Synopsys Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2021

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Synopsys Earnings Conference Call for Second Quarter of Fiscal Year 2021. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will

Speaker 1

be given at that time.

Operator

Today's call will last 1 hour. 5 minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Eubank, Vice President of Investor Relations. Please go ahead.

Speaker 2

Thank you, Eric. Good afternoon, everyone, and thanks for joining us. Speaking today are Art DeGeus, Chairman and Co CEO of Synopsys and Trac Pham, Chief Financial Officer. Before we begin, I'd like to remind everyone That during the course of the conference call, Synopsys will discuss forecasts, targets and other forward looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, Our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

Speaker 2

In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, We will refer to non GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement and 8 ks that we released earlier today. All of these items, plus the most recent investor presentation are available on our website at synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call.

Speaker 2

With that, I'll turn it over to Art Tejia.

Speaker 1

Good afternoon. Synopsys continues to execute very well, delivering record revenue and non GAAP earnings in the 3rd quarter. Revenue was $1,057,000,000 with GAAP earnings per share of $1.27 and non GAAP earnings of 1.81 We again made excellent progress on our margin expansion goals and generated $422,000,000 of operating cash flow. Thanks for the hard work of our entire Synopsys team. On a TTM basis, we have surpassed the major milestone we set our sights on a few years ago, $4,000,000,000 in revenue and 30 percent operating margin.

Speaker 1

Reflecting our strong year to date results, the vibrant markets we serve And technology innovations driving customer momentum in all product groups and all geographies, we are raising fiscal 2021 revenue, Non GAAP ops margin, earnings and cash flow targets. We are well on the way towards our next goal of crossing $5,000,000,000 in revenue by 2023, raising our long term revenue objective to double digit growth with Continued margin expansion. Trac will discuss the financials in more detail. Meanwhile, The market is not only strong, it is transforming in a way that is very positive for Synopsys. Both consumer and business demand for smart everything continue to intensify and grow.

Speaker 1

Smart devices intersect many skills and technologies. Massive amounts of data to be stored, transmitted and processed sophisticated machine learning and application software specific to each market segment. In this megatrend, semiconductors are absolutely critical. This means not just more chips, but more advanced chips, lower power chips and chips that can be abutted or stacked for tight implementations. In addition, security and safety are rapidly becoming must haves, integrating more and more system requirements.

Speaker 1

To make smart everything possible, companies need more automation while transforming the way they approach the development of their systems. New entrants such as large hyperscalers increasingly designed their own specialized chips and our business with them is growing rapidly. Other systems companies such as automotive increasingly exert heavy influence on their suppliers by specifying key elements of chip performance as well as functional safety and security. Synopsys is a crucial enabler and the broad economic pool is now augmented augmenting the traditional Moore's Law push, thus driving more opportunity for us. Synopsys is ideally suited to capitalize on these tailwinds.

Speaker 1

Over the past 5 years plus, We've invested heavily in breakthrough innovations that are now driving excellent customer results and with it accelerated business growth. Let me highlight 3 areas: AI and autonomous design, silicon IP and security. Let's start with AI. Designing today's most advanced chips with the additional vertical market requirements is among the most difficult engineering tasks, period. As schedule pressured designers reach the practical limits of human design efforts, We must use the power of AI to automate not just design tasks, but entire segments of the design flow.

Speaker 1

This is exactly what Synopsys pioneered a year and a half ago, AI driven autonomous design. Sitting on top of our Fusion Design platform, we have built an AI design solution that automatically explores, implements and optimizes multi month design efforts in a matter of weeks. Called dso.ai, which stands for Design Space Optimization Using AI. The system has been used by customers on real chips, gone through production tape outs and seen silicon back for manufacturing. DSO dot ai is breakthrough technology.

Speaker 1

The results are great. Through this, we've already achieved important customer renewals. Not only does it literally reduce design times from months to weeks, It improves performance, power and areas substantially beyond what teams of experts achieve on their own. In addition to early industry recognition, as it won a 2020 World Electronics Achievement Award for Innovative Product of the Year, Customer engagements have been exceptional with early endorsements by Samsung and Renaissance. In addition, this quarter, A large Asia Pacific provider of advanced chips achieved with 1 engineer in 1 month, what previously required several experts over 3 months of manual work.

Speaker 1

One high profile U. S. Customer using dso.ai attained better quality of results through a remarkable 20% reduction In power consumption, next Monday, I'll keynote the Hotchips conference reporting on further great DSO advances and another exciting customer success. The impact of this AI brain is greatly leveraged by the powerful system that it sits on top of, our Fusion design platform. We pioneered the Fusion concept several years ago by literally fusing together critical segments of the design flow into a single platform.

