Synopsys Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2022

There are 10 speakers on the call.

Operator

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for Q3 of Fiscal Year 2022. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. On your touch tone phone. You may remove yourself from queue at any time by repeating the 10 command.

Operator

Star then 0. 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 Lisa Eubank, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Carrie. Good afternoon, everyone. Hosting the call today are Art DeGeus, Chairman and CEO of Synopsys and Trac Pham, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this 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 1

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 website at the conclusion of the call.

Speaker 1

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

Speaker 2

Good afternoon. We delivered another excellent quarter with enduring broad based strength. Revenue for the quarter was $1,250,000,000 GAAP earnings per share were $1.43 with non GAAP earnings at $2.10 we generated $440,000,000 of operating cash flow. Notwithstanding the normal ebb and flow of the semiconductor market, design activity remains 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.

Speaker 2

Based on this strength and confidence in our business, we are raising guidance for the full year. We expect to grow fiscal 21% and past the $5,000,000,000 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 $1,600,000,000 to $1,650,000,000 in operating cash flow. Clark will discuss the financials in more detail.

Speaker 2

Over the last 5 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 was increasingly constrained engineering talent resources. For the last 35 years, Synopsys has been privileged to grow as an essential catalyst of this transformation, delivering 10,000,000 x in productivity.

Speaker 2

Today's Synopsys uniquely sits at the intersection of the dual system forces of semiconductors and software, enabling both with the bold ambition to capitalize another 1000x this decade. We partner and collaborate 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's Synopsys is successfully bridging technologies from silicon to software to systems as we engage with all these companies.

Speaker 2

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.

Speaker 2

Leading the way is our award winning dso.ai artificial intelligence design solution, which is revolutionizing chip design. First to market over the 3 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 dotai's ability to learn from prior designs. For example, 2 of the largest most advanced Doctor companies in the world achieved a 25% reduction in turnaround time and compute resources.

Speaker 2

DSO dot ai is also driving very significant low power improvements, exemplified by a large automotive chipmaker 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 a marquee U. S. Hyperscaler and top consumer chip company.

Speaker 2

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 has generated notable run time in PPA performance power area, improvements at top graphics processor companies, and we have gained majority positions at 1 of the largest mobile SoC providers and at multiple leading hyperscalers.

Speaker 2

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.

Speaker 2

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 3 d multi die and chiplet designs. In mobile, we achieved plan of record of leading semiconductor companies for their next generation multi die processors.

Speaker 2

In high performance compute, multi di systems incorporate a new interconnect IP standard, UCIE, which stands for Universal 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 at 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.

Speaker 2

Meanwhile, our industry leading ARC, NPX 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 with large traditional and 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.

Speaker 2

In other words, verifying that the chips and system will do what was intended. Our market leading emulation and prototyping hardware products are 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.

Speaker 2

We are on pace for yet another record year of hardware revenue. With SmartEverything entering every vertical The 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 $500,000,000 TTM revenue mark.

Speaker 2

This quarter, we saw main multi year, multimillion 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.

Speaker 2

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, We delivered another excellent quarter, and we are raising our outlook for fiscal 2022. Multiple game changing innovations are driving outstanding technical and business results reflected in our accelerated growth. Notwithstanding economic choppiness, customers continue to invest heavily in critical chips, system designs and immense amounts of software. Against this backdrop, our technology vision and execution drive growth, while our resilient business model provides a level of stability that stands out in the software industry.

Speaker 2

As we prepare to imminently cross $5,000,000,000 revenue mark, I want to thank our employees around the world for their ongoing efforts and commitment. With that, I'll turn it over to Trac.

Speaker 3

Thanks, Art. Good afternoon, everyone. Q3 was another excellent quarter. We delivered revenue and EPS above our targets and achieve cash flow above our plan. For the full year, we are raising our outlook and are on track to deliver over 20% revenue growth, an increase in non GAAP operating margin of approximately 250 basis points, non GAAP earnings per share growth of approximately 29% and $1,600,000,000 to $1,650,000,000 in operating cash flow.

Speaker 3

We continue to execute well, which is a testament to our innovative technology portfolio, ongoing design activity by our customers who continue to invest through semiconductor cycles, financial discipline and the stability and resilience of our time based business model. I'll now review the Q3 results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1,250,000,000 up 18% over the prior year with broad based strength. Total GAAP costs and expenses were $1,010,000,000 Total non GAAP costs and expenses were 856,000,000 resulting in a non GAAP operating margin of 31.4%.

