001/4:30 P.M. CST
PAGE 23
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.
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PAGE 24
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
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PAGE 25
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
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PAGE 26
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?
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PAGE 27
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.
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PAGE 28
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
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PAGE 29
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
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PAGE 30
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.
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PAGE 31
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.
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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?
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PAGE 33
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?
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PAGE 34
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?
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PAGE 35
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
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PAGE 36
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?
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PAGE 37
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.
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PAGE 38
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
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PAGE 39
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.
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