Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Synopsis earnings Conference call for the first quarter fiscal year 2020 at this time all participants are in a listen only mode later.
We will conduct a question and answer session and instructions will be given at that time, we ask that you limit yourself to one question and one follow up so that we can accommodate if you should require assistance during the call. Please press star followed by zero today's call will last one hour five minutes prior to the end.
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 You Bank Vice President of Investor Relations. Please go ahead.
Thank you Laurie good afternoon hosting the call today, our art did yes, chairman and co CEO of synopsis and track from Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of this conference call synopsis will discuss forecast 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 in performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.
In addition to any risks that we highlight during the call important factors that may affect or future results are described in our most recent FCC reports and todays 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-K that we released earlier today.
All of these items plus the most recent investor presentation are available on our website at synopsis Dot com.
In addition, the prepared remarks will be posted on the site at the conclusion of the call.
With that I'll turn the call over to art did yes.
Good afternoon.
Q1 was an excellent starts to the year as we met or exceeded overall guidance targets.
Revenue was eight hundreds and 34 million with GAAP earnings per share of 67 cents and non-GAAP earnings above our target range at a dollar and one cents.
In December we communicated our fiscal 20 guidance high single digit revenue growth substantial ups margin expansion mid teens non-GAAP earnings per share growth and more than 800 million in operating cash flow.
We are reaffirming our guidance for the year.
Jack will discuss the financials in more detail.
Looking at your landscape ongoing geopolitical tension and the recent Corona virus outbreak of generated tysons uncertainty around the world.
Regarding the virus outbreak our first priority has been the safety and health of our employees customers and partners.
We continue to monitor the situation and support our China teams as they continue to drive business execution.
On the triggered by those challenges electronics companies ranging from traditional semiconductor and systems companies to new startups and hyperscalers persist in designing ever more complex chips and devices with a high degree of market urgency.
Driven by AI and machine learning automotive Fiveg, I O T and cloud expansion.
The proliferation of smart everything is and will be central driver for years to cone.
As a result robust demand for all solutions has continued in twentytwenty.
Our innovation and technologies spanning the spectrum from silicon to software absolutely central to the ambitious products and systems being built.
Let me share some product highlights from the quarter study was indeed.
An important differentiator for Synopsys continues to be our leading position in enabling manufacturing process development.
Was highly sophisticated simulation of new technologies, new transistors, and the structure is needed for the most themselves in the world, we not only assist our manufacturing partners.
We also laid the groundwork for our design tools to be tuned and ready well before these technologies go into production design.
Well towables out over the last several years Synopsys has pioneered a new approach cold fusion that literally fuses algorithms from different tools, resulting in faster and lower power chips in fall this time.
A showcase example of this is our fusion compiler product introduced about a year ago.
Within just a few months of its introduction fusion compiler revealed itself as a revolutionary product.
It is winning head to head benchmarks was consistently superior performance power and area results across a broad set of applications.
Results. Thus far are ahead of our initial plan with many customer engages progressing very well from exploring the tool to usage on a few life design blogs through production rollout.
In Q1, we built upon several breakthrough competitive wins ranging from the largest global communications processing graphics firms to high impact cloud hyperscalers to multiple influential system houses.
For example, AMC chose fusion compiler for its full flow digital design implementation of its next generation processes.
Fusion compilers displacing the competition of the large hyperscaler for next generation arm core based graphics design at five nanometer end below.
We achieved a significant win at a large multinational consumer electronics company on Nexgen arm CPU core.
We are expanding displacement and deployment at a leading mobile company for critical Fiveg designs at five and for nanometer.
A leading U.S. semiconductor company is deploying fusion compiler on all new graphics designs.
Taking advantage of better runtime and quality of results.
We displaced the competition for encore designs at a leading automotive semiconductor company.
How do we expanded proliferation of larger U.S. semiconductor leader with a new win in wireless design.
Well still relatively early in our multi year product cycle. These important wins, we presented significant momentum and usage share gains which will flow into revenue overtime.
The fusion concept is very powerful and he's getting great results across synopsys as our innovation continues at a rapid pace.
Stay tuned for some exciting new product announcements as we approach all much Silicon Valley user group event.
Let me now turn to custom design.
