Interview with a CFO of an EDA Firm

Who are the primary negotiators in a possible acquisition?

It is normally either myself, the CEO and the President and then I have a person on my staff responsible for mergers and acquisitions, who came out of the investment banking world. At different stages, depending upon which deal, all of us will become involved at some level.

How does the company decide where to spend the money?

We start with our commitment to the shareholders to deliver earnings per share. We build a financial model around that. The model determines the kind of resources we can distribute through the company. Then we match that up against the bottoms up requests from the organizations. Essentially the senior management team which includes the SVP of S&M and business unit GMs, SVP Engineering- we sit down and essentially negotiate how we are going to distribute these resources. We try to make it a discipline approach where if someone is asking for incremental resources, we want incremental commitments out of them. Whether that be with the engineering organization for new products or pushed up delivery schedules or the sales team with increasing quotas and targets or with my organization asking for more resources to shorten the close cycle or things like that. Make sure that everybody appreciates the fact that these resources are precious and that there is some discipline behind how we go about distributing that. In most cases for us resources means headcount.

We really focus on how we are going to bring on headcount into the company. Clearly in our growth stage the key focus centered around the engineering and field organizations, scaling those groups up to match hopefully growing demand. It's really a negotiation of senior management team that at the end of the day we all have to buy into.

How does the fact that your business is international impact the CFO?

It makes the job far more complex on all levels. Starting right from the sales transaction and the complexities of being international brings local currencies. What are the local country regulations? Pretty much everything in the company. Because we are so internationally oriented, over 50% comes from offshore, it is a far more complex enterprise than it would be if it were a company of the same size that was principally a US oriented company. All of my organization whether that be my legal staff, HR, the finance team have world wide responsibilities and have to be able to deal with situations anywhere in the world. We tend to work an almost 24/7 basis at some point in time because somewhere in the world the company is functioning at all hours.

Things like tax planning become very complex. All of our regulatory fillings, export controls even things as simple as employment agreements world wide differ dramatically in Korea and China. Things like that. It means that people in my organization have to have a level of knowledge and a level of recourses that they can pull up that is far greater than if they were in a domestic organization.

How and when do you do currency conversion for reporting purposes?

We do conversions monthly and then report them quarterly. They are under FASB 52 guidelines as to how you do that and depending upon what the transaction is. If it's a balance sheet item it might be held at historical rate, average rate during the period, or be held for month or quarterly end rate. The accounting rules specify exactly what to do with each transaction. Then for all foreign locations you have to decide what the local currency is going to be. In some cases a foreign location is essentially a branch doing transactions principally in US dollars even though in a foreign location. They have a functional currency of US dollars. Other enterprises, groups, branches or subsidiaries may have local currency as their functional currency. You have to make a determination site by site depending upon fact and circumstances on what currency that entity is going to operate in and then once you make that decision, there is a specific set of accounting rules for actually converting and consolidating back into US dollars on a report basis.

Do you do any currency hedging?

In our case we principally use non-derivative currency exposure management techniques where we are trying to match up naturally timing and denominational currencies of spending, revenues and cash flow. We do that to the greatest extent possible. We have had discussions at the board level on whether we should actively look at hedging currency risk through foreign currency markets, the futures markets, the option markets and so forth which I have done at other places at different stages. I think at our scale and at our level of ability to manage right now the board has said we don't want to undertake that but it is something we have to review occasionally. So say we now have this level of overall currency risk that we can naturally hedge parts of it but some part is uncovered unless we do something active. At some point I wouldn't be surprised that the board decides that we now think the risk is great enough and complex enough that we want to take active measure to hedge that. But we have not done that yet.

What is the underlying rationale for stock repurchase that we see happening?

It serves a number of purposes. First, to a certain extent it is making a statement of the company's view of the future performance of the company. More important it allows you to bring stock back into the company for excess cash that you can then utilize for incentive programs through the organization. We here in Silicon Valley particularly a lot of compensation is incentive stock options. By doing stock repurchasing programs, it's a way to fund some of those types of compensation programs and without creating further dilution of the stock on the street. We did our first one of those in the June ending quarter. In September quarter we did a million share repurchase for around $17 million. It's a fairly small one at our stage but we wanted to put the mechanics in place so that if we decide to do more of these downstream we've got all the mechanics worked out to do it. We know how to execute it. It is a very good way if you have a market opportunity that you consider the right valuation to fund this kind of program.

What are the major challenges facing a CFO these days?

There is a kind that I would call business challenges and a kind I would call regulatory challenges. From a business challenge standpoint, particularly in EDA, keeping up with the business, particularly model changes and structural changes that are going on in the industry is very, very important. You see recently that Synopsys has announced changing their model for revenue and contracting and so forth. Cadence has gone through a certain number of shifts back and forth. We've got a model and that is shifting, there are trends going on. We are seeing the length of contracts shortening. It is very important for a CFO to be aware of those shifts and have a hands on approach for knowing what is going on there and what impact those will have on the business. That's a challenge.

In these days the regulatory and government environment is very tricky and very risky and the penalties have gone up dramatically for even unintentional errors and things like that. You really have to build an organization that views compliance as an important item these days because one simply can do it alone. The world is too complex, the competition is too complex. So you have to focus on building a very high quality organization.

How do you go abut generating revenue and profit forecast given these shifts?

It is such an intensely competitive industry. So you really have to keep tabs on what you are doing, what other companies are doing, and how that is going to impact the forecasting ability. What is going on at the macro level versus the micro level. We roll up the sales pipeline detail from the field. We match that against our market level studies and what I call financial and mathematical analysis and look for logical places where they intersect. That's what we consider the highest probability. Is it disconnected? Are we missing something? Has there been a shift in the marketplace? How much of the pipeline is likely to close? What kind of deals are we likely to close? It really requires a lot of sophistication from pure financial viewpoint but the real thing is having my team that deals with the field understanding the psychology and being able to communicate with the field organization and be able to read the field organization's body language.

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