WILSONVILLE, Ore. — (BUSINESS WIRE) — August 20, 2015 — Mentor Graphics Corporation (NASDAQ: MENT) today announced financial results for the company’s fiscal second quarter ended July 31, 2015. The company reported revenues of $281.1 million, non-GAAP earnings per share of $0.36, and GAAP earnings per share of $0.26.
“Revenue was an all-time second quarter record and Mentor exceeded non-GAAP earnings per share guidance for the 26th consecutive quarter,” said Walden C. Rhines, chairman and CEO. “Customer need for increased amounts of software drove early renewal activity and the upside in the quarter. Demand was strongest in both Design to Silicon and Scalable Verification. During the quarter we added five new emulation customers, including both a Top Ten chip company and a start-up.”
During the quarter, the company announced Veloce® Power Application software, which captures real power consumption during emulation and passes the information efficiently to power analysis tools. Mentor also announced its next-generation MicReD® Industrial Power Tester, which now provides 1500 amp electronic component power cycling and thermal testing for up to 12 devices simultaneously, to benefit automotive, railway, power generation and renewable energy industries. The quarter also had a major new release of the Mentor® Enterprise Verification Platform, with new levels of Questa® performance and productivity in areas including simulation, debug, and low-power verification.
In the second quarter the company also announced the newest version of the FloTHERM® XT product, with EDA connectivity for advanced thermal management of electronic systems, printed circuit boards and packages of any geometric complexity. In addition Mentor introduced the latest release of the Flowmaster® computational fluid dynamics software targeting network systems in automotive, aerospace and power generation. The company also announced a new release of the Mentor® Embedded Nucleus® Real-Time Operating System targeting connected embedded devices for high-performance Internet of Things applications.
“Second quarter results highlight both our continued rigorous attention to cost control and the operating leverage in our business,” said Gregory K. Hinckley, president of Mentor Graphics. “On an 8% increase in revenue, GAAP and non-GAAP operating expenses grew less than 1.5% year on year. Second quarter revenue exceeded guidance by 12% while non-GAAP EPS was up over 150% versus guidance. Cash flow, another important metric, was strong with cash flow from operations of $49 million in the second quarter and $95 million in the first half of fiscal 2016.”
Outlook
For the third quarter of fiscal 2016, the company expects revenue of about $290 million, non-GAAP earnings per share of about $0.27 and GAAP earnings per share of approximately $0.17. For the full year fiscal 2016, the company is raising revenue guidance to about $1.285 billion; is increasing non-GAAP earnings per share guidance from $1.88 to about $1.90; and currently expects GAAP earnings per share of approximately $1.25.
Dividend
The company announced a quarterly dividend of $0.055 per share on outstanding common stock. The dividend is payable on September 30, 2015 to shareholders of record at the close of business on September 10, 2015.
Fiscal Year Definition
Mentor Graphics Corporation’s fiscal year runs from February 1 to January 31. The fiscal year is dated by the calendar year in which the fiscal year ends. As a result, the first three fiscal quarters of any fiscal year will be dated with the next calendar year, rather than the current calendar year.
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 gross profit, operating income, operating margin, net income, and earnings per share which we refer to as non-GAAP gross profit, operating income, operating margin, net income, and earnings per share, respectively. These non-GAAP measures are derived from the revenues of our product, maintenance, and services business operations and the costs directly related to the generation of those revenues, such as cost of revenue, research and development, marketing and sales, and general and administrative expenses, that management considers in evaluating our ongoing core operating performance. These non-GAAP measures exclude amortization of intangible assets, special charges, equity plan-related compensation expenses, interest expense associated with the amortization of original issuance debt discount on convertible debt, the equity in earnings or losses of unconsolidated entities (except Frontline PCB Solutions Limited Partnership (Frontline)), and the impact on basic and diluted earnings per share of changes in the calculated redemption value of noncontrolling interests, which management does not consider reflective of our core operating business.