Speaker 1

The outcome best in class results in terms of chip speed, power and area. Today, Fusion Compiler is the only solution available that seamlessly integrates market leading synthesis, place and route with timing, Power and physical sign off all into a single tool. It's the fastest ramping new design solution in Synopsys' history, already surpassing 500 tape outs across multiple verticals, including AI, 5 gs and high performance compute for process nodes from 40 nanometer down to 3 nanometer. Notably, our leading foundry partners are already actively leveraging Fusion Compiler Towards 2 Nanometer Enablement. Our Fusion design platform is relied on by the world's largest influential and hard driving companies.

Speaker 1

Production successes include advanced tapeout by Samsung Foundry for its next generation chip in 3 nanometer gate all around technology. In parallel to autonomous design, another way to reduce risk and speed time to market for complex chips is by using a ready made IP. Our broad market leading IP portfolio is delivering excellent double digit growth towards what will be another outstanding year. Demand is very strong with customers substantially expanding their reliance on us and renewing multiyear commitments faster than ever before. High performance compute, automotive and mobile markets are especially strong, wanting both more and more advanced IP.

Speaker 1

Let me highlight 3 areas. 1st, with growth in cloud data, we're seeing high demand for faster high performance interfaces such as DDR5, PCI Express 5.06.0 and 800 gig Ethernet. We saw great momentum this quarter with multiple customers selecting our first to market next generation PCI Express 6.0 IP for advanced high performance compute chips. This is a testament to the success of our PCI Express 5.0 IP, which has nearly 200 design wins. This quarter, we also saw immediate traction for our 400 gig, 800 gig Ethernet IP solution through multiple design wins that include our 112 gig SerDes.

Speaker 1

2nd, the number of highly advanced chip designs across cloud, AI and 5 gs applications has been growing rapidly. Our large and experienced R and D team remains at the forefront of delivering highly differentiated IP at the cutting edge of technology. In 5 nanometer, we've secured nearly 400 design ins across 33 customers. And this quarter, A significant driver of our physical IP business came from 5, 4 and 3 nanometer. Lastly, we're also seeing our customers integrating more security capabilities into their chips.

Speaker 1

This is driving excellent momentum with our security IP portfolio, including strong demand for IDE IP to secure PCI Express and CXL interfaces, which is a natural segue to software integrity. We're doing well with increasing momentum, following the significant execution and operational improvements we've made. In fact, Q3 was our highest order quarter ever, and we expect to eclipse our original revenue goal for the year. As massive ongoing security threats to business safety and health become almost commonplace, Companies are rethinking their protection strategy. It's no longer effective to pick and choose point tools with partial capabilities.

Speaker 1

Protection now requires a holistic, strategic approach. Synopsys is at the forefront of this evolution With the industry's only portfolio that features the broadest set of application testing solutions, strategic consulting to assist executives and boards in charting their software security plan and now an innovative offering that elevates the impact of the Polaris platform. With the recent introduction of intelligent orchestration, our Polaris platform can seamlessly integrate and automate security testing within each company's protocol. We took another significant step in Q3 with the acquisition of CodeDx. We are the leading provider of application security risk management products that automate and accelerate the discovery, prioritization and remediation of software vulnerabilities.

Speaker 1

This combination elevates our capabilities beyond what competitors can provide, a comprehensive, easy to adopt holistic solution. On the go to market side, we see very good progress from the enhancements we've made. Our services business again did better than planned with over 20 new logo wins in North America alone. Our win and renewal rates continue to improve, and we're encouraged by the progress we've made. Industry analysts continue to recognize the strengths of our strategy and portfolio.

Speaker 1

For the 5th year in a row, Synopsys was named the leader in the Gartner Magic Quadrant for application security testing. And today, we were again recognized as a leader in the Forrester wave for software composition analysis. So far, I've highlighted 3 major areas: AI, IP and Security. Let me point out a couple of other innovations that enable this new era. One of Senoz's strength is focused on the intersection of hardware and software, which is inherently crucial in Smart Everything.

Speaker 1

Our hardware based verification systems continue to generate very strong business with year to date 36 new logos and about 150 repeat orders. In addition, with innovation Spanning both emulation FPGA based prototyping, we're off to a solid start to a multiyear product upgrade cycle. Over the last two quarters, we introduced new application specific emulation products. The Xebu Empower system Enables early power analysis to reduce power related risks. And the Zebu EP1 is the first of its kind high performance compute for mobile, GPU, CPU and AI design.

Speaker 1

Both are substantially faster with higher capacity than any competitive solution in the market today. And we're already seeing strong demand and deployments at large influential customers around the world. Q3 was our largest orders quarter ever for our HAPS prototyping product line, fueled by the new HAPS 100. With highest performance and unmatched enterprise scalability, we closed multiple competitive wins in the quarter. With the momentum in both emulation and prototyping, we expect another record revenue year, extending our market and technology leadership.

