Synopsys, Inc. (SNPS) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earning Conference Call for Fourth Quarter and Fiscal Year 2011. [Operator Instructions] As a reminder, today's call is being recorded. And at this time, I'd like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Nick. Good afternoon, everyone. With us on the call today are Aart de Geus, Chairman and CEO of Synopsys; and Brian Beattie, Chief Financial Officer. Today's conference call will include commentary regarding our Q4 and fiscal 2011 results and also the definitive agreement to acquire Magma Design Automation, both of which we announced this afternoon. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts and targets and will make other forward-looking statements regarding the company and its financial results, our expectations about the timing and likelihood of closing the acquisition and about the potential benefits of the culmination. While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our quarterly report on Form 10-Q for the quarter ended July 31, 2011, our earnings release for the fourth quarter of fiscal year 2011 and our press release announcing the definitive agreement to acquire Magma issued this afternoon. All financial information to be discussed on this conference call, the reconciliation of the non-GAAP financial measures to their most directly comparable GAAP financial measures and supplemental financial information can be found in the current report on Form 8-K that we filed today, our fourth quarter earnings release and our financial supplement. All of these items are currently available on our website at www.synopsys.com. In addition, the information we discuss on this conference call related to our intent to acquire Magma is for informational purposes only. This information is not an offer to buy or the solicitation of an offer to sell any securities. Magma intends to file with the Securities and Exchange Commission preliminary and definitive proxy statements and other relevant materials in connection with the proposed transaction. Before making any voting or investment decision with respect to the acquisition, investors are urged to read Magma's proxy statement and the other relevant materials when they become available because they will contain important information about the transaction. With that, I'll turn the call over to Aart de Geus.

Good afternoon, and thank you for joining us. Today, I'm happy to report first on our excellent Q4 and fiscal 2011 results and our raised guidance for FY 2012 and second on the signing of a definitive agreement to acquire Magma Design Automation, which we announced this afternoon. Let me begin with our results. Our business in Q4 was strong, closing an outstanding overall fiscal '11 and most importantly yielding an excellent position heading into FY '12. Specifically, in Q4, we delivered revenue of $391 million resulting in $1.536 billion for the fiscal year. This is 11% growth over FY '10. With non-GAAP earnings per share of $0.45 in Q4, we delivered $1.80 for the year, above the target range we communicated at the beginning of fiscal '11 and 13% growth over fiscal '10. In the process, we managed to a solid non-GAAP operating margin of 22.3% for the year while generating $440 million in operating cash flow. Our 3-year backlog grew to $2.5 billion and we have more than 80% of next year's plan revenue scheduled from current backlog. In summary, a strong year with double-digit growth in both top and bottom line. Looking forward to fiscal year 2012, we are raising our outlook. While we're conscious of the continued economic uncertainty, our good momentum and backlog support an objective of double-digit non-GAAP EPS growth. We plan to achieve this goal on the basis of solid top line growth and improvement of our operating margin. Brian will give you more detail in just a minute. Before moving to the business highlights, let me address today's announcement that we have signed a definitive agreement to acquire Magma Design Automation. This acquisition is motivated by our customers' need for further technology exploration and productivity. Indeed, today's chip designs requires customers to…

Well, thanks, Aart, and good afternoon. In my comments today, I will summarize our financial results for the quarter and fiscal year, provide you with our 2012 guidance for Q1 and the full year and provide some financial details of the Magma transaction. As a reminder, I'll be discussing certain GAAP and non-GAAP measures of our financial performance, and we provided reconciliations and explanations in the press release, 8-K and financial supplement posted on our website. In my discussions, all my comparisons will be year-over-year, unless I specify otherwise. Now as Aart mentioned, Synopsys delivered a very solid fourth quarter wrapping up an outstanding year. FY '11 financial results were highlighted by strong business levels, double-digit growth in both revenue and non-GAAP earnings and considerable free cash flow generation. Let me now provide some additional detail on our financials. Q4 total revenue increased 4% to $391 million and annual revenue grew 11% to $1.536 billion. Our IP and systems products continued their momentum and achieved double-digit revenue growth in Q4 and the year. One customer accounted for slightly more than 10% of Q4 and fiscal year revenue. Greater than 90% of Q4 revenue came from beginning of quarter backlog, while upfront revenue was 5% of the total for Q4 and 6% for all of FY '11. This is well within our target range of less than 10% upfront. The average length of our renewable customer license commitments for the quarter and for the fiscal year was about 2.7 years. We currently expect average duration in fiscal 2012 to be between 2.7 and 2.9 years as we're seeing some customers refining their contract durations to match their particular design cycles. Three-year backlog increased to $2.5 billion from $2.4 billion with a book-to-bill slightly greater than one. And finally, we have greater…