Speaker 3

GAAP earnings per share were $1.43 Non GAAP earnings per share were $2.10 up 16% over the prior year. Semiconductor and System Design segment revenue was $1,130,000,000 up 18%, driven by continued strength in EDA and IP. Trailing 12 month Semiconductor and System Design adjusted operating margin was 35.8%. Software Integrity segment revenue was $118,000,000 up 21%, with trailing 12 month adjusted operating margin of 11%. We continue to expect Software Integrity to deliver 15% to 20% growth with expanded adjusted operating margin in 2022.

Speaker 3

Turning to cash. We generated $440,000,000 in operating cash flow. We used $257,000,000 of our cash for buybacks and have repurchased $972,000,000 of stock over the past 12 months. In addition, we paid $330,000,000 to acquire WhiteHat security. Our balance sheet remains very strong.

Speaker 3

We ended the quarter with cash and short term investments of 1,530,000,000 and debt of $22,000,000 Now to guidance. We are raising our full year outlook for revenue, earnings and cash flow. For fiscal year 2022, the full year targets are revenue of $5,060,000,000 to $5,090,000,000 which represents 20% to 21% growth total GAAP costs and expenses between $3,978,000,000 $3,998,000,000 Total non GAAP costs and expenses between $3,395,000,000 $3,050,000,000 resulting in a non GAAP operating margin improvement of approximately 2 50 basis points, non GAAP tax rate of 18%, GAAP earnings of $6.37 to $6.49 per share non GAAP earnings of 8.80 to $8.85 per share, representing approximately 29% growth cash flow from operations of $1,600,000,000 to 1.6 $5,000,000,000 capital expenditures of approximately $145,000,000 Now to the targets for the 4th quarter. Revenue between $1,263,000,000 $1,293,000,000 total GAAP costs and expenses between $1,076,000,000 $1,096,000,000 total non GAAP costs and expenses between $919,000,000 $929,000,000 GAAP earnings of $1.06 to $1.18 per share and non GAAP earnings of $1.80 to $1.85 per share. Consistent with our prior years, we will provide additional comments and guidance for 2023 when we report next quarter.

Speaker 3

In conclusion, we again delivered revenue and non GAAP earnings above our targets. Based on our excellent results year to date and strong outlook, we are again raising our targets for the full year. We continue to see strong momentum in the business and are executing well with our robust portfolio and resilient business model. With that, I'll turn it over to the operator for questions.

Operator

All right. Thank you. Before we begin the Q and 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. And Our first question comes from Joe Greuwink from Baird. Please go ahead.

Speaker 4

Great. Hi, everyone. Maybe I'll start with kind of 2 questions on backlog. 1, just where it finished the quarter and then 2, You've been in this stretch of really remarkable sequential backlog growth, and I completely understand you only get Shot to renew an enterprise customer with a 3 year deal every 3 years. So Are we reaching a point where maybe the backlog metrics stabilize and you start to pull Bigger ACV out of the backlog and that starts to show up in maybe a more meaningful way in forward revenue metrics?

Speaker 3

Joe, well, I'm glad you started with that question and added some caveats to it. So backlog for the quarter ended at $7,100,000,000 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 aim for a duration target in the 2.5 to 3 year range. This quarter was on the lower end, running closer to 2.3 years, so slightly outside of our range. Okay.

Speaker 4

Okay. That is helpful. And then in your financial supplement, Obviously, you reiterated all of the long term targets. And then as a footnote, they're Current as of today, and they take into account all current entity list restrictions. There were some new updates to Entity list restrictions.

Speaker 4

You've also had a much stronger current fiscal year. So the baseline against which You expect to grow double digits. I guess it might be a bit harder. Is that kind of the right way, A literal interpretation of all of these things when thinking about what Synopsys intends to do next fiscal year?

Speaker 2

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 projections, it's not material in terms of changes.

Operator

All right, thank you. And now to the line of Gary Mobley from Wells Fargo Securities. Please go ahead.

Speaker 5

Good afternoon, everybody. Thanks for taking my question. I apologize for the background noise. I want to start out 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?

Speaker 5

And is it part of the reason why we're starting to see a pretty Sharp increase in the OpEx.

Speaker 3

So Gary, the increase from Q2 to Q3 does reflect Some amount of acquisitions for WhiteHat, but it also reflects the planned organic hire for the year. The increase in expenses for the quarter and Q4 that we're guiding to does reflect our Expected hiring, as well as, frankly, given how strong the year has been, we are accruing for some additional variable comp.

