CIMdata PLM Industry Summary Online Archive
20 August 2008
Financial News
Mentor Graphics Reports Fiscal Second Quarter Results
Mentor Graphics Corporation announced fiscal second quarter revenue of $182.4 million, a GAAP loss of $.19 per share, and a non-GAAP loss of $.02 per share.
“Mentor Graphics continues to execute against its plan in an environment which remains challenging,” said Walden C. Rhines, chairman and CEO of Mentor Graphics. “Our young and innovative product portfolio has enabled Mentor Graphics to continue to perform as customers adopt new process nodes. Customer adoption of leading-edge physical place and route technology at 45nm is accelerating, and is rapidly expanding Mentor’s base of Olympus-SoC users.”
During the quarter, the company unveiled its sub-45nm integrated circuit (IC) implementation strategy, blending the strengths of its Calibre® design for manufacturing (DFM), Olympus-SoC™ place and route, design for test (DFT) and yield learning solutions. The company also built on its leadership in automotive electrical system design with a new version of its CHS™ software. The company’s inFact™ intelligent testbench software was updated to allow it to automatically scale across a server farm of up to 1000 CPUs. The company announced that it had enhanced its award-winning support with personalized support web portals, allowing customers to quickly and easily access the support content they need.
The company made two acquisitions in the quarter. It acquired substantially all of the assets of Ponte Solutions to extend the company’s Calibre DFM product line. The company also acquired Flomerics, a market leading provider of thermal simulation and analysis tools.
“We predicted a tough environment this year, and we continue to see it. Despite this, the company performed better than our guidance for the quarter,” said Gregory K. Hinckley, president of Mentor Graphics. “We saw some bright spots in our newer products with Calibre DFM and automotive both performing quite well. Additionally, consulting was up 25% over last year. I view increased bookings in consulting as a leading indicator of an improving business climate. Lastly, our cost-saving initiatives are on track to meet or exceed our goals. Mentor is committed to delivering the most effective cost control program within the EDA industry.”
GUIDANCE
For fiscal 2009, the company continues to expect revenue growth of about 4% to $915 million, with non-GAAP earnings per share in the range of $1.05 - $1.10 and GAAP earnings per share in the range of $0.22 - $0.27. For fiscal third quarter, the company expects revenue of about $220 million with Non-GAAP earnings per share of approximately $.15 - $.20 and GAAP earnings of $0.03 - $0.08.
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, in-process research and development, special charges, equity plan-related compensation expenses and charges, and gains 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. In-process research and development charges represent products in development that had not reached technological feasibility at the time of acquisition. Special charges consist of post-acquisition rebalance costs including severance and benefits, excess facilities, and asset-related charges, and also include strategic reallocations or reductions of personnel resources. 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.
During the six months ended July 31, 2007, we excluded $164 thousand of interest expense attributable to net retirement premiums and write-offs of debt issuance costs. The amounts were expensed in connection with the refinancing or repurchase of certain convertible debt. The amounts were excluded as management does not consider these transactions a part of its core operating performance. There were no debt repurchases during the six months ended July 31, 2008.
During the six months ended July 31, 2008, we excluded $643 thousand of equity in losses of unconsolidated entities. The amounts represent our equity in the losses of a common stock investment accounted for under the equity method. The amounts were excluded as management does not consider these transactions a part of its core operating performance. We had no equity in unconsolidated entities during the six months ended July 31, 2007.
In certain instances our GAAP results of operations may not be profitable when our corresponding non-GAAP results are profitable or vice versa. The number of shares on which our non-GAAP EPS is calculated may therefore differ from the GAAP presentation due to the anti-dilutive effect of stock options in a loss situation.
Non-GAAP gross margin, operating margin and net income (loss) are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. Moreover, they should not be considered as an alternative to any performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. We present non-GAAP gross margin, operating margin and net income (loss) because we consider them to be important supplemental measures of our operating performance and profitability trends, and because we believe they give investors useful information on period-to-period performance as evaluated by management.
