Verisity Announces Record Revenue of $17.8 Million for Fourth Quarter

Verisity Announces Record Revenue of $17.8 Million for Fourth Quarter Fiscal 2004

    Business Editors/High-Tech Writers

    MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Jan. 24, 2005--Verisity Ltd. (Nasdaq:VRST), the leading supplier of Verification Process Automation (VPA) solutions, today announced financial results for the fourth fiscal quarter and year ended December 31, 2004. Revenue for the quarter was $17.8 million, a 45% increase from revenue of $12.3 million for the quarter ended December 31 2003, and a 15% increase from revenue of $15.5 million for the quarter ended September 30, 2004.
    The Company's net loss under generally accepted accounting principles (GAAP) for the quarter ended December 31, 2004 was $1.6 million, or ($0.07) per diluted share, compared to net income of $2.3 million, or $0.11 per diluted share, for the quarter ended December 31, 2003 and net loss of $3.3 million, or ($0.14) per diluted share, for the quarter ended September 30, 2004.
    Non-GAAP net income for the quarter ended December 31, 2004 was $382,000, or $0.02 per diluted share, compared to non-GAAP net income of $2.4 million, or $0.11 per diluted share, for the quarter ended December 31, 2003 and non-GAAP net income of $146,000, or $0.01 per diluted share, for the quarter ended September 30, 2004.
    Revenue for the year ended December 31, 2004, was $58.0 million, compared to revenue of $48.5 million for the year ended December 31, 2003. For the year ended December 31, 2004, the Company's net loss was $9.5 million, or ($0.41) per diluted share, compared to a net income of $8.7 million, or $0.41 per diluted share, for the year ended December 31, 2003. Non-GAAP net loss for the year ended December 31, 2004 was $1.0 million, or ($0.04) per diluted share, compared to non-GAAP net income of $8.8 million, or $0.41 per diluted share, for the year ended December 31, 2003.
    Non-GAAP results for the quarter and the year ended December 31, 2004 exclude non-cash charges related to equity issuances, amortization of deferred compensation, amortization of intangible assets resulting from the acquisition of Axis Systems which was completed on February 9, 2004, and one-time expenses for professional services in respect to our recently announced definitive agreement to be acquired by Cadence Design Systems, Inc. Non-GAAP results for the quarter and the year ended December 31, 2003 excludes stock-based compensation. A reconciliation of GAAP to non-GAAP net income (loss) for the quarter and the year ended December 31, 2004 is included with this press release.
    "Our financial performance in the final quarter of fiscal 2004 was stellar. We grew revenue 15% and increased non-GAAP net income by 162% sequentially, and built very substantial backlog," said Moshe Gavrielov, chief executive officer of Verisity. "We plan to continue to build on our technology leadership position and provide customers with the best possible solutions and support that automate their verification process, thereby promoting productivity, quality and predictability," concluded Gavrielov.
    The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially. We do not plan to update, confirm or change this guidance until our next earnings conference call except by press release in the case of material events.

--	Revenue in the first quarter of 2005 is expected to be approximately $17.8 to $18.2 million
--	Non-GAAP income per share in the first quarter of 2005 is expected to be approximately $0.02 to $0.03

    A schedule showing a reconciliation of the business outlook from GAAP to non-GAAP is included in this release.
    Verisity's earnings call will be webcast today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time, and may be accessed at http://www.verisity.com. Following the conclusion of the webcast, a replay will be available via Verisity's web site at http://www.verisity.com through January 31, 2005. For those without access to the Internet, a replay of the call will be available from 5:00 p.m. Pacific Time on January 24, 2005 through January 31, 2005. To listen to a replay, call (719) 457-0820, access code 647866. The Company plans to include a business outlook in the conference call.