Speaker 2

Okay. And

Speaker 5

for the past 2 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, do you see any hesitation on the part of customers in signing large deals?

Speaker 5

Or are you having to go to a higher level to get approvals for the large deals?

Speaker 2

We are well aware of companies having reduced their hiring, at least temporarily somewhat. I have not heard of any significant pullback The design activities typically don't mirror immediately what happens in the market because the market It is really a function of the end sales, I. E, the quantity of chips being sold. And so R and D is very stable against that. And more often than not, when there's a flat period or even a downturn, people invest in R and D to make sure that they have differentiation coming out of it.

Speaker 2

So as we, I think, said in the preamble, we feel that our business is actually very robust right now.

Speaker 3

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.

Operator

All right. Thank you. And now to the line of Gal Munda from Wolfe Research. Please go ahead.

Speaker 3

Hi, it's Arsenio on for Gal. Congrats on the quarter. Just if you think about It's been a year of pretty outstanding 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 up that and start the year? Yes.

Speaker 3

If you look at the guidance that we just gave for this fiscal year and compare it to where we were back in December, at the midpoint, we're up north Of $300,000,000 in terms of the outlook for the year. And what we're seeing in terms of that better outlook is just really strength across all of the products. Going into the year, we did expect it to be a strong year, but the traction that we've gotten on the new products, The continued strength on our IP business and it's just the continued momentum on SIG that we saw for the last The previous 4 quarters continued. So we really saw strong growth across the customer base, across all geos, across So our product line. So business is doing really well.

Speaker 3

Great. That's helpful. And just one quick How is DSO AI contributing financially to growth? Is it at any material level yet? And just kind

Speaker 5

of the growth outlook on that and what

Speaker 3

you guys are looking forward to at that conference?

Speaker 2

Sorry, it was a little hard to understand the whole question. But on dso.ai, you have to think of this as sort of a multiplier On our existing products, and it's our products working together in a flow. And so DSO dot ai really improves both The speed of getting results and the quality of the results in terms of typically the performance and the power utilization of the resulting chips. And so that is of super high value, but that also encourages our customers to work with our suite because The suite of tools is particularly well matched to DSO. AI.

Speaker 2

And so that is really one of the reasons that we see strong growth around that Entire Digital Design Solution.

Operator

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

Speaker 6

Good afternoon and congratulations on the solid results and execution. On the growth outlook, Yes. With the passing of the Chips Act combined with the recent semiconductor supply chain disruptions that we've seen over the past two and a half years, You've got growing geopolitical risk. Many of your semiconductor customers are prioritizing manufacturing diversification, And they're now starting to put in place plans to support 1 or more new foundry partners. So this is going to entail new library development, new IP blocks and even in some New design flows.

Speaker 6

This is for both leading edge digital and analog. I know that your customers have to add design engineers every time they add a new foundry partner. So Art, is this focus on diversification a forward driver of both your EDA and IP businesses as well?

Speaker 2

The answer in a nutshell is absolutely yes. And you actually explained the situation very lucidly Because it's clearly visible that manufacturers in the 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.

Speaker 2

And if there's one thing that we cannot grow faster than a 20 year rate, it's talent in the world. It's 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 would this reduce employment in the industry on the contrary, But it does help a little bit with this talent shortage.

Speaker 2

And all of this ties together pretty much in the way you described it. Thank you.

Speaker 6

I appreciate that. And another growth trend I sort of wanted to touch base is on. You talked about the expansion of your customer base, right, in chip design to

Speaker 3

a lot of your sort of

Speaker 6

systems level customers. And recently, one of the largest ASIC Semi companies, it's a big customer for Synopsys. They did a deep dive into their ASIC business and they've helped customers like Google, Cisco, Facebook and many others bring their ASIC Chips to the market and they've got a design win pipeline. I think of like somewhere over like 70 advanced chip designs. Now, obviously, this is the classical engagement model, right?

Speaker 6

The systems customer does much of the front end design, which obviously has been a strong growth driver for Synopsys. The ASIC company like Broadcom or Marvell does the back end physical design, design closure, verification tape off. I'm wondering if you're starting to see the move by these ASIC systems customers to move more towards a full flow or CLT model, which obviously, would open up more growth opportunities for your team as well?

Speaker 2

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 it the other direction. The software is 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.

Speaker 2

And you're 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 they 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.

Speaker 2

And the reality is it's a race for different vertical segments.

