Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Second Quarter Fiscal Year 2024. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President, Investor Relations. Please go ahead.

Sassine Ghazi:

Thanks, Trey. Good afternoon. In Q2, we continued our strong execution and momentum. Semiconductor and systems companies continue to invest in Synopsys Solutions to maximize their R&D capabilities and productivity. Revenue was up 15% year-over-year and at the high end of our guided range. Non-GAAP operating margin was 37.3%, up approximately 3 points year-over-year. And non-GAAP EPS was up 26% year-over-year and above guidance. Given our momentum and continued confidence in our business, we are again raising our full year revenue and non-GAAP EPS guidance. Shelagh will discuss the financials in more detail. First, I'll give some context for our confidence and share some business highlights from the quarter. First, we are in an era of pervasive intelligence, fueled by the rise of artificial intelligence, silicon proliferation and software defined systems. These trends are driving systemic complexity for technology R&D, which in turn drives unprecedented opportunity for Synopsys. Our silicon customers are racing to design and manufacture complex, purpose built silicon. And our customer set is expanding as systems companies are also either designing their own chips or defining and optimizing their system performance at the silicon level. In March, many of our semiconductor and systems customers attended SNUG, our yearly Synopsys user Group Conference in Silicon Valley. Thousands of passionate design engineers shared best practices and learned about the innovations we're driving. And we were honored to have a dozen key customers, including NVIDIA, Intel, AMD, AWS, Tesla and others contribute their perspective regarding the mission critical role Synopsys plays in their innovation. As a leading silicon to systems design solutions company, Synopsys opportunity has never been greater. Today, we have best-in-class EDA tools and the broadest portfolio of silicon IP. Our planned acquisition of Ansys will expand our TAM and further our mission of empowering technology innovators everywhere. Let me provide a brief update on this important transaction. Our customers have overwhelmingly told us that they see tremendous potential for the combination to accelerate their innovation and address their rapidly increasing need for system design solutions that provided deeper integration between electronics and physics. We're pleased to announce that Ansys stockholders approved the transaction this morning. Synopsys and Ansys are making progress towards securing the necessary regulatory approvals and we remain confident in the regulatory review process given the clear and compelling benefits of this combination for customers and partners. We continue to expect the transaction to close in the first half of 2025. Let's move to segment business highlights, starting with Design Automation. Q2 Design Automation revenue was up 14% year-over-year with strength across the business and continued rapid adoption of synopsys.ai. Customers realize impressive gains in performance, power and area. In analog and mixed signal design, customers are looking to Synopsys as they modernize their flows and move to more advanced process nodes. We saw 10 displacement design wins in the quarter and now have 20 displacements through the first half of the year. In Q2, we delivered the marquee win for full flow displacement at a leading U.S. systems company, while a leading Asian memory company chose our analog design environment for their next generation memory designs. Our synopsys.ai engine for analog, ASO.ai allows analog customers to harness the power of AI to simplify node migration. A high speed connectivity customer recently reported a 10x productivity gain using ASO.ai. Transitioning to digital, where we continue to expand our leadership across advanced node design flows. In Q2, our Fusion compiler continued to push boundaries in performance and power efficiency optimization, demonstrating 8% better power on a 2 nanometer based CPU at a U.S. CPU company. And higher performance versus competition for the flagship mobile CPU at Samsung. Demonstrably better PPA results such as these also led to Fusion compiler wins at a large U.S. hyperscaler and a top U.S. mobile CPU company. While the customer results from Fusion are exceptional, we believe the combination of Fusion and AI based optimization is game changing. In Q2, multiple Asian design services firms exceeded maximum frequency targets with DSO.ai and a leading U.S. GPU company deployed DSO.ai for improved productivity. In verification, our flagship VCS product delivered 15 competitive displacements in the quarter, led by wins at an Asian systems company, a leading U.S. hyperscaler and a top U.S. GPU company. The synopsys.ai optimization engine that partners with VCS, VSO.ai saw significant adoption as well. We are now engaged with over 30 customers, demonstrating up to 10x fast turnaround time and double digit increase in coverage. Shifting to hardware assisted verification. Demand exceeded our expectations for the quarter with four new customer wins and over 50 repeat customer wins. At SNUG, we announced ZeBu EP2 and saw the first sales to a large Asian mobile SOC company in a competitive win for full SoC verification. We also saw significant customer pull for HAPS, including at a large U.S. mobile company, which deployed multi-die designs on HAPS and reduced bring up time by approximately 40%. On to Design IP, which delivered 19% revenue growth as the IP supplier of choice for leading HPC, AI, automotive and mobile chips at advanced nodes. Q2 was particularly strong quarter for automotive wins. Electrification, infotainment and ADAS features continue to drive strong demand for our comprehensive automotive portfolio. Chip level security continues to be a concern to chip designers. In Q2, we announced the acquisition of Intrinsic ID to add physical and clonable functions or PUF technology to our extensive IP portfolio. More broadly, we gained over 10 secure interface IP wins in the quarter, including five new customers. Demand for interface IP for AI and data center applications is growing at a blistering pace. In the quarter, we launched the industry's first 1.6 terabyte Ethernet solution to meet the high bandwidth needs of AI and hyperscaler chips, securing design wins at two leading high speed Ethernet customers. Additionally, we secured more than 10 design wins for PCIe 6.0 and CXL 3.0 solutions. We also have the industry's most expensive IP library for Multi-die, starting with the standard for die-to-die interconnect UCIe. We won five UCIe IP licenses in the quarter across end markets from memory to mobile to HPC. With these wins, we now have 50 lifetime wins for die-to-die connectivity. As silicon becomes foundational to innovation in nearly every industry, we've seen an infusion of government support and funding for chip manufacturing around the world. Synopsys plays a mission critical role as an on ramp to the world's foundries, enabling manufacturing success for our mutual customers. In Q2, we won a significant enablement engagement with the emerging leading edge Japanese foundry, Rapidus Corporation, involving our leadership 2 nanometer interface IP. This builds on a major Rapidus [Technical Difficulty] design win for foundation. Having a portfolio of trusted IP is a requirement for every world class foundry. As the leading provider of interface and foundation IP, Synopsys is often the first stop for foundry enablement. Synopsys IP provides a path for mutual customers to bring Rapidus manufactured chips to market faster and with lower risk. The design and manufacturing of semiconductors is inextricably linked and we engage deeply with all the major foundries. At TSMC Symposium, we announced TSMC N2 IP development and demonstrated silicon proof points for N3E and N3P IP. At Samsung, we secured multiple IP wins enabling customers to confidently adopt Samsung's leading processes for AI, storage, automotive and other applications. We also partnered with Intel Foundry to accelerate advanced chip designs with Synopsys IP and certified EDA flows for their 18A process. This quarter also marked another transformative milestone as we accelerate our Silicon to Systems strategy and prioritize growth investments in our core EDA and IP businesses. We recently announced the definitive agreement to sell the software integrity business to Clear Lake Capital and Francisco Partners. This transaction valued at up to $2.1 billion will establish SIG as a newly independent leading application security testing software provider and is expected to close in the second half of 2024, subject to customary closing conditions and regulatory approval. This agreement fulfilled the key priorities we had for the sale. Find our team and our customers great new owners that can care about nurturing and investing in the business to deliver to its full potential, focus on speed and certainty to close and deliver financial value and smooth transition for Synopsys. We are proud to have started the business, grown it to be the application and security testing leader and will partner with the new owners to ensure a seamless transition. We have strong continuing momentum across the business, supported by multiple secular growth drivers. We have a resilient business model and our customers continue to prioritize investments in the silicon and systems that position them for future growth. We are aligning our portfolio investment with the greatest return potential to accelerate our growth. Thank you to our employees, partners and customers for their passion and commitment. With that, I'll turn it over to Shelagh.

Operator:

Thank you. [Operator Instructions] Your first question comes from the line of Joseph Vruwink with Baird. Your line is open.

Sassine Ghazi:

Yes, very good question. So it's true. The 20% uplift is based on the DSO.ai incremental booking and revenue we're able to capture and the baseline increase for Fusion Compiler. On ASO.ai and VSO.ai, we're still in early stages, it's very difficult at this stage to give you what will the average be. So give us some time before we're able to capture more data points. But the one thing that we can confirm is as customers are using that technology in production, we're able to monetize it through the same approach and uplift to get access for the technology and an uplift based on the consumption -- the baseline consumption.

Sassine Ghazi:

So two points on the Ansys performance. One, as you know, we're operating as two separate companies. So my suggestion here is to refer you back to what they're communicating, which is their continued commitment for double digit ACV and revenue growth for their FY 2024. And the other point is, during our diligence process, we had a close insight in terms of the shape of the year where it's tilted more for a second half performance compared to the first half in terms of the shape. So really that's the most we can say at this stage. But if you have any questions, refer back to the Ansys commentary.

Sassine Ghazi:

Thank you.

Jason Celino:

Hey, great. Thanks for taking my questions. This quarter was a little unique and that we got basically an update 60 days ago at SNUG in the Analyst Day. Nice to see the quarter come at the high end and raising the guide again. But curious like -- again, I don't see Synopsys as being like a very back end loaded company, but curious what exactly drove the strength and the upside just from that short period ago.

Jason Celino:

Thank you.

Jason Celino:

Okay. Perfect. And then maybe just a quick one for Shelagh. I think you said backlog of 7.9. Is that an AppSec backlog number?

Jason Celino:

Okay. Excellent. Thank you.

Operator:

Your next question comes from the line of Charles Shi with Needham. Your line is open.

Shelagh Glaser:

Well, as you noted, IP tends to be lumpy for us. And so you saw us have about 53% IP growth in Q1. So Q1 -- Q2 is a bit muted from that, although we're still up 19% year-over-year and we anticipate another strong year for IP. And the lumpiness is really about the timeline in which the customers need to ingest IP into their design. And so as you noted, that will continue through the year and we expect continued growth throughout Q3 and Q4 with a strong Q4.

Sassine Ghazi:

Yes. As you recall, Charles, we communicated early in the year that we're a little bit cautious on China as we see macro and challenges in the economy in China and some impact of the restrictions. We had a good first half. We are anticipating growth in China. But overall, we're taking a balanced approach for the overall macro.

Sassine Ghazi:

Thanks, Charles.

Operator:

Your next question comes from the line of Josh Tilton with Wolfe Research. Your line is open.

Sassine Ghazi:

Yes.

Sassine Ghazi:

Sure. Our customers are expecting analog design workflows and environment methodology, et cetera, to be more modernized. Think of it feeling more like digital. And this is a great opportunity for Synopsys and we introduced couple of things. One is the AI for analog, which is ASO.ai. Our customers are using it primarily for migration from a node-to-node or in some cases foundry-to-foundry. And the other aspect of the analog competitive wins that we've had is the full flow. When you look at the complete design environment, simulation, et cetera and offering a modern competitive platform for our customers. And we're actually very excited about the momentum that ASO.ai is driving and the overall the workflow that we're putting together for our customer?

Sassine Ghazi:

Yeah. remember, Josh, we've had a partnership since 2017. So the customers that we engage -- we Synopsys engage with in our core business, we already have that established go-to-market and established technology connections between the products that are relevant for that grouping of customers. So I won't say there is anything different in terms of customer behavior at this stage. Think of it as a continuation of what we started in 2017.

Sassine Ghazi:

Thank you.

Gary Mobley:

Hi, everyone. Thanks for taking my question. I wanted to ask about the regulatory approval process for the Ansys acquisition and I guess what's developed most recently was China SAMR approval. I presume that you always expected to file a China SAMR given the close timeframe of first half next year. Maybe if you could just speak to your confidence in that approval process and any concessions you might be willing to make to get that across the finish line?

Gary Mobley:

Okay. Thank you. As my follow-up, you mentioned in your prepared remarks about a customer win with an Asian memory designer. And if I'm not mistaken, memory as a subgroup of the semiconductor industry hasn't historically leaned heavily on commercial EDA. Maybe if you can just give us how that -- some insight into how that might be changing and then in particular, how HBM memory for data center might be factoring into some of the needs for your tools?

Gary Mobley:

That's good color. Thank you.

Operator:

Your next question comes from the line of Lee Simpson with Morgan Stanley. Your line is open.

Sassine Ghazi:

Yes. So when a new node comes online, we engage in the point one and in some cases like foundation IP, even we engage before the point one PDK. And the reason we engage that early is in order to deliver what's called the node entitlement to get a sense of what's the power, the performance, the area of that node. And that's a very deep in the trenches collaboration with in this case TSMC, but it applies to Samsung, Intel, many other foundries. So the first is with our foundation IP. Then shortly after it's followed by the interface IP, where we are a number of the test chip shuttles that they have for internal validation of their process technology. And those come way before the customers buying the IP from us. So by the time the customer is ready to at a the 0.5 PDK. And in some cases, as you know, they wait for 0.9 PDK, et cetera, that's when they start pulling the IP from us. So the engagement starts, in some cases a year, a year plus before we see a customer ready to pull the IP.

Sassine Ghazi:

Not at all. Interoperability is so essential for the workflows, so essential. And as far as I can go back and remember in EDA, you have customers that they're using mixed flows, mixed environments. It's very well alive and thriving in terms of customers using this mixed environment for many reasons. Many times the customer wants to introduce their special sauce inside the flow and they want to have these handshakes in an industry standard interoperable ways. And we've been doing it with Ansys. We've been doing it with our competitors, et cetera and I don't see anything changing there. The one thing that you hear when we talk about Fusion is there is absolutely value when you integrate deeper than the technology into your platform, the value of it to our customer is a predictable outcome where the step one is correlated with step 2, correlated with step 3, et cetera. But that as well can be achieved through an Interoperable mix environment. So I absolutely see that will continuing and you absolutely need an ecosystem in order to deal with the complexity of the future. It cannot be in my mind, a one platform that is sufficient to close the gap of complexity.

Sassine Ghazi:

Thank you, Lee.

Jay Vleeschhouwer:

Thank you. Good evening. Starting with NAI question, you noted some adoption of some of your branded products as seen, but perhaps a two part question. Number one, what are you seeing in terms of the relative adoption of AI, your branded AI by semi versus systems customers? And over time, would you be indifferent to the economics of supporting those two classes of customers with AI? In other words, with your ACV, your margin structure, et cetera, be indifferent to that mix with respect to AI adoption? And are you also beginning to see any signs of customers taking two or more solutions at this point of AI branded products? And then my follow-up.

Jay Vleeschhouwer:

Okay. Now you noted the strength of hardware. This is a follow-up. And hardware of course, for you and your peers has been a substantial growth category for a decade. The latest data shows that including your numbers, it's well over $1.2 billion of total revenue for the category. The question is, where do you still see pockets of underutilization or under automation, vis-a-vis EDA hardware. I mean, do you foresee this, including yourselves growing to be, for example, a $2 billion category, the way IP has grown into a $2 billion category.

Jay Vleeschhouwer:

Okay. Thank you, Sassine.

Operator:

Your next question comes from the line of Gianmarco Conti with Deutsche Bank. Your line is open.

Sassine Ghazi:

Okay. Yes, for DSO.ai, what we communicated actually during Investor Day that if you look at the TAM for the DSO.ai, use cases that you can take advantage of that technology. We're still in early stages. We are in roughly 20% of the TAM from a adoption point of view for DSO.ai. So there's plenty of opportunity to continue on expanding. And within that 20%, we are roughly at the 15%-ish in terms of adoption. And the reason for that, not because customers are pushing back or they're not seeing value, and there's a rhythm of adoption where you have to finish the tape out, go into the next project and broader that deployment across more -- we call them blocks, meaning partitions of the design. So that's DSO.ai. VSO.ai, we anticipate the adoption to be faster and the ramp to be faster than DSO.ai because what it does, it looks at your verification cycles and it improves the coverage by not having to go back and run and verify something you already verified in the previous run. So it's smarter approach to improve coverage while reducing the time and the need to just waste more verification cycles. And what the customer, the way they're looking at it is a TCO reduction because it impacts their hardware utilization where they're running that software on in order to get a higher coverage and speed up. As I mentioned on ASO.ai, it's all about modernization of the workflow. And in the early use cases we're seeing is a node migration. So to automate, accelerate, the customer feel of moving from node A to node B, where do they stand in terms of power performance area, and it's not only a digital thing you need because you need the whole SoC to go through this entitlement exercise.

Shelagh Glaser:

Sure. So our main focus on our investment is obviously investing in both design automation and design IP. So we're -- I think as we talked about at Investor Day in the IP Group, we're building out IP blocks for the leading edge technology where the standards are moving much more rapidly, especially driven by the kind of the insatiable needs of AI. So we're building out the standards in a more rapid fashion. And so that's a significant part of our R&D. And then in the EDA the Design Automation group and the EDA in particular, we're investing in building out all our Synopsys study, AI capabilities and continuing to further those because even the ones that we've already launched, we're driving improvements in those. Those aren't just static investments.

Operator:

Your next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open.

Shelagh Glaser:

Correct. It's within the continuing operations and thanks for the clarification. I know there's a lot of moving parts here with the move of SIG to discontinued operations. And the way we're thinking about it is, as you know, we are scaling the business, how do we drive better leverage across the R&D and then how do we drive better leverage across the core infrastructure of the company. And our long-term expectation that we shared in Investor Day and when we did Ansys is that our expectation is that we're going to drive operating margin to the mid 40s. So we see continued expansion and it's very much a part of how we're thinking about the growth of the company. And as Sassine talked a lot about the AI that we're infusing in our customers. And if you will, we're eating at our own restaurant. We're infusing AI into everything we do inside the company to drive more modern ways of doing things so that allows us to drive more innovation?

Shelagh Glaser:

Certainly. So what we talked about with SIG is it's up to $2.1 billion in consideration. And the way that breaks out is in three distinct parts. So we'll have $1.5 billion payment at close of the SIG transaction. And as we had noted, we expect that this transaction will close in the second half of 2024. So that would happen in this year. And then over the subsequent five quarters, starting in Q1, our first fiscal quarter of 2025, there is a cumulative $125 million payment. So you can think about the cash that we'll get is 1.625. So think about that. And then the balance, the 475 is payable upon agreed to specified rate of return that the sponsors would achieve and then we would participate in that -- that upside through a potential liquidity transaction.

Shelagh Glaser:

Thanks for the question.

Blair Abernethy:

Thank you. And nice quarter, guys. Sassine, I just wanted to come back on the analog side of things. And it seems like you've had a good performance here. Are you seeing a shift in momentum in that part of the business for Synopsys? And where do you see sort of the lowest hanging fruit or the best opportunities for you in analog?

Blair Abernethy:

Great. Thank you very much.

Sassine Ghazi:

And did you have a follow-up? Did you have follow-up, Blair or is that it?

Sassine Ghazi:

All right. Thank you.

Sassine Ghazi:

Let's go ahead and close out the call. Thanks, Sarah.

Trey Campbell:

Thank you.

Operator:

Ladies and gentlemen, welcome to Synopsys Earnings Conference Call for the First Quarter Fiscal Year 2024. At this time all participants’ are in listen-only mode. [Operator Instructions]. Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President of Investor Relations. Please go ahead.