Thank you, Brian. We know there will be a lot of questions today. So to help us accommodate everyone, we'd like to ask a favor and request that you try to focus on one or 2 questions at first, and then we'll of course come back around after we give everyone a chance to ask additional questions. Thank you very much, and I'd like to turn it over to the operator.

[Operator Instructions] Our first question will come from the line of Rich Valera with Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: I guess to start with -- off on the acquisition, Aart, with all due respect in your comments, you suggested that Magma's complementary to you, guys. But it -- most people would suggest, I think, that they have quite a bit of overlap with your core businesses. So just wondering how you think about how much overlap there is there. How much do you see is not overlapping? And how do you sort of deal with that potentially from a regulatory perspective?

Well, as you know, EDA is a very competitive field with constant innovation and many tools with many different capabilities and often catering to different subsegments of the market. Simultaneously, as I highlighted in my preamble, what we're seeing right now, and when I mean right now, I'm really meaning the last 18 months or so, is just a tremendous acceleration of technology demand. And I think it's partially due to the fact that there is so much opportunity in some of the mobile devices that demand really state-of-the-art technology, that the advances needed suggest keep up with what the customers need will require substantial R&D investment and also substantial technical support. And so it's in that context that there's no question that we will be able to jointly much better support the customer. As a matter of fact, we have already gotten a wave of very positive feedback from the customers that we've spoken to. Richard Valera - Needham & Company, LLC, Research Division: Great. And I mean, just a follow-up on that, have you done any sort of preliminary -- any trust analysis? Do you have any feel for how this might be viewed? Obviously, Magma much smaller in scale than the other 3 big players, which I think would be something in your favor but still a lot of overlap. Do you have any initial feel for that? Anything you can share with us?

Well, of course, I cannot go into any of the details, but we understand perfectly the process of going through the governmental steps. And of course, we do our homework beforehand very carefully. But in that context, we will engage with the government on these issues as we have done in the past and our confidence in the outcome. Richard Valera - Needham & Company, LLC, Research Division: Great. And just one quick one, if I could, for Brian. When you talk about being somewhat accretive or modestly accretive in the fiscal '12, does that include the expected loss of deferred revenue from Magma?

It does, Rich. Yes.

Our next question comes from the line of Raj Seth with Cowen and Company.

Aart, if I could follow up on Rich's line of questioning just a bit. And congratulations, I actually think it's quite a good deal. Is your plan -- to the extent that you can discuss it at all, is your plan to keep 2 platforms in digital sort of your Galaxy platform entails where there is overlap? Or would you anticipate over sometime taking sort of the best of both worlds and creating a new sort of optimized level for some of the leading-edge customers that you've talked about?

Good question. And I'm sure you understand, we cannot comment about specific plans partially because these plans can only be finalized and developed once we have closed the deal. But there are 2 fundamental principles that we follow. And the first principle is a very, very important one, which is do not disrupt the customer. In both our values and maybe our business thinking, it is very clear. Customers absolutely rely on us for chips that are vital to their success, and we will continue to support them being successful through all of those chips. Simultaneously, in the long-term, we -- actually, in the short-term, we also follow the principle of understanding where the most rapid developments in technology are needed. And as mentioned earlier, the race is very much on in technology. And so long term, we will obviously deliver more precise road maps once this is closed. But long term, we absolutely have to lead the state-of-the-art. This is important for not just the EDA industry. It is important for the semiconductor industry. And there are a lot of opportunities there. So we have a lot of work ahead of us here.