Operator

All right. Thank you. And now to the line of Charles Shi from Needham and Company. Please go ahead.

Speaker 7

Good afternoon and thank you for taking my question. Maybe Art, 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, I know you're not guiding 20 But what do you think that are you going to maintain your low double digit growth into quite a challenging year in terms So 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 1 year that is kind of showing flattish kind of growth, which was 'eight, 'nine around that time. So maybe very specifically, my question is how bad macro has to be for what happened in 'eightnine to repeat in 'twenty three, 'twenty four. Do you think That's going to happen, if not and the one.

Speaker 2

Well, of course, bringing up 'eight, 'nine is bringing up something where in 'eight, people This is the Great Depression coming back, right? There was very little consistency or belief that This would go away after a couple of years. Having said that, in 'eight, 'nine, we were able To actually every year eke out a little bit of growth, but for all practical terms, we were flat. And I think one of the reasons for that was our stable business model. But the other reason was that people don't stop R and D For a long time before they decide to have to cut that because that is cutting off your future.

Speaker 2

And so they'd rather starve the rest of the company a bit in order to make sure that new products keep coming out. And the other observation is that even in 'eight, 'nine, there was no slowdown of new technology. Meaning, if you stop designing for 2 years, you are definitely no longer in the leading pack from a technology point of view. So Am I the right person to ask if we're going to have an 'eight, 'nine economy going forward? No, I'm not the right person, but I also don't believe that that's going to happen.

Speaker 2

And so the indications right now subject to, of course, any crazy political situation. But aside of that, all our key customers are investing in technology and are racing forward.

Speaker 7

Thank you. Maybe another question about your specific about your IP excluding the system integration business. 'twenty one definitely you are growing, I believe, slightly ahead of your mid teen outlook, probably closer to 20%. 'twenty two year to date, looks like your IT growth is potentially very strong double digit and probably north of 20%, I assume. But you're still guiding 15% long term outlook.

Speaker 7

So maybe this is a kind of simplistic view here. Is there a risk of mini reversion at some point, meaning IP could grow under 15% at some point in the future? Why or why not? Thank you.

Speaker 2

I understand that your objective is to look at what we're going to do in 'twenty three, but you know well that in December, we'll give you A better guidance on that. But I'd like to raise the fact that when we gave you the long term objectives, This is only December. So it's not that long ago. And so right now, we certainly state that we're not changing that guidance at all. And so I don't expect that we will surprise you in some big way in December.

Speaker 2

I think we were on track to continue against

Operator

And now to Jason Celino from KeyBanc.

Speaker 8

Great. Thanks for fitting me in. So Art, the references for dso.ai, the customer wins, they're quite impressive. How are How are customers using DSO deadide today? Is it more proof of concept type work?

Speaker 8

Is it leading edge type work? And then are these customers evaluating Cadence Cerebras? Are they simultaneously? Thanks.

Speaker 2

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 is 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.

Speaker 2

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, 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 try very quickly and they're absolutely adopting.

Speaker 8

Okay, great. Thank you. And then Track, again, impressive guidance raised here. Sorry to try to parse this out, but how much of the revenue contribution in the guidance is coming from WhiteHat?

Speaker 3

Just to give you a sense of what half of the year, it's about $15,000,000 to $20,000,000 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.

Speaker 8

Okay, great. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. And now to the line of Jay Vleeschhouwer, please go ahead.

Speaker 3

Thank you. Good evening. Art, a Technology question for you first and then a follow-up for TRAC. So on the subject of AI, Two things. First, could you talk about how you do your own internal development For AI, that is for dso.ai.

Speaker 3

The reason I ask is, as I'm sure you're well aware, there's an arms race across multiple Software companies 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?

Speaker 3

The reason I asked that is Synopsys in 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, in which, of course, you're number 1, at least in EDA. So for TRACK, 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 queue, is your FSAs, which was $1,000,000,000 as of the end of Q2. Could you talk about the composition of that number? Is that predominantly IT? And how does it factor into your guidance and revenue growth

Speaker 2

assumptions. Okay. Let me start with AI. The first thing to understand with AI is AI is a very advanced different way of programming the solution to a variety of problems. And of course, we use the traditional approach, but we also use what's called pattern matching where you find situations where the recognition of the situation allows It should improve something for the better.