A product area that on the wins, a multiyear innovation Bush and has seen excellent progress over the last 18 months.
Not only are we know highly competitive for advanced nodes, we continue to see a growing number of displacements and full flow engagements.
Our expansion is driven by fresh innovations focused on maximizing designer productivity.
Customers are experiencing this benefit and we saw excellent growth in revenue from our custom compiler products again this quarter.
For example, a high impact global systems company expanded its full flow usage of in Q1.
Proliferating after a significant competitive displacement.
Additional custom compiler wins include a leading silicon photonics developer and a Cmos image sensor company.
Let me know move to our verification continuum platform, where we maintain our number one market share position.
In verification software, we gained share in Q1 at a large global hyperscaler driven by a growing needs for verification capacity across our platform.
Meanwhile, demand for hardware based verification is high across the board driven by continued complexity growth in new designs.
The speed and capacity of our solutions are particularly well suited whenever software bring up is involved.
Well, a strong Q1 last year makes for a tough year over year hardware comparison, we continue to gain momentum with both new and existing customers.
In Q1, we gained nine new logos and 34 repeat orders, including very high profile systems in semiconductor companies.
And you see for example chose our zebu emulation system over the incumbent.
For the high performance.
Compute solutions due to our superior performance very fast bring uptime and unique debug visibility.
In Q1, we also announced the acquisition of the Deeni group, which further expands our haps SPG based prototyping portfolio.
No to IP, which continues to deliver strong results.
As they don't want provider of interface embedded memory analog and foundry specific IP.
We provide the industry's broadest portfolio covering all key markets AI automotive cloud Aiotv and Fiveg mobile.
Oh demonstrate the strength in high performance cloud computing applications is evident in several areas.
We've already achieved more than 60 design wins in DC I Express 5.0.
Our new die to die 56, and a 112 gig thirtys continues to gain market traction.
We also had a significant IP portfolio win was a major China E Commerce company for Microserver applications.
Oh leadership position you SB led to multiple tier one process or semiconductor companies adopting our newest generation U.S. be 4.0, IP in a leading five nanometer process.
We're also seeing unmatched leadership and momentum in automotive, where our automotive great IP is being used by 10 of the top 11 semiconductor suppliers to that industry.
Well. Notable example is Qualcomm, which selected our automotive IP portfolio, including interface aren't processors and embedded pest and repair solutions for their new Snapdragon right platform for autonomous driving.
Finally, we continue to expand our IP portfolio with the acquisition of technologies from East Silicon and invest cause the latter closing just last week.
Along with valuable technology. These acquisitions also enable us to further scale, our IP development to meet high customer demand across growing markets.
Now do software integrity, the tools that test software code for security vulnerabilities and quality issues.
We delivered a solid beginning to the year was business levels up more than 30% over the same period last year.
We see come we saw continued progress in driving multiyear multimillion dollar agreements booking several across multiple verticals.
As I mentioned in December we have entered phase two of our strategy scaling into the 500 million to 1 billion revenue space.
To accomplish this we're focused on four areas.
Warm expanding our cloud base Polaris software integrity platform through additional product integration.
Two scaling consulting engagements to fully leverage a key differentiator in the software Devops market.
Three refining our channel to better serve large enterprise customers key market verticals and new regional business.
And for evolving our management team for the complexity and size of a larger business.
We're moving fast on all of these.
Just last week, we announced the expansion of the Polaris platform.
Bringing static testing and softer composition analysis directly to the developers desktop.
This first of its kind solution enables developers to seamlessly find and fix security weaknesses in proprietary code and known vulnerabilities in open source code all within their desktop development environment.
We also added to the team and products from Tinfoil security broadening our product offerings for dynamic application security testing or das.
And adding apiay scanning capability.
Our scaling efforts in the field also progressing well as we've ramped up hiring activity and are excited about the sales energy in the organization.
A good example of the power of the combination of products and consulting is one of the largest pharmaceutical companies in the world.
Our relationship that began with a small initial service engagements to help them respond to a security breach has grown to include both product purchases and no additional services to help them proliferate our solutions.
We're also moving fast to scale, our leadership and management team to the next level.
We have launched an external search for a new general manager to lead the organization into the 500 million to 1 billion level.
