Synopsys Posts Financial Results for Third Quarter of Fiscal 2004

MOUNTAIN VIEW, Calif. August 18, 2004 – Synopsys, Inc. (Nasdaq: SNPS), the world leader in semiconductor design software, today reported results for its third quarter ended July 31, 2004.

For the third quarter of fiscal 2004, Synopsys reported revenue of $281.7 million, a 6% decrease compared to revenue of $300.4 million for the third quarter of fiscal 2003. For the nine-month period ended July 31, 2004, revenue was $861.5 million compared to revenue of $860.5 million for the same period in 2003.

GAAP Results

On a generally accepted accounting principles (GAAP) basis, for the third quarter of fiscal 2004, net income was $41.8 million, or $0.26 per share, compared to net income of $48.5 million, or $0.30 per share, for the third quarter of fiscal 2003. GAAP net income for the nine-month period ended July 31, 2004 was $102.7 million, or $0.63 per share, compared to $105.1 million, or $0.67 per share, for the same period in fiscal 2003.

Non-GAAP Results

On a non-GAAP basis, net income was $53.2 million, or $0.33 per share, for the third quarter of fiscal 2004 compared to non-GAAP net income of $66.9 million, or $0.41 per share, for the third quarter of fiscal 2003. Non-GAAP net income for the nine-month period ended July 31, 2004 was $164.6 million, or $1.01 per share, compared to $180.5 million, or $1.15 per share, for the same period in fiscal 2003.

A description of the items excluded from non-GAAP results and a reconciliation of GAAP and non-GAAP results are contained in the section entitled “GAAP Reconciliation” below. Per share data for the periods presented reflects Synopsys’ two-for-one stock split completed on September 23, 2003.

Third Quarter Business Environment

“Clearly, our third quarter was tough, mainly due to lower-than-expected bookings for upfront licenses, with several contracts being pushed out very late in the quarter,” said Aart de Geus, chairman and chief executive officer. “In July, customers became markedly more cautious about extending existing commitments and spending cash, particularly impacting our upfront bookings, which under our model require front-loaded payment terms. Recent announcements in the industry of lower earnings and reduced forecasts suggest continued caution on customer spending. This caution, and the fact that we anticipate 2005 will be a relatively low renewal year for Synopsys, will reduce our bookings expectations for fiscal 2005.

“Against this backdrop, with new technology rolling out this year and accelerating in 2005, and with the advantage of a strong existing backlog, we have decided to move Synopsys immediately towards a maximally subscription-based license model,” continued Dr. de Geus. “We believe this further transition offers the best opportunity to preserve the value of our new technology, aggressively pursue competitive displacements, decrease end-ofquarter uncertainty, and more flexibly offer customers complete, differentiated solutions to match their current needs. Moving away from upfront licenses will in the near-term lower our fourth quarter, fiscal 2004 and fiscal 2005 revenue expectations, but we believe it is the right action to put Synopsys on the strongest long-term footing.”

2004 Financial Targets

Synopsys also announced its operating model targets for the fourth quarter of fiscal 2004 and revised targets for the full fiscal year. These targets reflect Synopsys’ expectations of a shift in the mix of license revenues during the fourth quarter.

Fourth Quarter of Fiscal 2004 Targets:

Revenue: $220 million - $240 million
Non-GAAP expenses: $222 million - $232 million
Other income and expense: ($1.5) million – $1.5 million
Fully diluted outstanding shares: 150 million - 158 million
Tax rate applied in net income calculations: 31%
Non-GAAP earnings: $0.00 - $0.04 per share
Revenue from backlog: over 90% of revenue target

Revised Fiscal 2004 Targets:

Revenue: $1.08 billion - $1.1 billion
Non-GAAP expenses: $846 million - $856 million
Fully diluted outstanding shares: 158 million - 162 million
Non-GAAP earnings: $1.01 - $1.05 per share

Synopsys’ orders for the year are expected to be below its previous target of $1.4 billion. Synopsys is not providing a new total orders target for fiscal 2004 or an updated target for upfront orders as a percentage of product orders for the year. Both of these metrics will be materially affected, more so than in other quarters, by the timing of completion of certain agreements currently being negotiated. Synopsys intends to report on its orders results for the year when it reports its fourth quarter results.

Preliminary Fiscal 2005 Financial Targets

Synopsys’ preliminary operating model targets for fiscal 2005 are as follows:

Orders: approximately $900 million
Revenue: approximately $940 million
Non-GAAP earnings: $0.28 - $0.38 per share

The fourth quarter, full-year fiscal 2004 and preliminary fiscal 2005 financial targets constitute forward-looking information based on current expectations. For a discussion of factors that could cause actual results to differ materially from these targets, see the section entitled “Forward-Looking Statements” below.

GAAP Reconciliation

Non-GAAP net income consists of GAAP net income excluding, to the extent incurred in a particular quarter, amortization of intangible assets and deferred stock compensation, inprocess research and development charges, integration and other acquisition-related expenses and facilities and workforce realignment charges. Intangible assets consist primarily of purchased technology, contract rights intangible, customer-installed base/relationships, trademarks and tradenames, covenants not to compete and customer backlog. Non-GAAP net income is reduced by the amount of additional taxes that Synopsys would accrue if it used non-GAAP results instead of GAAP results to calculate Synopsys’ tax liability.

Synopsys’ management evaluates and makes operating decisions primarily based on the bookings and revenues of its core software and services business operations and the direct, ongoing and recurring costs of those operations such as cost of revenues and research and development, sales and marketing and general and administrative expenses. Management does not believe amortization of intangible assets and deferred stock compensation, inprocess research and development charges, integration and other acquisition-related expenses and facilities and workforce realignment charges are ordinary, ongoing and recurring operating charges for Synopsys’ core software and services business operations. Therefore, management calculates the non-GAAP financial measures used in this earnings release excluding these charges and uses these non-GAAP financial measures to enable it to analyze further and more consistently the period-to-period financial performance of its core business operations. 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.

Financial Tables

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