Sassine Ghazi:

Good afternoon. In Q1, we continued our strong momentum with revenue in the upper end of our guidance range and non-GAAP EPS surpassing the upper end of our guidance range. Revenue was $1.65 billion, up 21% year-over-year. Non-GAAP operating margin was 38.7% up approximately 3.5 points year-over-year. Non-GAAP EPS was $3.56, up 36% year-over-year. While maintaining our laser focus on meeting our quarterly financial commitments, we strategically drive the business for long-term financial success. Over the last three years, we have delivered a 17% of revenue CAGR, non-GAAP operating margin improvement of 7 points and non-GAAP EPS growth at a 26% CAGR. Shelagh will discuss our financials and guidance in more detail. Let's turn to market trends. We've entered an era of pervasive intelligence, driven by the rise of artificial intelligence, silicon proliferation and software-defined systems. These trends demand more compute, new architectures and new design methodologies who are requiring us to address the significant challenges of complexity, cost, energy consumption and security. Despite the mounting challenges, design starts continue to rise as the semiconductor industry scales to $1 trillion in revenue or more by the end of the decade. As the leading silicon to system design solution company with best-in-class EDA tools and the broadest portfolio of semiconductor IP, Synopsys growth opportunity is truly incredible and already underway. Across industries, a paradigm shift is underway as companies race to deliver on this era of pervasive intelligence where AI and smart technologies are omnipresent and interconnected. To capitalize on this shift, the technology is overcoming is converging on a silicon to systems approach to innovation. As the company at the heart of silicon and systems, Synopsys was made for this moment. There is no one more capable of helping companies innovate for this era of pervasive intelligence. Semiconductor companies are now designing with a system approach in mind, while system companies are unlocking additional value through purpose-built chips and software-defined systems. At the same time, customers see the fusion of electronics design and physics simulation as critical to delivering high-performing and high-yielding solutions for their business. Building on our seven-year partnership with Ansys, the industry leader in simulation and a bit multiyear strategy to reshape our business to support system-level design. Last month, we announced our intent to acquire Ansys. This transaction will grow our TAM by 1.5 times to $28 billion and further enhance our silicon to system strategy. Both across our core EDA segment and a highly attractive adjacent growth areas where Ansys has an established presence and successful go-to-market expertise. Customer feedback on the proposed transaction has been incredibly supportive, and we look forward to closing this transaction in the first half of 2024. Now I'll share some segment highlights starting with Design Automation, where we saw strong design win activity across the business. We continue to enhance our leadership in digital EDA as our capabilities become increasingly critical for the leading chips at advanced nodes. We are proud to have partnered with our customers to achieve a number of industry firsts in Q1. The world's first GAA-based next generation arm, Cortex-X mobile core tape-out at a leading Asian mobile SoC provider. The first completed tape-out for a server SoC on 18A. And Asia's first N5 arm flagship automotive core tape-out for a leading EV OEM. In addition, we had multiple competitive wins anchored by 2-nanometer and 3-nanometer projects at a leading Asian mobile semiconductor company. We are also gaining momentum with analog mixed-signal customers. We won several competitive full flow displacements at analog mixed signal companies including networking OEMs in Europe and Japan. A key differentiator in these competitive wins was the breadth and leadership of our EDA platform, from digital to analog and from architecture to sign off. All turbo charged with the industry's leading full-flow AI platform, synopsys.ai. Synopsys.ai focuses on three distinct pillars of value for our customers, optimization, XSO.ai beat analytics, and generative AI, including our copilot. Starting with our XSO.ai family, which includes design, verification, test and analog space optimization. We continue to expand our footprint and drive set in our core EDA tools. DSO.ai was key in several major wins and continues to drive a 20% plus uplift to Fusion Compiler revenue at multiple accounts. Increasing share of usage of DSO.ai were competition was driven by superior PPA results on our platform versus alternatives. We saw a very strong pull for VSO.ai with multiple production deployments that are seeing excellent improvements in test coverage and turnaround time. A large North American HPC semiconductor company made a significant investment in VSO.ai technology with plans to immediately deploy on four projects and eventually deploy corporate-wide. Another large North American GPU company saw 2 times faster turnaround time and a 20% improvement in coverage and is planning a large-scale deployment of the technology. Our analog tool, ASO.ai now has multiple deployments moving to production with reference flows at TSMC, Samsung and Intel for analog migration. We also brought in the capability of TSO.ai, adding a design for test feature to the proven ability for advanced pattern generation. At the International Test Conference this quarter, we demonstrated a 20% reduction in total pattern count using TSO.ai. Our data analytics AI products also saw significant logo engagement growth. A great example is Silicon.da production analytics, which is part of the silicon lifecycle management family and spans design through product manufacturing phases. Silicon.da automatically highlights silicon data outliers, enabling engineering teams to quickly identify and correct underlying issues in design and manufacturing and boost productivity. Last quarter, we had a groundbreaking generative AI announcement with Microsoft for accelerating chip design, Synopsys.ai copilot. The integration of Gen AI across Synopsys.ai provides chip designers with collaborative capabilities that offer expert tool guidance, generative capabilities to enable RTL and collateral creation from natural language. Following positive feedback from initial pilot participants, AMD, Intel and Microsoft will be adding a number of other companies with our beta rollout. In Q1, we also won significant multi-die package designs. Our 3DIC Compiler platform gained substantial momentum in multi-die packaging. Multi-die implementations continue to increase in the HPC market with an expectation that by 2028, 40% of HPC designs will be multi-die architectures. Like the transition to AI this new design paradigm will create significant opportunity for both our EDA and IP businesses. Moving to our systems business. Hardware-assisted verification had a strong quarter with excellent booking on ZeBu and HAPS, across multiple geos with eight new hardware logos. We saw share expansion at a large Asian OEM on ZeBu 5 and grew our HAPS footprint at two top North American customers. In system software, bookings momentum continued with key automotive OEMs and Tier 1s. One example was the collaboration we announced with Continental. Integrating our industry-leading virtual prototyping solutions within Continental's automotive edge development framework, we're building the digital twin capabilities that allow automakers to accelerate their software development and improve their time to market. Now moving to Design IP, which continues to deliver industry-leading growth as the IP supplier of choice for leading HPC, AI, automotive and mobile chips at advanced nodes. This quarter, we closed a multiyear, multi-node and multi-foundry agreements to enable the next-generation automotive and IoT platforms in a landmark design win at the major North American semiconductor company. A keystone IP in HPC and AI is PCIe 6.0, where we lead the industry with more than 50 lifetime wins. We demonstrated our next wave of innovation by showcasing our PCIe 7.0 technology at DesignCon 2024. Multi-die packaging is a significant tailwind to IP as well as EDA. We want four die-to-die IP engagements in the quarter surpassing 45 lifetime enhancing our leadership in this emerging space. We proudly demonstrated the industry's first silicon success for UCIeS by IP in TSMC, NCE and N5. The tight integration with our flagship EDA tool, 3DIC Compiler is generating significant productivity gains with improved line margins. Finally, at the beginning of the quarter, we launched our new ARC 5 RISC 5 based portfolio with strong customer interest. The ARC processors are highly configurable and extensible to deliver optimal power performance efficiency for a broad range of applications such as automotive, storage and IoT. Now to the Software Integrity segment. which delivered record revenue despite a challenging macroeconomic backdrop for enterprise software. We continue to evaluate strategic alternatives for this business, and we will provide an update when we complete this process. While the company engages in this process, the Software Integrity Group will continue to focus on investing and integrating in our market-leading products and serving customers with our leading application security testing portfolio and a global go-to-market execution. In summary, we had an excellent start to the year, building on underpinned by multiple secular growth drivers. We have a resilient business model and our customers continue to prioritize investments in the silicon systems that position them for future growth. We are aligning our portfolio investment with the greatest return potential to accelerate our growth. Thank you to our employees partners and customers for their passion and commitment. Finally, we look forward to providing you more insight into our business, strategy and growth opportunities at our upcoming Investor Day, which will be held in conjunction with our Synopsys Users Group event in Santa Clara on March 20. I hope to see many of you there. With that, I'll turn it over to Shelagh.

Operator:

[Operator Instructions] Our first question comes from the line of Gary with Wells Fargo Securities. Gary, the floor is yours.

Sassine Ghazi:

Thank you, Gary, for the question. You are correct. When we guided FY ‘24, we called out two possible headwinds. One, the continued enterprise software slowness and the one was around China, both the macro and the impact of the export control. That will continue in terms of our balanced view as we're looking at the year. And as we communicated well, we believe that being pragmatic around the China growth as we look at FY '24 was important. Now as you saw in Q1, as you're calling out, strong Q1 that is due to some timing of our pull down of our business, be it in EDA or IP that can vary quarter-over-quarter but the remainder of the year is pretty much what we communicated when we guided the year.

Shelagh Glaser:

Yes. The backlog is $8.2 billion for the quarter. So we had obviously a record backlog in Q4 of $8.6 billion and that's sort of the natural lumpiness of timing of big orders, so that was a pretty normal expectation. And then some of the goodness we saw in some of our other with some improvement in some ForEx. And so obviously, that can ebb and flow, but that's what we saw in Q1.

Sassine Ghazi:

Thanks, Gary.

Operator:

Our next question comes from the line of KeyBanc. The floor is yours.

Sassine Ghazi:

Yes, Jason.

Shelagh Glaser:

Yes. I wouldn't say there's anything unusual about it. I mean, year-over-year, we're up about 19%. So we kind of think about managing these things on a yearly increment because you think about timing of renewals and things like that, which usually we think about over the course of 12 months. So there's nothing really specific about the Q4 to Q1 other than I would point out that Q4 was an all-time high. So in some senses, that all-time high. We'll go through sort of the natural pull down and then replenishment of the backlog as we drive renewals and expansion.

Sassine Ghazi:

Yes. Thanks, Jason. As far as IP goes, the beauty of what we have in our IP business, given it's an interface, more silicon proliferation, more chip starts, they need IP to connect the chip, inside the chip, the different blocks to each other and connect the chip to the outside world, and this is where we lead with our IP business. Now that being said, there are constant new standards that are being delivered in order to support the complexity and the performance requirements for be it an AI chip or any chip that goes into data center, et cetera. Multi-die is another factor. The moment you start stacking dice together in a package you need more and more interface IP to connect that multi-die package together. So those were the factors that were driving the IP opportunity and we are very confident that this secular trend with IP demand will continue as long as there is more demand for silicon and more sophisticated silicon.

Jason Celino:

Okay. Appreciate that. Thank you both.

Shelagh Glaser:

Thank you, Jason.

Jay Vleeschhouwer:

Thank you, good evening. So I've seen with the Ansys acquisition, you are, of course, pursuing the largest convergence event in the industry. But the question is, in the meantime, could you talk about the kind of internal resources or investments you were making anyway as you await the transaction in terms of new technologies, new methodologies to effectuate conversions even before the Ansys transaction closes, particularly for the target markets that is motivating the acquisition, such as aero, auto and industrial?

Jay Vleeschhouwer:

Okay. For the follow-up, one of the things that distinguishes your current business is the customer concentration. That is at least with one customer, Shelagh's former company. Over time, as AI becomes increasingly pervasive and all the other phenomena that you've talked about and that Aart talked about this morning at the IFS event, called, how do you foresee your customer concentration perhaps evolving in core EDA, IP and/or hardware over the next number of years. When you think about all the various trends, technology trends that you've been speaking about for some time, do you think the concentration gets more? Or do you think that you will have less customer concentration over time and set aside Ansys for the moment?

Jay Vleeschhouwer:

Okay, very good. Thank you.

Operator:

Our next question comes from the line of Lee Simpson with Morgan Stanley. Lee, the floor is yours.

Sassine Ghazi:

So any time there is a new technology, in this case, the GA, the N2, 18A and maybe you heard Intel earlier today talking about 14A, fantastic opportunity for 2 reasons. In order for the customer to be able to explore that process technology innovation, even if they want to get a feel, do they want to move in the direction or not? Does it add value in terms of performance, power, et cetera? That technology, that process technology needs to be enabled. In order to be enabled, it means Synopsys needs to design its IP on that process technology and make sure that our EDA products are comprehending that new technology in order to deliver to the target performance power area of this pathology. So our work starts at least two years before we start talking about the GAA tape-out that I mentioned in the script in order to deliver the IP and e Design IP and making sure that our EDA products are available and ready. So you can think of it in the time frame that whenever you hear a new technology being introduced, process technology, there is an early, early effort to provide what is called the entitlement of that technology from a design point of view, and then you start seeing IP coming in, design start coming in around three, four months from announcement of technology from the leading foundries.

Sassine Ghazi:

Yes. Lee, good question. We're actually at -- if you think at the software over-the-air update that is being pushed out to, say, a car. What is needed in order for that software to be implemented is for the hardware to be adaptable to the software changes that got pushed down. How do you know? Now let's assume you're an automotive OEM? How do you know the response or the reaction of that software update to the function of that system, the cost. And this is where we come in, where you look at tire electronic system of a car, we can model every chip. We can test every chip. So as the software is adaptable and changing, the automotive OEM will get a feel and validation to every change they make without having to change, of course, the chips and the actual silicon that is in the car. So that's really where we come in, is that's what we're referring to electronics digital twin, where we have the ability to model every aspect of the electronics, the chips and the car. So those automotive OEMs can do exactly what you described.

Sassine Ghazi:

Thank you.

Joe Vruwink:

Great. Thanks for taking my questions. I wanted to go back to IP performance. Sassine, in your prepared remarks, you mentioned how AI is starting to lift growth around some of the core EDA software lines. I'm wondering if you can maybe do that but for IP and how AI development that customers are maybe starting to lift growth in your IP portfolio. And then related to that, I would imagine these are a lot of advanced IP applications. Is this starting to show up? And what could maybe be favorable price mix, I think it's interesting, if you look at margins over the last four quarters now is actually higher than the Design Automation segment. So there seems to be something going on there that's quite impressive.

Joe Vruwink:

Okay. That's great. And then second question, just looking at your inventory balances, a pretty nice jump there, which I imagine relates just to your expectations on the hardware business looking forward. Any changes in those expectations here at the start of the year? And then I guess related to this, how do you think about the concept of hardware cycles at this point? In the past, there was an all-new platform generation and then upgrading along the way. So you would kind of get ebbs and flows, but we're now several years into a strong hardware environment. How do you see that progressing going forward?

Sassine Ghazi:

Yes, sure. Joe, if you go back eight, 10 years ago, selling hardware to customers. The customers view viewed it at the time as an option. They could have gotten the job done without it, but they used it because it accelerated their efforts. You fast forward to now, there is no way a chip can go to tape-out, meaning to manufacturing without having many, many cycles of emulation and prototyping to make sure that you cover as much as possible in terms of verifying the chip before you committed to manufacturing. So it's no longer a ebbs and flows of demands around hardware. There's a constant need by our customers to expand their investment and support the latest and greatest systems in order to take advantage of ensuring that the silicon they get back from manufacturing is going to be functioning and working.

Sassine Ghazi:

Thank you, Joe.

Operator:

Our next question comes from the line of Harlan with JPMorgan. Harlan, the floor is yours.

Sassine Ghazi:

Thank you, Harlan, for the question. Actually, that's exactly what we refer to as pervasive intelligence. Exactly what we -- when we talk about, we're entering and we are in the era of pervasive intelligence, it's more and more devices are interconnected and smart devices. So that exactly means the reference you made AI on the edge, et cetera, which requires more sophisticated silicon and a broader silicon proliferation of those advanced chips. And for our industry, for us, when you think about EDA and IP, that's a fantastic opportunity. And this is where when we make commentary that despite the ebbs and flows of the semiconductor market, the cyclical market, we don't see it because the design starts is tied to those R&D investments that customers are expanding for all these different applications. So absolutely, we're seeing it. We're engaged with those customers and when we start describing our company as silicon to systems in that era of pervasive intelligence is exactly the opportunity that we're talking about here.

Sassine Ghazi:

So the customer feedback has been truly overwhelmingly positive around 2 points they make. One, the challenges they're dealing with, they're looking for a deeper collaboration in order to solve the problems they're running into today. And as importantly, they're going to face into the future. So from a -- anticipated solution the way the customers are looking at current product and future products, they are looking forward to this combination. Now the second feedback that is consistent is what where you were touching on, which is the system level perspective which is, if you look at the various market verticals, you can argue each one of them is going to go through an inflection point at various points in time. If you fast forward seven, eight, 10-years from now and you pick an industry, let's say, industrial health, et cetera. They will go through that inflection point of transfer and digitizing their applications in order to be connected in order to be smarter devices in their application, et cetera. And this, again, where Ansys has a very strong presence. Because Synopsys for -- since its existence, we serve the chip design customer base. And of course, we extended into our system companies where today, about 45% of our business is with system companies, but those are system companies around hyperscalers and mobile primarily, many, many opportunities to expand with other system companies. And that's where Ansys will bring in more than just the silicon aspect that is needed for 3DIC, but that whole silicon to system modernization for the rest of the market verticals.

Sassine Ghazi:

Thanks, Harlan.

Joshua Tilton:

Hey guys, can you hear me?

Joshua Tilton:

Great. Actually, I really want to follow up on that last question about the customer feedback on the Ansys acquisition. Is the positive feedback that you're hearing from customers that currently don't leverage the benefits of the existing Ansys analysis partnership? Or are these existing customers of both Synopsys and Ansys?

Joshua Tilton:

Makes total sense. I guess my follow-up to that then is just are you seeing any signs from your existing Synopsys customers of excitement around customers who didn't leverage this partnership previously and now because of these integrations to come are like reaching out to you asking about the potential, the opportunities? And basically, is there any early signs that you're going to see incremental synopsis plus Ansys users and payers because of this partnership or this acquisition that will quite first point out.

Joshua Tilton:

So just to be clear, the opportunity is more about making Ansys customers that aren't Synopsys customers, Ansys plus Synopsys customers and less about making Synopsys, Synopsys for a customer.

Shelagh Glaser:

Yes. And Josh, what we shared in the announced that by year four, we'll have a run rate of $400 million in synergies. It was cross-sell both ways is a big part of that. And then as Sassine's talking about that multi-die that is further monetization inside an existing customer because that's a more integrated solution than they're currently able to for either one of us individually.

Sassine Ghazi:

Yes. Thank you, everyone.

Operator:

Ladies and gentlemen, that ends today's conference. You may now disconnect.

Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter and Fiscal Year 2023. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Trey Campbell, Senior Vice President, Invest Relations. Please go ahead.

