Synopsys takes stock hit with new licensing model

Synopsys to take profits hit with new licensing model
By Michael Santarini, EE Times
August 4, 2000 (1:24 p.m. EST)
URL: http://www.eetimes.com/story/OEG20000801S0047

SAN MATEO, Calif. — Synopsys Inc. earnings will take a hit in the coming quarters as the EDA giant shifts to a new licensing model that it expects will smooth out a much-criticized sales-accounting practice, its chairman and chief executive said Tuesday (Aug. 1).

In an interview Tuesday with EE Times, Aart de Geus said the company likely will lose 45 cents a share in the fourth fiscal quarter and earn 90 cents a share in 2001. EDA analysts had expected the company to post earnings of roughly 77 cents per share for the fourth quarter and earnings per share of roughly $3.39 for 2001.

In the hours following the Monday business-model announcement, Synopsys' stock dropped from $32 9/16 to roughly $26 per share.

Starting in the fourth fiscal quarter, the company will drop its use of Time Value licenses and will move to a mix of 75 percent Technology Subscription licenses and 25 percent perpetual licenses, the long-held method in whic h customers buy 99-year or 25-year licenses but buy additional software based on need and available budgets.

Time Value licenses (also known as FAM or Flexible Access Model) have been criticized because customers pay up front for a one- to three-year license, and companies realize all the revenues in the quarter in which the sales occur, rather than over the life of the contract. This makes the immediate quarter's financials look good but does not contribute to the subsequent quarters. Cadence Design Systems Inc. also has suffered under the FAM model.

Synopsys officials said that a nasty side effect of the Time Value licenses is that customers wait until the very end of an EDA company's fiscal quarter to get tools cheap, knowing that the company needs to make sales to meet quarterly financial expectations.

De Geus said the use of a Technology Subscription license will allow Synopsys to gain the "full value" of its tools and do away with stressful last-minute tool negotiations to meet fiscal pred ictions.

"Moving to a more ratable model will allow us to offer payment terms that are much better suited to our customers' needs," de Geus said. Customers can spread out payments on tools rather than having to come up with all the money up front, he added.

Synopsys also announced that its board of directors has authorized a $500 million stock buyback and has approved a $7.5 million employee stock purchase plan to retain and recruit employees.

The stock repurchase program, which goes into effect Thursday (Aug. 3), replaces the $200 million repurchase program authorized by the board in February 2000, under which $70 million remained available as of the end of the third quarter.

"We are making this transition at a time of strength," de Geus said. "I think this move will turn out to be a positive, not just for Synopsys but for the entire EDA and electronics industry."

In related news, Synopsys said it will meet Wall Street expectations by posting third-quarter revenues of $228 million ($.62 per share).