    Use of Non-GAAP Financial Measures

    This press release includes financial measures for net income (loss) and net income (loss) per share that exclude certain non-cash charges and that have not been calculated in accordance with GAAP. These measures differ from GAAP in that they exclude non-cash charges related to equity issuances, amortization of deferred compensation, amortization of intangible assets resulting from the acquisition of Axis Systems which was completed on February 9, 2004, and one-time expenses for professional services in respect to our recently announced definitive agreement to be acquired by Cadence Design Systems, Inc. Verisity provides these measurements in addition to GAAP financial results because it believes they provide a consistent basis for comparison between quarters that is not influenced by certain non-cash expenses and therefore is helpful to understanding Verisity's underlying operational results. Further, these non-GAAP measures are some of the primary measures Verisity's management uses for planning and forecasting. These measures should not be considered an alternative to GAAP, and these non-GAAP measures may not be comparable to information provided by other companies. For more information regarding the foregoing, including Verisity's unaudited non-GAAP condensed combined consolidated balance sheet as of December 31, 2003 and unaudited pro forma condensed combined consolidated statement of operations for the year ended December 31, 2003, please refer to Verisity's Current Report on Form 8-K/A, Amendment No. 1, filed with the Securities and Exchange Commission on April 22, 2004.

    About Verisity

    Verisity Ltd. (NASDAQ: VRST) is the leading supplier of process automation solutions for functional verification. The Company addresses customers' critical business issues with its market-leading software and intellectual property (IP) that effectively and efficiently verify the design of electronic systems and complex integrated circuits for the communications, computing and consumer electronics global markets. Verisity's VPA solutions enable projects to move from executable verification plans to unit, chip/system and project level 'total coverage' and verification closure, while maximizing productivity, product quality and predictability of schedules. The Company's strong market presence is driven by its proven technology, methodology and solid strategic partnerships and programs. Verisity's customer list includes leading companies in all strategic technology sectors. Verisity is a global organization with offices throughout Asia, Europe, and North America. Verisity's principal executive offices are located in Mountain View, California, with its principal research and development offices located in Rosh Ha'ain, Israel. For more information, visit www.verisity.com.

    Forward-Looking Statements

    To the extent statements contained herein are not purely historical, they are forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed in the Company's filings with the Securities and Exchange Commission. Financial results for the quarter and year ended December 31, 2004 are preliminary and are subject to the completion of the audit by the Company's independent auditors. Words such as "expects," "expectation", "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. All forward-looking statements represent only management's present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results or performance to differ materially from those described in the forward-looking statements. In particular, these factors include the Company's ability to forecast accurately the Company's short-term and long-term operating performance, the effect of the pending merger announcement on bookings by new and existing customers and on actions of our suppliers and employees, the effects of continued economic and geopolitical uncertainty and the related effects on customers' budgets, whether new or existing customers will purchase time-based or perpetual licenses, the timing of customer acceptance of the Company's products following delivery and the timing of significant orders. Another factor that could cause actual results or performance to differ materially from those described in the forward-looking statements include the impact of the acquisition of Axis on the Company's future operating or financial performance, including, but not limited to, the amount of additional investment required to develop integrated products. For a discussion of the factors and uncertainties relating to the Axis acquisition and the pending merger with Cadence Design Systems, Inc, please refer to the Company's public disclosures made in connection with the Axis acquisition and the Cadence merger, including, but not limited to, the Company's filings with the Securities and Exchange Commission and its news releases and webcasts, which are available on its website located at www.verisity.com. Verisity Ltd. is not under any obligation, and expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

    Verisity, the Verisity logo and Specman Elite are either registered trademarks or trademarks of Verisity Design, Inc. in the United States and/or other jurisdictions. All other trademarks are the property of their respective holders.

