FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

Ikos Systems, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IKOS)") else Response.Write("(NASDAQ: IKOS)") end if %>
19050 Pruneridge Avenue
Cupertino, CA 95014
408-255-8699
http://www.ikos.com/

AGOURA HILLS, Ca., January 21, 1997/FOOLWIRE/ --- IKOS Systems, Inc. reported on January 16, 1997 its fiscal 1997 first quarter results for the period ending December 31, 1996.

IKOS posted record sales for the quarter of $14.2 million, a 53% increase over revenues of $9.3 million for the same quarter last year. Net income for the quarter increased to $2.2 million, or 25 cents per share; on a fully-taxed basis, this compares to net income of $1 million, or 14 cents per share, for the year-ago quarter.

Commenting on the quarter, Ramon Nunez, Chief Executive Officer of IKOS Systems, said: "During the first quarter we made significant progress in strengthening our market position in the EDA [Electronic Design Automation] industry. We received significant orders across our product lines, including over $1.5 million in orders for our new emulation product VirtuaLogic. We also experienced increased interest from our ASIC vendors, who accounted for over $2 million in sales this quarter, as their need for verification of complex chips at the ASIC foundries continues to be an important opportunity for IKOS."

STRONG MARGIN PERFORMANCE. Gross profit margin came in at 78%. This compares to 77% a year ago and 78.5% in the prior quarter. Operating profit rose to 22.4% of revenue, compared to 15.3% in the year-ago quarter, due primarily to increased efficiencies in the sales organization.

DSOS RISE TO 69 DAYS. IKOS attributed the higher DSOs (days sales outstanding) to both increased sales overseas and manufacturing delays for the new 24MHz accelerator systems. While this is within the range of the industry average, IKOS would like to see this number lower. With the transition to production of the 24MHz accelerator complete, they look forward to a gradual reduction in DSOs in coming quarters.

A GROWING EMPLOYEE BASE. At 17% of revenue, research and development spending fell shy of IKOS' internal target of 19% this quarter, the result of delays in adding new engineering staff. IKOS had budgeted for 12 new engineers, yet managed to bring only five on board during the quarter. The company continues to aggressively pursue prospective candidates and will budget R&D at 19% going forward. On the sales and marketing side, IKOS added eight new employees in sales and technical support in accordance with its plan to bolster marketing resources for its new VirtuaLogic emulation product.

REVENUE BREAKDOWN. IKOS' revenue breaks out into three principal categories: 1) Maintenance revenue, 16% of sales; 2) Emulation products (VirtuaLogic), 11% of revenue; and 3) Simulation products (composed of the NSIM, Voyager, and Gemini product lines), 73% of revenue. Geographically, international sales accounted for 43% of revenue this quarter (up from a 37% share last quarter and 25% in the year-ago quarter). International revenue was evenly split between Asia (23%) and Europe (20%); the company further reported that sales in Asia expanded beyond their traditional base in Japan as first-time deals were inked in Singapore and India. (As an aside, while the company noted the increase in international business as a cause for increased DSOs, they have no currency exposure as all their business is transacted in U.S. dollars.) Finally, IKOS' top customers in terms of sales this quarter included Lucent Technologies, Hughes, LSI Logic, SGS-Thomson, Toshiba, and Cirrus Logic.

BACKLOG BETWEEN 30-50%. IKOS does not provide specific backlog figures, citing competitive reasons for withholding this information. However, Mr. Nunez was willing to give analysts a range from which to work, stating that at the beginning of the current quarter IKOS had 30-50% of their revenue target "in the bag."

OUTLOOK FOR ELECTRONIC DESIGN AUTOMATION (EDA) INDUSTRY REMAINS POSITIVE. IKOS sells into two discrete segements of the EDA market: 1) the simulation market (its core business), and 2) the emulation market (to which it is a relative newcomer). During the call, IKOS was asked to present their outlook for both the simulation and emulation market, as well as their overall assessment of the EDA industry in general.

According to the company, the EDA industry grew by 20% in 1996. Some EDA companies did not participate in the industry-wide growth last year for a variety of different reasons, but IKOS experienced above-average growth during 1996 and expects this trend to continue in 1997. And, while the semiconductor industry which they serve suffered through a down cycle in 1996, the design side of the electronics industry continues to enjoy good health. The company cites increasingly complex designs of integrated circuits coupled with further integration of semiconductors in electronic devices as the primary driving forces behind continued strength in the industry.

