“We believe the semiconductor market has stabilized, and that customers who wish to remain competitive will sustain most of their design effort,” said Walden C. Rhines, CEO and chairman of Mentor Graphics. “Mentor’s investments in markets adjacent to traditional EDA helped drive the quarter’s results with 10% of total bookings from transportation companies and 5% from the thermal analysis market. The quarter’s strength was across Mentor’s broad customer base within EDA, spanning both semiconductor and systems companies. Systems companies contributed to a 55% increase in bookings for our Integrated Systems Design division, while semiconductor companies drove a 35% increase in IC Design to Silicon division bookings.”
During the quarter, the company extended its transportation product portfolio with new offerings for AUTOSAR in-vehicle network design and for specialty vehicle electrical wire harness design. Addressing low-power design issues in integrated circuits, the Olympus-SoC™ place and route tool can now help designers save 30% in power versus traditional design techniques and achieve design closure two to three times faster. The Calibre® 3D variability solution allows designers to address the growing problem of thickness variability caused by chemical mechanical polishing (CMP) at advanced nodes. The new FloEFD™ 9.0 product allows mechanical designers to easily analyze thermal effects of products directly from their mechanical design environment. The HyperLynx® power integrity product allows designers of printed circuit boards to better plan their power requirements. In addition, the design-for-test tool TestKompress® won Test and Measurement World’s Test of Time Award, and the RF Design solution, jointly developed with Agilent, won EDN magazine’s Innovation Award for the electronic design automation category.
“Our guidance for the second quarter is the result of a lower renewal portfolio for the quarter, and an expectation that in this environment, customers will not renew early,” said Gregory K. Hinckley, president of Mentor Graphics. “We continue to manage costs aggressively, with a year-on-year decline in the first quarter in non-GAAP total expenses of about $7 million, and expect further reductions in the second quarter.”
Outlook
For the second quarter fiscal 2010, the company has no significant contract renewals scheduled. Given that, the company expects second quarter revenues of about $165 million, a non-GAAP loss per share of about $.10, and a GAAP loss per share of about $.41. The dollar value of contracts expiring in fiscal 2010 is a record; however, most of the contracts expire late in the year.
Adoption of FASB Staff Position APB 14-1
During the first quarter of fiscal 2010, Mentor Graphics adopted FASB Staff Position Accounting Principles Board Opinion 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). FSP APB 14-1 requires retroactive application to all prior periods reported. Accordingly, we have adjusted the applicable prior period balance sheets, statements of operations including net income (loss) per share, and statements of cash flows to reflect the adjusted balance of the convertible notes and related items, and to record the amortization of the discount on the convertible notes as a non-cash interest expense. A reconciliation of our adjusted Condensed Consolidated Balance Sheets as of January 31, 2009, our adjusted Condensed Consolidated Statements of Operations and our adjusted Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2008 to their original filings is included with this release.
Discussion of Non-GAAP Financial Measures
Mentor Graphics management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted gross margin, operating margin and net income (loss), which we refer to as non-GAAP gross margin, operating margin, and net income (loss), respectively. These non-GAAP measures are derived from the revenues of our product, maintenance, and services business operations and the costs directly related to the generation of those revenues, such as cost of revenue, research and development, sales and marketing, and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. These non-GAAP measures exclude amortization of purchased and other identified intangible assets, special charges, equity plan-related compensation expenses and charges, interest expense attributable to net retirement premiums or discounts on the early retirement of debt and associated debt issuance costs, interest expense associated with the amortization of debt discount on convertible debt recorded under FSB APB 14-1, impairment of cost method investments, and the equity in income or losses of unconsolidated entities, which management does not consider reflective of our core operating business.
Purchased and other identified intangible assets consist primarily of
purchased technology, backlog, trade names, customer relationships, and
employment agreements. Special charges primarily consist of costs
incurred for employee terminations due to a reduction of personnel
resources driven by modifications of business strategy or business
emphasis. Special charges may also include expenses incurred related to
potential acquisitions, excess facility costs, asset-related charges,
post-acquisition rebalance costs and restructuring costs, including
severance and benefits. Equity plan-related compensation expenses
represent the fair value of all share-based payments to employees,
including grants of employee stock options, as required under Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (SFAS 123R). For purposes of comparability across other periods
and against other companies in our industry, non-GAAP net income (loss)
is adjusted by the amount of additional taxes or tax benefit that we
would accrue using a normalized effective tax rate applied to the
non-GAAP results.