Yes. I mean, given that both these flows are somewhat integrated, you mentioned a lot of work, how long do you think it takes to resolve these kinds of issues in the customer base notwithstanding your commentary on that one to disrupt them? Is this something that you would anticipate in this domain? It takes, I don't know, 1 year 18 months? Or is this something that even takes longer? And then I'm just curious as it relates to the attractiveness of Magma. They have had some success certainly in Fine [ph], Sam [ph] and some of the other simulation products they have. Was there -- aside from the obvious advantages of taking some of the tele stuff and some of those customers under your wing, was there something particular in the products that was or has become more attractive to you and the -- recently that help drive your decision to do this now?

So obviously, I cannot comment about specific products at this point in time. But what is clear, and I want to emphasize that. When you say how long will it take for customers to know, they should know immediately. We will support them. It's that simple. We care first and foremost about their success with whichever tools they use, and we will continue to do that as much as we possibly can until they tape out successfully and probably long beyond that. At the same time, road maps are actually almost a misnomer because the road keeps changing very rapidly in our field. And so I think we have an opportunity here to think through what are the things that in the long term will have the biggest impact on our customers. And we have such a large number of requests and demands from the customers right now that I'm not worried at all that we will not be able to really make a difference for the customers soon after we close the transaction.

Right. And just a quick one for Brian. Brian, in your accretion commentary, are you assuming some meaningful cost reductions out of the combination? You've mentioned to Rich that deferred was accommodated in that commentary? Are you -- do you have a number in terms of the channel cost or anything else to come out that you're assuming?

Well, I think these are all that the forms of the details are going to be worked out as we work through the regulatory approvals over the next little while. But certainly, as we look at the company, I think there are certain levels of synergies you might expect to come through. So as we see that plus the revenue, some -- we see the deal is modestly accretive in FY '12, assuming that it can close in the second quarter -- calendar quarter of next year.

Our next question comes from the line of Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: I want to keep beating a dead horse here. In terms of the regulatory environment that we're in, the deal is like you've got #1 buying #4. We see this in a much larger case that's out there. When I look specifically at SPICE simulators and even the strong combined market share on digital place-and-route, what is it that gave you the confidence that you felt that you can move forward and get a transaction like this stuff?

Yes, you're beating indeed a dead horse. We won't go much deeper in this area, but we did very good due diligence on these areas. We have seen that it's an extremely competitive landscape with actually many more players than what you're mentioning. And so our sense right now is that we're on a good track, but we will follow the rules and work with the HSR authorities to make this the right thing. Sterling P. Auty - JP Morgan Chase & Co, Research Division: So LAVA moved over to subscription basically about the same time they cadenced it. So thinking about how the combined financials will look, Brian, are you anticipating of having like a non-GAAP revenue where you're actually going to add back the deferred revenue that's written down and that's part of the accretion that we're talking about?

No, Sterling, we typically don't do that. In the case, if you look at Magma's financials, there was just approximately $20 million of deferred revenue backlog. So relative to the entire size of the company, it's not that significant. So again, people know what the amount is. We typically do not adjust for that. I think the results will be pretty visible as we complete the transaction. And we'll build that into the guidance as the deal closes, and we'll update our outlook for 2012 at that point. Sterling P. Auty - JP Morgan Chase & Co, Research Division: All right, great. And last question just on the core business, you're finishing up a strong year, you ended the shortened contract durations, you made some commentary there. Just as you look at the macro environment and some of the comments coming out of semis, do you think that the contract durations that you've included are short enough? Could we actually go to an even shorter level as we move into 2012? Or does it just not make economic sense then to go much shorter?