Aart de Geus:

Good afternoon. In Q4, we exceeded the high end of all our guidance targets and delivered another quarterly revenue high at $1.599 billion. Q4 thus capped a record year, growing revenue by 15% to $5.84 billion, with strong orders expanding backlog by $1.5 billion to $8.6 billion. We further improved non-GAAP operating margin to 35.1%, increased non-GAAP EPS by 26%, generated $1.7 billion in operating cash flow while maintaining an exceptionally strong balance sheet. Clearly, Synopsys has moved forward with sustained momentum. Over the last five years, we've grown revenue at 13% CAGR, expanded non-GAAP operating margin by 13 points, and increased non-GAAP EPS at a 23% CAGR. Through the year, we also widened our differentiation by substantially expanding our AI-driven product capabilities, but also through unique collaborations that strengthened our customers' differentiation while cementing deep long-term relationships. We thank our employees for their passion and dedication, and our customers for their business and trust in Synopsys. Meanwhile, dark geopolitical clouds are inflicting unimaginable harm in multiple conflict zones. Our hearts hurt with deep compassion for our employees, families, colleagues, customers, and all others impacted by pain, loss, and uncertainty. Yet, we will never give up believing in the positive potential of humanity. It is thus heartwarming to see how fast our teams have turned compassion into caring, caring into action, and how respect and support for each other is an active norm at Synopsys. Let me now briefly share some thoughts on the state of the industry and our company before I pass the baton to Sassine. From the first days of Synopsys 37 years ago, Synopsys has enabled and navigated the exponential ambition that came to be defining the semiconductor industry and which in turn radically impacted the world. Our initial contribution, synthesis, revolutionized digital design. We ushered in the transition from CAD, Computer Aided Design, to EDA, Electronic Design Automation, so far delivering roughly a 10 million X increase in design productivity. During Synopsys' entire existence, the vast majority of our products have been the state-of-the-art. Together with the leading foundries, we thus empowered digital age exponential, referred to as Moore's Law. And then at the very moment that the economics of classic Moore's Law are slowing down in terms of transistor performance and cost improvements, the era of big data and AI becomes real, triggering enormous compute needs on the horizon. About eight years ago, Synopsys forecasted this age of smart everything would become the driver for the semiconductor growth to a trillion dollars in this decade. And here we are. This year's Generative AI advances and furious adoption clearly fulfill our vision. As Pervasive AI is now massively underway, the classic Moore's Law era in turn is morphing into the SysMoore era, systemic complexity but still with a Moore's Law exponential ambition. SysMoore is happening in front of our eyes by reinventing architectures not based on a single chip, but on multiple chips, tightly connected, or even stacked on top of each other with extreme proximity. These so-called software-defined multi-die architectures will enable massive increases in the number of transistors available. And again, Synopsys is at the heart of the heart of catalyzing exponential impact. Our investments in multi-die design, our massive collection of IP building blocks in many silicon technology, our prototyping and electronic digital twinning technology that lets customers run software before the hardware actually exists, are all essential enablers driving the new race into AI driven computation. Adding one more spark to our technical leadership, Synopsys also pioneered the use of DeepLearning.AI in chip design. Applied to optimization, verification, and test, production results are outstanding, and adoption is broad and rapid. Most recently, our announcement of exciting GenAI capabilities adds yet another angle to driving the state-of-the-art forward. If nothing else, my enthusiasm for both the CISMO opportunity and for our technology advances should give you a sense how Synopsys is on the move. Talking about on the move, we're also well on the way in our executive leadership transition. I have great confidence, expectations, and enthusiasm for Sassine Ghazi as our next CEO. Sassine, please give us your perspective, vision and ambition for Synopsys. The floor is all yours.

Shelagh Glaser:

Thank you, Sassine. 2023 was an excellent year highlighted by record revenue, record non-GAAP operating margin, and record earnings. We continue our strong execution with financial discipline and are confident in our business heading into 2024, driven by our execution and leadership position across our segment, robust chip and system design activity by our customers who continue to invest through semiconductor cycles and with $8.6 billion in non-cancellable backlog, the stability and resilience of our time-based business model. As a result, while the macro environment is uncertain. We expect to grow revenue 12.4% to 13.5%, expand non-GAAP operating margin by approximately 2 percentage points, and drive non-GAAP PPS growth of 19% to 20% in 2024. Let me provide some highlights of our full year 2023 results. We generated total revenue of $5.84 billion, up 15% over the prior year, with double digit growth across all key products and geographies. Total GAAP costs and expenses were $4.6 billion and total non-GAAP costs and expenses were $3.8 billion, resulting in non-GAAP operating margin of 35.1%. GAAP earnings per share were $7.92 and non-GAAP earnings per share were $11.19, up 26% year-over-year. Now onto our segment. Design automation segment revenue was $3.78 billion, up 14% driven by strengths in EDA software and hardware. Design automation adjusted operating margin was 38.1%. Design IP segment revenue was $1.54 billion, up 17%, driven by broad-based strength. Design IP adjusted operating margin was 34.5%. Software integrity revenue was $525 million, up 13%, and adjusted operating margin was 14.5%. Turning to cash. Operating cash flow for the year was $1.7 billion. We ended the year with cash and short-term investment of $1.59 billion and total debt of $18 million. During the year we completed buybacks of $1.2 billion or 80% of free cash. Now to targets which reflect the impact from export control regulations and assume no further changes for the year. Based on our current assessment of timing of hardware and IP deliveries, we expect the first half, second half split of approximately 48% to 52% for revenue and non-GAAP EPS. For fiscal year 2024, the full year targets are revenue of $6.57 billion to $6.63 billion, total GAAP costs and expenses between $5.0 billion and $5.05 billion, total non-GAAP cost and expenses between $4.14 billion and $4.18 billion, resulting in non-GAAP operating margin improvement of roughly 2 percentage points, non-GAAP tax rate of 15%, GAAP earnings of $9.07 to $9.25 per share, non-GAAP earnings of $13.33 to $13.41. Cash flow from operations of approximately $1.4 billion, which includes an impact of approximately $200 million of 2023 taxes that we will pay in ‘24 and approximately $400 million of higher cash taxes due to the amortization of R&D expense. Following 2024, we expect cash tax growth rate to be approximately in line with operating income growth over a multi-year period. Now to targets for the first quarter, which includes an extra week compared to the first quarter of fiscal 2023. Revenue between $1.63 billion and $1.66 billion, which includes approximately $70 million from the extra week. Total GAAP cost and expenses between $1.22 billion and $1.24 billion, total non-GAAP cost and expenses between $1.02 billion and $1.03 billion, GAAP earnings of $2.40 to $2.50 per share, non-GAAP earnings of $3.40 to $3.45 per share, including approximately $0.14 from the extra week. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliation. I also want to highlight that we will be hosting our Investor Day on March 20th, which will be held in conjunction with our Synopsys Users Group event in Santa Clara. We look forward to seeing many of you there. In conclusion, we entered 2024 with momentum and confidence, reflecting our leadership position across our segments, robust design activity by our customers who continue to invest through semiconductor cycles, and the stability and resiliency of our time-based business line. With that, I'll turn it over to the operator for questions.

Harlan Sur:

Good afternoon and congratulations on the strong execution and fiscal ‘24 guidance.

Harlan Sur:

You're welcome. Hardware verification, emulation, prototyping, I mean, this has been a big contributor to your double digits revenue growth profile over the past number of years. Lots of customers focusing on verification on these very complex chip designs, a lot of them wanting to get a head start on the embedded and application software development. Is the team anticipating another strong year next year for hardware? Will it be growing at a double-digit sort of growth rate within your fiscal ‘24 guidance? And if I look at inventories, right, they're up 53% year-over-year to kind of record levels, which I think is a good indicator of a strong hardware pipeline, but wanted to get your views.

Shelagh Glaser:

Sure, as Sassine said, we had a record in 2023. We expect another record in 2024, and we're building inventory to be able to fulfill our customer demands.

Sassine Ghazi:

So again, exactly the way you're outlining the requirement, there is two factors. There's the complexity and then there is the different methods of designing an SoC or chip with multi-die is opening up the door for new protocols, UCIE, the PCIe, the CXL, the one that you've listed. There are different protocols for various markets for automotive. As they expand their sophistication in developing the electronic system, it requires different requirements for the IP, interface IP for an automotive application. What we outlined in the script as well is today, we are the leading supplier for TSMC, Samsung and Intel Foundry business. And that puts us in a great position because most of these complex chip developments are on these advanced foundries. And today, we are in a very fortunate position to be the partner and the leader in providing the IP for that business. So we expect that growth to continue, given the market demand for the sophisticated chips will continue.

Sassine Ghazi:

Thank you.

Joe Vruwink:

Great. Hi, everyone. I maybe want to start by parsing out some of the demand commentary. So first, there was a big step-up in backlog. I'd imagine that bodes well for 2024 and 2025 positive for revenue. At the same time, maybe the incremental moderation you're signaling in China, as I think about just the last 12 months, I think China contributed about 2 points worth of revenue growth, just the incremental revenue contribution from China. So arriving at the 13% growth guidance, are you really seeing kind of good strength, something better than 13% and then China is maybe just a more neutral factor in your outlook?

Joe Vruwink:

Okay. That's clear. Thank you. And then just on the topic of Generative AI, I did want to maybe get your take, if it's possible to contrast just the pace of product development incorporating such a technology relative to what you've done in the past? And I guess the context for this question, as I think back to DAC in July, there were actually members of the Microsoft verification team speaking about how they wanted more robust tools from their EDA vendors that incorporated GenAI and we're not very far from July. And here you are with a product in conjunction with Microsoft and now Microsoft verification is using this in their workflows. So it seems like a very quick turnaround. Is it that much quicker than maybe what Synopsys was able to do in the past?

Joe Vruwink:

Great. Thank you very much.

Operator:

We'll take our next question from Vivek Arya with Bank of America Securities.

Shelagh Glaser:

So, Vik, thanks for the question. This is Shelagh. I'll jump in on that. So we're obviously taking a balanced stance as Sassine had talked about at the we're at a 13% growth year-over-year. And we're seeing design automation, Design IP have incredibly strong momentum. You mentioned the $8.6 billion backlog. We're seeing that growth in line with our long-term targets. And we're seeing AI as a catalyst, but it's in its early inning. So we think it's a long-term growth catalyst. And we're looking forward to having it be able to help drive our business over the horizon. But the two headwinds are China, as we've talked about the macro situation in China and the restrictions that have been imposed on China, are having some dampening effect. We expect China to grow in '24, but at a lesser rate than it grew in '23. And the other headwind that we have is we are expecting a muted environment for enterprise software spend to impact our software integrity business, and we're assuming that, that business will be single-digit growth in 2024. So it's the combination of those headwinds and tailwinds that's leading to our 13% growth rate at the midpoint.

Sassine Ghazi:

So the way we're thinking and we expect this over the last few calls, which is AI will be offered to our customers through a subscription license, meaning, if a customer wants to use an AI capability, be it a DSO.ai or VSO.ai, it will be offered as an incremental spend for the customer to get access to that technology. And in some early adopter cases where they’re still not ready to make the long-term commitment, we're offering it as well in terms of consumption base. They may be looking for one project to use it, et cetera. And the Copilot in particular case, it's still be early, fairly maybe early stage in terms of us to talk about monetization and how is it contributing overall. But those are the flexibility tools per se, we're providing the customer to get access to it.

Sassine Ghazi:

Thank you, Vivek.

Jason Celino:

Great. Thanks for taking my question. The backlog number, it's quite impressive. Looking back at the last couple of years, it looks like it's sequentially the biggest quarter-over-quarter increase we've ever seen, up 20% year-over-year. Just wanted to check how much of this has been driven just from the AI design activity or the AI tool revenue. It sounds like it was more broad-based, but just wanted to check.

Jason Celino:

Okay. Interesting. Thank you. And then one question on the OCF guidance. It will be down next year. Are you saying that there's a $600 million headwind from cash taxes and then additional amortization and then are you saying it's going to grow just in line with net income growth that you're after? Can you clarify?

Jason Celino:

Got it. But this is the new base level, right?

Jason Celino:

Got you. Okay, great. Thank you.

Shelagh Glaser:

Thank you, Jason.

Jay Vleeschhouwer:

Thank you. Good evening. For Aart and Sassine, first and a financial follow-up for Shelagh. For Aart and Sassine, one of the tailwinds that you've had for the last number of years, and we've spoken about this often is what you've referred to as domain-specific architectures on the part of your customers or specialty chips. And AI is probably a very special case of that. The question is, how do you think the whole phenomenon of the main specific design at either the chip or system level is going to be fundamentally altered by the AI phenomenon? And in turn, what does it mean for any additional investments you need to make outside of R&D, for example, in AE capacity services, et cetera?

Jay Vleeschhouwer:

For Shelagh, one of the largest components of your backlog has been FSAs which are, I would assume, largely related to IP. Is there any reason to believe that in future, the pull down of FSAs for IP consumption would be faster or larger than has been the case to date? And for that matter, were FSAs a large component of the $1.5 billion sequential increase in backlog that you noted?

Sassine Ghazi:

Thanks, Jay.

Operator:

We'll take our next question from Charles Shi with Needham.

Shelagh Glaser:

Yeah. Thanks for the question. So the backlog was broad-based. It was across multiple customers. And as Sassine said, some of them was larger renewals and new deals that we booked. There was -- there's no change in the duration in our contracts. So there's no change from our typical duration. As we were putting the forecast together for the year, we are really balancing the headwinds and tailwinds that we're seeing in the business, and we're seeing because of the backlog, we're seeing very strong momentum in the core business in design automation and Design IP where we're seeing the headwinds is on China, in particular, which obviously has been a large growth driver for us for the last several years. We're seeing that growth rate slower and then the other one is SIG, which the Software Integrity business is still -- we anticipate going to be impacted by a difficult software enterprise purchasing environment. And so that's why we've got that business forecast at single-digit growth. So it's really the balancing of those things. But we are seeing design automation and design IP aligned with our long-term goals for those businesses.

Shelagh Glaser:

Thanks for the question.

Shelagh Glaser:

Yeah. It's really just the balance of how we see the customers wanting to ingest our hardware and our IP business. So it's fairly aligned also with what we saw in '23 and fairly aligned with what we saw in '21.

Trey Campbell:

Thanks, Charles. Let's do one more question and then if you could turn it back over to me, Lisa.

Gianmarco Conti:

Hi, there. Thank you for taking the questions. So I guess the first one would be, how should we think about the recurring revenue rate into 2024? Is it fair to assume that given that we're expecting another record [hard year] (ph) into '24, it will inch closer to 80%. And secondly, could you provide some more color on the SIG strategic initiatives that you're considering?

Shelagh Glaser:

Yeah. And I would add that on the recurring revenue question, we're not expecting a substantial change in that. We've had a record hardware year in '22 and '23, and we're expecting another one in '24, but the overall business is growing too. So it won't substantially change the mix of recurring revenue. Thank you for the question.

Aart de Geus:

Thank you. A couple of personal words in closure here. Since the IPO in 1992, this is my 128th earnings call. I did not miss a single one, but I suspect that literally only Jay Vleeschhouwer remembers exactly what was said at each one of these calls. So a big thank you to you, Jay. But really huge gratitude to all of you for your feedback, you have write-ups, your advocacy on the market, but also for never giving up on asking questions where you perfectly well know that we will never answer them. So I really hope that you will keep that up with Sassine. But more importantly, a gratitude for having been travel made and family members in raising this fragile Synopsys start-up child into the strong worldwide market and technology leader that is today. Thank you. Now some CEO transitions are hard, but I think we're doing very well. Sassine is the perfect choice for CEO. He already leads with ambition, heart and smart and of course, his 25 years of experience at Synopsys is comprehended is complemented, I should say, by great customer relationships and very importantly, trust. Sassine has my respect, my enthusiasm and my full support. So please give him your support as well. With that, I look forward to from time to time, touching base with you, so until then, be well and thank you very much.

Operator:

Thank you. And that does conclude today's presentation. Thank you for your participation today. You may now disconnect.

Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Third Quarter of Fiscal year 2023. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Today’s call will last 1 hour. And as a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President, Investor Relations. Please go ahead, sir.

Aart de Geus:

Good afternoon. We delivered outstanding results in the third quarter, exceeding the midpoint of all our guidance targets, while reaching another quarterly revenue record. Revenue of $1.487 billion was in the high end of our guidance with non-GAAP operating margin at 35.3%. GAAP earnings per share was $2.17, while non-GAAP earnings per share was above our target range at $2.88. We generated $560 million of operating cash flow, ended Q3 with a backlog of $7.1 billion. By now, you have all seen our other news. So before I address our segment results and outlook, let me warmly welcome Sassine Ghazi to the call. Today, we announced that the Synopsys Board has named Sassine as Synopsys President and CEO starting January 2024, and that I will take the role of Executive Chair of Synopsys Board at the same time. I'm absolutely thrilled with this transition into the CEO role for Sassine. Sassine is uniquely qualified. He is a proven operational leader, a technology innovator and a trusted partner to our customers and ecosystem friends, but he is so much more than that. He embodies our values and culture, and inspires our company, including me, with his results focused leadership. Sassine, welcome to your first of many Synopsys earnings calls.

Aart de Geus:

Thanks, Sassine. You have my full support. Now let's turn to what we're seeing in the market. Technology industry trends are playing to our strength. The AI-driven Smart Everything era is putting positive pressure on the semi-conductor industry to deliver more. Despite economic challenges, semiconductor design starts and R&D investments continue unabated. Our relentless innovation drive has made Synopsys a catalyst for our customers' success in this new growth era for semiconductors. In fact, the market is playing out much as we expected when we planned the year and we are executing accordingly. Based on continued strong design activity, our high confidence in our business, we are raising our full year revenue guidance range to between $5.81 billion and $5.84 billion. We are increasing our year-over-year non-GAAP ops margin improvement expectation to 200 basis points. This is approximately 0.5 point up versus prior guidance. We are raising our full year non-GAAP EPS range to between $11.04 and $11.09. Shelagh will give you -- will discuss the financials in more detail. Prior to giving color on our segment results, let me update you on our AI progress. By now, I hope that we all understand that AI can and does and has further potential to unlock massive new productivity gains. So while we continue to embed AI in everything we do, not surprisingly, one consistent question most of you are asking is how will monetize our AI leadership? Let me address that question head on through the techonomic lens of product differentiation and business model framework including some early proof points. For AI monetization, we see three distinct value stream. First, through our design participation and the explosive growth in demand for AI chips. Second, by pervasively embedding our pioneering AI across our full EDA stack, which we call Synopsis.ai. And third, through AI-driven efficiency transformations, as we optimize and automate our own internal workflows. Let's start with AI chips. Use cases for AI are proliferating rapidly, as are the number of companies designing AI chips. Novel architectures are multiplying, stimulated by vertical markets, all wanting solutions optimized for their specific application. Third parties estimate that today's $20 billion to $30 billion market for AI chips will exceed $100 billion by 2030. In this new era of Smart Everything, these chips in turn, drive growth in surrounding semiconductors for storage, connectivity, sensing, AtoD and DtoA converters, power management, et cetera. Growth predictions for the entire semi market to pass $1 trillion by 2030 are thus quite credible. We are uniquely positioned to benefit. In the semi ecosystem, Synopsys is the leading EDA provider to AI chip designers. Designers requiring unmatched capabilities in design tools, particularly at the most advanced process nodes. They also need our leading interface IP portfolio as AI chips are banking on enormous amounts of data, driving new, faster and lower power interconnect protocol. Synopsys excels at this. In summary, AI chips are a core value stream for Synopsys, already accounting on a trailing 12-month basis for well over $0.5 billion. We see this growth continuing throughout the decade. Let's move to our second value stream, synopsys.ai. This is where starting in 2017, Synopsys, incidentally led by Sassine, pioneered AI-driven chip design, and we have relentlessly advance the state-of-the-art ever since. Using our AI to automate entire design sub flows, our customers report schedule reductions from months to weeks while simultaneously also achieving better results in terms of speed, power and area of the chips. In February, we reported that our customers had passed 100 commercial tape-outs using our AI. Today, the tally crossed 270 as adoption continues rapidly. Nine out of 10 of the top semiconductor vendors are using Synopsys.ai in production, and the tenth one is already testing our solution. What makes this doubly relevant is that the worldwide semi industry has a significant resource shortage. Third parties estimate a design engineering gap of between 15% to 30% by 2030. Even the multiplicity of National Chip Acts recognizes this, and AI in design automation will be critical to help bridge the gap. That's where the industry's first AI-driven full EDA suite, Synopsis.ai, comes in. Initially launched in 2020 for design optimization, we have since added AI-driven test and verification flows now in commercial adoption. Usage is expanding rapidly as customers are seeing stunning results. In the last quarter, our customers have demonstrated up to 10x faster turnaround time and double-digit improvements in verification coverage. Customers are also reporting more than 20% silicon test cost reduction. Recently, we engaged Synopsys.ai for analog and custom design. One of our top customers used our AI optimized Custom Compiler to achieve a 6% performance improvement over manually crafted custom circuits. Further completing our Synopsys.ai stack, more AI-driven manufacturing flow extensions are coming soon. But back to economics. Synopsys.ai revenue is just starting to ramp, but early proof points give us high confidence in its long-term growth prospects. We've moved from project-based experimentations to customers now adding Synopsys.ai subscription. Synopsys.ai has driven more than 20% value increases in several recent digital implementation renewals, often leveraging significant growth for the underlying core tools used by Synopsys.ai. This quarter, we saw multiple full-flow displacements to Synopsys.ai, driven by up to 10x productivity differentiation versus the competition, which brings me to generative AI. Over our history, key disruptive technologies have catalyzed innovation opportunities for Synopsys to deliver leaps in productivity. Gen AI is such a technology. Anchored in 35-plus years of experience in developing model-based solutions now with unparalleled data assets portfolio, we intend to harness Gen AI capabilities into Synopsys.ai. We see this delivering further advances in design assistance, design exploration and design generation. On the design flow spectrum from optionality to optimality, in other words, moving from many options in early architectures to highly tuned error-free tape-outs, Gen AI techniques will augment the exploration, accelerate design choices and automate some design generation. This will further broaden the intelligence dimensions in our Synopsys.ai. These new capabilities represent additional customer value, opening multiple new monetization opportunities. We will elaborate more on our road map in the coming quarters, which brings me to our third monetization value stream, operational efficiency transformation. Gen AI isn't just an opportunity for our customers. We, ourselves, truly intend to eat at our own AI restaurant, so to speak. We see significant operational efficiency and automation potential and processes across the company so that our employees can focus on higher ROI tasks. Our experimentation is in full swing, and we are rapidly learning the strength and challenging of these new approaches. Overall, fast progress on our AI journey, and it is great to have Sassine on the call for Q&A as he is very focused on our AI business strategy and monetization. Let me now give some color on our segments of Design Automation at roughly 65% of our business, Design IP at about 25% and Software Integrity at around 10%. Starting with Design Automation, we saw strong revenue momentum and the segment delivered its first $1 billion quarter. Fusion Compiler momentum continues to grow with increased customer share and Synopsys-enabled customers taping out first to a number of leading manufacturing nodes, including TSMC N2 and N5A, Samsung SF3 and Intel 18A. Fusion leadership at advanced node has also translated into key HPC core wins at both semiconductor and hyperscale companies. Transitioning to multi-die chip design, our 3D IC Compiler platform continued momentum across verticals, achieving deployment on the industry's first advanced 3D stacked heterogeneous design for smartphone. We also expanded our multi-die ecosystem enablement, including qualification for leading foundries, latest multi-die flows and support for key 3D design standards. Of note, we deepened our collaboration with Samsung Foundry to accelerate multi-die system design for advanced processes. Let's move to verification, where the need for acceleration is paramount. In Q3, we won a Zebu hardware-assisted verification engagement with a RISC-V AI chip provider and saw HAPS deployments for prototyping AI chips at a large hyperscaler and a large HPC company. Synopsys Cloud continues to deliver substantial differentiation and time-to-market gains for our customers. Our SaaS solution, which accounts for 70% of our Cloud users, continued to gain strong adoption with multiple AI chip start-ups, leading new SaaS deployments. Now turning to Design IP, which is roughly 25% of our revenue. We had an excellent quarter working closely with some of our partners to enable the most advanced process nodes in the design ecosystem. Just this week, Synopsys and Intel announced a very significant expansion of our long-standing strategic partnership in EDA and IP to speed the design and manufacturing of advanced SoCs and multi-die systems for Intel processes. This comprehensive agreement enables Intel's internal IDM 2.0 teams and their external foundry customers to accelerate chip and system design with a powerful portfolio of essential IP developed by Synopsys for Intel 3 and 18A processes. Synopsys IP is now key to ramping and filling multibillion dollar wafer fabs as the advanced node IP supplier of choice for customers and the manufacturing ecosystem. Further supporting this in Q3, we also announced the industry's broadest portfolio of silicon proven IP for TSMC's N3E process as well as an extensive portfolio of IP or all of Samsung Foundry's advanced process technology. In automotive, autonomous driving ADAS systems continues to drive strong demand for our IP. This quarter, we exceeded 30 design wins in 5-nanometer and won our first 3-nanometer design at a marquee automotive OEM. All in all, we have won IP sockets on more than 100 ADAS chips. Third, the Software Integrity segment, which represents 10% of our revenue. Against the continued challenging macro environment for enterprise software, the business delivered solid results. The imperative for security and quality in software has always been critical. And with the rise in Gen AI generated code, big new risks are emerging. Racing forward, we continue to develop innovative new solutions like our AI code analysis API offering on our Polaris SaaS platform. AI code analysis API enables developers to automatically submit code snippets from code assistance such as GitHub copilot and ChatGPT to receive instant feedback on whether the code may originate from risky open source projects. In summary, we had outstanding Q3 financial results and operational execution and are confident in our strong close to the year. We are raising our guidance for full year revenue and year-over-year op margin as well as non-GAAP earnings per share expectations. We have a resilient business model and our customers continue to prioritize investments in the chips and systems that position them for future growth. We continue to invest in technology leadership, multi-die design solutions, state-of-the-art IP and the leading edge AI-driven EDA suite to help catalyze this decade of smart, secure and safe products. And last, but certainly not least, I am just delighted to welcome Sassine as our new CEO. I would like to thank our employees and our partners for their passion and commitment. With that, I'll turn it over to Shelagh.

Operator:

Thank you. [Operator Instructions] We'll take our first question from Jason Celino with KeyBanc Capital Markets.

Sassine Ghazi:

Sure. First, thank you, Jason. And as Aart mentioned, actually, the AI journey for Synopsys started around 2017. I was the General Manager of our EDA business at the time, and no one in our industry was talking about AI in 2017 for EDA applications. Around the 2020 time frame, we actually had customers using it in early production stages. And now as you saw the number, many, many tape-outs. At the time, we started with the design space as the early stage of high impact using AI. And as you have seen us talk about the last couple of quarters with Synopsys.ai, where we're expanding the impact into test, verification, analog custom, manufacturing, et cetera. And Aart mentioned in his remarks that we have customers at this point buying our AI solution as part of their subscription license. And when a customer does that, they already see the value and the impact and they're willing to pay for it. And that's the stage we're in at this point.

Sassine Ghazi:

I'm sorry, the 20% increase in what? I missed the first part of the question.

Sassine Ghazi:

We are seeing, yes, absolutely two factors. One, there’s a pull-through of the technology that our AI system uses, Fusion Compiler, Prime Time, et cetera, et cetera. And the customer is adding money, new money in the agreement based on the AI system that we are selling them. So it’s not only an upsell and a pull-through of the license, it’s incremental value that the customers are adding to their renewal with Synopsys.

Sassine Ghazi:

Thank you, Jason.

Gary Mobley:

Good afternoon, everybody and thank you for taking the questions and congrats to both Aart and Sassine on the transition.

Gary Mobley:

And I just want to pick up where the last discussion point left off. I wanted to maybe probe into maybe how many renewals have come up since you went from on a per design subscription for AI tools to rolling into baseline license renewals. I just want to get a sense of how many of these license renewals are now including AI?

Gary Mobley:

Okay. Thanks you for that. I wanted to change topics and move to the different trends in the operating margin for the different business segments. I know that you called out in the past, quarter-to-quarter volatility in the op margins for the IP business, but we now have a trend with the trend downwards for the past two quarters. So maybe if you can speak to that specific to the IP business. And then conversely, you're showing nice gains in the Software Integrity business with seemingly not much revenue ramp. So maybe you can speak to the under occurrence there and as it relates to OpEx controls in the soft or integrity side?

Gary Mobley:

Thank you..

Operator:

We'll take our next question from Joshua Tilton with Wolfe.

Aart de Geus:

Not like I'm completely disappearing, right? Just to be clear.

Sassine Ghazi:

Josh, I've been part of this company for 25 years, and the last three years, it's really been the start of what we call like a momentum journey, and we'll continue that pace of the journey moving forward. What Aart and I when I was appointed to COO and then later President, we really set out three vectors as priority for the company. The first one is focused on the growth ambition; the second one is scaling and how do we scale efficiently as a company; three, technology leadership and innovation. And if you look at the results, they're really amazing. Over that period of time, we're able to grow revenue 17% CAGR, 700 basis points in non-GAAP operating margin and 26% CAGR EPS. And doing all of this while pioneering industry-first technologies like the AI solutions that we are talking about, plus 3D IC from a multi-die both IT and design tools, et cetera, et cetera. So as we look ahead, January 1, as you commented, it's just the continuity of the pace at a time where the market, the semiconductor chip activity, is so exciting, driven by the AI demand that requires more compute, either data center cloud or edge as well as everything going smart, smart everything in a car, in home, in the industry, et cetera. So it's really continuing that pace of momentum we created on all three vectors.

Joshua Tilton:

Super helpful. And I think just a quick follow-up that on track. When you guys started buying up all these SIG assets, I think the bullish take was we have this portion of the business that's growing a lot faster than the core EDA, and we could see this nice mix shift effect as SIG becomes a bigger piece of the total pie. But I guess, how do we think about when, from an investor perspective, we should kind of expect SIG growth to be back above the corporate average? Like, just maybe help us out with a little color there.

Joshua Tilton:

Makes sense. Thanks guys.

Operator:

We'll take our next question from Joe Vruwink with Baird.

Aart de Geus:

Well, you have our basic financial outlook because we have communicated that we're focusing on number one growth and continued gradual improvement of ops margin. And in many ways, this is against a backdrop that is fantastically exciting because there's going to be a wave of end users, and I mean with systems companies that all want to have AI, that all wants to have chips that are way faster, way lower power, way more data. In other words, the entire industry around us will be unhappy with semiconductors because they want more. And there is nothing better than that because that is what in the early days drove the whole Moore's Law at super high growth. And we have a similar feel going on right now. And you may say, well, but is the technology not limited? Well, no, it's not What has changed is that the architectures are all changing and that the ability to bring chips immensely close together, including stacking them vertically is now suddenly opening up. Still difficult, still expensive. But that's what FinFETs were before to and then suddenly out of nowhere there were over 10 generations of it. And I think this is exactly the space that we've entered. And so that's another way of saying design is going to become more complex, more engineers are needed. And given that the world supply of engineers is somewhat limited, more automation is the only answer to solve this. Again, not any difference than in the '80s, '90s, 2000s and we all feel this drive because the notion of smart everything has shown itself as relevant. Now a little portion of that is, well, how smart are we on the inside? And there's a lot that we can learn. And obviously, anything that we can automate or accelerate in our processes directly goes to the bottom line at that point in time. So Sassine job is to figure out how much of that money to the bottom line goes directly back into AI research, right? So that circle is very active.

Sassine Ghazi:

Yeah. In the early stages of AI, what the customers were struggling with were two things. One, I may not have enough compute; and two, I may not have enough licenses, EDA licenses. On the compute side, there are multiple ways that can be invested, but most of our customers figure that out given the value that they were able to see. . On the EDA side, the reason we started with project-based, we were really trying to figure out with the customers, what's the combination of number of licenses needed for an AI job because AI is pulling far more licenses of the technology that is under the hood compared to an engineering -- individual engineer effort. So after we learned from that experiment in, let's call it, around 2020 and comers wanting to scale it up, we started providing it as part of the subscription license in order to enable broader and easier adoption for the customer. And with that came monetization to Synopsys. As I said, incremental monetization on two sites, more selling of the licenses plus selling the AI technology as well. We have now actually many. Still early stages, though, when I say many in terms of renewals, remember, those are 3-year cycles of renewals and 2020 was just around the corner in terms of a renewal cycle. But we have many customers that they have gone through renewing their subscription license with Synopsys and added more technology that’s pulling and AI license.

Aart de Geus:

Thank you, Joe.

Vivek Arya:

Thank you and best wishes to both Aart and Sassine on your new roles.

Vivek Arya:

So I had a near and a longer-term question. So on the near-term design IP, when I look year-to-date, if the model is right, your sales are basically flattish so far this year, I think maybe up 1%. So I'm curious, why is it well below your long-term growth expectations? And then when can we see this business get towards your target, which I think is to grow at kind of in a mid-teens annual basis?

Vivek Arya:

All right. And for my follow-up, I'm trying to think of what is the right way to think about your sales growth for the next two to three years? Can it stay mid-teens? Will it decelerate, right, to low double digit, will it accelerate? Because AI is growing, but that's only 10% of your sales. Is that really enough to help Synopsys continue to grow at this mid-teens pace? Because when I look at a lot of the other parts of semis, right, whether it's consumer or parts of industrial, a traditional data center, they have really slowed down. So I'm curious, is this AI enough to help Synopsys continue to grow its sales at kind of this mid-teens space over the next two to three years? Thank you.

Vivek Arya:

Right. Without giving guidance, I guess what I'm curious about is your insights on the growth in the business, excluding AI because you gave $0.5 billion number over the last two months. Your total...

Vivek Arya:

Thank you.

Ruben Roy:

Thank you and my congrats as well to Aart and Sassine. And Aart, I hope we get to see you plan to more going forward from here.

Ruben Roy:

You'll see me there, definitely. So Sassine, I wanted to ask on AI as well around the sort of how you're viewing the pervasiveness of AI, talked about the $100 billion market potentially in AI chips by the end of the decade and the 10% of $1 trillion semiconductor market. Early days, but do you think for now that I embedded tools are slated better for a certain portion of semiconductor design market? Clearly, generative AI design helper mechanism can be pervasive across the entire game of semiconductor, I would think. But for now, is that the right way to think about it is this kind of large designs with very complicated place in route or do you think it will be more pervasive than that?

Ruben Roy:

Very helpful.

Ruben Roy:

Yes, it's a very interesting discussion. Thanks for all the detail guys. I could ask what I hope is a quick follow-up. Some of your semiconductor customers have started to show their own accelerated compute platforms as platforms for EDA tools and in those demonstrations more efficient than current standard server farms running EDA. What's your feeling on that? Do you view that, obviously, early days, but as additional accelerants to EDA use or semiconductor design activity out there as the overall productivity could get faster as we put some of these new systems in place for your tools?

Ruben Roy:

Got it. Thank you very much.

Operator:

[Operator Instructions] We'll take our next question from Jay Vleeschhouwer with Griffin Securities.

Sassine Ghazi:

Jay, excellent question, and I remember that discussion as well. When we introduced MDM at the time, if you remember, for our digital platform data model, it was around the 2015 time frame. So when you look at the decade, it's right around the corner. We continue -- and that's what's really the primary foundation to build Fusion, where you bring timeline Fusion Compilers, SRC, et cetera, the whole digital platform on one unified data model that is helping us accelerate our innovation pace and rhythm because tools are connected and we're able to move much faster in delivering a new technology, new products. And as you can imagine, the team is constantly looking, is there a more efficient new data model that we can build on? And you mentioned the 2019 Investor Day, maybe us build the beams. We will have, hopefully, in the first half of '24, it will be great timing to talk about how we see the future given all the very exciting areas of technology innovation and the market around us.

Sassine Ghazi:

Would I say Investor Day?

Sassine Ghazi:

I was too excited.

Charles Shi:

Hi. Thank you for squeezing me in and congrats to Aart. It's really been my great pleasure and honor actually to work with the luminary of the EDA and semiconductor industry as you are. Also congrats, Sassine.

Charles Shi:

Yes. And congrats to Sassine as well. Looking forward to working with you in the future. Maybe my question. I wanted to ask again on the IP revenue. It seems like so far this year, it's been tracking to like single-digit growth this year. It doesn't sound too right because your long-term guidance is kind of like in the mid-teens. Unless are you expecting we get a big bump in Q4? Or are we going to be tracking below that long-term guidance. But maybe next year, we should expect a somewhat above the long-term guidance kind of growth? That will be my first question. Thank you.

Operator:

We'll take our next question from Gianmarco Conti with Deutsche Bank.

Aart de Geus:

Yeah. We set out two priorities for SIG about 1.5 years, two years ago. One is building out our Polaris platform, which is an integrated SaaS, which is the static and dynamic software composition analysis and its cloud-native cloud-ready system. So from a go-to-market point of view, we're still in a transition phase or transitioning our customers to Polaris while we're selling Coverity, Black Duck, et cetera, all the other products that they can be primarily used. So that's from a technology platform point of view. From a go-to-market standpoint, actually, we've done a fairly good job in putting the right investments, how much do we do direct, how much do we do through distribution. And we're still on that journey of evolving our go-to-market. Where we're seeing difficulties right now is the negotiation with the customers, given the headwind, they're ending up being a shorter renewals and taking longer to close. So that's really the impact we're seeing, not from a value market share, et cetera, et cetera standpoint. It's just the budget is tighter, in particular, for our enterprise customers.

Aart de Geus:

Operator, we will take one more question.

Blair Abernethy:

Well, thanks very much. Let me offer my congratulations on the transition as well, gentleman. Just on the IP business, I'm wondering, if you can give us a sense of where you're seeing the biggest opportunity over the next, say, three to five years? Is it 3D multi-die interconnects? Is it chip design IP and just sort of where are you -- how are you thinking about your investments in this segment?

Blair Abernethy:

Thank you so much for the call. Look forward to talking with you over the coming days.

Trey Campbell:

Thank you.

Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Second Quarter of Fiscal Year 2023. At this time, all participants are in a listen-only mode. After the speakers' remarks, we will conduct a question-and-answer session. [Operator Instructions] Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President and Investor Relations. Please go ahead.