While these efforts will flow into revenue over time.
We're encouraged by the positive start.
There's a tremendous opportunity in this space and we're well positioned to enable companies to improve the security and quality of their software was a combination of high value products, a great new platform and enabling consulting services.
In closing.
Q1 was a very good starts to the year.
We delivered strong financial results and are reaffirming our outlook for fiscal 2020.
Even with some caution around global markets electronics companies continue to invest in critical chip and system designs as well as immense amounts of sophisticated software.
Our innovation engine is prolific and this quarter, we will be introducing a number of exciting new products and differentiating capabilities.
We are committed and on track towards our mid and long term growth and margin expansion targets.
Finally, let me think our customers for their business and our employees for their dedication and hard work and delivering continued strong results.
Truck will know highlights the financial perspective.
Thanks.
Good afternoon, everyone.
We delivered a strong starting the year meeting or exceeding our guidance targets for the quarter.
We are on pace for our full year plant.
We remain relentlessly focused on execution.
Generating revenue for the quarter at the high end of our target range and non-GAAP earnings per share well above the range.
We produced another quarter of strong collections, which contributed to positive cash flow in the quarter as typically an outflow due to variable compensation payouts and we launched a 100 million dollar share repurchase.
Our increasingly diverse customer base strong product portfolio combined with our nearly 90% recurring revenue model position us for success in periods of high demand as well as those of great uncertainty.
Multiple factors, including the entity Liz export restrictions and broader trade tensions as well as the Corona virus situation has added to market volatility.
Based on our current view and the strength of our business. We are confident in our ability to manage through this uncertainty and we are reiterating our guidance for the year.
I'll now review, our first quarter results.
All comparisons are year over year, unless otherwise stated.
We generated total revenue of 834 million.
Semiconductor and system designed segment revenue was 749 billion with strong growth at IP, a tough hardware comparison over strong Q1 of last year.
Excluding hardware and the impact of entity lists trade restrictions.
D.A. software results remain within our long term target range of mid to high single digits.
[noise] software integrity segment revenue was 86 million 10% of total.
Business levels for the quarter increased more than 30%.
Because of our largely time based model the associated revenue will be recognized over the life with the contracts.
Moving onto expenses total GAAP cost and expenses were 747 million, which includes approximately 9 billion in restructuring costs.
Total non-GAAP cost and expenses or 647 million, resulting in a non-GAAP operating margin of 22.4%.
Our Q1 margin reflects revenue profile this year as well as a change in the timing of general salary increases now in Q1.
We are on track to generate approximately 200 basis points of op margin expansion for the year.
Adjusted operating margin for semiconductor system design was 23.9%.
Software integrity was 9.4%.
Finally, GAAP earnings per share were 67 cents and non-GAAP earnings per share were one dollar and one set.
Turning to cash we generated a 10 million in operating cash flow.
Including that 100 million dollar Q1, as our we've repurchased 1.9 billion of our stock since 2015 or approximately 80% of our free cash flow returning to shareholders over that period.
We ended the quarter with a cash balance of 700 million a total debt of 331 million.
A couple of comments before I move onto our targets.
As I've noted we delivered a strong start to the year and we are reiterating our full year guidance.
We are maintaining our first half second half revenue split of roughly 45% 55%.
Which reflects forecast the timing of IP hardware deliveries.
As well as general Prudence, given the uncertainty around the unfolding for Rona buyer situation.
For fiscal 2020, we are targeting.
Revenue of 3.6 to 3.65 billion.
Total GAAP cost and expenses between 2.953 billion.
Total non-GAAP cost and expenses between 2.63 and 2.66 billion.
Resulting in a non-GAAP operating margin of approximately 27%.
GAAP earnings of $3 and 68 to $3.87 per share.
Non-GAAP earnings of $5 on 18 to $5 at 25 cents per share.
Cash flow from operations of 800 to 825 million.
And capital expenditures of approximately 180 million.
We expect capital expenditures to decline in 2021.
Now to the targets for the second quarter.
Revenue between 820 and 850 million.
Total GAAP cost and expenses between 724 at 758 million.
Total non cap costs and expenses between 645 at 665 million.
GAAP earnings of 49 to 62 cents per share.
Non-GAAP earnings of 96 cents to one dollar one cents per share.