Actually, I'm in the second camp. I don't think that it's going to be much shorter. It's possible that people want to go a little bit shorter if they feel a high degree of uncertainty of the overall markets around us. And you know more about it than I do, but we all observe the -- our screens being red one day and green the next based on the effects that have really nothing to do with the semiconductor industry. But obviously, there's a certain degree of nervousness overall. Having said that, it is precisely the mall that we have and the really strong backlog and, relatively speaking, very long commitments that we have that gives us the ability to weather any storm very well. And it is particularly positive to be able to move forward on this transaction at the time where our own results for the year were good, our outlook is very solid. And as you have heard, we have a very large portion of our FY '12 business already scheduled in hand. And so in that sense, no matter what, I think there are few companies that have the degree of stability and solidity that we have in light of the degree of uncertainness and question marks around it.

Our next question comes from the line of Paul Thomas with Bank of America Merrill Lynch.

I guess if you look at the guidance, the full year guidance for Synopsys standalone, you're in the 7% to 8% range. And if we take out the extra week, you'd be a little bit below that. And if, Aart, we look back to your previous commentary about what you'd expect from a normal year for core and system IP growth, it seems like you might be in line with that to a little bit less than that. And so I just wanted to get your sense of do you think that this year is starting out as a little bit below what you might expect for a normal year? Or are you just being conservative at this point?

Well, I think we may have the reputation that we're conservative and we tend to deliver well on commitments, let's say. But at the same time, no, my sense is not that we're starting off particularly weak. On the contrary, I think that as a company, we feel that we have good momentum. But not to -- to beat another dead horse, which is the economy around us, there's clearly a certain degree of uncertainty about what may happen. And not that that necessarily changes the actual outcome on markets, but it does change a little bit the caution that customers will display. And so in that context, we actually feel that we're doing quite well. Now maybe digging -- slightly deepening your question in a different angle, which is we've said before that the growth in core EDA is less high than some of the new areas that we're growing in. And so for example, if you look at the IP area, we are clearly doing very well there. And some years, we'll see a little bit more core EDA then expect that some years we'll see a little more IP than expected. But in aggregate, we felt comfortable enough that without any M&A, we are right now setting an objective of double-digit non-GAAP EPS growth. And that is definitely more aggressive than what we did last year even if we delivered more than what we have promised.

Next we go to the line of Tom Diffely with D.A. Davidson. Thomas Diffely - D.A. Davidson & Co., Research Division: Just one question on LAVA, is there a breakup fee in no shop or go shop provision at all?

Yes, there is some. Included in the definitive agreement, which we signed this afternoon, is a standard breakup fee of 3.25%. That's about $17 million the value. There's also a reverse breakup fee of $30 million that we would pay Magma. So it works on both sides of the agreement, and you'll see all the details in the definitive agreement. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay, and who are the advisors on this one?

Well, on our side, we did not use excellent advisors. We had, of course, a number of legal counsels, specifically Dewey & LeBoeuf. On the Magma side, you can ask them, but they use Catalyst. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then, Aart, has something happened with the business as far as normal seasonality? I mean, usually your fourth quarters are quite strong. And it seems like the last couple of years, it's become a lot more evenly split through the year.

Oh yes, and there's a good reason for that is because these are the benefits of much more ratable businesses. Yes, you have the very natural and good objective setting and human behavior that, at the end of the year, you really want to close all the deals that you've been working on. And so, therefore, there are tends to be always somewhat of a push in any business, ratable or not, in that context. But from a utilization of tools and from a revenue recognition point of view, the 2 things reflect each other now very well. And so in that sense, this is the part of the positive outcome of having moved to a much more ratable business model. Now there's a small percentage of this that is not completely ratable because it tends to be attached to either specific milestones or IP delivery. And with IP growing, you will see a slight increase there. At the same time, though, there's a certain base of IP business that keeps happening every quarter. So even there, you don't see all that much fluctuation. And given that people really buy IP when they need it, meaning when they have projects, there's not like over purchasing massively occurring there. And so it's, in that sense, also a fairly predictable revenue stream. So I think we have a very balanced model that is well-suited for multi-year technical and support investments, which is what our customers care about.