Speaker 1

With increasing chip and system complexity, growing reliability requirements are now demanding ongoing post silicon analysis, maintenance and optimization. Our new silicon lifecycle management platform leverages our leadership in both EDA and IP as it monitors, analyzes and optimizes chips from design to manufacturing to in field adjustments. This innovative approach opens up a substantial new TAM for us with business ramping ahead of expectations. Even at this early stage, we achieved 2 large expanded renewals this quarter. In summary, Q3 results were excellent, and we are raising our full year objectives substantially.

Speaker 1

Vibrant markets, compelling innovations and strong execution position us to continue to increase shareholder value going forward. While we will provide specific long term objectives next quarter, We aim to cross $5,000,000,000 in revenue by 2023. We are raising our annual revenue growth objectives to double digits with continued margin expansion. These results are not possible without our global team. Through the pandemic, They have demonstrated commitment, resilience and compassion for others, while executing very well.

Speaker 1

Lastly, I hope you and your families are vaccinated, healthy and staying safe. With that, I'll return it over to Chuck.

Speaker 3

Thanks, Art. Good afternoon, everyone. 3rd quarter results, including record revenue and non GAAP earnings, reflect strong momentum across the Company. For the full year, we are on track to deliver mid teens revenue growth, an increase in non GAAP operating margin of more than 200 basis points, Non GAAP earnings per share growth of more than 20% and approximately $1,350,000,000 in operating cash flow. The combination of the dynamic markets we serve, the powerful impact of our products and solutions on customer results And our history of strong execution is the basis for us setting the goal of crossing $5,000,000,000 in revenue by 2023.

Speaker 3

Now to the Q3 results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1,057,000,000 up 10%, driven by broad based strength across all product groups and geographies. Semiconductor and System Design segment revenue was $969,000,000 with solid growth in both EDA and IP. Software Integrity segment revenue was $98,000,000 and we are executing better than expected against our bookings plan for the year.

Speaker 3

As a result, We project that Software Integrity revenue growth will approach double digits for the full year, and we are solidly on the path to accelerate revenue growth to the 15% to 20% range long term. Moving on to expenses. Total GAAP costs and expenses were $855,000,000 which includes approximately $15,000,000 in restructuring costs. Total non GAAP costs and expenses were 720,000,000 resulting in a non GAAP operating margin of 31.9%. We are on track to deliver operating margin expansion to approximately 30.5% for the year.

Speaker 3

Adjusted operating margin for the Semiconductor and Systems Design segment was 34% and software integrity margin was 9%. Wrapping up the income statement. GAAP earnings per share were $1.27 Non GAAP earnings per share were $1.81 Turning to cash. We generated $422,000,000 in operating cash flow. We recently completed a $175,000,000 stock buyback, bringing the total to the fiscal year to 573,000,000 And we ended the quarter with a cash balance of $1,530,000,000 with total debt of 107,000,000 For fiscal 2021, we are raising our revenue and non GAAP operating margin and earnings guidance.

Speaker 3

Our targets are revenue of $4,190,000,000 to $4,220,000,000 an increase of $145,000,000 at the midpoint, representing mid teens growth. Total GAAP costs and expenses between $3,431,000,000 $3,459,000,000 Total non GAAP costs and expenses between $2,915,000,000 $2,925,000,000 a non GAAP operating margin of approximately 30.5 percent, other income and expenses between minus 6,000,000 and minus 4,000,000 Non GAAP normalized tax rate of 16% GAAP earnings of $4.63 to $4.79 per share Non GAAP earnings of $6.78 to $6.83 per share, representing over 20% growth. Cash flow from operations of approximately $1,350,000,000 and capital expenditures of approximately 90,000,000 Now, let's see the targets for the Q4. Revenue between $1,138,000,000 $1,168,000,000 total GAAP costs and expenses between $924,000,000 $952,000,000 total non GAAP costs and expenses between $805,000,000 $815,000,000 GAAP earnings of $1.09 to $1.25 per share and non GAAP earnings of $1.75 to $1.80 per share. We will provide detailed 2020 guidance and our updated long term financial objectives and assumptions we'll report next quarter.

Speaker 3

As part of that discussion, we will also provide an update of our normalized of our 3 year normalized non GAAP tax rate, which is under review. Although we have not completed the assessment, I want to highlight that the rate may increase in light of the assumptions under review. In conclusion, we delivered record revenue and non GAAP earnings and strong operating cash flow. Based on our excellent results year to date and our outlook for Q4, we are substantially raising our targets for the full year and setting the goal of crossing $5,000,000,000 in revenue by 2023. This reflects an increase in our long term revenue growth objectives to double digits and is also complemented by ongoing margin expansion.