Aart de Geus:

Good afternoon. We delivered excellent results in the second quarter exceeding all our guidance targets while reaching another quarterly revenue record. Revenue of $1.395 billion was above the high end of our guidance range, with non-GAAP operating margin at 33.3%. GAAP earnings per share was $1.76, while non-GAAP earnings per share was above the high end of our target range at $2.54. We generated 703 million of operating cash flow and increased our backlog to 7.3 billion. The market is playing out much as we expected when we planned the year. Demand is weaker for semiconductors overall with consumer markets most impacted. Despite choppy macroeconomic conditions, customers continue to prioritize R&D for new chip designs so that they emerge stronger when demand accelerates. The transition to Smart Everything is well underway and will drive significant long-term growth for semiconductors and outsized contribution for us. Against this backdrop, we planned and are executing accordingly. Based on continued strong design activity and high confidence in our business, we are raising our full year revenue guidance range to between $5.79 billion and $5.83 billion. We're increasing our year-over-year non-GAAP ops margin improvement expectation to 150 basis points, up approximately 0.5 versus prior guidance. We are raising our full year non-GAAP EPS range to between $10.77 and $10.84. Shelagh will discuss the financials in more detail. Let me give some color for the quarter. In March, we held SNUG our yearly Synopsys Users Group Conference in Silicon Valley, including its follow on road shows we bring together over 12,000 passionate design engineers around our common focus of driving innovation in chip and system design. Life after three years of COVID, the conference was fantastically engaging. Our audience fully recognized how design parameters and product requirements have become exponentially more complex and interwoven, accelerated by the breakthroughs of multi-die designs. Simultaneously, the end market hunger for Smart Everything puts huge pressure on increasing performance-per-watt to the limit. And on top of that, security and safety are now becoming mandatory everywhere. Synopsys' vision and mission of smart, secure and safe thus sets both a high bar and foreshadows great opportunities for our customers and our company. Users told me, though, that while system complexities are growing exponentially, design resources are not. Design productivity thus requires a catalytic step function change in our approach. To us, this inflection comes from AI. We are embedding AI in everything we do. We have made world class advances in design flow automation and our customers are now adopting synopsis AI on production designs at a remarkable rate. This is not by accident. 12 years ago, we called out a vision of Smart Everything unleashed by the intersection of big data and machine learning. Since then, we applied ML everywhere on our product offering. In 2017, we decided to harness AI for entire design subflows and began investing in DSO.ai where DSO stands for Design Space Optimization. We rapidly progressed from prototype to customer validation of AI driven results in 2019, recognized by the ASPENCORE IEEE World Electronics Achievement Award for Innovative Product of the Year in 2020. The following year, at the 2021 HOT CHIPS Conference, we unveiled our pioneering AI journey and roadmap showcased by a slew of remarkable results. DSO.ai delivered not only better speed and power on large and complex design blocks, but it did so in a fraction of the time meaning month down to weeks, while requiring fewer, less specialized designers. This did not go unnoticed as it had been validated weeks earlier by Samsung, an early partner announcing the world's first AI driven commercial tapeout with DSO.ai. By the end of 2022, adoption, including nine of the top ten semiconductor vendors, had moved forward at great speed with 100 AI driven commercial tapeouts. Today, the tally is well over 200 and continues to increase at a very fast clip as the industry broadly adopts AI for design from Synopsys. But we have not sat still. At SNUG, we unveiled the industry's first full stack AI driven EDA suite Synopsys.ai Specifically in parallel to second generation advances in DSO.ai, we announced VSO.ai which stands for Verification Space Optimization and TSO.ai, Test Space Optimization. In addition, we are extending AI across the design stack to include analog design and manufacturing. Partners in the announcement included Nvidia, TSMC, MediaTek, Renesas and IBM Research, all providing stunning use cases of the rapid progress and criticality of Synopsys.ai to deliver their breakthrough results. As an example, Renesas achieved up to 10X improvement in reducing functional coverage holes and up to 30% increase in verification productivity. This is substantial progress. Yet it's still only the beginning of our AI journey. The roadmap of optimizing, automating and generative AI use cases is wide open to deliver productivity breakthroughs for years to come. Turning now to our segment results, let me start with design automation, which accounts for roughly 65% of Synopsys revenue. Design automation had a very strong quarter with robust order and revenue growth. Let me lead off by recognizing the one year anniversary of Synopsys Cloud, the industry's first and only SaaS solution that provides customers with a completely browser-based experience, optimized compute and preconfigured EDA flows. We're seeing excellent momentum as customers gain significant time to market advantages with the industry's only cloud optimized pay-per-use business model providing on demand tool access with cloud scale elasticity. In the past year, we have doubled our customer base every quarter this year with the SaaS model accounting for 70% of users. Market adoption of our fusion compiler continues to grow across vertical segments and manufacturing nodes. This quarter we won many major designs, including wins at two top Asian semiconductor companies and a leading high performance computing company. Fusion compiler is a leading advanced three nanometer node tapeout with roughly two-thirds of designs exclusively using Synopsys flows. We continue to drive our design automation leadership. In Q2, we announced a collaboration with TSMC to deliver digital and custom design EDA flows on their most advanced two nanometer process node. Our full EDA stack complemented with the timeless timeliness of IP offering, allows designers to jumpstart their two nanometer designs, differentiate their SOCs and accelerate their time to market. Expanding from digital, we continue to grow and displace competition in the custom design market. We earned eight new design wins in Q2, giving us 23 wins year-to-date. We also benefit from a growing pipeline of top customers using Synopsys for advanced node retargeting. Transitioning to multi-die chip design we're leading the industry's transformation from monolithic SoCs to multi-die systems with a comprehensive and scalable solution for fast, heterogeneous integration. In Q2, we deployed our multi-die VCS functional verification at a leading US high performance computing customer, delivering more than 2X faster turnaround time. We also announced our collaboration with TSMC and Ansys for multi-die system design and manufacturing, providing the industry's most comprehensive EDA and IP solutions on TSMC's advanced process technologies. We've often talked about the unbounded demands for verification. The need for verification acceleration is unrelenting. Our customers want more, more throughput, more capacity and more energy efficiency, all with lower total cost of ownership. This quarter we announced ZeBu Server 5, the industry's first emulation system with unmatched capacity to enable electronic digital twins of advanced SoCs. ZeBu Server 5 delivers this with 2X higher throughput and 2X lower energy usage compared to our previous generation. We are seeing pull from a broad range of semiconductor system and hyperscaler companies with exceptional adoption results. One large semiconductor company saw ZeBu Server 5 deliver a 40% reduction in compile times on multiple large designs. Finally, I want to highlight a breakthrough on the manufacturing front that Nvidia announced at its March GTC conference. Currently lithography is nearing the limits of what physics makes possible. Our collaboration with Nvidia remedies this by running Synopsys OPC, Optical Proximity Correction software on Nvidia's computational lithography platform named cuLitho. Our collaboration massively reduces compute time from literally weeks to days. Now let's move to design IP, which is roughly 25% of our revenue. This quarter, we're celebrating 25 years of being in the IP business. Starting with simple building blocks and interfaces, then we now provide entire IP subsystems. Today, we have over 7500 IP components supporting 340 process technologies, all driven by the same smart, secure and safe innovation imperative. Momentum in the business is very strong with demand fuelled by high performance computing, automotive and mobile applications where Smart Everything Devices need high speed and secure connectivity increasingly architected for multi-die systems. These systems drive the need for state-of-the-art high speed die-to-die interfaces led by UCIe or Universal Chiplet Interconnect Express, which is rapidly becoming the industry standard. We continue to build technical leadership in advanced nodes. In Q2, we received outstanding silicon results on our 224G PHY IP already demonstrated at multiple conferences. We're also achieving excellent silicon results and customer engagements on the advanced three nanometer process across multiple IP products, including our high speed interfaces and Foundation IP. Third, the Software Integrity segment, which represents around 10% of our revenue. Another milestone here as well as we just passed the $500 million mark in trailing 12 month revenue. The imperative for security and quality in software is vital. Today, every meaningful business is a software business. Our solutions help companies improve and manage security and quality vectors across a broad set of vertical end markets. Well, this part of our business is the most affected by the challenging macro environment. We delivered solid growth with notable wins across vertical segments, including technology, financials, healthcare and telecommunications. We also continue to see most of the segments revenue driven by customers adopting two or more of our solutions as they consolidate providers for efficiency and economics. One last closing point. This week we released our 2022 ESG report. Throughout this call, I have highlighted the privilege of delivering world changing technology. For Synopsys this starts with a commitment to maximize our positive impact and to use our influence to drive broad-based change. I encourage you to read our full report at synopsys.com. In summary, we had an excellent Q2 financial results and operational execution, growing confidence in the second half of the year. We are raising our guidance for full year revenue to between $5.79 billion and $5.83 billion. We now expect to improve full year non-GAAP ops margin by 150 basis points versus last year. We are raising our year-over-year non-GAAP earnings per share growth expectation to 21% to 22%. We have a resilient business model uncommon in most software companies. Despite expected macroeconomic headwinds throughout the year, our customers continue to prioritize investments in the chips, systems and security that will position them for future growth. As you heard, we continue to invest in advanced technologies, multi-die design solutions, state-of-the-art IP and the leading edge EDA AI driven suite to make this decade of smart, secure and safe products happen. I would like to thank our employees and our partners for their dedication and passion that makes this possible. With that, I'll turn it over to Shelagh.

Operator:

[Operator Instructions] Your first question comes from the line of Harlan Sur with JPMorgan. Your line is open.

Aart de Geus:

Thank you.

Aart de Geus:

Well, first, the answer is absolutely, yes. And it's not a surprise. In general, even when there are economic downturns, the semiconductor industry tends to invest strongly in chip design so that when the downturn fades away, they have differentiation because the worst is to miss an upturn because that's where most of the money is made. In this case, there's an additional substantial driver. And you've seen it with all the excitement, I would say, 5% hype and 95%, absolutely great understanding of the impact of what this will have on the world, where every vertical market is now committed to Smart Everything. Now the question is how quickly can they become smart? And they quickly discover that, well, the software is fantastic, the computation requirements of that software are fantastic, too. And so the race is on for more chips, faster chips and most importantly, chips where you can get high compute at low power. And so this plays into the core competencies that Synopsys has. And because simultaneously, there is a shortage of top designers, the productivity enhancements that we can bring about with our own AI have a material impact on that.

Aart de Geus:

Yes. I think in hindsight, I think we have mapped out the year pretty well. And you have to always map it out by also looking at the previous year, which was exceptional in its other directivity. It had very big growth early on and then less growth in the second half. Now we're back to essentially a normal year where you move left to right and bottom to up on an ongoing basis. And one of the reasons that we were able to map it pretty well is because we have a reasonable understanding of what designs are coming, what renewals, but also what IP will be pulled during the year from the needs of the different projects. So you can never quite forecast the future exactly, and so we may have been careful. But I think we had actually mapped pretty well, and we have a high degree of confidence on the numbers that we're guiding you to.

Harlan Sur:

Yeah, perfect. Thank you very much.

Operator:

Your next question comes from the line of Joe Vruwink with Baird. Your line is open.

Aart de Geus:

Well, let me work backwards on that one. Yes, AI is absolutely prominent in many transactions because either people have already very good experience in just racing to implement it in many more chips or use it on many more chips or they have heard from others and are racing to now look at how they can use it. At the same time, I would say that there's no alignment in big renewals across the industry. They happen whenever they happen for each one of the individual companies. But I would say that there are evolutions in industry. And the evolutions are that companies that in the past were sort of investing in chip design because they felt it was going to be important in the future. Now suddenly are realizing it has big impact on their future because they have to make architectural decisions, because they're certainly discovering that they do have a lot of data to do things with. And I'm talking about hyperscalers or big system design companies or then the semiconductor design companies that have this nonstop pressure from their customers, give me way more compute for less power and maybe roughly the same cost. And those are pressures that are challenging, but also exciting. So I would think that the industry is overall notwithstanding ups and downs of volumes is actually quite healthy and looking at the coming decade of great opportunities given the state-of-the-art of the software demand.

Aart de Geus:

Well, I would say that it has broadened. A number of years ago, only very few companies would use hardware systems and verification, they would use it quite massively. But now many companies are doing that. And actually, there are two very different reasons. One is to use the verification assistance or the hardware to essentially accelerate tasks that used to do, which is verify the functionality of chips. We have long entered a different space with Synopsys, by being at the heart of the intersection between software and hardware. And there, the objective is essentially to mimic the hardware on machine or partially on a machine so that people can run the software to not only check if the hardware works, but just as importantly, how good is the software. And even more interestingly is can you optimize the software so that you use less energy in the computation. In other words, there's an interaction between hardware and software, that is a great place to optimize the actual computational costs. And so as you can imagine, running real software on machines that mimic the very chips you don't have yet is very complex. And we're doing very well with that. And the Server 5 that we just announced is yet another example of a big piece, all around the space of what we would call electronic digital twinning, which is created an artificial world on a computer and be able to exercise the real world on it to see what the results will look like.

Joseph Vruwink:

That's great. Thank you very much.

Operator:

Your next question comes from the line of Jason Celino with KeyBanc. Your line is open.

Aart de Geus:

Well, it's always hard to say if it's better than expected of which -- we just worked harder at it. But the fact is I think we executed well. We have a number of key people in our management team that have been new to the company in the last year, and we are making really excellent progress of scaling Synopsys for the ability to work at this level. But simultaneously, I think that the trust built up with the customers and the breakthroughs and technologies that we've had in the last few years really bodes well going forward. And so I've plenty highlighted, I think, the AI in the preamble. But I'd like to also mention the fact that multi-die is really in many ways, the technology answer for a few additional decades of what I'd like to call Sys Moore, so systemic complexity Moore's Law, still an exponential ambition, but much more complex with multiple chips. And we are very well engaged with that. It is quite complex to do. And these are good things for us to deliver.

Aart de Geus:

I think what we're seeing with AI that it will augment everything. Now not all the everything are created equal, right? So you need to have understanding of any of the fields or the disciplines to use AI well, but the ability to look at data from many different perspectives and many different interconnections opens the door to all kinds of advances. And so it shouldn't be surprising that Synopsys is well invested in many different explorations. And that includes the SIG area that includes every aspect of the company. But it's also exciting to see that with the approaches that we have taken that require a very high degree of accuracy, we've been successful. And so just to make a distinction, generative AI can do wonders with enormous amount of data, but it is not necessarily always correct. We cannot afford that. A single transistor doesn't work, the whole system doesn't work. And so we're in a class of AI that requires actually very rigorous computation. And -- but all of this is wide open. So it's an exciting time.

Aart de Geus:

Thank you.

Gary Mobley:

Hi, everyone. Thanks for taking the question. I wanted to ask about how transformational AI can be for the core EDA market. And the angle I'm taking here is that clearly, the core EDA market has grown faster than chip designers. And that really is driven by efficiency. That's what the AI and EDA stands for, right? And so my question is, how does AI further enhance the automation and chip design? How do you share with your customer savings on that? Could you just give us a sense of sort of the magnitude of the inflationary tailwind on a per seat license basis or maybe from a different perspective, how it transforms the growth rate of the core EDA market?

Gary Mobley:

Thanks for that, Aart. And may be a question more for Shelagh. But I appreciate the fact that your first half IP business is facing the tough year ago comp and thus the minor increase or excuse me decrease in the revenue. But what's driving the profitability headwind? If I'm not mistaken, there's a 10 to 12 percentage point degradation in the op margin. Is that mix related? Or are there some other factors factoring in there? Thank you.

Gary Mobley:

Thank you.

Vivek Arya:

Thanks for taking my question. Aart, you mentioned the adoption of multi-die designs. And I'm curious, what percentage of chip design starts do you think are in this multi-die architecture? And where do you see that going? And is there a way to quantify the benefit to Synopsys in that transition?

Vivek Arya:

And for my follow-up, maybe one for Shelgah on operating margin expansion. So you mentioned you're raising the target 250 basis points. When I look over the last few years, I know your former target is to expand it by 100 basis points. But I think on an average, it's been over 250 basis points for the last several years, if my model is right. So first part of the question is what is helping the expansion this year? Is it -- sales are doing better, costs are under control? So what's the driver? And then what keeps them from expanding the way you have been able to expand over the last few years?

Vivek Arya:

Thank you.

Charles Shi:

Hey, thank you for letting me ask a couple of questions. So Aart, maybe first off, I want to ask a long-term question related to generative AI, not to your products, but to your customers' products. It looks like with all the news flows of the last quarter, the accelerated hardware right now seems to be converging to Nvidia GPUs. But I remember, over the past few years, I mean, at least for EDA industry, system companies designing on their own AI accelerators, AI start-ups, innovating in AI hardware has been a big driver for EDA. So my question is -- and maybe I'm just picking one very specific hardware AI accelerator here, but is the trend towards customer accelerators reversing? Or is it not quite reversing, but will likely continue? How do we think about what's going on in the trend there?

Charles Shi:

Thank you, Aart. Maybe the next follow-up. On the second half acceleration, what -- can you kind of provide a little bit more color on what are the drivers? I think you mentioned about the better visibility into the IP drawdowns in the second half, but is that the majority of the drivers? And do you -- shall we expect that the EDA revenue run rate go higher into second half? Because I kind of noted that in fiscal second quarter, your EDA revenue actually broke the $900 million mark. By the way, congratulations on that. But so we expect that to trend higher into the second half? Thank you.

Shelagh Glaser:

Yes. And I mean, obviously, the trend of first half, second half is more traditionally what we see. Last year was a little bit unusual and then a very balanced first half and second half. But we do expect growth across the businesses, and we do expect particular growth in our IP business.

Aart de Geus:

You're welcome.

Jay Vleeschhouwer:

Thank you. Aart, for you first, it was interesting to hear you speak about the extent of production deployments of AI so far in terms of your software as compared to what might have been perhaps more ad hoc or piloting or conservative implementation to this point, since historically, EDA customers are somewhat conservative in terms of how quickly they adopt new technology. The question for you is as that is occurring, what effect are you seeing or what the fact you expect in terms of your services revenue? You had an unusually flat sequential comp in terms of services. But you have been, on the other hand, investing substantially in the AE capacity. So maybe talk about that relationship? And then I have a follow-up.

Jay Vleeschhouwer:

As a follow-up, there have been a number of questions about the second half. When we look at your inventories, which of course is related to your hardware business, there was a substantial sequential increase to a record level to just over $0.25 billion. How quickly do you think you'll be able to convert that into shipment? I assume you've got a pretty substantial pipeline now for emulation and prototyping behind that inventory number. So is -- are you expecting to convert that in the second half and thereby drive hardware revenue?

Jay Vleeschhouwer:

Thank you, both.

Shelagh Glaser:

Thank you.

Joshua Tilton:

Hey, guys. Thanks for taking my question.

Joshua Tilton:

My first one, Aart, you might have alluded to it a little bit, but I kind of just want to ask it more clearly. Outside of all the productivity benefits that you're talking to from AI, do you expect these new AI tools or capabilities to make it more likely for a customer to want to choose a full flow from Synopsys versus maybe in the past where they might have put that flow together from numerous products from numerous vendors?

Joshua Tilton:

Super helpful. And then just for my follow-up, it has been kind of a tough go for some of the pure-play security names this quarter so far. SIG revenue growth is obviously pretty fantastic in the quarter, but it's kind of a lagging indicator. Can you just maybe talk to how the SIG bookings have been trending? And maybe just what gives you confidence that you can continue to sustain that growth in SIG that you're seeing today throughout the rest of the year?

Shelagh Glaser:

Yes. And I would add that our long-term view of that business is 15% to 20% due to some of the headwinds that Aart mentioned. We think we're probably closer to the lower end of that, closer to the 15% this year. Thanks, guys. Very helpful.

Aart de Geus:

You're welcome.

Ruben Roy:

Thank you. Aart, I had a couple of AI questions. I'll ask them both the question and the follow-up. As the AI product family starts to take shape 200 tape-outs or production tape-outs, I guess, you said. Are you seeing kind of a sweet spot in kind of where AI is being implemented in terms of either I don't know, type of design, gate count or is it kind of a broad-based usage of AI? And the follow-up to that, I guess, longer term, I was wondering if you think that as the AI tools develop, if you think that either semiconductor companies or non-traditional semiconductor companies that historically might have been reluctant to design custom semiconductors, right, because of the expense and maybe went to merchant ships that were invested or FPGAs or what have you, do you think that your productivity improvement from AI may push those customers towards custom semi designs in the future? Thank you.

Ruben Roy:

I appreciate that details, Aart. That's all I had. Thank you.

Operator:

Our last question will come from Gianmarco Conti with Deutsche Bank. Your line is open.

Aart de Geus:

Okay. Well, there are record years and record years, right? If you're growing a company, hopefully, on a linear scale or trailing 12 months or so, you're a little bit record every quarter. The last few years have been particularly lumpy for a variety of reasons, some to do directly with hardware, some to do with supply chains and some to do with COVID changing the world. And so in aggregate, though, if you buy into my premise that there will be more and more need for fast verification, hardware-accelerated verification is absolutely worthwhile because of the speed that you can get. On top of that, the intersection with software is a little bit more complex than that because we have not only hardware verification but also virtual verification and combination of the two. And that's why Synopsys is so well positioned at that intersection. But be it as it may, all of those things are going to continue to increase in importance. And our job is to just keep up a) from the technologies that are available to us. Now we're on the spot of delivering something that has to be state-of-the-art. Secondly, to make that in such a fashion that it's economically, i.e. Techonomics for our customers viable and so on. And we have to deliver the fact that they will need more. And so that is a self-regulating business opportunity, but there's no doubt whatsoever that this will continue for quite a while.