And maybe I'll just add, with the transparency, of course, and that we have the visibility using $2.5 billion of backlog that we profile out over the next 3 years, we have that greater than 80% of the full year already booked. And that profile, as you know, we split that by customer, we split the cash flows by customer, by quarter. So we can really get an excellent level of visibility, and that's what you see relative to the quarterly profiles. We just wanted to give you all of the transparencies on the quarter 1, quarter 2 shifts, quarter 3 and 4 for the year. So no surprises during the year and we're committed to delivering on that. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then, Brian, for I didn't hear, did you mention anything about the go shop provision?

No, I did not. No. Thomas Diffely - D.A. Davidson & Co., Research Division: So that's in there right now?

No. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then I was curious, with your book-to-bill being around 1 for the year, did the acquisitions impacted any of the direction?

For -- are you talking about the past year? Thomas Diffely - D.A. Davidson & Co., Research Division: Yes, for 2011.

No, of course, because we have done many acquisitions over the years. They layer in overtime. Once a company gets acquired, of course, gradually, actually reasonably fast, the revenue becomes indistinguishable of the other revenue. And so if some of you had the opportunity to attend our investor presentation in New York a couple of months ago, I tried to explain that the way we grow is really through a combination of investing in new technology ourselves as well as acquiring technology. And so all of these things are part of a business model that has been honed over many years and is working well for us. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. I was kind of curious that the book-to-bill have been close to one even without acquisitions.

Yes, it's really not a big factor at all at least. If you looked at the acquisitions, the largest we did in the fourth quarter of last year of 2010, I should say. And the impact relative to bookings level is new deals get booked as they were. The backlog comes over as it were. And then the revenue, as you know, gets a bit of a revenue haircut due to some of the deferred revenues that were on the balance sheet. And then that folds in over the year. So again, just relative to our total business, it's really an insignificant impact on the book-to-bill. Thomas Diffely - D.A. Davidson & Co., Research Division: Okay. And then finally, when you look at the $300 million projected for cash flow next year, what is the projected kind of onshore, offshore mix of that?

Well, we have our certain balance right now of 23%, 77% of our billion dollars in cash. As we go forward on operating cash flow, it's split about 50/50 of onshore and offshore cash.

Our next question is from Mahesh Sanganeria with RBC Capital Markets.

Again, congratulations on the acquisition. Assuming that most of this, the revenue from Magma side, will come from place-and-route, can you, Aart, can you refresh us on the market place-and-route mark in terms of what are the market shares and what are the features of different products? And how will the -- will combining your product with Magma, does that give you a pricing advantage but less number of players in the market?

Well, the place-and-route market is extremely competitive with many players. And moreover, most of the players have multiple place-and-route systems. Yes, we, ourselves, have, I think, 4 routers or something like that. And so all of these things tend to end up being quickly specialized in multiple dimensions, be it detailed route, be it block route, be it talk to your routing or a top level routing. And then even there, there are specializations for different end markets. And so there's really a plethora of technology. And the very fact that customers have time -- have a hard time in knowing what are the strengths and weaknesses of each of the customers makes it impossible for me to go into detail here. But suffice to say, this is an area that sees continual evolution and innovation and new entrants and quite a large numbers of players. And I think our challenge is going to be to just to live up to the expectations of the customers that we have, and we have done well and it's never been an easy journey.

But does having a bigger pipe -- bigger pie, does that help you in terms of pricing going forward?

No, I don't think so. The -- fundamentally, this is extremely competitive market. I know that many of you have asked pricing questions for many years. The reality is that most of the pricing question is actually answered in a very different area, which is the content, meaning that the rate of change of what customers get for the same dollar is astronomically high, meaning we deliver really a large number -- a large amount of value and continually changing value. Now at times, we try to explain that to the customer and they say, "Yes, well, and so do we." Meaning that they, too, for the same size chips get about the same amount of money while delivering dramatically new capabilities. That's the nature of high tech. And so I think that none of these things are won or lost on pricing. They weren't on lost on the basis of driving technology forward and being really there for the customer when they need you in support. And that is really what we're focusing on in how we build Synopsys.

And one last question, Brian. How should we think about in terms of your cash requirement to -- I mean, right now you have just, what, $230 million onshore. How much do you need to run the business? I would think that the remaining you'll have to issue a debt, is that a right way to think about?