Management excludes from our non-GAAP measures certain recurring items to facilitate its review of the comparability of our core operating performance on a period-to-period basis because such items are not related to our ongoing core operating performance as viewed by management. Management considers our core operating performance to be that which can be affected by our managers in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Management uses this view of our operating performance for purposes of comparison with our 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:
- Identified intangible assets consist primarily of purchased technology, backlog, trade names, and customer relationships. Amortization charges for our intangible assets can vary in frequency and amount due to the timing and magnitude of acquisition transactions. We consider our operating results without these charges when evaluating our core performance due to the variability. Generally, the most significant impact to inter-period comparability of our net income is in the first twelve months following an acquisition.
- Special charges may include expenses related to employee severance, certain litigation costs, acquisitions, excess facility costs, and other asset related charges. Special charges are incurred based on particular facts and circumstances and can vary in size and frequency. Restructuring costs included in special charges include costs incurred for employee terminations, including severance and benefits, driven by modification of business strategy or business emphasis. Litigation costs classified as special charges consist of professional service fees related to patent litigation involving us, EVE S.A., and Synopsys, Inc. These costs are included in special charges because of their unusual nature due to the significance in variability of timing and amount. Special charges are not ordinarily included in our annual operating plan and related budget due to unpredictability, driven in part by rapidly changing technology and the competitive environment in our industry. We therefore exclude them when evaluating our managers’ performance internally.
- Equity plan-related compensation expenses represent the fair value of all share-based payments to employees, including grants of employee stock options and restricted stock units, and purchases made as a result of our employee stock purchase plans. We do not consider equity plan-related compensation expense in evaluating our managers’ performance internally or our core operations in any given period.
- Interest expense attributable to amortization of the original issuance debt discount on convertible debt is excluded. Management does not consider this charge as a part of our core operating performance. We do not consider the amortization of the original issuance debt discount on convertible debt to be a direct cost of operations.
- Equity in earnings or losses of unconsolidated entities represents our equity in the net income (loss) of common stock investments accounted for under the equity method. The carrying amounts of our investments are adjusted for our share of earnings or losses of the investee. We report our equity in the earnings or losses of investments in other income (expense), net (with the exception of our investment in Frontline as discussed below). The amounts are excluded from our non-GAAP results as we do not control the results of operations for the investments and we do not participate in regular and periodic operating activities; therefore, management does not consider these investments as a part of our core operating performance.
- The Company maintains a 50% interest in Frontline, a joint venture. We report our equity in the earnings or losses of Frontline within operating income. Although we do not exert control, we actively participate in regular and periodic activities such as budgeting, business planning, marketing and direction of research and development projects. Accordingly, we do not exclude our share of Frontline’s earnings or losses from our non-GAAP results as management considers the joint venture to be core to our operating performance.
- Income tax expense 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, utilizing a normalized effective tax rate. The normalized non-GAAP effective tax rate of 19% considers our global tax posture, including the weighted average tax rates applicable in the various jurisdictions in which we operate; eliminates the effects of non-recurring and period specific items which are often attributable to acquisition decisions and can vary in size and frequency; and considers our U.S. tax loss carryforwards and tax credits that were not previously recorded as a benefit in our financial statements. Our non-GAAP effective tax rate is subject to change over time for various reasons, including changes in geographic business mix, statutory tax rates, foreign re-investment expectations, and availability of U.S. tax loss carryforwards and tax credits that were not previously recorded as a benefit. Our normalized effective non-GAAP tax rate increased from 17% for the year ended January 31, 2015 to 19% for the year ended January 31, 2016. The increase in the normalized non-GAAP effective tax rate reflects the reduced availability of U.S. tax loss carryforwards that were not previously recorded as a benefit in our financial statements. Our GAAP tax rate for the six months ended July 31, 2015 is 11% after consideration of period specific items. Without period specific items of $(1.6) million, our GAAP tax rate is 18%. Our full fiscal year 2016 GAAP tax rate, inclusive of period specific items recognized through July 31, 2015, is projected to be 16%.
- Our agreement with the owners of noncontrolling interests in one of our subsidiaries gives them a right to require us to purchase their interests for a price based on a formula defined in the agreement. Under GAAP, increases (or decreases to the extent they offset previous increases) in the calculated redemption value of the noncontrolling interests are recorded directly to retained earnings and therefore do not affect net income. However, as required by GAAP, these amounts are applied to increase or decrease the numerator in the calculation of basic and diluted earnings per share. Management does not consider fluctuations in the calculated redemption value of noncontrolling interests to be relevant to our core operating performance.