Speaker 3

At the same time, We will continue to invest to further scale the business and drive increasing shareholder value going forward. With that, I'll turn it over to the operator for questions.

Operator

Before we begin the Q and A session, I would like to ask everyone to please limit yourself to one question and one 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. One moment please for the first question. And the first question comes from the line of Joe Veruik, please with Baird, please go ahead.

Speaker 4

Great. Hi, everyone. I wanted to start on Kind of the recalibrated revenue growth framework. Can you maybe discuss some of the ways the composition Of the growth profile is different than it has been in the past. You spent a lot of time in prepared remarks highlighting new products.

Speaker 4

Is Vitality better today than it maybe was in the past? Or is this a huge wave of Domain specific, application specific development, is that just a magnitude proving to be much greater than it has been in the past?

Speaker 1

Thanks for the question. It's been all of that. I think that Synopsys is a high degree of vitality right now, largely as a result of many years of complex investments that suddenly are intersecting in a positive way. And so, you may recall the many times we talked about Fusion Compiler, for example, as sort of a platform to do very advanced design with. Well, once you intersect that with the ability to automate some of that, in other words, put sort of a brain on top of it, That brings if it functions well, can do a lot because the Fusion Compound is very, very powerful tool.

Speaker 1

And so, all of these efforts took many years to get to this point, And now, they are showing results. And what is powerful about showing results is you learn very quickly from the results to get better results and improve. And so, this is moving forward very rapidly. Simultaneously, you opened up a very good other comment, which is that Number of efforts become maybe not entirely domain specific, but certainly more domain sensitive. And so, when you talk about automotive or industrial or other areas that require a certain degree of security and safety, Well, those are additional demands that come in.

Speaker 1

And in general, if you buy into my picture of saying, hey, the whole world is heading towards smart everything, Well, all the smarts is applied in those verticals in different ways. And so, some have a lot of data, others have very difficult data to deal with And others just require instantaneous fast computing. Those are all a bit different. And so, yes, there will be an Please for gradual specializations in the vertical markets. But at the same time, you can only do that if you have an extremely Strong and capable foundation.

Speaker 1

And I think we're certainly in a good spot for that.

Speaker 4

And then maybe Just more of a near term focus question. The guidance for the Q4 does imply a pretty big Step up just relative to where the implied guidance was last quarter. I'd imagine you touched on the strength on the hardware. I would assume that's a contributor. Can you just talk about the expected performance of the software business into the Q4?

Speaker 4

And I'll leave it there. Thank you.

Speaker 3

Yes. Let me take that one. Joe, the core Q4 really reflects continuing strength across all the businesses. We continue to ramp up Software, hardware is better than expected, same with IP. And then, you're also seeing a progression on the software integrity business as well.

Speaker 3

So, it's coming from all areas of the business.

Operator

And the next question comes from the line of Jackson Ader with JP Morgan. Please go ahead.

Speaker 3

Okay. Thanks for taking my questions. The first one is on DSO dotai. Art, I'm just curious, can we get a little bit more color on maybe how this is priced on a per seat basis and whether Is it only available to those customers that are on the Fusion Compiler platform or is it also available elsewhere? Well,

Speaker 1

it's a bit of a complicated question because we are in the first wave of making this successful. And certainly, we have built one of its capabilities on Fusion Compiler. And since we have pretty much all of the Advanced customers Using Fusion Compiler, we have plenty of opportunity to continue with that. And there's a lot of runway in terms of what we can accomplish. What I did not mention is that dso.ai is actually a capability that can also be applied in other domains.

Speaker 1

And over time, we will use some of that technology in the ability to design better silicon Technologies, for example, or in the verification space. So, there are many directions that we can take with that. And We are strongly engaged now with some of the most advanced design teams in the world. And Maybe the only comment I want to make right now on pricing and so on is that it has already helped us see some growth in renewals. And that is really the direction that we count on for technology that truly has a big impact with our customers.

Speaker 3

Okay. All right, great. And then, a follow-up on the regions. Is there a this is kind of the second, third quarter in a row that China had this Big sequential jump. And I'm just curious whether there's a distinct seasonal purchasing pattern in China that might be different from the other regions that you see?

Speaker 1

To be honest, I think for the last 15 years, I've said we've never had really seasonal patterns. It's just one continuous wave. And when a certain region is not as big as another, it is More often than not, just the fact that the renewals at that time are different than in other regions. Now, commenting specifically about China, the very, very good results and continued good results are due to a very broad So, by many companies. And of course, many companies by themselves are investing heavily in the future and driving business very hard.

Speaker 1

So, it's just a very active region, and I expect that to continue.

Operator

And the next question comes from the line of Tom Diffely with D. A. Davidson. Please go ahead. Yes.