Speaker 2

Now that statement applies to the domain that you apply it to. And so if we took Our DSO.ai and say, hey, tomorrow morning, we're going to do, I don't know, blood diagnostics and learn something about patients, We should have initially 0 to offer because the AI needs to be matched in its intent to the area of the problem. And by the way, I de facto alluded to that a minute ago on the question of why the AI chips, all these people are essentially optimizing for their domain, right? Well, we have optimized for our domain, and our domain is unbelievably complex because we have arguably some of the most complex Search spaces, meaning those are all the potential solutions, finding the right one in any field. And so it's really the combination The understanding of what we do and then the exploration with AI that fits together.

Speaker 2

Secondly, AI for IP, of course, we use it ourselves. And a very simple reason would be one could consider Synopsis as one of the most advanced design companies in the world for what we do. And so we don't use our designs to put chips on the markets. We don't design chips. We design IP blocks.

Speaker 2

But the concept is actually similar. 3rd, you mentioned something interesting that I'm well familiar with, which is the need and the desire to sometime take an existing design and migrate it to a different technology node. Sometimes it's called remastering, sometimes it's called retargeting. That's the word you use, I think. And initially, we did some experiments already a year ago for knowing going from one node to another node that was pretty similar.

Speaker 2

And we got excellent results, saying we got them fast, and we could learn from the existing design and apply it to the new one. Meanwhile, we

Speaker 6

have vastly improved on that because we've been able to

Speaker 2

move many We improved on that because we've been able to move many clicks forward in terms of nodal technology and still gets much better results. And so I'm the first one to say we're at the beginning of a big journey, but so far, it's a pretty cool journey.

Speaker 3

Jade, so 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 went in effect, Whenever a customer pulls down software or pulls down IP, revenue gets recognized at that point, where historically, it would have been recognized over time. So You'll see that create more variability in the business. Now, on a plus side, from a commercial perspective, what's great about FSAs It gives our customer a lot more flexibility in terms of how they can transact.

Speaker 3

So they'll sign a contract. And this is an area where if we continue to innovate and launch new products, they will actually we'll see them consume those FSAs quicker. You'll see an acceleration of revenues from that business model.

Operator

Thank you. And now to the line of Vivek Arya from Bank of America. Please go ahead.

Speaker 5

Hi. This is Sachin Zhang on behalf of Quebec, and 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%.

Speaker 5

So could you help us understand what's causing this slowdown? And when do you expect it to go back to the trend line? Thank you.

Speaker 3

Let me clarify. The business is doing very well. And certainly, we're executing. We're seeing growth in That business line within our business model of double digit growth. So this, what you're seeing here is just a function of 2 The fluctuation, the comparisons to last year, remember, this year, you've got hardware that's front end loaded compared to last year, which is more back end loaded.

Speaker 3

So it's a function of comparison. But also, when you match up our when you decompose the EDA Software business, which is about 65% of our overall revenues, were growing very nicely, well within and certainly well within the double digit model.

Speaker 5

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?

Speaker 2

Well, None of that is material, but Gate All Around in China doesn't exist yet.

Speaker 5

Got it. Thank you.

Operator

Thank you. And now to the line of Blair Abernathy from Rosenblatt.

Speaker 9

Art, just wondering if there was anything you'd call out from the U. S. Chips And Science Act, any change or opportunities that you might present for Synopsys?

Speaker 2

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 is 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.

Speaker 2

And so supply shortages brought 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, we'll 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.

Speaker 2

Around that, there needs to be quite a bit of enablement. There will also be investments made to look at newer ways of doing things. And we highlighted the whole multi chip For 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 respond to these requirements.

Speaker 2

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.

Speaker 9

Okay, great. And then just one other follow-up on the DSO AI questions. Any sense of the breadth of interest in the product, obviously, in the more advanced Customers looking at it first, but are you seeing it really broaden out into the bigger part of your base in the systems companies, for example, and so forth. Just wondering how deep is this is the opportunity for DSOAI?

Speaker 2

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, no, let's not go too 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.

Speaker 2

So Fundamentally, this will continue to become a strong ingredient in any design flow over time. But We have a very wide industry 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.

Operator

Thank you. We have no one else in queue. Please continue.

Speaker 2

Well, at this point in time, thank you for your support and interest. We continue to do well against markets That's only demands the skills that we have to provide. And we hope that we'll be able to deliver to you what We said for this year, actually, we don't hope. We plan. And that is passing the $5,000,000,000 mark, and that's an exciting moment.

Speaker 2

So thank you for your support, and thank you to our employees to help make this happen.

Operator

All right. Thank you. And ladies and gentlemen, that does conclude our call for today.

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Earnings Conference Call
Synopsys Q3 2022
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