Aart de Geus:

Well, thank you again for participating. I hope that you got the sense that we had a very strong quarter and that we're enthusiastic about the future, be it technology-wise and business-wise. And in all cases, we're always thankful for your participation in this event. Have a good rest of the day.

Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the First Quarter of Fiscal Year 2023. At this time, all participants are in a listen-only mode. [Operator Instructions] And as a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Phil Lee, Director of Investor Relations. Please go ahead.

Aart de Geus:

Good afternoon. Q1 delivered a very solid start to the year. Building on our strength and momentum from 2022, we met or exceeded all of our guidance targets. Revenue was $1.36 billion, with non-GAAP operating margin at 35.2%, resulting in GAAP earnings per share of $1.75. And non-GAAP earnings above the high end of our target range at $2.62. Based on the continued robust design activity, we remain confident in our business. We are reaffirming our full year guidance for revenue and non-GAAP op margin improvement while raising guidance for non-GAAP EPS. In the last few years, Synopsys has grown and evolved substantially. Commensurately, we are evolving our financial reporting. Starting in Q1, we are reporting our business in three segments

Operator:

Thank you. [Operator Instructions] We'll take our first question from Joe Vruwink with Baird.

Aart de Geus :

Well, going backwards on your question, yes, I think it will drive positive growth for Synopsys. And starting at the beginning of your question, which was how does it change the relationship. It's been actually quite remarkable as we started to travel again this year that after a number of years of being at least physically distant, the relationship with many of our customers have evolved substantially. And I think a big piece of that comes from the fact that they all realize that the technology is becoming way more complex. And actually, in a good way, meaning that both this continuation on the traditional Moore's Law, but there's also a whole set of systems interactions be it when you have multiple dies or if you have hardware and software interactions that all demand a degree of automation that is way more sophisticated. And so in the midst of that, comes the entry now for us a little bit over two years ago of capabilities that really change how design is done. And moreover, it changes them in a very similar fashion like Synthesis literally many decades ago, it automates things that previously were thought to not be automatable. And it does this in a fraction of the time and with better results. And so the engagements have been extremely fast. And the very fact that we can point at so many production designs, we're not talking people trying stuff out. Many tried it out. And then in the midst of the trial, they said, well, I want to reuse these results because they're better than what I had before, and that project is not finished yet. And so the adoption is fast. At the same time, you would say, well, what would slow it down? Well, what slows it down is, are they sure that the tools don't make mistakes that it's actually proven technology. And the answer has been a resounding yes. That's why all these production designs are using it. So I see extremely high opportunity space for us there. And moreover, I think that is touching the tip of the iceberg. Now how that turns into contract evolutions. Well, that's the negotiation scale that we will need to bring to bear and they will need to bring to bear. But fundamentally, I think we add a lot of value to what they can do. And I think we will be suddenly rewarded in some way from that.

Shelagh Glaser :

So this year, we are more back half weighted, and that actually is traditionally what we were in 2020 and 2021. 2022 was a bit unusual, and that was quite balanced between the first half and the second half. I would say we're not seeing any change in design. We're not seeing projects be canceled or projects shifted out we're seeing robust design activity. And as you note, I mean, really, the timing of revenue and the timing for us is aligned with when we sign the big deals and when the customers have pulled down things for their own product schedules.

Shelagh Glaser :

Thank you.

Jason Celino :

Great. Thanks for taking my question. I think, first of all, thanks for breaking out the Design Automation margins and the IP margins. It's interesting to see that. When I think about the improvement potential for both, what are the levers that you have? Or how should we think about the improvement versus the other? Thanks.

Jason Celino :

Okay. Maybe just as my quick one follow-up. Do you feel that the margin profile on the core design automation side still has some room for…?

Shelagh Glaser :

Yeah. And I would just reiterate that our goal that we have for the year is to improve greater than 100 basis points in our margin. So we're very committed to driving that.

Aart de Geus :

Thank you, Jason.

Charles Shi :

Hi, good afternoon. Thank you for taking my questions. Hey, I really want to come back and ask you around AI and the ChatGPT, I'm just taking it as an example. I think that some people are thinking about this is the competition between really between Microsoft and Google, but there are some other people think this is actually a competition between GPU and TPU, I mean, tensor processing unit that Google internally developed. But what is your view there? The reason why I tried to ask this is that as everybody knows, TPUs kind of like the in-house designs from hyperscalers and well in-house designs by the system companies, they benefit companies like Synopsys, right? So I just want to check because I don't exactly want you to comment on your customer, but this hopefully, you can provide you a vision on this. Are this trend on AI? Is it going to lead to more of the custom chip designs? Or what's your thought there? Thank you.

Charles Shi :

Thank you, Aart. Maybe a follow-up question back to this question, another analyst had just asked. On the operating margin side, very pleasantly surprised by the 41% operating margin of your Design IP business in Q1 '22. Just want to really come back to the point. I think there's a premise that the IP may be structurally lower margin than EDA, well, partly because it's more labor-intensive Aart, as you mentioned, but it looks like it's probably not always the case, at least on a quarterly basis, but on an annual basis going forward, shall we be thinking about IP operating margin is kind of in line with design automation or there may still be some gap despite there may be some quarter-to-quarter fluctuations from here? Thank you.

Charles Shi :

Thank you, Shelagh. Thank you, Aart.

Operator:

We'll take our next question from Gary Mobley with Wells Fargo Securities.

Shelagh Glaser :

It's a combination really of all those things. So as we think about our business, our design IP business has a lumpiness to it just in terms of aligning with customers' product starts our schedules aligned with that. We do, as you mentioned, have a significant backlog that we balance through the year, and then hardware does have some lumpiness with customers depending on when their schedules to take possession of it. Aart?

Gary Mobley :

Got it. Okay. Aart, I haven't heard you mention silicon life cycle management recently or maybe I missed it. I did. But maybe if you can just give us an update on where that new product set stands in terms of customer adoption?

Gary Mobley :

Thank you, Aart.

Operator:

Our next question comes from Jay Vleeschhouwer with Griffin Securities.

Aart de Geus :

Well, it's a great question because whenever we introduce new technology, you have two or three different steps. The first thing is, obviously, how quickly can 1 make it useful for a customer given their flows, their ways of doing things and adapt it essentially to their situation while at the same time, teaching them the basics of how to run it to get good results. Once you have done that, it never ends because once you get good results, they want great results. And of course, there's a lot we can do by optimizing things for their circumstances. And this is going to be somewhat different for different types of products, of course. By the time you talk about something like SLM, it goes in many different directions because now you have the intersection of testing techniques, built-in sensor or techniques all the way to how ultimately does this get designed into the system with learning capabilities and fast interpretation on chip. And so in general, I think we are going to broaden the skill set to be more and more multidisciplinary as we have some people that obviously are very deep in different areas. And the people that can handle a broader swath of the design flow for the customer or with the customer, I should say, is important. The last two comments is with some of the newer entrants into chip design, they really are looking for a lot of automation as much as possible upfront. And sometimes that's helpful because there are also no preconceived notions of how things should be done. And one can start right away with brand new flows, reuse of IT and so on. So in general, it's a multiplier on our business and the quality of our people and the trust relationship becomes more and more important as we are working deep in the production designs of our customers.

Aart de Geus :

Well, while we don't disclose in detail what the size is of this, it is part of our Design Automation segment. And as you can imagine, the technology has become dramatically more complex as we also go to much smaller device sizes. But that very complexity is also the reason why we are more and more involved in the development of advanced technologies with the customer. And there's absolutely a great return for the customer in doing that because more and more doing and the fab is extremely expensive, but it also takes a long time before you have results. And so the more you can essentially build what today would be called digital twins of how things are manufactured and model it electrically the better. So this is an area that we see good growth in and certainly very high strength for Synopsis. And again, I'll use the word trust because -- this -- we are really very much inside of the silicon kitchen here.

Aart de Geus :

Thank you, Jay.

Vivek Arya :

Thanks for taking my question. I'm probably nitpicking here, but if I go over the last few years, you were able to raise full year sales outlook almost consistently every quarter. And even when I go to the last call, there was a statement about steady growth throughout the year. That's why I find it surprising, you're not raising your outlook for the year? I mean 14%, 15% is obviously still very impressive. But what is different or do you think, between this year versus the last few years in terms of how you saw steady upside throughout the year, but you're not seeing it so far this year.

Vivek Arya :

Got it. And then as the cost to move to more advanced nodes becomes expensive, is that a positive or a headwind to your sales growth? Does it mean fewer design starts because it's very expensive to do three-nanometer or two-nanometer design, but then maybe they become more tool intensive. So I'm just curious, how is it netting out for Synopsys?

Vivek Arya :

Thank you.

Operator:

We'll take our next question from Ruben Roy with Stifel.

Aart de Geus :

Great question. Actually, it's both. Remember, though, that the most advanced customers, the biggest ones have themselves enormous clouds. But it's interesting, even there, we see a number of people that say, well, what it had way more compute for a couple of weeks. Could you still better? And the very fact that they are experimenting with that is very exciting because you can still do better. But we have also a number of customers that are now really driving towards wanting to move their company to more cloud-based computation. And we're completely capable and on top of running it in those circumstances. So I think we'll continue to see both, but overall, it's going to be spreading among more and more customers. There's no doubt about that.

Aart de Geus :

It's absolutely a good way to think about it because you're absolutely right. When a product can essentially improve itself over time, what is there to find negative about that? That is great. The results do get better. But generally, it's not only the product that's getting better. It is also the product understanding of the specific design that's working on getting better. And we often forget that, well, a lot of people talk about, is this new design we're doing and new design we're doing. In fact, there's many of these signs are derivatives of already existing designs. And we have fantastic evidence of demonstrating that when DSO.ai was used on an earlier version that it has a lot of stuff that it can learn from that version and directly apply to the next incarnation of the chip. And that includes, by the way, if that chip needs to go to a different silicon technology or if that chip gets a few other additional blocks to let's say, personalize it to a different customer of the customer. And I think there is a lot of potential in all of these things to still do way, way, way better, but the advances are remarkable. And we're tracking this, and we see quarter-by-quarter new breakthroughs in many things. And that's absolutely exciting.

Aart de Geus :

You're welcome. Thank you.

Giani Conti :

Yeah. Hi, there. And thank you for taking my questions. So maybe starting with FIG. Could you maybe share some more color on its performance this quarter and whether you've seen any new wins versus backdrop from clients pushing away maybe some projects that were in the pipeline previously. I'd imagine the professional services arm and maybe some of those initial cities would be those are suffering a little bit more. However, I mean, it's still great to see that growth is higher from our breakdown as well as margin improvement. So maybe just give me a a little sense of how is that development in terms of projects? And then I'll ask a follow-up after. Thank you.

Giani Conti :

Great. That was really helpful. My follow-up would be, maybe on DSO.ai. Could you maybe talk a little bit about the training time for existing engineers using the new tool that are only going in new design. Is it time consuming? Or are they using pretty much the same GUI. And also maybe if you could just share a little bit on how does that compare to competition such as to say. It seems like you guys are both doing sort of like a race towards capturing the most amount of the market, and it seems to be a great growth opportunity. So maybe yeah, it's basically two questions in one about training time and and using same interface dry versus competition as well? Thank you.

Giani Conti :

Great. Thank you. Appreciate it.

Operator:

We'll take our next question from Blair Abernethy with Rosenblatt Securities.

Aart de Geus :

It may be somewhat simplistic terms. I would say when you suddenly have a step that does work in third of the time and gets you another 10% or so better speed and lower power. Margin issues are not really the driver. It's more like, okay, can they find the budget to keep moving here. And I don't want to be too light about a statement like that because we work with people for many, many years. And it is very important that we further in ability for our customers to adopt be successful themselves in good and tougher times. But overall, I think there's no question. These are technical advances of extremely high value, and they directly multiply the opportunity space that our customers have. So I think we will be okay.

Shelagh Glaser :

It will come through over the first three quarters of the year. A portion of it is sitting in Q1, about $41 million of that is hitting in Q1. And what we're really doing is we're doing a small reduction. And then we're taking that investment and shifting it into some of the growth areas that we've talked about today. So we're using this as a way to rebalance and set ourselves up for that future growth trajectory.

Shelagh Glaser :

Thank you.

Aart de Geus:

Well, thank you very much for participating in the call. If nothing else, you probably heard in our voice some degree of enthusiasm for the advances that we're making. And as you know, we will be looking forward to speaking to some of you later on today. With that, stay safe, and have a great day. Bye-bye.

Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter of Fiscal year 2022. At this time, all participants are in a listen-only mode. [Operator Instructions] Today’s call will last one hour. And as a reminder, today’s call is being recorded At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Aart de Geus:

Good afternoon. I am happy to report that Synopsys completed an outstanding year with sustained forward momentum. Since about four years ago, we communicated our dual objectives of accelerating growth and expanding margin. Synopsys has delivered on and, in fact, exceeded those expectations. This is visible through over 60% revenue growth since that point, 11 percentage points higher non-GAAP operating margin and more than doubled EPS. This quarter, we also crossed the $5 billion annual revenue milestone. Simultaneously, we substantially evolved our product offering, expanded customer relationships and increased competitive differentiation. Building on this, we delivered another record year in fiscal 2022. Revenue grew 21% to $5.08 billion, with double-digit growth in all product groups and across geographies. We further expanded non-GAAP operating margin to 33%, grew earnings by 30% and generated record cash flow of $1.7 billion. While semiconductor industry revenue growth has moderated, design activity remains robust. In addition, our time-based business model, with $7.1 billion of non-cancelable backlog and a diversified customer base, all provide stability, resilience and forward momentum. While fully mindful of the macro dynamics around us, including the most recent US government export restrictions, Synopsys is poised for strong results in fiscal 2023. We intend to grow revenue 14% to 15%, continue to drive notable ops margin expansion and aim for approximately 16% non-GAAP earnings per share growth. Trac will discuss the financials in more detail. Looking at the landscape around us, some of you have asked us why customers design activity remains solid throughout waves of the business cycle. Two reasons. First, the macro quest for Smart Everything devices and with its AI and big data infrastructure is unrelenting and expect it to drive a decade of strong semiconductor growth. Second, semiconductor and systems companies, be it traditional or new entrants, prioritize design engineering throughout economic cycle precisely to be ready to feel competitive new products when the market turns upward again. We've seen this dynamic consistently in past up and down markets and expect it to continue. Today, Synopsys aims to be a key engineering catalyst towards this Smart Everything world as our mission is to enable innovation at the critical interplay between semiconductors and software. Our customers are racing to differentiate along three axes; first, still higher complexity chips with massive compute capability; second, super tightly integrated systems of chips optimized for the software that will run on them; and third, increasing focus on security and safety across both software and hardware in virtually all vertical segments. Synopsys is uniquely positioned to address these challenges as we provide the most advanced and complete design and verification solutions available today, the leading portfolio of highly valuable semiconductor IP blocks and the broader set of software security testing solutions. In the past few years, we have introduced some truly groundbreaking innovations that radically advance how design is done. Let me begin the highlights with our DSO.ai artificial intelligence design solution. With already well-over 100 commercial production design, it continues to deliver amazing results. Applied simultaneously to multiple steps of the design flow, DSO.ai reduces efforts for months to now weeks, while also delivering superior performance and reduced power. Results reported by customers include 25% reduction in turnaround time and compute resources and up to 30% power reduction. With customers such as Samsung, Renesas, Intel, MediaTek, Sony and many others reporting impressive achievements, customer adoptions have accelerated across a wide range of process nodes and market verticals. In FY 2022, the number of customers more than doubled, and we've already seen significant repeat orders and broadening proliferation. Seven out of the top 10 semiconductor companies have adopted DSO.ai for production design. Meanwhile, we're also extending machine learning capabilities across other EDA workloads from verification to test, to custom design. These next phase solutions are already in customers' hands, showing excellent impacts and promise. Central to the impact of DSO.ai are the powerful digital design solution engines underpinning it, specifically our Fusion Compiler products. It drove numerous competitive wins with accelerated proliferation for a wide variety of customers. Key adoptions range from the largest processor firms to influential systems companies, to major hyperscalers. Fusion Compiler is used in over 90% of advanced nodes down to 3 and 2-nanometer, with a majority exclusively using Synopsys. In Q4, cumulative customer tape-outs surpassed 1,000, more than doubling the combined total of FY 2020 and 2021. Our customer solutions also saw strong market momentum this year, continuing the drumbeat of competitive displacements. With options ranging from large semiconductor companies at advanced nodes to automotive to memory vendors, as we added more than 45 new logos this year, nearly one per week with double-digit revenue growth. To address the highly advanced chip mentioned earlier, multi-die system design, sometimes also called chiplet-based design, is opening a whole new era of silicon complexity. Having forecasted this a number of years ago, Synopsys now provides a differentiated multi-die solution that enables architecture, analysis, design, and sign-off all integrated in one place. This includes our 3DIC Compiler solution and our industry-leading portfolio of state-of-the-art die-to-die interface IP. Today, we're already tracking more than 100 multi-die designs for a range of applications, including high-performance compute, data centers, and automotive, seeing strong adoption of our broad solution. A notable example is achieving plan of record for multiple 3D stack designs at a very large, high-performance computing company as well as expanded deployment at a leading mobile customer. Meanwhile, the recently introduced UCIE protocol, short for Universal Chiplet Interconnect Express, has become the interconnect of choice for multi-die systems. Both our UCIE interface IP and HBM3 memory IP are at the forefront of enabling multi-die designs with multiple wins at Tier 1 customers. More broadly, third-party IP is a must-have for designs across the board. Our market-leading IP portfolio, by far the broadest in the industry, continues to drive significant adoption and growth. In fiscal 2022, our IP business delivered another record year with more than 20% growth. We continue to see particularly strong demand in key markets such as high-performance compute, automotive and mobile, where the systems are driven by smart everything, high-speed secure connectivity and advanced process geometries. While maintaining technical leadership in IP for advanced process technologies, we delivered multiple IP products in the most advanced 3- and 4-nanometer process nodes to our customers in high-end mobile and HPC applications. Very strong adoption also of our automotive-grade IP solutions as cars are being re-architected towards both electrification and autonomous driving. The acceleration of car electrification driven by urgent climate considerations notably drives a slew of new sensor, actuator, and control chip designs. Our automotive solutions had outstanding growth. Today, we have engaged with hundreds of designs from more than 30 leading semiconductor providers, more than 10 OEMs, and three of the top four Tier 1 suppliers. At the core of these systems is the intersection of hardware and software. To optimize the system, our customers must verify both the software in the context of the hardware and the hardware in context of the software. While verification is fundamentally an unbounded problem, our state-of-the-art simulation, emulation and prototyping products tackle these tough verification challenges at unparalleled speed with the fastest engine, highest capacity, and lowest cost of ownership. Specifically, our hardware-based products delivered a record year with competitive momentum, adding more than 30 new logos and over 200 repeat orders. Moving now to software security, the critical nature of which continues to grow as management teams and Boards are keenly focused on ways to protect their companies and their customers from destructive cyber attacks. Our Software Integrity solution enables organizations to manage the security and quality of software across a wide range of industry verticals from semiconductor and systems to financial services, automotive, industrial, health and more. Industry groups such as Gartner and Forrester recognized Synopsys leadership. Gartner positions us at the top and farthest right of its Magic Quadrant, rating us highly for technology depth, breadth, consulting capabilities and vision. While this is the one area where we did see some impact from the macro environment in the quarter, revenue growth for the year accelerated over FY 2021. Notably, we saw good progress with the go-to-market and product initiatives introduced last year. Our indirect channel partner business, for example, continues to ramp well by expanding our reach into customer groups and geographies that we haven't connected with in the past. We are building momentum with the goal of another significant increase in indirect sales in FY 2023. On the product side, we expanded our offerings by launching two new SaaS services for static analysis and open source analysis integrated into our Polaris platform. We expect these SaaS capabilities to accelerate adoption and consumption of our solutions as they are particularly well-suited to growth in the mid-market. Early customer reception has been quite positive. Our continually evolving and strengthening platform also provides more and more valuable insights to help companies drive increasingly robust top-down software risk management. In summary, Synopsys exceeded beginning of year targets and delivered a record fiscal 2022 across all metrics with the additional spark of passing the $5 billion milestone. We enter FY 2023 with excellent momentum and a resilient business model that provides stability and wherewithal to navigate market cycles. Notwithstanding, some economic uncertainty, our customers are continuing to prioritize their chip system and software development investments to be ready with differentiated products at the next upturn. On our side, many game changing innovations across our portfolio position as well to capitalize a decade of semiconductor importance and impact. Finally, our execution and operational management continue to drive growth and margin expansion, and we're particularly thankful to our employees around the world for their vitality and diligence throughout the year. One more comment. As you may have seen yesterday, we announced the appointment of Shelagh Glaser to become our new CFO on December 2nd. She's here with us today, listening in as we prepare to pass the torch from Trac in a few days. Before I pass the microphone to Trac for his review of fiscal 2022, it's wonderful to say a heartfelt thank you for his contributions that helped build the company we are today. With 16 years on our team, eight as Synopsys CFO, Trac is a cornerstone architect and execution leader of the strong results of the past year. During his tenure, he strengthened our fiscal discipline and acumen, engineered trusting and effective relationships with the other parts of the company and, most importantly, assembled and grew a great team that we will continue to build on. So it is all the more meaningful to voice our gratitude to Trac at the very moment that we pass this unique revenue milestone. Thank you, Trac. And now one more time, please give us your perspective on the state of Synopsys.

