Mr. Auty: On the whole, they are doing okay but for much different reasons. Synopsys has the best technology in place across the broadest portfolio - meaning the broadest number of applications and solutions. It also has the best management team that's been in place the longest. So there is continuity there. As a whole, Synopsys has weathered the downturn relatively well. Cadence, on the other hand, had to go through a big disruption with eliminating their top five executives, bringing in a new executive management team and beginning the transition to a subscription model. So from a fundamental perspective, you can say that they got hit likely the hardest because of the downturn and some of the moves that they've made. But from a stock perspective, it's also the most interesting opportunity in our mind because we believe the transition to a subscription model offers a unique opportunity. Mentor Graphics is the last remaining holdout that derives a large percentage of its revenue from contracts that are recognized upfront. In some ways, it's like a canary in the mine. The upfront revenue recognition means the downturn was reflected in its results quicker. We're still seeing the pressures on it, and as things start to turn up, you will also see the signal right in their topline as things get better. They are starting to head into a stronger renewal period. So, while Mentor really had its lumps, as we get into later this year, we're going to have to take another look at the company.
TWST: Would you tell us more about the differences in the subscription model at
Synopsys and Cadence and upfront contracts at Mentor?
Mr. Auty: Synopsys was actually the first one that moved to an almost entirely
subscription model in July 2004. Roughly 93% of their revenue comes from
contracts that are recognized equally over the life of the contract, which is
around three years.
Cadence has decided to move entirely in that same direction. Traditionally, they
had part of their revenue that was recognized in a subscription, or ratable,
way, but in the fall of 2008 made the decision to go to an almost complete -
about 90% - subscription format, meaning that the contracts that are signed with
customers will be recognized for revenue equally over the life. So if you had a
3 contract and that contract was for three-years, you would get 1 of revenue
each year for each of the three years. Cadence, which collects quarterly for the
most part, really does a nice job of matching up the cash collections with the
revenue recognition.
For Mentor, let's just say roughly half their revenue in any given quarter is
done in a traditional software, or enterprise software model, where they will
sign a contract that they are able to recognize all of the revenue upfront.
Then, over the next couple of years, the maintenance part of those contracts and
the ratable type contracts are recognized. So Mentor has about half its revenue
in a traditional software model, like Oracle, and Cadence is moving to the
subscription route just like Synopsys did in July 2004.
Tickers included in this excerpt: CDNS, MENT, SNPS
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.