Well, what we covered today as well is the renewal of our line of credit facility with very attractive rates, just renewing what we had in place earlier, and that's up to $350 million. So as we look forward, we'll have more details of this as we complete all of the acquisition-related activities over the next 6 months. It's also, of course, a period where we will generate additional cash for the business. And at that point, we'll be determining to what extent do we use a relatively low cost line of credit plus our U.S. cash we've got available. And as many transaction you have on a global basis, you do sometimes have to put your IP into some of the other jurisdictions. And that also requires, in some ways, some of the offshore cash. So a lot of details to be worked through. But again, we're in very good shape relative to the cash and the cash availabilities. We do not have any use of our line of credit already. And we're in full compliance with all the covenants built into those agreements as well. So we're in very good shape.

[Operator Instructions] We'll now go to the line of Jay Vleeschhouwer with Griffin Securities.

Aart, I'd like to ask if there's anything instructive from your experience with the Avanti acquisition a decade ago or what might occur with the Magma acquisition. What I mean is, you bought then a company that was barely overlapping with Synopsys, but it took you a number of years longer to fully benefit from the integration of their complementary technology. And so again, the question is, do you think that there's anything that is destructive from that experience if you're maybe able to apply it to LAVA?

Yes, actually a very interesting question. We pride ourselves for being a learning company and one can argue how good we are at that. But there's no question that -- not just the Avanti acquisition but a number of others, each one of those have taught us new facets. I think it's important to start one of the fundamental principles back to it is all about the customer. And so no matter what we think about our plans and directions and technology, the first thing to do is to make sure that the customers are successful during this. Secondly, you're right that sometimes how one integrate or how one leverages new technologies or how one invents new things is very much a function of how one executes. And of course, we've learned many management lessons on how to do that better, how to set the objectives aggressively while at the same time not short-shifting the support of the existing customer. And so I think we will be able to execute more rapidly than in the past. But at the same time, I think it's also clear that the external landscape has evolved significantly since the mid of the last decade. And so it will be very important to involve customers in helping us at some of the key priorities because we're getting so much feedback of them wanting us to do even more than what we're doing today. So it's another learning experience, I guess, but we definitely benefit from the teachings of the past.

Could you comment on how LAVA helps you with your adjacency strategy particularly in the area of System-Level design or anything else you may care to mention?

Well, yes, of course, there are many adjacencies. And each one of these technologies have some key angles that are very valuable. Maybe highlighting one, which is the whole custom analog/mixed-signal domain is one where an enormous amount of invention actually is needed or maybe innovation is a better word, because it is clear that not only has analog/mixed-signal design not lived up to the same rate of productivity increase, it is -- in addition, if I can use the term harassed by the physics of small dimensions in a fashion that's actually tougher than on some of the design side -- of the digital sides. And so I think they are the areas here that can be exciting for us going forward. But this is all looking into the future at a time where we don't have specific plans ready yet. And so we'll communicate when we're ready. But the space around us is still very, very big.

Just a market follow-up and one quick one for Brian. At the Analyst Meeting, John mentioned that by your estimation, about 1/10 of the typical cost of an IC or semi-project is comprised of EDA tools. And I don't know if that was a specific or limited case example you were giving. But could you comment on that ratio, particularly in the context of all the technology and market pressures you refer to, if there's a possibility that that proportion, that 1/10 share that you mentioned might possibly go up?

