CIMdata PLM Industry Summary Online Archive
20 October 2005
Financial News
Mentor Graphics Announces Third Quarter Results; Reaffirms 2005 and 2006 Guidance
Mentor Graphics Corporation announced record revenue for a third quarter of $164.8 million. Earnings were break-even on a GAAP basis, and $0.04 on a non-GAAP basis. Bookings increased to the highest level ever for a third quarter, and were up about 15% on both a year-on-year and a sequential basis.
"The expected Calibre rebound resulted in a strong booking quarter for Mentor. Bookings for our Design-to-Silicon family of tools were up about 50% sequentially and nearly double the third quarter of 2004," said Walden C. Rhines, CEO and chairman of Mentor Graphics. "Calibre usage continues to expand. For the third quarter, average dollar value of Calibre family bookings was up 60% versus the third quarter of 2004."
During the quarter, the company introduced enhancements to its wire harness product line, as well as launching its new full automotive design flow. The automotive products, including the Volcano product line, acquired in the second quarter of 2005, performed well in the quarter. Volcano won its first order from a major Chinese auto manufacturer. In addition, more than 40 customers purchased Mentor's advanced verification solution, Questa, which was launched in the second quarter of 2005.
"We saw positive signs of growth in demand from customers in the quarter. Four of our top ten transactions were renewals, and these deals grew in both absolute dollars and units," said Gregory K. Hinckley, president of Mentor Graphics. "Three years ago when these deals were signed, the market looked bleak and customer demand was down. As these deals are coming up for renewal, we believe our customers' businesses are in much better shape and demand is up. However, while the third quarter booking trend is positive compared to the prior year, total year-to-date bookings still lag the first nine months of 2004 due to first half weakness."
Revenue by region was 35% Americas, 35% Europe, 15% Japan and 15% Pacific Rim. By product line, revenue was 30% Design-to-Silicon, 30% scalable verification, 25% integrated system design and 15% new and emerging products.
Term bookings were 55% of total, perpetual was 35%, and subscription was 10%. Top ten accounts were 45% of total bookings, unchanged from the third quarter of 2004.
GAAP Results
On a GAAP basis, net income was $0.2 million for the third quarter of 2005, or $0.00 per share, compared to a net loss of $5.7 million, or ($0.08) per share for the same period in 2004.
Net loss on a GAAP basis for the nine months ended September 30, 2005 was $11.1 million, or ($0.14) per share, compared to a net loss of $36.4 million, or ($0.51) per share for the same period in 2004.
Non-GAAP Results
On a non-GAAP basis, net income was $3.4 million for the third quarter of 2005, or $0.04 per share, compared to net income of $3.0 million, or $0.04 per share for the same period in 2004.
Non-GAAP net loss for the nine months ended September 30, 2005 was $4.0 million, or ($0.05) per share as compared to net income of $18.0 million, or $0.24 per share for the same period in 2004.
2005 and 2006 Guidance
Mentor reaffirms its previous full year 2005 and 2006 guidance.
For 2005, Mentor expects revenue of approximately $700 million, GAAP earnings per share of $0.08 and non-GAAP earnings per share of approximately $0.40, all within previously guided ranges.
For the fourth quarter, Mentor expects revenue of approximately $216 million, GAAP earnings per share of $0.22 and non-GAAP earnings per share of $0.42.
For 2006, Mentor continues to expect revenue of approximately $755 million, GAAP earnings per share of $0.30 and non-GAAP earnings per share of approximately $0.50, representing, respectively, 8%, 275% and 25% growth from 2005. Mentor is not providing guidance per quarter for 2006 at this time.
For the fourth quarter non-GAAP earnings per share estimate, the dilutive impact from Mentor's convertible debt of approximately ($0.02) has been included. For all other earnings per share guidance, the convertible debt is anti-dilutive, and therefore was excluded from the calculations.
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 net income (loss), which we refer to as non-GAAP net income (loss). This measure is generally based on the revenues of our product, maintenance and services business operations and the costs of those operations, 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. Non-GAAP net income (loss) consists of net income (loss) excluding amortization of intangible assets, merger and acquisition charges, special charges and charges and gains which management does not consider reflective of our core operating business. Intangible assets consist primarily of purchased technology, backlog, trade names, customer relationships, employment agreements and stock options issued in connection with acquisitions. Merger and acquisition charges represent in-process research and development charges related to products in development that had not reached technological feasibility at the time of acquisition. Special charges consist of post-acquisition restructuring costs including severance and benefits, excess facilities and asset-related charges, and also include strategic reallocations or reductions of personnel resources. In addition, 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 the company would accrue using a normalized effective tax rate applied to the non-GAAP results. In addition, during the nine months ended September 30, 2005, a $4.75 million purchase of technology that had not yet reached technological feasibility, a $957 thousand gain on the sale of a building and a $469 thousand gain on investment earnout income were excluded as management does not consider these transactions a part of its core operating performance. During the nine months ended September 30, 2004, investment earnout and holdback income of $745 thousand were also excluded.
Non-GAAP net income (loss) is a supplemental measure of our performance that is not required by, or presented in accordance with, GAAP. Moreover, it should not be considered as an alternative to net income, operating income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities or as a measure of our liquidity. We present non-GAAP net income (loss) because we consider it an important supplemental measure of our performance.
Management excludes from its non-GAAP net income (loss) certain recurring items to facilitate its review of the comparability of the company's core operating performance on a period to period basis because such items are not related to the company's ongoing core operating performance as viewed by management. Management uses this view of its operating performance for purposes of comparison with its 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 intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of the company's acquisition transactions. We therefore consider our operating results without these charges when evaluating our core performance. Generally, the most significant impact to the company's net income (loss) is in the first twelve months following the acquisition.
• Special charges are primarily severance related and are due to the company's 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 the company's 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.
• Merger and acquisition charges are in-process R&D charges, which are largely disregarded as acquisition decisions are made and which 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.
• 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 the company's 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 the company operates assuming current year forecasted geographic business mix. This rate is subject to change as the geographic business mix and statutory tax rates and their effect on the weighted average tax rate differ over time. Our GAAP tax rate for the nine months ended September 30, 2005 is 52% and assumes a pre-tax profit for the year overall resulting in a tax benefit in our 2005 nine month GAAP results. This tax rate is substantially impacted by minor changes in forecasted earnings as pre-tax income for the year is currently projected to be near break-even, which exacerbates the effect of certain mandatory payments in some jurisdictions on our overall expected tax rate. Our adjustment for tax related items in 2005 applies this normalized rate to our non-GAAP pre-tax loss, and thereby reduces the unusually large benefit for taxes reflected in our GAAP results. Our adjustment for tax-related items in 2004 primarily reflects the elimination of the additional tax charge associated with a one-time intercompany tax dividend of $120 million, in addition to the tax impact of other previously described non-GAAP adjustments.
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 the company expects 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 intangibles, though not directly affecting our current cash position, represent 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.
• The company regularly engages in acquisition and assimilation activities as part of its 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 available funds of the company.
• The company's income tax expense (benefit) will be ultimately based on its GAAP taxable income and actual tax rates in effect, which may 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.
Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with our net income (loss), which is our most directly comparable GAAP financial results. We compensate for the limitations of our use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only supplementally. For more information, see the consolidated statements of operations contained in this press release.
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