Management excludes from our non-GAAP measures certain recurring items to facilitate its review of the comparability of our core operating performance on a period-to-period basis because such items are not related to our ongoing core operating performance as viewed by management. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Management uses this view of our operating performance for purposes of comparison with our business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. More specifically management adjusts for the excluded items for the following reasons:
• Amortization charges for our purchased and other identified intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of our acquisition transactions. We therefore consider our operating results without these charges when evaluating our core performance. Generally, the most significant impact to inter-period comparability of our net income (loss) is in the first twelve months following an acquisition.
• Special charges are primarily severance related and are due to our reallocation or reduction of personnel resources driven by modifications of business strategy or business emphasis and by assimilation of acquired businesses. These costs are originated based on the particular facts and circumstances of business decisions and can vary in size. Special charges also include excess facility and asset-related restructuring charges. These charges are not specifically included in our annual operating plan and related budget due to the rapidly changing technology and competitive environment in our industry. We therefore exclude them when evaluating our managers’ performance internally.
• In-process research and development charges are largely disregarded as acquisition decisions are made, since they often result in charges that vary significantly in size and amount. Management excludes these charges when evaluating the impact of an acquisition transaction and our ongoing performance.
• Management supplementally considers performance without the impact of equity plan-related compensation charges and believes this information is useful to investors to compare our performance to the performance of other companies in our industry who present non-GAAP results adjusted to exclude stock compensation expense. We view equity plan-related compensation as a key element of our employee retention and long-term incentives, not as an expense that should be an element of evaluating core operations in any given period. We therefore exclude these charges for purposes of evaluating our core performance.
• Income tax expense (benefit) is adjusted by the amount of additional tax expense or benefit that we would accrue if we used non-GAAP results instead of GAAP results in the calculation of our tax liability, taking into consideration our long-term tax structure. We use a normalized effective tax rate of 17%, which reflects the weighted average tax rate applicable under the various tax jurisdictions in which we operate. This non-GAAP weighted average tax rate is subject to change over time for various reasons, including changes in the geographic business mix and changes in statutory tax rates. Our GAAP tax rate for the six months ended July 31, 2008, is 36% after consideration of discrete items. Without discrete items of $1,425 thousand, our GAAP tax rate is 38%. Inclusive of discrete items, our full fiscal year 2009 GAAP tax rate is projected to be 46%. The GAAP tax rate considers certain mandatory and other non-scalable tax costs which may adversely or beneficially affect our tax rate depending upon our level of profitability.
Non-GAAP net income (loss) also facilitates comparison with other companies in our industry, which use similar financial measures to supplement their GAAP results. However, non-GAAP net income (loss) has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items in our non-GAAP presentation should not be construed as an inference that these costs are unusual, infrequent or non-recurring. Some of the limitations in relying on non-GAAP net income (loss) are:
• Amortization of purchased intangibles, though not directly affecting our current cash position, represents the loss in value as the technology in our industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry, which is addressed through our research and development program.
• We regularly engage in acquisition and assimilation activities as part of our ongoing business and therefore we will continue to experience special charges and in-process research and development charges on a regular basis. These costs also directly impact our available funds.
• Our stock option and stock purchase plans are important components of our incentive compensation arrangements and will be reflected as expenses in our GAAP results for the foreseeable future under SFAS 123R.
• Our income tax expense (benefit) will be ultimately based on our GAAP taxable income and actual tax rates in effect, which often differ significantly from the 17% rate assumed in our non-GAAP presentation.
• Other companies, including other companies in our industry, may calculate non-GAAP net income (loss) differently than we do, limiting its usefulness as a comparative measure.
Please access http://www.mentor.com/company/news/upload/082008Q2FY09Earnings_pdf for full financials.
Become a member of the CIMdata PLM Community to receive your daily PLM news and much more.
Tell us what you think of the CIMdata Newsletter. Send your feedback.
CIMdata is committed to your privacy. Your personal information will never be sold or shared outside of CIMdata without your express permission.