Operator

Good afternoon. Thanks for the question. Track, I was hoping you could give me a little bit more about your view on operating leverage going forward. And what do you see as the key drivers, be it segments or product mix or moving to a hybrid office model, whatever you think is important?

Speaker 3

I think all those things that you touched on, John, Tom, will help the operating leverage. Really, the 2 biggest ones are continue to grow revenues. And in fact, we're raising the outlook for revenue growth. Secondly, the things that really moved the needle are the investments in the business and making sure that we're investing in the areas that are going to give us the Biggest returns. You're also seeing strong results in the growth in revenues for this year because of changes Improvements that we've made on the go to market side, both on the semi and the SIC side software integrity side.

Speaker 3

Those big drivers as well as A ton of work across the Company in so many different areas, including the items that you mentioned is what is going to help us continue to drive Operating margin is up over the next several years.

Operator

Okay. Thanks. That's helpful. And then, Art, I was hoping you could give us a little bit more about the competitive landscape in the key markets and what you're seeing from a pricing point of view, just an overall competition point of view?

Speaker 1

Well, I think we continue to outperform well others because of both the breadth and the complexity of our platform. I want to say though, ARM is also doing very, very well. And we are sort of almost 100% complementary to what they do. And so, what I think we see is, A, that there are many more designs that they're especially much more complex designs. And that second comment is important because the value and the cost, but also the necessity for very advanced nodes has increased.

Speaker 1

And so, we observe that in multiple ways, a, of course, by what our customers order, But also at the speed with which they absorb it. And in some of the numbers I gave in the preamble, you could see that a significant portion of our business is already at 5, 4 and 3 nanometer. And these are invariably extremely sophisticated customers that need large complex blocks And do a lot of design. So, in general, for us, the market is doing extremely well and IP has definitely been A shining star at Synopsys for a number of quarters now.

Operator

Okay. And you're seeing pricing strength, Sid, along the way?

Speaker 1

I don't think that it has changed. The more complex things are more expensive, and customers expect that. But fundamentally, it's a business of almost constant renewals. And I think, We must be okay with our pricing because our customers consume what they buy often faster than the timeframe that they allocate And a lot of this business is built on the trust that we will deliver something that they can count on at the right time. And so a lot of it is very sophisticated repeat business.

Operator

And the next question comes from the line of Gary Mobley with Wells Fargo. Please go ahead.

Speaker 3

Everybody, good afternoon. Thanks for taking my question. Since you guys mentioned it in your prepared remarks and your press release, Hopefully, you can give us some additional color on your long term view of revenue, dollars 5,000,000,000 in fiscal year 'twenty three. You can get to double digit percent compound annual growth depending on what your starting point is. If it's fiscal year 'twenty, you can get there.

Speaker 3

But are we talking about double digit percent growth on average for the next 2 years? In other words, is this a preliminary view of double digit percent revenue growth for next fiscal year? Well, I want to be careful about getting into the details of next year, but the math over the next couple of years really is off of The current guidance for 'twenty one, Gary. Got you. Well, that makes it very clear then, very bullish.

Speaker 1

And then I'm surprised it hasn't

Speaker 3

been asked yet, but you're raising the implied 4th quarter revenue guide From the previous implied, I guess, I should say, by 11%. That's obviously perhaps supported by some stronger backlogs. And the question is, What is the backlog? Can you share with the 10 Q filing? Yes, certainly.

Speaker 3

When we 5Q, the backlog you'll see is $4,700,000,000 And as we've cautioned you and others on the past backlog, While it's a big number, we'll move from quarter to quarter, right, depending on what gets renewed and what gets recognized as revenue. I think this quarter is a very emphatic support of that, that we can raise the year by $165,000,000 at the midpoint and See backlog move the other way. So, overall, really the guidance and the outlook for the year is a reflection of the strong growth And the deals that we're booking and our confidence in our ability to continue to drive out those strong renewals. And

Operator

the next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Please go ahead.

Speaker 3

Thank you. Good evening. With regard to that very interesting target now for 2023, A couple of things. Internally, how are you thinking about any structural or Capacity or operational changes that you might need to put in place with respect to let's say R and D or go to market. Similarly, you have one customer that is well known as a matter of public record, is fairly consistently over 10% of your revenue, but also has not grown necessarily every period, also a matter of public record.

Speaker 3

Does your growth forecast of 2023 necessitate that large customer keep pace or can you grow the business to the degree you're talking about, Even if that large one lags and you can grow with others or perhaps substantially increase the total number of customers, particularly in core EDA? And then, a follow-up for Trac.