Operator:

Thank you. Just before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants, if you have additional questions please reenter the queue and we’ll take as many as time permits. We'll take our first question from Joe Vruwink with Baird.

Aart de Geus:

Well, first, actually, I think your comparison is pretty good because 2019 was really just waving around the medium for the growth of the semiconductor industry. And so in that sense, I don't see a long-term change in the trajectory, which essentially forecast that for this decade, semiconductors are making it to $1 trillion, and we see all the reason why it will get there. The fact that some years are higher, others are slightly lower is just a given. And in a context like that, Synopsys has the good fortune to have a business model that is very stable and self-sustainable, but also a set of customers that have no interest in going up and down in their R&D force, because it's a continual investment over typically products that take two to three years to develop, and so I think we provide a good solidity in pretty much all the fronts.

Joe Vruwink:

Okay. Great. And then I was hoping maybe just reconcile some of the year-over-year changes with your cash flow outlook. Even, I guess, if I adjust for the $100 million in early collections, I think cash from operations is growing a bit more slowly than your core EBIT and earnings. And then the -- it looks like a big step-up in CapEx. Maybe just what's behind that?

Joe Vruwink:

Okay. Thank you very much.

Aart de Geus:

Thank you, Joe.

Gal Munda:

Hey thank you for taking my questions and Trac, congratulations on your last quarterly call as well. I hope you enjoy your retirement. The first one is just I wanted to focus a little bit on the DSO. You mentioned, Aart, that you've doubled the amount of customers in 2022. My question is, how early are you in that potential to penetrate the customer base, especially the ones that move the need and the better and within the ones that already adopted? Do you feel it's just the beginning from them in terms of being productive? Or do you think there's still a lot of room to sell deeper into those accounts?

Gal Munda:

That's very interesting. Thank you. And then just as a follow-up, you mentioned automotive solutions and the OEMs as well coming in, both from the semi companies and the OEMs kind of increasing demand, and that's kind of driving part of the growth. I guess if I do math and I think about your growth vectors today, I'm thinking maybe specifically about next year when you look at your pipeline, how does the reliance on the core semis, the leading-edge companies, compared to the systems companies in terms of the growth? Who's bearing the higher proportion of growth in terms of responsibility to deliver those targets that are pretty impressive? Thank you.

Gal Munda:

Thank you so much.

Operator:

We'll take our next question from Jason Celino with KeyBanc.

Trac Pham:

Thanks Jason.

Trac Pham:

I wouldn't naturally attach hardware to upfront. Of course, it will show up in online. But keep in mind that we do have IP that is reflected in that category as well. And keep -- remember, in our statement, we -- our IP business grew over 20% in 2022. So heading in 2023, really the 14% to 15% guide for revenue growth is coming across all product areas. And that's where we're -- and that's all product areas and all key geographies, and so that's where the confidence and the comfort is in terms of our ability to execute against that plan.

Aart de Geus:

Sure. I'll be a little careful with giving too much of the roadmap. But I want to make sure that you understand that in all of these areas, we have worked on those now for already quite a while, and we have a number of very positive results directly with customers. And at the end of the day, it's like the old the VC, do the dog, feed the dog, dog food, not that I would ever want to compare customers to dogs, of course. But the fact is, it's in the field that you realize what are the issues that one may not have contemplated, and the feedback is very positive because there, too, while the tools have long been optimized with a variety of machine learning and AI capabilities, changing the very workflow is how you get a more profound impact. And so we have a long opportunity space to grow into, but the engagement already signifies that we have results that customers want to keep and turn into production.

Aart de Geus:

Thank you.

Harlan Sur:

Good afternoon and congratulations on the solid results and outlook. And Trac, best of luck, and thanks for all the support. As you guys pointed out, chip design activity in leading-edge digital is very strong, where you have accelerated compute processors, next-gen networking, switching and routing ships, new ASIC programs. Very strong, but also significant increase in design complexity and more importantly, chip design cycle times, Aart, I'm wondering is the complexity and cycle time dynamic requiring your customers to use hardware emulation and prototyping as an integral part of the verification and software development process versus it being somewhat discretionary five, 10 years ago. And is this what's helping to sustain the hardware growth into next year?

Harlan Sur:

Thanks for that. And then on your IP business, we've got Intel and AMD, they're now starting to roll out their new processor chips, right, supporting next-gen memory and storage interfaces, right? Strong area for you guys, big DDR5 from memory, PCI Gen 5, CXL for storage. These processors are starting to roll out now. Additionally, you have more of your customers bringing on additional foundries as a part of their diversification and reshoring efforts. I think this should drive higher adoption of your foundational IP as well. So what are the other dynamics that are going to drive the IP business next year? And does this segment continue at strong double-digit year-over-year growth in fiscal 2023?

Harlan Sur:

Thank you.

Operator:

We'll take our next question from Charles Shi with Needham & Company.

Aart de Geus:

It's a very good question, and I understand why it's difficult because a lot of these things are written in terms of hard to understand technology. And so of course, whenever there's a change, we look solidly at all the changes, as is the impact. And actually, I think we explicitly communicated that our assessment showed that it was not material in the financial terms. We highlight that we have factored in, to the best of our ability, exactly what the situation is today in our forecast. And moreover, we have put a lot of emphasis on making sure that we are 100% compliant with all the rules so that we act in a clean fashion. I would add only one more thing, which is China is a very broad market, and so there are many technologies that are not anywhere close to being touched by the advanced restrictions. So we see continued great opportunity, but we understand with you that it's an area to keep watching and to make sure that we grow in other parts of the world as well.

Trac Pham:

Sure, Charles. Let me zoom out a little bit because over the last couple of years, we've had some unusual profiles coming into the year, right? So 2020 was very back end -- 2021 was back-end loaded. Heading into 2022, we said it would be very front-end loaded. When we look at the profile this year, keep in mind that it's based on backlog that we have scheduled out for our software business, IP and hardware. So, there's good visibility into how it lays out throughout the year. And when you look at the profile, you're right, it's slightly to the back half, but just marginally so. And if you look at the first half comparison -- first half, second half comparison for 2023 and you go back in time, it's just actually in line with what we have historically seen, which is kind of unusual but nice to get back to that profile. And it does imply that there is incremental increases in the business as we progress throughout the year. The basis for the forecast, as I said, is grounded very much on visibility of the backlog, but also what we expect to book in the year. And we are playing the year based on what we can execute, similar to what we have said in the past. So it's not a stretch to assume that it's dependent on major market forces or anything out of our control. We want to give guidance in terms of the outlook for the business, both top line and bottom line. That really is heavily dependent on our ability to execute. And at this point, given our visibility, the portfolio that we have and the -- our confidence in our execution, we feel really good about the 14% to 15% growth and driving 16% EPS growth.

Trac Pham:

You're welcome.

Jay Vleeschhouwer:

Thank you. Good evening. Aart, for you first, a product question since the term road map came up a couple of times. I'm wondering if there is some potential development of catalysts that you might be able to bring to market. For example, would it make any sense or would it be feasible for you to increasingly connect SIG with hardware-based prototyping? Along the lines of an earlier question, you haven't mentioned silicon lifecycle management or SLM, but would it make some sense there to connect it increasingly to your sign-off business and so forth and other kinds of intracompany integrations that could be differentiators or new catalysts for product growth? And then my final question for Trac. With regard to SIG, could you comment on the results that you've been seeing for your investments in international expansion for SIG over the last number of years, including, in particular, your investments in security consulting outside of the US?

Trac Pham:

Jay, this is Trac. So to your question regarding SIG and international expansion, you're right, that was a really intentional focus for us a couple of years ago in terms of improving the go-to-market function, both internationally and with channel partners. And I would say that when you look at the results over the last couple of years, I think we've made really good progress with regards to how we're executing internationally and the additions and the execution with new channel partners. I'm optimistic not only because of the results has been good, but we're in the early stages of actually seeing strong results from that. So I think there's a lot of progress ahead of us and lot of opportunities ahead of us in both those areas.

Aart de Geus:

You're welcome.

Operator:

We will take our last question from Ruben Roy with Stifel Nicolaus.

Aart de Geus:

Sure. Well, first, I do think that the results were quite good. What we did see, and it probably started a little earlier than this quarter that some of the negotiations turned out to be a bit longer, maybe some more layers of approval. And actually, that is very, very common when you see economy looking at, well, is it going to be a recession or not, people little bit worried. Well, they just start putting some breaks on the decision making first and foremost. But at the same time, we were encouraged by the fact that growth continues to improve over the previous year. And there's no doubt in our mind that this is a very good part of Synopsys and there's a lot of opportunity, so we'll keep pushing.

Aart de Geus:

Okay, well the first one is turnaround time reduction for everybody and that in itself is interesting because if you remember my other comments about moving into a whole different league of complexity, while people will continue to push on performance and power and right now they're pushing on making just sure that they can finish the job, and in that context, improving the turnaround time is extremely valuable. But the other thing is that in many areas, it opens up doors that they didn't have before because if you can work in multiple nodes, the question is can you also start to translate from one node into another. And we have in the last 12 months specifically seen more and more really outstanding experiments and showcases where we helped people move from one node and design in let's say the next node or even some nodes that are quite different from the ones where they started with the benefit of the learning from the original node. And I think that that opens the fertile space because in reality, most design is redesigned. You try to always use what you did in the past. And the question is, how easy is that when the past becomes more and more complex? And that's where AI I think has a lot of potential going forward. So, sometimes you call that retargeting or remastering and I think it's going to be a lot of need for that.

Aart de Geus:

Thank you.

Aart de Geus:

Well, first and foremost, thank you for all the support and the good questions over the last year. I think we concluded a very strong year. Of course, again, it's a very strong market, but I think we also demonstrated that there's momentum going forward. And so that 2023, even without Trac, will be a good year for us. And we thank Trac one more time. We also thank you for your support and for your continuing support of our stock. With that, have a great rest of the year, and we'll talk to you soon.

Operator:

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Third Quarter of Fiscal Year 2022. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Today's call will last one hour. And as a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Aart de Geus:

Good afternoon. We delivered another excellent quarter with enduring broad-based strength. Revenue for the quarter was $1.25 billion. GAAP earnings per share were $1.43, with non-GAAP earnings at $2.10. We generated $440 million of operating cash flow. Notwithstanding the normal ebb and flow of the semiconductor market, design activity remained robust. In addition, our business model sets us apart by adding a solid level of stability and resilience to the accelerated growth we're seeing. Based on this strength and confidence in our business, we are raising guidance for the full year. We expect to grow fiscal '22 revenue approximately 21% and past the $5 billion milestone. We continue to drive notable ops margin expansion, and we intend to grow non-GAAP earnings per share by approximately 29%. In the process, we expect to generate $1.6 billion to $1.65 billion in operating cash flow. Trac will discuss the financials in more detail. Over the last five or so decades, semiconductor chips and software have transformed every aspect of our world. From traditional computers to networks, to mobile devices, from entertainment systems to home security, to medical wonder machines. Every vertical market is affected and expecting more. As a result, not only does the world demand more chips, but more chips are being designed by an expanded group of semiconductor and systems companies. Those chips are much more complex. They need to be designed faster due to time-to-market pressure and with increasingly constrained engineering talent resources. For the last 35 years, Synopsys has been privileged to grow as an essential catalyst of this transformation, delivering 10 million-x in productivity. Today, Synopsys uniquely sits at the intersection of the dual system forces of semiconductors and software, enabling both with the bold ambition to capitalize another 1,000x this decade. We partner and collaborate with the most advanced companies in the entire supply chain. And while the technical challenges are huge, so are the opportunities. On top of this, security, safety and reliability are now a must for markets such as robotics, automotive and aerospace. Meanwhile, more and more systems companies from large hyperscalers to AI startups, to verticals like automotive have decided to own their destiny and design their own chips and systems to accelerate their differentiation. Today, Synopsys is successfully bridging technologies from silicon to software, to systems as we engage with all these companies. In the last few years, we have delivered a number of groundbreaking innovations that are making tremendous impact. For example, in chip design, we're automating not only individual design steps, but entire sub flows. Our preconfigured IP blocks not only speed up chip design, but also let architects rapidly explore new market-specific chip and system configurations. Our emulation and prototyping solutions are now essential to verify and optimize the interplay between hardware and software in the system. And in addition, we continue to grow our solutions that enable high-quality and more secure software as well as provide security IP blocks. Leading the way is our award-winning DSO.ai artificial intelligence design solution, which is revolutionizing chip design. First to market over two years ago with technology that is still unmatched today, it delivers outstanding productivity improvements that are already driving substantial increases in customer commitments. The technical results are truly groundbreaking. Customers are seeing tremendous benefits from DSO.ai's ability to learn from prior designs. For example, two of the largest, most advanced semiconductor companies in the world achieved a 25% reduction in turnaround time and compute resources. DSO.ai is also driving very significant low-power improvements exemplified by a large automotive chip maker, achieving a 30% power reduction. These compelling outcomes are driving a high pace of adoption for production tape-outs across verticals and a broad set of process nodes. Examples this quarter include long-term business commitments at marquee U.S. hyperscaler and top consumer chip company. Our entire market-leading digital design solution both empowers and benefits from DSO.ai. This highly differentiated combination led to a competitive displacement at a large automotive chip company in Q3. Our Fusion Compiler product continues to drive accelerated growth and competitive wins across market verticals and a broad swath of technology nodes. This quarter, we expect to pass the 1,000 tape-out milestone with successes in many different customer categories. Fusion Compiler is generated notable run time and PPA performance power area, improvements at top graphics processor companies, and we have gained majority positions at one of the largest mobile's SoC providers and at multiple leading hyperscalers. Excellent progress and strong demand also for our modern custom design solutions. This area of growth is fueled by the key segments that include hyperscalers, high-performance compute and AI machine learning. In custom design, long dominated by older products, we've already surpassed last year's new logos with 36 additional year-to-date, including high-profile semiconductor and hyperscaler customers. Companies driving Smart Everything continue to innovate at breathtaking speed and are now embracing migration to multi-die system designs for next-generation systems. Our multi-die system solution that includes our 3DIC compiler platform and die-to-die IP portfolio is seeing strong demand. Not surprisingly, the key markets are high-performance compute, data center and mobile. While we continue to expand deployment at a marquee U.S. IDM, we also experienced increased traction at prominent high-performance compute and hyperscaler customers for complex 3D multi-die and chiplet design. In mobile, we achieved plan of record of leading semiconductor companies for their next-generation multi-die processors. In high-performance compute, multi-die systems incorporate a new interconnect IP standard, UCIe, which stands for Universal Chiplet Interconnect Express. As the term express captures, it is all about speed, and Synopsys is seeing great traction in this area with a healthy pipeline and multiple wins at 3-nanometer. More broadly, IP blocks are a must have to meet intense time-to-market pressures. Our unique breadth of scale and scale of our high-quality IP portfolio with early availability as advanced processes continue to drive strong momentum. Demand is particularly high in markets such as high-performance compute, AI/machine learning, automotive and mobile where systems are fueled by smart everything, high-speed and secure connectivity and advanced process geometries. In this context, our ARC Vision Processor IP was named Best Automotive AI Solution by the Edge AI and Vision Alliance. Meanwhile, our industry-leading ARC, MPX and VPX processor cores that accelerate neural networks continue to see strong adoption in augmented and virtual reality, automotive and consumer applications with multiple wins in the quarter. In automotive, we closed significant transactions new OEMs, Tier 1s and semiconductor vendors. Security remains front and center across all market segments. We're gaining strong adoption of our security solutions for interfaces such as PCI Express, CXL and DDR, with more than 30 design wins across all market segments. Now moving to the crucial intersection of hardware and software. In other words, verifying that the chips and system will do what was intended. Our market-leading emulation and prototyping hardware products are a unique strength and clear differentiator for Synopsys. With the fastest engines, highest capacity and lowest cost of ownership, we're doing very well. Our products not only verify hardware/software correctness, but also help find ways to reduce power consumption, one of the most vital metrics of any system. High demand continues for our ZeBu emulation and HAPS-100 prototyping systems, growing with many of the largest semiconductor and hyperscaler customers in the world. We are on pace for yet another record year of hardware revenue. With Smart Everything entering every vertical market, requirements for security and safety continue to expand. Our Software Integrity business is a key enabler of modern software security. Our leading portfolio of products and consulting is unique in its ability to provide high value for developers, the DevOps group, and the corporate security team. This business is rapidly approaching the $0.5 billion TTM revenue mark. This quarter, we again saw many multi-year, multi-million-dollar commitments in both renewals and new business. Business touched a broad set of verticals, including financial institutions, semiconductors, government, medical, and enterprise software. Our channel partner program progressed well this quarter, with notable new logos and expansions into new customer divisions. We also continue to increase business in new countries that we have never sold to before, and repeat business with partners that opened new markets as recently as the past 12 months. Finally, we further strengthened our broad product and consulting portfolio with the acquisition of WhiteHat Security and its leading solution in dynamic application security testing. We’re excited to have the outstanding WhiteHat team part of Synopsys and while it’s only been a few weeks, the integration is going well and customer response has been enthusiastic. In summary

Operator:

All right. Thank you. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to us to accommodate all participants. If you have additional questions, please reenter the queue and we will take as many as time permits. [Operator Instructions] And our first question comes from Joe Vruwink from Baird. Please go ahead.

