Synopsys Posts Financial Results for Third Quarter of Fiscal 2005

MOUNTAIN VIEW, Calif. August 17, 2005 – Synopsys, Inc. (Nasdaq: SNPS), a world leader in semiconductor design software, today reported results for its third quarter ended July 31, 2005.

For the third quarter of fiscal 2005, Synopsys reported revenue of $251.5 million, a 3% increase compared to the second quarter of fiscal 2005, and an 11% decrease from $281.7 million in the third quarter of fiscal 2004. For the nine-month period ended July 31, 2005, revenue was $737.1 million, a decrease of 14% from revenue of $861.5 million for the same period in fiscal 2004. The year-over-year comparisons reflect the company’s shift to an almost-fully ratable license model initiated in the fourth quarter of fiscal 2004, under which most of the company’s license revenue is recognized over time rather than upfront in the quarter shipped. As a result, in the most recent quarter more than 90% of revenue came from backlog.

“I am very pleased to report that in our third quarter, we continued in the strong direction set in the first half of the year, making excellent progress on our objectives to increase revenue, improve operating margin and grow earnings under a more predictable and stable business model,” said Aart de Geus, Chairman and Chief Executive Officer of Synopsys.

GAAP Results

On a generally accepted accounting principles (GAAP) basis, for the third quarter of fiscal 2005 net income was $17.3 million, or $0.12 per share, compared to a loss of ($0.03) per share in the second quarter of fiscal 2005. In the third quarter of last year, net income was $41.8 million, or $0.26 per share. Third quarter fiscal 2005 results include a $33 million litigation settlement received in connection with the acquisition of Nassda Corporation, which closed in May 2005.

GAAP net loss for the nine-month period ended July 31, 2005 was ($2.0) million, or ($0.01) per share, compared to net income of $102.7 million, or $0.63 per share, for the same period in 2004.

Non-GAAP Results

On a non-GAAP basis, net income for the third quarter of fiscal 2005 was $15.2 million, or $0.10 per share, compared to $0.09 per share in the second quarter of 2005. In the third quarter of last year, non-GAAP net income was $53.2 million, or $0.33 per share. Non-GAAP net income for the nine-month period ended July 31, 2005 was $42.6 million, or $0.29 per share, compared to $164.6 million, or $1.01 per share, for the same period in 2004. Non-GAAP net income consists of GAAP net income excluding, to the extent incurred in a particular quarter or period, amortization of intangible assets and deferred stock compensation, in-process research and development charges, integration and other acquisition-related expenses, facilities and workforce realignment charges, and other significant items which, in the opinion of management are extraordinary.

The decreases in GAAP and non-GAAP net income for these periods were due primarily to lower revenues as a result of our shift to a more than 90% ratable license model.

Financial Targets

Synopsys also announced its operating model targets for the fourth quarter and full fiscal year 2005. These targets constitute forward-looking information and are based on current expectations. For a discussion of factors that could cause actual results to differ materially from these targets, see “Forward-Looking Statements” below.

Fourth Quarter of Fiscal 2005 Targets:

Revenue: $248 million - $258 million
GAAP expenses: $243 million - $254 million
Non-GAAP expenses: $227 million - $237 million
Other income and expense: $0 million – $4 million
Fully diluted outstanding shares: 142 million - 150 million
Tax rate applied in non-GAAP net income calculations: 29%
GAAP earnings: ($0.02) - $0.01 per share
Non-GAAP earnings: $0.07 - $0.11 per share
Revenue from backlog: more than 90% of revenue

Full-Year Fiscal Year 2005 Targets

Revenue: $985 million - $995 million
Fully diluted outstanding shares: 142 million - 150 million
Tax rate applied in non-GAAP net income calculations: 31%
GAAP earnings: ($0.03) - $0.00 per share
Non-GAAP earnings: $0.36 - $0.40 per share
We continue to expect GAAP cash flow from operations to be approximately $200 million

These targets supersede all fiscal 2005 financial targets previously published by Synopsys.

GAAP Reconciliation

Synopsys’ management evaluates and makes operating decisions about its business operations primarily based on the bookings, revenue and direct, ongoing and recurring costs of those operations. Management does not believe amortization of intangible assets and deferred stock compensation, in-process research and development charges, integration and other acquisition-related expenses, facilities and workforce realignment charges and other significant extraordinary items are ongoing and recurring operating costs of its core software and service business operations. Therefore, management adjusts the following GAAP financial measures included in this earnings release to exclude such costs, to the extent incurred in a particular quarter: total cost of revenue, gross margin, total operating expenses, operating (loss) income, (loss) income before (benefit from) provision for income taxes, (benefit from) provision for income taxes, net (loss) income and net (loss) income per share.

For each such measure, excluding these costs provides management with more consistent, comparable information about the Company’s core profitability. For example, since the Company does not acquire businesses on a predictable cycle, management would have difficulty evaluating the Company’s profitability as measured by gross margin, operating margin, income before taxes and net income on a period-to-period basis unless it excluded acquisition-related charges. Similarly, the Company does not undertake significant restructuring or realignments on a predictable cycle, and thus excludes associated charges in order to enable better and more consistent evaluations of the Company’s operating expenses before and after such actions are taken. Management also uses these measures to help it make budgeting decisions, for example, as between product development expenses (which affect cost of revenue and gross margin) and research and development, sales and marketing and general and administrative expenses (which affect operating expenses and operating margin). Finally, the availability of such information helps management track performance to both internal and externally communicated financial targets and to its competitors’ operating results.

Management recognizes that the use of these non-GAAP measures has certain limitations, including the fact that management must exercise judgment in determining whether certain types of charges, such as those relating to workforce reductions executed in the ordinary course, should be excluded from non-GAAP results. However, management believes that, although it is important for investors to understand GAAP measures, providing investors with these non-GAAP measures gives them additional important information to enable them to assess, in a way management assesses, Synopsys’ current and future continuing operations.

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