In conclusion, our focus execution enabled us to again delivered strong results meeting or exceeding our targets.
With a very good start in Q1, we are reaffirming the full year guidance provided in December.
We're also tracking Welch our goals of high Twentys operating margin by 2021 at profitability or 30% range longer term as we move towards our next milestone for being in revenue.
We remain committed to balanced capital allocation strategy, consisting of investing in that business for growth, while continuing to return capital shareholders as we focus on driving sustainable long term shareholder value.
And with that I'll turn it over the operator for questions.
And ladies and gentlemen, if you wish to ask a question. Please press one than zero on your telephone keypad. You mean withdraw your question at any time by repeating the one zero command and if you are using a speakerphone. Please pick up the handset before pressing the numbers once again, if you have.
A question you May press, one than zero at this time and before we begin the Q any session I would like to ask everyone to please limit yourself to two questions to allow us to accommodate all participants if you do have additional questions. Please reenter the queue and we'll take as many as time permits.
And our first question from the line of Rich Valera with Needham and company. Please go ahead.
Thank you.
[noise] art question on.
So for integrity. So you mentioned you had very good business levels, I think said, 30% increase in business levels, but it looked like revenue decelerated pretty sharply in the business. So just wanted to understand it business levels refer to bookings and why the deceleration in revenue and what might drive that to Reaccelerate.
So you're correct business levels referred to bookings and you may recall that last quarter reported stats.
2019 had been relatively weak in terms of bookings and so what you saw is the result of that plus whatever was transacted during the quarter and so our objective obviously isn't it used to now built back to Ohio level, and we will actively pursue them.
[noise] any any thoughts or commentary on when that business my reaccelerate sort of into the double digits for teens.
Well you know I mean, we just finished what we thought was a strong caught ourself.
It's easier said than down to just keep doing that but that's obviously the objective writers to to invest in some of the channel area, specifically that I think can be more balanced for the opportunity space and make sure that we moved fast on the Oh, the deployment off the Polaris platform and integrate.
One of new capabilities, those are sort of some of the cornerstones to success in the long term business.
Adjusted in life that in December we also highlighted that the into summary highlights of long term growth for this business of our multiyear period is 15% to 20% and where we are committed to that and we should be able to grow at least with a marker faster.
Got it just a quick follow up to that aren't you've talked about the salesforce salesforce realignment and it sounds like some new personnel being brought in where do you think that both that salesforce is in terms of structure in personnel <unk> relative to where you want it to be is there is there more you need to bring any you think you feel like you've got pretty much the.
For the head count you need to to drive the business forward.
Well, we're now in active hiring we have hired a number of people.
It's both a combination of tuning meaning putting into in the in the right organization and and simultaneously filling the holes as we see opportunities and there are plenty of opportunities. So no. We're far from Don but we have a good start and actually some of the changes that we made in 19 appear to.
Have generally she is quite a bit of energy on the part of the Salesforce that feels that they have a better shot this year than last year.
That's right also reiterate that as part of our plan, we did contemplate the hiring additional highlights in that business will continue to invest that business as it scales and as we said in December which were still on track for us maintaining margins relatively flat year over year. So all the other commentary that we described is consistent with how we're.
Managing the business.
Got it gets the booking sounds encouraging look forward to seeing the progress there. Thank you.
Thank you.
And our next question from the line of Joe Vruwink with Baird. Your line is open.
That's one of the easier questions [noise].
I I it sounds like we have no connection or let me check a if Joe Vruwink a your line is open.
Oh, Okay. He me I popped back into the queue here momentarily I will go to our next person Mitch Steves with RBC capital markets. Your line is open.
Hey, guys. Thanks, Thanks for taking my questions. The first one I kind of what it to point to assist for track.
So given the current a virus or any other macro concerns my question is.
You guys be pretty nicely in the first quarter would you have raised to full year, assuming that there was no macro change or do you do you believe this Saturday encapsulated in your for your guide.
It's factored in there are a guide and I would say that it's not a meaningful impact to the year.
We did get a very stressed started a year. So after 90 days, we feel very good about the outlook for for the business or the full year basis.
As we typically do describe your after one quarter. It's a good start and it gives us good good progress to the year, but there's still a lot of business left to book.