Trac Pham:

Well, I'm glad you started with that question and added some caveats to it. So backlog for the quarter ended at $7.1 billion. And as you alluded to, it will fluctuate quarter-to-quarter, depending on the timing and recognition of revenue. The one thing I'll add to backlog, too, is that we duration target in the 2.5- to 3-year range. This quarter was on the lower end, running closer to 2.3 years. So it's slightly outside of our range.

Aart de Geus:

Let me take the entity list part. All the forward projections that we always give you take into account anything we know about entity list or even suspected entity list increases. Typically, the entity list doesn't grow particularly fast or a lot, but we follow rigorously whatever the government decides there. And I would say at this point in time for our projections, it's not material in terms of changes.

Gary Mobley:

Apologize for the background noise. I want to start with a question about headcount. If I read your supplemental data correctly, it's up about close to 2,000 quarter-over-quarter. Does that reflect just aggressive hiring, some acquisitions, all of the above? And is it part of the reason why we're starting to see a pretty sharp increase in the OpEx?

Gary Mobley:

Okay. And for the past two years, we've had a pretty good backdrop in which you license, right? So, we've had above-trend semiconductor industry revenue growth. But it's clear that the industry is entering a more challenging time, and we've heard from some companies about a minimum pulling back on hiring, just tightening down, so to speak. And so my question to you is, have you seen the hesitation on the part of customers in signing large deals? Or are you having to go to a higher level to get approvals for large deals?

Trac Pham:

Gary, in addition to that, from a business metric perspective, we saw run rate up pretty strongly in Q3. So we're not seeing any indication of those concerns.

Unidentified Analyst:

It's [Arsenio] for Gal. Congrats on the quarter. Just if you think about guidance again, it's been a year of putting us down the execution. If you look back at when you first guided, what surprised you most this year so far that has allowed you to kind of walk outside throughout the year?

Unidentified Analyst:

Great. That's helpful. And just I have one quick follow-up. How was going to DSO.ai contributing financially to growth? Is it at any material level yet and just kind of your growth outlook on that? And what you guys are looking forward to that offering? Thank you.

Operator:

All right. Thank you. And now to Harlan Sur from JPMorgan. Please go ahead.

Aart de Geus:

The answer in a nutshell is absolutely yes. And you actually explained the situation very lucidly because it's clearly visible that many factories in front of the mind of many countries because they want to make sure that they have supply. And the value of chips has suddenly been recognized by not having them, meaning a supply shortage immediately puts the attention on that. But from a development point of view, when you put more manufacturing in place, you need to have the complete enablement capabilities, which are the tools, the IP, the services and so on, and you said correctly, and the talent. And if there is one thing that we cannot grow faster than a 20-year rate, it's talent in the world. That is going to be one of the shortages. And so, one of the interesting side ramifications for us is this is one additional reason why the value of being able to shorten design time is so valuable. But it's even better than that in some of the capabilities that we have we can get these results with less skilled people and fewer of them. And so, by no means, with this reduced employment in the industry on the contrary, but it does help a little bit with the talent shortage and all of this ties together pretty much in the way you described it. Thank you.

Aart de Geus:

Well, we see them go in all of these directions. And for these large hyperscalers that you mentioned, they are all essentially discovering what the semiconductor world looks like. Because they have figured out that, the semiconductor is a direct multiplier on their software, but you can also say the other direction in the software as a direct multiplier on the semiconductor underneath. And so if they can optimize solutions, for just their applications with other words narrower solutions that is their hope to get much higher speed throughput and in some cases also much less power utilization. And you are absolutely correct that you can go having a full design flow yourself, you can have a full service company do everything for you or you can do something in between, which is the ASIC pathway where you design most of the functionality, structure the architecture and then let somebody else do the physical design. And I think these will all three stay alive, but the good news is a lot more people that want chips just for themselves. And that's where you see this broadening of different architectures, and certainly AI was a foreboding example of that because literally 100 or so AI companies are all designing the best chip ever, of course. And the reality is it's a race for different vertical segments.

Charles Shi:

Good afternoon and thank you for taking my question. Maybe, Aart, the first question, you sort of mentioned about ebbs and flows happening in the semiconductor industry and quite frankly the broader macro economy. Looking ahead to point, so I know you're not guiding '23, but what do you think that are you going to maintain your low double-digit growth into quite a challenging year in terms of macro next year? Because when I look at your historical numbers after you transition to basically a time based revenue model, you probably only had one year that is kind of showing flattish kind of growth, which was away all night around that time. So maybe very specifically, my question is how bad a macro has to be for what happened in '08, '09 to repeat in '23, '24. Do you think that's going to happen, if not, and why?

Charles Shi:

Maybe another question about your specific about your IP, excluding the system integration business, '21, definitely, you are growing, I believe, slightly ahead of your mid-teen outlook, probably closer to 20%. '22 year-to-date looks like your IP growth is potentially very strong, double digit, and probably north of 20%, I assume, but you're still guiding 15% long-term outlook. So maybe this is a kind of simplistic view here. Is there a risk of mean reversion at some point, meaning IP could grow under 15% at some point in the future why or why not?

Operator:

All right. Thank you. And now to Jason Celino from KeyBanc. Please go ahead.

Aart de Geus:

Well, the reason I mentioned that it has impact on our business is because they're using this in production. And yes, of course, the most advanced people have always been the people that first pick up on the most capable new tools. And so, these are very advanced often large companies that are doing now many designs with this capability because the value it's high, and they are definitely seeing the issue of insufficient talent. And so that's sort of the main space. I don't know actually that we see much of our competition, not to put them down or anything like that. I'm sure they're doing good stuff. But the advances that we've made in the last year, even in my own book, are quite remarkable and are broadening, by the way, to more and more capabilities going forward. So I think we're into a whole next phase of what EDA will mean to our customers. And very often, advanced users try very quickly and then they're very careful. They tried very quickly, and they're absolutely adopting.

Trac Pham:

Just to give you a sense of the WhiteHat for the year, it's about $15 million to $20 million in terms of revenue. So a large part of the raise for the full year is really coming from a very strong healthy organic business.

Jay Vleeschhouwer:

Aart, a technology question for you first and then a follow-up for Trac. So on subject of AI, two things. First, could you talk about how you do your own internal development for AI? That is for DSO.ai. The reason I ask is, as I'm sure you're well aware, there's an arms race across multiple software company, each claiming to have some AI. And obviously, you do. It's in production. But I'm curious as to how you distinguish or carve out your own internal AI, specifically for EDA purposes, as compared to the developments you do for the tools themselves. And then more broadly, how do you think about the implications of AI for the IP business? The reason I asked that is Synopsys and a recent technology presentation at -- actually an ANSYS Conference spoke about, for example, AI in the context of design reuse, design remastering, all of which would seem to have some implication for IT and which, of course, you're number one, at least in EDA. For Trac, one number that has become increasingly material in your disclosures, and I'm sure we'll get the update in a couple of days in the Q, is your FSAs, which was $1 billion as of the end of Q2. Could you talk about the composition of that number? Is that predominantly IP? And how does it factor with your guidance and revenue growth assumptions?

Trac Pham:

So, Jay, your question on FSAs and the mix of that and how it affects us -- affects our results. FSAs are predominantly IP, but there's a good portion of EDA software in there as well. With FSAs, what's changed most significantly is since 606 when in effect, whenever a customer pulls down software, pulls down IP, revenue gets recognized at that point where historically, it would have been recognized over time. So you see that create more variability in the business. Now on a plus side, from a commercial perspective, what's great about FSAs are that it gives our customer a lot more flexibility in terms of how they can transact. So they'll sign contract. And this is an area where we continue to innovate and launch new products. They will actually -- we'll see them consume those FSAs quicker. So, you'll see an acceleration in revenues from that business model.

Sachin Jain:

This is Sachin Jain on behalf of Vivek. Thank you for taking the question. I want to focus on EDA. Obviously, you've raised your full year guidance. But for EDA specifically, growth has slowed to just mid-single digits, and now it's below trend of 10% to 15%. So could you help us understand, what's causing the slowdown? And when do you expect it to go back to the trend line? Thank you.

Sachin Jain:

Great. And then just a follow-up to an earlier question on the entity list. Is it possible to give us a sense of how much of your sales are coming from gate-all-around development in China, whether domestic Chinese companies or multinational? Thank you.

Operator:

Thank you. And now to the line of Blair Abernethy from Rosenblatt. Please go ahead.

Aart de Geus:

Well, as you know, many countries are putting big investments in the semiconductor area in general. And the U.S. has been hesitant to do that for a while, but that now came to conclusion. It's a magnitude similar to investments that Europe is committing to, that Korea's committing to. China has a larger commitment but over a longer period of time. And so, I think this is all in recognition that when you don't have chips, you really want them badly. And so supply shortages got a lot of attention. At the same time, I think there's also an increased understanding that the importance of chips is growing because the importance of adding smarts in every aspect of life will require more computation. That computation needs to be really fast and that we're still at the beginning of exploring the full impact of AI. So people are investing in that from a strategic point of view. As somebody else noted, I think earlier, a lot of those investments are initially aimed at essentially putting manufacturing capacity in. Around that, there needs to be quite a bit of enablement, but there will also be investments made to look at newer ways of doing things, and we highlighted the whole multichip or multi-die 3DIC, there are many different names for it, very tight packaging, and there will most definitely be investments in that, but also specialty technologies that are needed so that one is not dependent on some singular location in the world to get those. In all of these, we are close partners to the companies that are the primary companies to respond to these requirements. And we are, in many ways, the enabler, we like to use the term the catalyst to make it happen. And so, if the industry around us does well, they will need us to really do well. And so I think it's only upside.

Aart de Geus:

I think it is very broad. It will follow sort of the urgency of the individual companies and also the skill set of the individual companies. In the system houses, we already have a number of people using it there as well. And at the same time, we have also some people say, "Oh, no, let's not go too fast. Let me first put in a regular "chip design approach." Well, yes, that will take a year, and then they will want to go faster, too. So fundamentally, this will continue to become a strong ingredient in any design flow over time. But we have a very wide and some very advanced people and some people that can do just fine with not being necessarily on the most of the most advanced versions.

Aart de Geus:

Well, at this point in time, thank you for your support and interest. We continue to do well against markets that certainly demand the skills that we have to provide. And we hope that we will be able to deliver to you what we said for this year. Actually, we don't hope, we plan, and that is passing the $5 billion mark, and that's an exciting moment. So thank you for your support, and thank you to our employees to help make this happen.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Second Quarter of Fiscal Year 2022. At this time, all participants are in a listen-only mode. [Operator Instructions] Today’s call will last one hour. As a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Aart de Geus:

Good afternoon. We delivered an outstanding second quarter, exceeding all of our guidance targets and reaching record revenue, operating margin, earnings per share and cash flow. Revenue for the quarter was $1.28 billion. Business was very strong across all product areas and geographies. Backlog grew to $7.3 billion. GAAP earnings per share were $1.89, with non-GAAP earnings of $2.50 and non-GAAP ops margin of 37%. We generated $750 million of operating cash flow. With our significant first half strength and high confidence in our business, we are raising guidance substantially for the year. We expect to grow annual revenue approximately 20% to pass the $5 billion milestone, drive further ops margin expansion and grow earnings per share by more than 25%, while generating approximately $1.6 billion in operating cash flow. Trac will discuss the financials in more detail. Our financial momentum builds on three drivers

Operator:

[Operator Instructions] Our first question comes from the line of Gary Mobley from Wells Fargo Securities.

Trac Pham:

Gary, the backlog is up due to overall run rate growth. Duration remains within the model we communicated in the past, which is 2.5 to 3 years.

Aart de Geus:

Well, right now, we’re not changing any targets for the long term, but clearly, we’re at the right end of the double digit answer. And in general, I would say that we feel that we’re in a strong position that has a potential to continue for quite a while by virtue of not only building up the backlog, but more importantly so, by the conjunction of the demand in the market and what we have to offer being particularly well aligned. So, I think, the Company is very strong right now, and you saw that we changed the objective for the year considerably from where we started the year.

Jason Celino:

Really impressive guidance raise here. I think as we kind of second -- cross into the second half, maybe if we take a step back six months coming into the year versus now, what exactly in your visibility or confidence level has improved so much? Or I guess, what has surprised you to this point?

Trac Pham:

Jason, we -- keep in mind, when we enter the year, we are feeling very bullish about the business, right? Because in December, we are coming off of several years of very strong growth and margin improvement. And based on that, we had already raised our long-term outlook for the business. What’s different now six months in is that we’ve booked six months worth of business that we continue to see the momentum be very strong and consistent with what we have communicated. So, right now, we’re feeling -- we’re feeling like we’re executing well against the opportunity ahead of us, and the outlook is really positive.

Trac Pham:

Well, I’ll start with the fact that we are raising the overall margins for the year by 250 basis points versus ‘21. So, it’s a really strong improvement. With regards to the Q4 profile, we continue to invest in the business in the second half. Good hiring, and frankly, the other part that’s contributing to it is the fact that the outlook is so strong that we are increasing our variable compensation accrual in the back half of the year.

Ruben Roy:

I’d like to extend my congratulations to you on solid execution. First question, Trac, just kind of around something that you mentioned last quarter and just thinking about durations haven’t changed, but backlog orders well ahead of plan, et cetera. You had talked about being able to extract more value in negotiations. And I’m just wondering if you could comment a little bit about kind of the pricing environment as you’re seeing expansion of tools across large customers, et cetera. Have the pricing dynamics across the business or product areas changed much between last year and this year?

Aart de Geus:

Yes. In general, I would add, there is just a lot of demand. People are designing much more complex, not just chips, but systems of chips. The intersection between those chips and the software is more important, meaning that they want to optimize the chips for certain software and optimize certain software for the chips or vice versa. And so, these are all relatively difficult problems that require a lot of our tools and a lot of our IP. And I think the semiconductor market overall is heading towards continued growth by the sheer need of all these parts.

Aart de Geus:

You’re right with both, meaning that in decades ago, clearly, was EDA driving things, and then you would sell some IP in some of the regions that have come online, let’s say, in the last 10 years, IP has often been the first decision-making point and then the EDA followed. And in the system world, it’s a little bit of both. But very often when people decide about what architecture they’re going to build, they make big decisions on the building blocks and then they immediately look in the catalog from Synopsys, okay, which building blocks can I have, ready to go or which ones can I get with some modifications. And that is, of course, a dramatic shortcut in design and effort. So, I think they’re sort of, in my perspective, two sides of the same coin. You need both, and both need to be working very well.

Charles Shi:

Congratulations on the strong results. I want to start with another question on IP. Thanks, Aart, for your answer on the synergy between EDA and IP. When I look at your numbers, it looks like your IP growth so far in this fiscal year has been far above your long-term target, like mid-teens. Really just wonder, do you still holding the view that IP is mid-teens kind of growth long term? Or do you think it may grow faster than that given how strong the results are so far in the year?

Charles Shi:

Maybe a second question. I know during the quarter, there was a press article about the subpoena -- the administrative subpoena you received probably like last year, by the end of last year. Can you give us an update as this is kind of an overhang, I mean, in terms of what investors think about Synopsys? And any update you -- is it closed, or when do you expect it to close?

Operator:

And our next question comes from the line of Joe Vruwink from Baird.

Aart de Geus:

That’s actually a fun question because you seem to know some of our better birthdays here. In ‘15 and ‘19, we had absolutely great products that hit markets that substantially advanced the existing state-of-the-art. I think when you talk about things like DSO or some of the hardware-software interaction, you’re essentially talking about a new state of the art. And having had the privilege to be here for a long time, I strongly feel that the early days of synthesis felt very similar to what we’re doing right now with AI applied to our own design flows, because it is so revolutionary from a computer science point of view as AI has essentially brought a whole new way to look at problems through the lens of can you recognize patterns versus can you do deductive calculations. And we have already demonstrated literally a month after month new results that are getting better and better, and also broadening the applicability beyond just design but also in verification. And so, I think there’s a long runway with that. But it is also literally fun to watch how excited our own teams are every time they get some better results.

Aart de Geus:

It’s a little bit of all of that. We have always wanted to say that backlog goes up and down because if you do, let’s say, a large transaction over multiple years, you get your backlog to go up, and then it gradually decreases as the revenue is recognized and then it gets renewed. Now, of course, we have many renewals, so it’s not that spiky in aggregate. But that’s the one flag I want to raise for backlog. On the other hand, there’s no question that our business is strong and that we have many growing renewals and are broadening the portfolio of what we offer as a company. And so, we are very purposefully building the Company for growth at this point in time. And so we’re watching to make sure that the backlog is in sync with the guidance that we give you going forward.

Operator:

And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

Aart de Geus:

Well, let me start with your first part 1, 2, 3 and 5 of the questions. All the things that you mentioned, I hope we have exactly those problems because we licked them in our history. The fact is that we have the good fortune of starting with synthesis that revolutionized digital design, made it possible, in all fairness, together with simulation, later place and route. And those automations kept growing with every success the customer who wants to do more. It’s like race car drivers, you give them a faster car, they drive fast and they say, "Can you give me something that’s faster?" And the good news is Synopsys for its entire history has always stayed at the state of the art. So, in that sense, this is normal evolution. Secondly, I think the AI capabilities that we have right now and that we’re building are actually quite broad in terms of the applicability. And if you add the very fact that on the side here, we have just announced that we also have a SaaS model for cloud, that’s theoretically saying, "Oh, there’s infinite compute waiting for you if you want to pay the price." And I don’t know I want to be light-hearted about this, but the fact is that compute is not a limitation for us right now. I think what will be the challenging part is that all the problems that we’re addressing are highly systemically complex, meaning there are so many different things that play together, and you have to nail every single one of them, otherwise, the system doesn’t work. And that plays absolutely to Synopsys’ strength because we are deep in every area that we touch, and we’ve put a high degree of emphasis now for a number of years for Synopsys to migrate its thinking from scale complexity to systemic complexity. And so, I actually have no fear in this direction. Trepidation on the execution is always there, but I think we’re on a roll here.

Operator:

Our next question comes from the line of Vivek Arya from Bank of America Securities.

Aart de Geus:

Well, in all areas, we’re outgrowing our competition. And that includes EDA and IP and the other areas that we’re in. At the same time, all of those have historical precedents of how the business is set up. And if you recall, it’s not that many quarters ago that we were referring to IP as in the mid-single-digits growth rate. And today, we’re clearly in the double digit. So, that has moved up. The IP has moved up very fast. And part of the explanation I tried to give a little bit earlier is that, in a number of situations, IP is leading as IP is, in many ways, the shortcut of EDA, right, which is you have design that’s already done. And so, the combination of IP and EDA actually works really well together, and one should take them in aggregate. And in aggregate, the Company is essentially predicting for this year what is a 19% to 20% growth. And so, you can split the numbers anyway you want.

Aart de Geus:

I cannot fully -- I cannot critique what others say about their business. We are doing well. I think the semiconductor industry is growing rapidly. There’s no question that most advanced nations in the world have all understood that chips are at the heart of all the software that’s needed to be competitive. And so, that is a very fundamental change. And we are, I think, playing very well in this with the technologies we have. And some of the areas that we have highlighted, such as DSO.ai, but I could have also highlighted SLM or a few other areas that are relatively new, we’re doing really well.

Trac Pham:

Yes. I would just look at the profiling. You’ve got two years that have very different profiles. And as a result, the comparisons are -- you’re comparing any particular quarter this year relative to the last year, it’s going to stand out and seem unusual. But I would -- if you zoom out and look at the full year, we’re delivering north of 25% EPS growth. And that’s really on the heels of strong revenue growth and margin improvement.