Maybe I should take care of that question, Jay, if you don't mind. The challenge with these statements, of course, is they're always directionally very correct, and the second decimal point is always very suspect in terms of putting exact numbers. What is clear, though, and we are seeing it with our customer engagements, is that the depths of the engagement is becoming very different than just 3 or 4 years ago. And the reason for that is simple, which is, a, the customers on the outside feel very much the pressure of having markets that are increasingly a little bit winner takes all and are very fast. And so you cannot miss the tape out wall. Secondly is that what they are attempting to do on these chips is complex in every dimension you can think about. And by the way, the EDA tool, the word ease-of-use as much as a positive, is continually in conflict with the necessity to be incredibly capable from a technology point of view, i.e. is another way of saying this is not best of value that's easy-to-use. In other words, your support is only becoming much more than support. It is absolutely being a member of the design team. And I think it's much more collaboration anything else. Therefore, the conclusion has to be that customers that start to appreciate what we actually can do to help them differentiate rather than just be part of their cost equation will do much better. And we definitely have evidence of that with the number of customers where we'll take some pride in their success because we know it was done together in its set of differentiation. And the moment one moves more into the space of helping customers differentiate rather than just be part of their cost equation, which by definition is always under pressure, I think we have a good opportunity. And I think this applies to the entire EDA industry not just to Synopsys. And that's maybe the reason you hear all in all recently good results from all the participants in our industry.

Okay. Just one last in for Brian. Could you comment on the degree of operating margin improvement in the IP business in fiscal '11? And could you perhaps talk about the extent of improvement you might see in fiscal '12 in IP?

Yes, we don't break out all the details down to the margin level. As you can see from the revenue growth in IP and systems, as a result of the acquisitions and our organic growth, we grew by 75% on the top line. And along with that came a very nice improvement in the operating margins for that business as well. And again, that is what we're counting on to continue in 2012 as we've committed to expand our operating margins in the year. And again, we have long-term targets we're continuing to work towards. But again, a nice improvement in 2012 compared to where we are at the end of '11.

[Operator Instructions] And we'll go to a follow-up question with Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Brian, I want to drill into the idea. You mentioned the $20 million of deferred revenue. So Magma had about $300 million of backlog coming into this fiscal year, they have the July fiscal year. So my question is this. As you go through the accounting on the merger, would it only be the deferred revenue write-down that you wouldn't get a chance to put through the income statement? If they haven't actually issued an invoice for, let's say, an annual collection on a 3-year deal as they're paying once a year, does -- a big chunk of that backlog, is that still eligible to come through the income statement for the combined company?

Yes. I can't comment on the specifics of their business, but I'll give you the update on how the accounting is done. And what happens is you do look at the deferred revenues at the point of closing the agreement and signing all the final agreements after the shareholder vote. And then given its software accounting, there is roughly a haircut between -- in every deal we do of 75% to 85%. And that's just based on the deferred revenues on the books at that point in time. The rest of backlogs and other contracts typically are able to be invoiced, collected and, again, reflect the commitments that are in place in the companies that we've acquired. So that's really the haircut you see. It's just the deferred revenues at that point in time. All the rest is cash due. It's revenues in the future and should contribute to the growth of the company. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. So that's the big difference in terms of you would think of a subscription combination taking a massive haircut on the combined company. But based on what's there, it's only good to small haircuts. So that makes more sense. Aart, one question to you. Magma spend a lot of time and effort building out an analog platform just like yourself to compete with Cadence. As you looked at that platform, how fresh is that technology relative to Synopsys on efforts? And how important was that in the combination?

Well, in general, we cannot comment too much of the details of the products at this point in time, but this is on the area that is highly complementary. And as I mentioned earlier, the custom area is really in need for a lot of innovation. And so I'm not worried that the capabilities that the companies offer cannot be leveraged in many different ways and, actually, are badly needed in the market, frankly.

Thank you, speakers. There are no further questions in the queue.

Well, it's almost perfect timing because it's 3:00. So thank you very much for attending this session. I understand, obviously, that with the acquisition, there are many questions, many that at this point and time we can't answer until it's close. You understand that. I also want to make sure that notwithstanding the excitement of M&A, the really big message here was that we did have a very strong '11. And most importantly, the strength manifests in itself in our ability to set more aggressive objectives for FY '12. And so without M&A, I think we're sharing a very strong outlook with you, and it's on to the next year. Thank you very much for support during FY '11, and we hope to have a further communication with you in what is now the new fiscal year. Thank you.

Thank you, ladies and gentlemen. That does conclude our conference for today. And we do thank you for your participation for using AT&T Executive Teleconference. You may now disconnect.