Hey, Matt to that you know our business is actually mostly multi year and so we have actually a fairly high degree of stability in our business.
Towards events like this at the same time it is clear that some of the customers all the customers customers are impacted because they may not be able to ship products and so.
It remains to be seen if that makes its way all the way to us, but mostly were quite isolated or insulate us should say fall from a these type of problems.
Okay and then my second one just on the core EDA business you guys have talked about.
At the high single digit growth, but if I look at this it looks like for the last about six quarters now it's been below about 4%. So I guess why is the time based revenue flat year over year Fediay software is still growing mid to high singles that just can accelerate in the back half and if so I just trying to understand whether it'd be the case.
Mitch I would separate the that question into two parts to first part is keep in mind that a emulation does show up in the DTA line. So from a product group perspective, we've continue to grow very nicely in in hardware and that tends to be lumpy quarter to quarter, but is can.
And your growth on multiyear basis that will affect the comparison, the second part, which you're trying to connect to is the license type of time based remember the last year, we did to transition to six so six and the mix that you're going to see that the.
And the time base versus the upfront lie is affected by that that revenue transition as we described the the numbers and the comparisons for EDA is colored by the timing of hardware this year as well as the entity lists that was affecting both the he did IP line, but we still very feel very.
Comfortable about long term and our our model to drive in the mid to high single digits.
Got it thank you.
Go back to kill for Inc.'s line. He is with Baird. Please go ahead.
Can you hear me now.
We can't.
Okay. There we go a lot I wanted to revisit the last question just regarding media performance and I think obviously I appreciate in the market uncertainty, but your customers seem to have I'm more optimistic view on their R&D activity and 2020 and I would argue 2021.
If that acceleration does come through or is there any reason why youre E.D.A. business, what end participate and that trend.
No. There's no reason it would not participate because we.
As I think someone mentioned that the preamble, we see customers be quite aggressive and what their designing and so fundamentally we are in in a good market and therefore participation be it a and E.D.A. or IP in that is absolutely a part of why we should do well.
I think where we're cautious just because there's been so many changes in the the global market that have had some impact as we gave out the numbers. We encompass the fact that we thought that would be no change to the entity list and so those are the several things that we're dealing with for the year, but fundamentally actually I think that we are in.
A long term good markets, leaving alone massive GDP fluctuation or anything like that.
The the technology needs are high for us and that's very encouraging.
And then if I can follow up on software integrity, and maybe trying to reconcile the comments a quarter ago that order is worried that softer to what seems really like a snap back to this 30% type number is that just the actions you outlined a quarter ago and you started out the call talking about.
Our though is beginning to bear fruit already or are there some other things going on.
Well, partially answered it definitely bear fruit, because we have invested and made quite a number of changes suddenly in the latter part of 2019 at the same time I don't want to set the expectation that over 30% isn't on for every quarter.
That's not where we guiding towards but the fact is this was a very good quarter from an order. This point of view and so that that will manifest itself in revenue overtime. So I think we have a lot of opportunities to to evolved the business to be capable of rising above the half billion, Mark and then you're sort of in a different legal off of.
Management at so many of the investments that we're making are really all aimed at oh, the skill of scaling to that next level.
Great. Thank you very much.
You're welcome.
And our next question from the line of Jackson Ader with JP Morgan. Please go ahead.
Great. Thanks for taking my questions guys.
First one is on hardware so coming out of last year, you mentioned that some large hardware deals slip I'm not sure we'd heard an update on what the expectations are for the timing and delivery in those now in 2020.
Oh, well, we typically don't give specific timing of shipments because some people try to understand which customer did walk to who but the bottom line is.
One of the reasons that we think we have a strong a year overall is that hardware will be strong and actually the demand continues in that direction or if he is also true that the a the delivery is lumpy and that in itself.
As visible somewhat in the first half second half of the year.
Okay.
Hi, I think I can follow the bread crumbs, there and then.
Paula.
On the.
Usually when the competitive when specifically where you were a what do you mentioned you're displacing a competitor.
Can you just give us a sense.
Either a mix or earned just identify some of the wins, whether these were brand new customers through synopsis or whether they were re winning or winning back a customer that it may be shifted away in the past.