Speaker 1

Well, so as you well know, we never comment about individual Certainly not from a business point of view, but I would just highlight that the most advanced customers, the largest customers in the world are also Far and away the most aggressive in technology adoption and for good reason. That is why they are the most successful ones And continue to grow. And so, I expect that to be the case for multiple of our top customers. In terms of structural changes, we've had the good fortune to be able to somewhat continually inside of Synopsys Evolve the structure as technologies either gain strength or are better put together with other products. And we've continued to do quite a bit of that under Sashin Ghazi's, our COO's leadership.

Speaker 1

And I think that has been very effective because not only does it have a high degree of vitality, it also opens up new doors. And you've seen, for example, out of the design effort, the SLM, the Silicon Lifecycle Management suddenly emerge and a number of other capabilities. A great example of course is DSO because it intersects with really the entire company, Primarily right now in design, because the results are just fantastic and of very high value. And so, we will continue in that vein. On the field side, there are 2.

Speaker 1

We continue to optimize For the customers driving different technologies and making sure that the coverage is very good. And in many ways, the good news is that despite All the restrictions with COVID, I think we have not really missed any beat in covering the needs of our customers well. And so, right now, I would consider that Synopsys is actually pretty good spot.

Speaker 3

So, Jay, can Can I just emphasize Art's comment on the restructuring, if I get your question? Because if you look at the operating margin Results over the last few years, we've increased it by 8 points since the low of 'eighteen, right? And so, There has been a lot of changes across the Company. And so, while we have been able to grow the business, to reinvest in the business, We're simultaneously making a lot of that change. And so, there is good opportunity for us to sustain that going forward.

Speaker 3

And so, it's not a new skill that we have to Acquire, develop. This is something that we've been working on for many years now. So, this practice of driving to Higher profitability in the next few years is going to be more of the same but more hard work because we're working off a pretty high base. With regard to customer concentration, I think the a lot of reality is we're still working on finalizing the budgets for next year and the plans for the next couple of years. What we are seeing is really strong strength across the broad product sets and strength across the broad customer base.

Speaker 3

And there's enough confidence in our ability to execute against that that we feel willing to go out and commit to $5,000,000,000 by 2023. So, it's very much fun days. Okay. Now, for Utrack, you spoke more positively about the SIG performance and outlook. What would seem to corroborate that is there has been over the last few months a very significant increase in the number of Open software security consulting positions you're looking to fill, Q3 over Q2, and so fairly material, Including the particular for Asia positions related to SIG.

Speaker 3

So, have you seen over the last quarter or so therefore A material increase in the pipeline for SIG engagements and deployments To warrant that kind of opening of the aperture for SIG hiring? Short answer is yes. I'll give you some color about how we're thinking about SIG. If you remember at the beginning of the year, we said that we were going to make some changes and to get the business back on A growth path of 15% to 20%. And what we said was for this current year that we would exit the year at double digits, right, because it would take time for the improvements in bookings to translate to revenue.

Speaker 3

And then by Q4, Our goal is to exit the year in double digits. We are now in fact approaching double digits for the full year and not just exiting. So, I think the momentum Clearly has been progressively improving. And I think, if you recall the tone throughout the year, I think, it was Kind of cautiously optimistic because you're seeing good progression and impacting the changes. But, 1 quarter or 2 quarter, I think it's too early to call, but Yes.

Speaker 3

4 quarters in, it does feel like we're really are on the right path. And if we continue executing this, The goal of 15% to 12% growth long term feels very, very doable. With regards to the investments, I think same thing there. We are we've been progressively feeling positive. And again, if you remember the commentary on operating margins, we thought we would have to invest more this year and then bring margins down in order to drive growth.

Speaker 3

In fact, the team has done a really good job balancing the changes in the business, but while kind of managing their investments to keep margins relatively flat. And so, we've the hiring that you're seeing certainly reflects an emphasis of hiring in areas where we can get the most impact. And it's just a very disciplined approach in terms of hiring. So, Overall, just good results that supports continued investments in that business. But the outlook is very good growth in the next few years as well as margin improvements.

Operator

And the next question comes from the line of Gal Munda with Berenberg. Please go ahead.

Speaker 5

Hey, thank you for taking my questions. The first one is just I'd like to go back On the bullishness of the full year guidance upgrade, I'm just kind of thinking about to make sure it's clear, It's not just that you were surprised by the amount of hardware orders that you're seeing in Q4. It's the mix Of all different business segments that allowed you to raise the guidance by $145,000,000 at the mix points. Is that correct?

Speaker 3

That's correct. Yes. Okay. Awesome. And then, just

Speaker 5

as a follow-up to that, it's a big Revenue number to raise with 1 quarter to go. But at the same time, when I look at the operating cash flow raise again, it's Just as impressive, it implies more than 50% incremental operating cash margin to that revenue base. So can you just talk To me, how much of that is kind of sustainable when you look at the operating cash flow incrementals versus any one offs that kind of play and It actually helped you this year a little bit because of the fact that it's a lot higher And the overall operating cash flow margin that you've been generating recently? Thank you.