SIMULATION: CORE BUSINESS. IKOS is one of only two companies in the EDA industry (the other being Zycad) that offers a simulation solution comprising both software (Voyager and Gemini) and a hardware accelerator (NSIM). This compares to other players in the industry offering only software products that run on general workstations. The distinguishing feature of hardware-assisted simulation is that it enables significantly faster verification of complex integrated circuit designs. IKOS believes the market will be further defined, and their position in it improved, as the increasing complexity of integrated circuit designs renders software-only tools inadequate in the verification process.

This quarter, IKOS experienced a significant increase in sales into the ASIC market. In particular, IKOS saw a jump in sales to ASIC vendors, who are best described as the companies that produce the silicon for chip designers. IKOS explained the increased interest from ASIC vendors as the direct result of their need to get their customers products to market as quickly as possible. The problem for ASIC vendors, which IKOS addresses, is in moving quickly from design to working silicon: before an ASIC vendor can commit a chip design to manufacture, it must verify that the design conforms to the vendor's unique integrated circuit technology. This verification is the final stage of the design process, known as "sign off."

IKOS IN THE TRIANGLE. IKOS describes their relationship to chip designers and ASIC vendors this way: the chip designer is a customer of both the ASIC manufacturer and IKOS, and it sits atop a triangle as the primary focus. On one side of the base of the triangle is IKOS, who provides the technology used to model the design, and on the other side is the ASIC vendor, who provides integrated circuit technology to the designer. Part of IKOS' task is to make sure the various ASIC vendors' technology is characterized within their design tools during the design process (contained in so-called "cell libraries"). The ASIC vendors, in turn, need to use an IKOS simulator during sign-off to maintain a unified, consistent design flow, as well as to enable faster time to manufacture.

COMPETITION FROM ZYCAD. IKOS saw Zycad at two accounts this quarter. One account was a previous customer of both Zycad and IKOS and the two companies split the business there. The second account (Hughes) was a traditional customer of Zycad and here IKOS won the business away from Zycad, "hands down."

EMULATION: VIRTUALOGIC ON TARGET. With the acquisition last May of privately-held Virtual Machine Works (VMW), IKOS acquired technology to be applied in a different segment of the EDA industry -- emulation. Last summer, IKOS introduced the product resulting from the acquisition, called VirtuaLogic, and has since been ramping up sales and marketing resources in accordance with a plan to address what is estimated to be a $400 million market. Sales of VirtuaLogic this quarter grew to over $1.5 million, and IKOS characterized progress with this product as "on target and ahead of plan." Yet while the emulation market is large, IKOS has set modest goals for this year, guiding analysts toward a range of $7-10 million in sales for the year, "With good upside potential on top of that number," added Ramon Nunez. As with IKOS' potential in the simulation market, the company describes their prospects in the emulation market as limited only by the resources they can apply to the market.

CHIPPING AWAY AT THE MARKET LEADER. This quarter, IKOS saw Quickturn Design Systems (QKTN) at every single deal in which IKOS competed. With sales nearly double that of IKOS' total revenues, Quickturn is the undisputed leader in the emulation market. According to the company, Quickturn's response to competition from IKOS has been to reduce their price in order to attract the customer. According to Mr. Nunez, IKOS has been able to maintain strong pricing and still win the business.

QUALIFYING CUSTOMERS LEADS TO GREATER SUCCESS. Mr. Nunez estimated that IKOS won close to 75% of the emulation business in which it actively engaged. IKOS' strategy with VirtuaLogic has thus far focused on qualifying potential customers before going after their business; in other words, determining beforehand the customer's specific verification needs and making sure their solution is a good fit. Not only does this allow the company to more effectively deploy its limited resources, it also raises the likelihood of their winning the business once they have decided to engage.

EMULATION PRODUCT ADVANTAGES. IKOS competes effectively against the competition in two ways. First, VirtuaLogic offers a fundamental technical advantage: the architecture of the product allows customers to fit a design in a much smaller configuration of field programmable gate arrays (FPGAs) than Quickturn's product allows. VirtuaLogic's unique architecture also provides for easier migration to next generation FPGAs as they become available. Second, IKOS has a list price advantage on the order of two to three times versus Quickturn.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.