CIMdata PLM Industry Summary Online Archive
28 February 2008
Financial News
Mentor Graphics Reports Fiscal Fourth Quarter 2008 Results
Mentor Graphics Corporation announced fiscal 2008 fourth quarter revenue of $284.8 million, and annual revenue of $879.7 million. On a GAAP basis, fiscal 2008 fourth quarter earnings per share were $.39 and $.32 for the full year. On a non-GAAP basis, earnings per share for fiscal 2008 fourth quarter were $.72, and $1.00 for the full year.
“Mentor’s focus on building number one positions in the market has enabled it to continue to thrive and helped drive our record fourth quarter revenue and earnings,” said Walden C. Rhines, chairman and CEO of Mentor Graphics. “Our Olympus place and route solution received orders from 8 of the top 20 semiconductor manufacturers, while bookings from automotive customers climbed 25% to become about 10% of total bookings for the company.”
During the quarter, Mentor Graphics and Cadence Design Systems delivered the Open Verification Methodology (OVM) to accelerate adoption of SystemVerilog methodologies. Mentor’s Veloce® emulator was picked as one of the Hot 100 products of 2007 by EDN magazine. Mentor’s Catapult C® Synthesis product was selected as part of Fujitsu’s Electronic System Level (ESL) reference flow. The company launched a multi-corner multi-mode signal integrity analysis tool as part of its Olympus™-SoC product line. The Japanese semiconductor consortium STARC validated an ESL reference flow featuring the Catapult C Synthesis product. The company also hosted its 6th annual Integrated Electrical Solutions Forum in Detroit with representatives from all of North America’s automotive OEMs and tier 1 suppliers.
“The company executed well in fiscal 2008, and we are positioned to continue to outperform the market in fiscal 2009,” said Gregory K. Hinckley, president of Mentor Graphics. “Additionally, we have tightened our focus on cost controls, and have taken a number of actions, including shuttering our IP division, to provide a more competitive cost basis going forward.”
Interest income resulting from the discount of long term accounts receivables has been historically reported as a component of Other income, net in the Consolidated Statement of Operations. Since the significance of the sale of term licenses that result in long term receivables has been increasing we have reclassified the interest income from Other income, net to Finance Revenue included as a component of Total Revenues in the Consolidated Statement of Operations. Along with the change in the classification of interest income, we have also reclassified the net gain or loss on the sale of long term receivables from Other income to General and Administration, and Other expense. The reclassifications have been made to the presentation of the prior years’ Consolidated Statements of Operations to conform to current year’s presentation. For the fourth quarter of fiscal 2008, the net adjustment to revenue was $4.3 million and for the year, it was $16.7 million. Net Income was unaffected.
Guidance
For fiscal year 2009, the company expects revenue growth of about 4% to about $915 million, and Non-GAAP earnings per share growth between 5% and 10% to $1.05 to $1.10. GAAP earnings per share is expected to range between $.65 and $.70.
For the first quarter, revenue is expected to be about $170 million with GAAP earnings per share a loss of about $.15 and Non-GAAP earnings per share a loss of about $.10.
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 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.
During the twelve months ended January 31, 2008 and December 31, 2006, $1.1 million and $7.2 million, respectively of interest expense attributable to net retirement premiums and write-offs of debt issuance costs related to the refinancing or repurchase of certain convertible debt was excluded as management does not consider these transactions a part of its core operating performance.
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 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 year ended January 31, 2008 is 49%. 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 merger and acquisition 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.
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