Speaker 3

Yes. No, overall, both on the P and L and the cash flows, I would characterize it as just very good results across the board as opposed to being driven by One time items or any unusual items. But keep in mind, the cash flow will be lumpy, Just given that depending on the day that we think it comes in, it can slip from 1 quarter to the next or 1 year to the next. But, Over the long term, if we continue to drive operating margins up and drive operating income growth, Cash flow should track very well to EBITDA less cash taxes over time. You're welcome.

Operator

And the next question comes from line of Jason Celino with KeyBanc Capital Markets. Please go ahead. Jason, your line is open. Okay. We'll move on to Pradeep Ramani with UBS.

Operator

Please go ahead.

Speaker 6

Hi. Congrats on the quarter and the guide. I just had a couple of questions on, first on the revenue, Pete. Based on what you're saying, it feels like 1.15 is more of a sort of a new base to think about, Just looking into October January, is that true? And then, if we do the math on your $5,000,000,000 target over, let's say, a 2 year period.

Speaker 6

That implies roughly 1.25 sort of a run rate. So, My question really is that, can we sort of expect, just given your Sort of broad based growth you're seeing, can we sort of expect a linear progression to from say 1.15 to 1.25 A quarter over 2 years.

Speaker 3

I wouldn't look at it that way, Pradeep. I think, you're trying to impart Seasonality on the business when there really isn't one. Our business is very much recurring, 9% of the business is But it could be a little noisy from quarter to quarter. And I think that overall, I would look at the trend over a multiyear period and focus on what we're describing for the year. And then, within the year, we'll give you very, very specific kind of feedback on what that quarterly profile can look like.

Speaker 3

And it will vary and it doesn't really it will vary depending on what the customer requirements are. And I'll just remind you that last year we had a Q3 3 in Q4 that was unusual by historical standards. And then this year has trended out to be a little bit more linear. And so, It will vary even within a 2 year span. But over time, as you look at the annual trends, it tends to be Pretty steady.

Speaker 6

Okay. And on the margin front, the semis And system design margins are approaching 34%, 35%. How can we think about Sort of the ceiling, if any, to margins on the semi side and sort of the progression of margins, even simply Backing out from your rule of 45%, the sort of 10% or 11% of revenue growth rate you're guiding to?

Operator

We'll continue to I'm sorry, let me

Speaker 3

start and then Art add some color. But we'll continue to look for efficiencies and productivity across all areas So that will include the semi side and software integrity. The opportunities, We're spending a lot in total as a company. And so, the more dollars that we can put behind projects and initiatives that are going Drive the best returns, we'll continue to do that. There's no reason to not maintain that discipline.

Speaker 3

That served us well the last few years because those investments As we've made and was highlighted in Art's prepared remarks, are a function of the big investments that we've made over the last 5 plus years. And so, we want to make sure that we're looking at that business as well to be more efficient. But, that does not at all imply that we won't But, we'll do that in a balanced way, so that all areas of the business are contributing to good growth and profitability improvements.

Speaker 1

Maybe if I can add something, you can look at it both outside and inside, starting outside. Of course, the semi and the systems industries have great opportunities right now, Because this age of smart everything will actually touch everything. And in some areas, it's going to go very And so, that is one of the reasons why you see the semiconductor industry do so well. And the fact that in some areas, our shortages may have nothing to do with that because it's certain specific areas. But in general, it does have to do with the fact that demand is high and higher than ability to satisfy it.

Speaker 1

So, We expect that the market in aggregate over time will stay very healthy for a while. On the inside, we've always said that So, you need to have a portfolio of things that are more mature and with more maturity, hopefully, comes sustainable Productivity and margin, and certain things that you have to invest in. And by definition, investing means putting money in. But on balance, I think that since we communicated to you about 2.5 years or so ago That we were going after rule of 40, we've executed well with that. And in many ways, I would consider that episode is now over.

Speaker 1

And now, we have Mentioned to you that rule of 45 is next. So, the general recipe is clear and the hard work is always hard, but I think we're on a very good track.

Operator

And the next question comes from the line of John Pete with Rosenblatt, please go ahead.

Speaker 7

Just along the lines, you just mentioned that a lot of your customers are mentioning component shortages, And you do have some hardware that has some components in it. And I'd just like to ask if you feel like you have secured enough Supply to of components to ship them?

Speaker 1

At this point in time, the answer is yes. We have Sufficient, which does not mean that we don't look for every part to see are there alternatives, what's the status, are there going to be some challenges. Luckily enough for us, we bought the most important parts at the right time in sufficient magnitude that for right now we're covered. But, right now, it's right now. And so, we'll keep being very diligent about this.

