“The quarter’s strong bookings performance was driven by new customers and new products. Though the business climate is still difficult, we did see strong sequential increases in consulting and distributor bookings during the quarter, both signs we take as indicators of an improving customer environment,” said Walden C. Rhines, CEO and chairman of Mentor Graphics. “The company continues to build its strength in new markets, expanding its electronic system level design (ESL) and low-power product offerings during the quarter. Taiwan Semiconductor Manufacturing Company’s (TSMC) inclusion of a full Mentor low-power implementation flow in their Reference Flow 10.0 further strengthens the company’s position in the physical implementation market.”
During the quarter, Mentor released a new version of its Catapult® C synthesis tool enabling full chip synthesis, including control logic, and better power management. The company also released its PADS® 9.0 printed circuit board flow which incorporated new collaboration, manufacturing and analysis tools. At the Design Automation Conference (DAC) in July, Mentor advanced its full system low-power strategy by launching its VistaTM platform which enables engineers to model power early in the design cycle. Also at DAC, Mentor and its partners detailed the company’s multi-operating system, multi-core embedded system strategy featuring Linux, Android, and Nucleus® operating systems. On Tuesday, the company closed its acquisition of LogicVision announced during the second quarter. The acquisition strengthens the company’s market-leading position in the design-for-test market by combining LogicVision’s strength in built-in-self-test (BIST) with the company’s strength in automated test pattern generation (ATPG) and embedded test pattern compression technology.
“With a tight rein on costs and the beginnings of an improving economic climate, the company performed better than we were confident to predict,” said Gregory K. Hinckley, president of Mentor Graphics. “The contract renewals we had in the quarter were at similar levels to their previous contract values, which was an improvement from the first quarter’s renewal rates. And despite acquisitions, headcount and operating expenses are down from a year ago, as the company continued to attack costs like travel, facilities and outside services.”
Outlook
For the third quarter fiscal 2010, the company expects revenue of about $183 million, non-GAAP earnings per share of about $.01 and a GAAP loss per share of about $.19.
Adoption of FASB Staff Position APB 14-1
During the first quarter of fiscal 2010, Mentor Graphics adopted FASB Staff Position No. APB 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 and six months ended July 31, 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 intangible assets, in-process research and development, 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.
Identified intangible assets consist primarily of purchased technology,
backlog, trade names, customer relationships, and employment agreements.
In periods prior to the adoption of Statement of Financial Accounting
Standards (SFAS) No. 141 (revised 2007), “Business Combinations,”
in-process research and development charges represented products in
development that had not reached technological feasibility at the time
of acquisition. 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 SFAS 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.