Verisity Ltd. Condensed Consolidated Balance Sheets (in thousands)

Adjusted Dec. 31, Dec. 31, Dec. 31 2004 2003 (1) 2003 (2) (unaudited) Assets: Current assets: Cash and cash equivalents $54,495 $91,004 $58,713 Accounts receivable 30,046 11,444 14,533 Inventory 3,272 - 3,764 Other current assets 13,961 4,412 5,048 ------------ --------- --------- Total current assets 101,774 106,860 82,058

Property and equipment, net 5,661 3,298 4,680 Other assets 1,118 386 663 Unbilled receivables associated with merger 3,503 -- 8,121 Deferred compensation associated with merger 1,820 -- 5,938 Intangible assets 16,203 -- 20,020 Goodwill 62,950 -- 53,023

------------ --------- --------- Total assets $193,029 $110,544 $174,503 ============ ========= =========

Liabilities and Shareholders' Equity: Current liabilities: Accounts payable and accrued liabilities $25,397 $12,855 $27,614 Deferred revenue 42,831 27,791 31,453 ------------ --------- --------- Total current liabilities 68,228 40,646 59,067

Other long-term liabilities 852 481 521 Long-term portion of deferred revenue 8,321 5,601 8,016 Long-term deferred taxes 10,429 - - Shareholders' equity: Share capital 110,024 59,108 102,191 Retained earnings (Accumulated deficit) (4,825) 4,708 4,708 ------------ --------- --------- Total shareholders' equity 105,199 63,816 106,899

------------ --------- --------- Total liabilities and shareholders' equity $193,029 $110,544 $174,503 ============ ========= =========

(1) Derived from the Company December 31, 2003 audited financial statements.

(2) Adjusted to include Axis Systems as of the merger date, February 9, 2004 as if Axis Systems had been acquired on December 31, 2003. See Form 8-K/A filed on April 22, 2004.

Verisity Ltd. Consolidated Statements of Operations (in thousands, except per share data)

Three Months Ended Year Ended December 31, December 31, 2004 2003 2004 2003 ------------------- -------------------- (unaudited) (unaudited) Revenue: License $10,807 $7,320 $33,087 $29,313 Maintenance 6,758 4,681 24,113 18,103 Other services 206 259 833 1,084 ------------ ------- ------------ --------

Total revenue 17,771 12,260 58,033 48,500 ------------ ------- ------------ --------

Total cost of revenue 2,117 720 6,085 2,827 ------------ ------- ------------ --------

Gross profit 15,654 11,540 51,948 45,673

Operating expenses: Research and development 4,349 2,577 16,248 10,281 Sales and marketing 8,482 5,152 29,436 20,785 General and administrative 2,731 1,425 9,065 5,721 Non-cash charges related to equity issuances 894 16 5,165 176 Amortization of deferred compensation 581 -- 4,117 -- Amortization of intangible assets 1,041 -- 3,817 -- ------------ ------- ------------ --------

Total operating expenses 18,078 9,170 67,848 36,963 ------------ ------- ------------ --------

Income (loss) from operations (2,424) 2,370 (15,900) 8,710 Other income (expense), net 261 177 386 712 ------------ ------- ------------ --------

Income (loss) before income tax provision (benefit) (2,163) 2,547 (15,514) 9,422

Income taxes provision (benefit) (579) 204 (5,981) 752 ------------ ------- ------------ --------

Net income (loss) $(1,584) $2,343 $(9,533) $8,670 ============ ======= ============ ========

Basic earnings (loss) per share: Basic net income (loss) per ordinary share $(0.07) $0.12 $(0.41) $0.44 ============ ======= ============ ======== Shares used in per share calculation 23,614 20,038 23,071 19,818 ============ ======= ============ ========

Diluted earnings (loss) per share: Diluted net income (loss) per ordinary share $(0.07) $0.11 $(0.41) $0.41 ============ ======= ============ ======== Shares used in per share calculation 23,614 21,580 23,071 21,363 ============ ======= ============ ========

Verisity Ltd. Non-GAAP Consolidated Statements of Operations (in thousands, expect per share data)

Three Months Ended December 31, 2004

As Adjustments Non- Reported GAAP ---------- ----------- --------

Revenue: License $10,807 -- $10,807 Maintenance 6,758 -- 6,758 Other services 206 -- 206 --------- ------------ --------