Speaker 1

Although, I expect that in some areas, the shortage

Speaker 7

One thing I've heard is the semi companies don't want to eat their seed corn, so you could be a priority Customer, because they can't get their designs done without your products.

Speaker 1

We're part of a circle, absolutely.

Speaker 7

Right. So, I guess, my second one is on gate all around. I did see the tape out at 3 with a customer. Do you see that as the future? And relative to your AIML enabled solution, things are Getting pretty hairy down there.

Speaker 7

Could you just talk about that maybe as a driver for different segments of the business, placing out, timing, I don't know? Sure.

Speaker 1

Well, let me make 3 comments. First is, there have been a number of generations of semiconductor Transistors, planar was for many years the way to do it. The thought to do FinFET was Heresy because these were very difficult to do and impossible and then they became possible and we moved forward on that. The way to look at data all around is essentially it's a Sophisticated variation on FinFET and a number of advanced customers and manufacturing partners Are clearly investing in this and clearly going in this direction. And we can absolutely support it all the way from the very beginnings of providing them with tools that allow them to literally simulate and design individual transistors all the way to our design The fusion compiler is completely capable of handling this.

Speaker 1

So, that's not going to be a problem. The second comment is What you're referring to when you say new types of transistor is de facto a form of continuation of Moore's Law, meaning still smaller transistor, still less power, And while Moore's Law has slowed down, I want to emphasize, it is still continuing. And that too for many times was viewed as impossible, but it is absolutely continuing. I would amend it with something though, which is you also see more talk of now bringing multiple chiplets or sometimes called tiles closely together, sometimes on top of other chips and on other pieces of semiconductor. And to me, that is a mega booster pack to Moore's Law, because if you cannot do more transistors on a chip, Can you do 2 chips closely together?

Speaker 1

And there are a number of design issues that SunOpta is particularly well equipped Because when you do something in 2 chips instead of 1, the biggest problem is the in between, right, which is how quickly can you get the signals from 1 to the other. That's why you want to have them very, very closely linked. We have a complete 3 d IC, that's design system for that. And as we see people do a combination of still smaller devices, but now also multiple chips closely together, We will gradually see that growing. So I'm very encouraged that for the next 10 years, we're still going to see way more complex systems.

Speaker 1

And in our case, the word complex is a good word.

Speaker 7

And just one little follow-up there. I mean, you did raise the Revenue growth target is double digits. You don't have to give a number, but EDA is assumed to be raised as well inside

Speaker 3

of that. Is that fair?

Speaker 1

Yes. Track sort of alluded to the fact that all of our business are doing well. And Absolutely, EDA is a very, very big piece of our business, the largest piece. And so, you cannot get to double digit and go from there, if that were a boat anchor. And in this context, it's actually the opposite, EDA is doing extremely well for

Operator

And the last question comes from line of Jason Celino with KeyBanc. Please go ahead.

Speaker 3

We can hear you. Okay. Sorry about that. Maybe in essence of time, I'll just ask Juan. Art, you mentioned you're seeing your customers renew faster Than they have ever before.

Speaker 3

I'm trying to understand this

Speaker 5

a little bit. Is this because of

Speaker 3

the products and capabilities that you're adding and they're having to come to the table quicker? Or is this maybe market appetite to move faster, go to market faster, etcetera? Thank you.

Speaker 1

Well, yes, the answer is yes and yes, Meaning that they see a lot of opportunity because there's a lot of demand for many of these new capabilities. And at the same time, because of the continued growth in complexity, they have to rely on more reuse of IP blocks, on more automation in the design process. And we are the ones providing that. And so, I'm Super enthusiastic about this decade because I can see the value at the end of this journey for so many vertical markets. Therefore, the economics from the end markets will come down into the systems, semiconductor and in our world, Because we are the neighbors for that.

Speaker 1

And I'm also super enthusiastic because I feel that many of the investments that we've made Have led Synopsys to be at just a unique point of new innovation. And having had the opportunity to be part of For the early beginnings of automation via Synthesis many years ago, I would equate what we're doing right now with AI on not a design step but a whole design flow to be very, very similar, and therefore a long term high impact. And it's just very exciting to feel the push of the technology and the pull of the end market. And having those aligned, I think, is just Well, I guess this signifies that we are done for this hour. First, thank you as usual for attending this and for following us.

Speaker 1

Hopefully, you read out of the discussion and the preambles that we feel that we're in a very strong, solid A business situation, but also very excited about the capabilities that are rolling out and their impact on the future. And lastly, that we are in a market situation and the markets really need the capabilities we have. And so, that leaves only the word execution to finish on, and That is our job. So, thank you very much. I hope you all stay healthy in a time where unfortunately the delta waves are bigger than

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT and T teleconference. You may now disconnect.

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Earnings Conference Call
Synopsys Q3 2021
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