Mentor Graphics (MENT)’s 2QFY11 results and outlook were of course already, and appropriately, reflected in the higher share price this past Friday, but the following details may still be of some interest. The 2QFY11 results were modestly below my model, but the guidance for the balance of the fiscal year ending January 2011 was better than I would have assumed (the outlook includes of course the recent Valor acquisition, which, due to certain accounting treatment for revenue recognition of a joint venture in which Valor had an interest, may not be as incremental on a fully consolidated basis as once thought. Nonetheless, in terms of product positioning the acquisition made sense).

Revenues and non-GAAP earnings

Results of $187.9 million and $0.01 a share compared with $191.7 million and $0.03 estimate. System & Software revenues of $100.5 million, down 3%, compared with an estimate of $108.9 million, while services & support revenues of $87.4 million outperformed the $82.8 million estimate (we can infer from the large year/year decline in cost of product revenues that hardware-based verification, which has a gross margin closer to 60% vs. the 95% or more for software, declined year/year, against a reasonably difficult comparison)..The non-GAAP operating margin of about 3% was more or less the same as the year-ago margin and an improvement from the preceding quarter’s margin, which has not always been the case sequentially from the first to second quarter MENT’s margin leverage is such, particularly given its unusually highly profitable fourth quarter, that the margin for the year should be in the low-to-mid-teens; longer-term the company should, ideally, go beyond those levels.

Bookings
As always, bookings are inferred not disclosed, though the company gives far more precise data than its peers do in terms of license type and product segment. As such, it seems that 2QFY11 product bookings were about $108 million, up 2% year/year (vs. my estimate of $111 million), for a book/bill of about 1.07x; over the past decade, the 2Q book/bill has been below 1.0x, so this year’s MENT 2Q did better than the trend.
Of course, some of the bookings increase included a small contribution from the Valor acquisition, but last year’s 2Q bookings were up by about a mid-teens rate, thus making the year/year comparison somewhat challenging. The top 10 accounts represented 50% of bookings (more or less the norm), with one customer accounting for more than 10% of bookings (also more or less the norm). For the trailing twelve months, product bookings appear to have been about $460-$465 million (roughly the same as Cadence’s over the past year), down 4%, for a book/bill of about 1x. It appears that MENT’s book/bill for the fiscal year ending January 2011 should be about parity (≈1.0x), thus repeating the performance of the preceding two fiscal years, allowing it therefore to more or less maintain backlog. It is also important to note that maintenance reinstatements have improved, thus rebuilding the active maintenance paying base of seats, just as we have seen among the manufacturing CAD software counterparts to the EDA companies.
Segment results.
In terms of product bookings by segment, I calculate that for the trailing twelve months: Integrated Systems Design (printed circuit boards, Valor) were about $94 million, down 4%; Design to Silicon (Calibre) was about $168 million, down 10% (against the very strong growth in 1QFY10 – up 35% - and 2QFY10 – up 45%); Scalable Verification (including hardware-based verification), about $96 million, down 12%; and, New & Emerging (e.g., transportation) was about $68 million, up 37%. The last segment in particular has been especially important in lessening the dependency on the pure IC part of the business; MENT is arguably the best positioned of the major vendors for the system-level design needs of the auto/aero customers.

Geographical Areas results.
On a trailing twelve month basis, North America was $320 million, down 5%; Europe was $199 million, down 19%; Japan was about $121 million, up 25%; and AsiaPac was about $154 million, up 24%. Based on the EDA Consortium data, on average. MENT’s best regional share is in Europe (at about 20%-25% of regional EDA spending), while it has more or less mid-teens share in the other major regions.

Guidance
3QFY11E (October 2010) company forecast of $220 million and $0.15 compares with my prior model of about $205 million and $0.10 a share. In 3QFY11, the year/year bookings comparisons for Integrated System Design and Scalable Verification will be fairly easy, while in 4QFY11 on the other hand, the comparisons for Design to Silicon and Scalable Verification will be relatively easy.
Questions & comments are welcome.
Regards,
Jay Vleeschhouwer
Mobile: 917-459-0501