Total revenue 17,771 - 17,771 --------- ------------ --------

Total cost of revenue (A) 2,117 (390) 1,727 --------- ------------ --------

Gross profit 15,654 390 16,044

Operating expenses: Research and development 4,349 -- 4,349 Sales and marketing 8,482 -- 8,482 General and administrative (B) 2,731 (371) 2,360 Non-cash charges related to equity issuance (C) 894 (894) - Amortization of deferred compensation associated with the merger (C) 581 (581) - Amortization of intangible assets (D) 1,041 (1,041) - --------- ------------ --------

Total operating expenses 18,078 (2,887) 15,191 --------- ------------ --------

Income (loss) from operations (2,424) 3,277 853 Other income (expense), net 261 -- 261 --------- ------------ --------

Income (loss) before income tax provision (benefit) (2,163) 3,277 1,114 Income taxes provision (benefit) (E) (579) 1,311 732 --------- ------------ --------

Net income $(1,584) $1,966 $382 ========= ============ ========

Diluted earnings (loss) per share: Diluted net income (loss) per ordinary share $(0.07) $0.02 ========= ========

Shares used in per share calculation 23,614 24,490 ========= ========

Year Ended December 31, 2004

As Adjustments Non- Reported GAAP ---------- ----------- --------

Revenue: License $33,087 -- $33,087 Maintenance 24,113 -- 24,113 Other services 833 -- 833 --------- ------------ --------

Total revenue 58,033 - 58,033 --------- ------------ --------

Total cost of revenue (A) 6,085 (681) 5,404 --------- ------------ --------

Gross profit 51,948 681 52,629

Operating expenses: Research and development 16,248 -- 16,248 Sales and marketing 29,436 -- 29,436 General and administrative (B) 9,065 (427) 8,638 Non-cash charges related to equity issuance (C) 5,165 (5,165) - Amortization of deferred compensation associated with the merger (C) 4,117 (4,117) - Amortization of intangible assets (D) 3,817 (3,817) - --------- ------------ --------

Total operating expenses 67,848 (13,526) 54,322 --------- ------------ --------

Income (loss) from operations (15,900) 14,207 (1,693) Other income (expense), net 386 -- 386 --------- ------------ --------

Income (loss) before income tax provision (benefit) (15,514) 14,207 (1,307) Income taxes provision (benefit) (E) (5,981) 5,683 (298) --------- ------------ --------

Net income $(9,533) $8,524 $(1,009) ========= ============ ========

Diluted earnings (loss) per share: Diluted net income (loss) per ordinary share $(0.41) $(0.04) ========= ========

Shares used in per share calculation 23,071 23,071 ========= ========

Notes:

(A) Adjusted to reduce the cost of products for the amortization created from purchase accounting, for the step up in fair value.

(B) Adjustment to record deprecation of the difference between the estimated fair value and the historical amount of Axis' property and equipment.

(C) Adjustment to record the amortization of deferred compensation associated with the acquisition of Axis Systems.

(D) Adjustment to reflect the amortization of the intangible assets associated with the Axis acquisition.

(E) Adjustment to reflect the change in tax benefit due to non- cash charges (see notes A,B,C and D above).

Verisity Ltd. As of January 24, 2005 Impact of Non-GAAP adjustments on Forward Looking Diluted Net Income per Share (unaudited)

Quarter Ended March 31, 2005 -------------------

GAAP loss per share ($0.06) to ($0.07) Amortization of step up in fair value 0.01 Non-Cash charges related to equity issuances 0.03 Amortization of deferred compensation associated with the merger 0.02 Amortization of intangible assets 0.04

Non-GAAP income per share $0.02 to $0.03

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CONTACT: Verisity Ltd. Bonnie Mott, 650/934-6800 (Investor Relations) bonnie@verisity.com Ric Chope, 650/934-6800 (Media Relations) ric@verisity.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: HARDWARE SOFTWARE TELECOMMUNICATIONS EARNINGS CONFERENCE CALLS EDA SOURCE: Verisity Ltd.

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