The answer is yes, yes, and yes, meaning that they fall in all categories.
In the past that has been relatively rare that that we'd be brand new customers because the semiconductor industry was relatively stable and actually partially consolidating that has that has changed substantially in two ways. One is a number of the hyperscalers are becoming interestingly a strongly interested in doing chip design.
And secondly, there's a plethora of IP companies that are doing extremely advanced design on an extremely aggressive time scale and for those are the utilization of our tools is just imperative to be able to succeed. So we have opportunities in all problems and the bottom line is we.
Have to continue to push hard on the technology, but right now it is very very strong.
Okay alright, thank you.
You're welcome.
Well go to Adam Gonzales with Bank of America Securities. Please go ahead.
Hi, guys, yes. Thanks for taking my question first I just wanted to ask about the China market and can you just discuss trends there.
Excluding hallway and how you see that market moving forward and then if you see any potential impact from the proposed changes to the regulatory outlook, whether that changes the de minimis rule or the foreign direct product well. Thanks.
Sure well if you take away the entity lists that I would say no change, meaning that a China continues to be very active moving forward at a rapid pace adopting new technologies and our business is a is strong regarding the entity list, we had a assumed a and somewhat.
Predicted staff it would be no radical change in the near future. So far that has turned out to be true, but as we all know things can happen in unexpected ways, depending on how the tensions between the countries a evolve we do it expects that any part of the specific rules would have major impact on <unk>.
In our business because bottom line is to the entity list. We're not shipping so that is sort of an all or nothing type of situation already today.
Great and track just wanted to follow up on the second half revenue outlook can you maybe give a little more detail about what your expectations are for a split between Q3 in Q4, and then I think on the prior call you for for the sake business you had outlined to that you expect to ramp up spending this year such that margins would stay relatively flat throughout the years that's still the.
Goal.
Yes, that's that's still the goes to the let me start with the first question in this first half second half.
We do expect Q4 to be our directionally, the largest quarter for revenues and S and that's that's consistent with the guideline.
The guidance.
With regards to Sig, we do expect the hiring Raptor continues throughout the year and that's reflected in the 200 basis points improvement, but quarter to quarter I can get little noisy, but generally flattish with last year.
Great. Thank you.
And we'll go next to John Pitzer with Credit Suisse. Your line is open.
Yes, good afternoon welcome to the more caution art Michael's question more like American.
CP you will recall stampede begin shipping.
Welcome to probable fundamental changes have been volleyball team over the next couple years will begin to move away from doing everything.
Well in IP to maybe even more off shelf walk quite speeds.
Why and I'm curious what did you change so the opportunity.
Great. Thank you.
John of my apologies, but are we sort of understood every second word and so we sort of made out the words I P and the word trend I think.
Yes.
I apologize if possible due to try to summarize.
Or just sort of the three or four awards that are most interest to you and I will try to fabricate.
Our response.
Got it.
Yeah, there's sort of these are all believe sounds as if you were under water. So.
Yeah, I apologize I want to California, you couldn't be better.
The marginally so did I get the word IP correctly.
Yes. Good question, there that the large north American.
You guys moving to kind of a different design philosophy Buck the option.
Maybe you can walk with internal cardiac internal IP pie.
Well off the shelf walk I'm kind of curious what that means you won't be more expense.
I think I understand the question I'll try to Oh, we answered re ask and all that which is essentially all of the or the North American CP you guys are they changing their design methodology to use more reusable IP well I want to broaden the the question slightly because answering for they're not that many nothing.
America, and CP, you guys and it's not appropriate for me to answer in a fashion that recognizes the customers but.
What I can say in general is there's no question that around CPQ design, and ALC, including that GPU and all the the abuse that our specialized for AI. The design methodology is definitely evolving there's certainly some people that continue the old way to massively optimized for the last.
Gigahertz, but but for a majority there's definitely a drift towards a applications that use much more data so that them to be more a machine learning oriented and with the outcomes architectures that are very much focused on getting data in an off a chip and so that in itself.
Ill brings about.
Natural increase of potentially a reasonable IP and yes, I think the quality of the IP the advance nature, meaning the advance nodes that are IP is available today and the the close collaboration we have with all of these skus. Some ours has made it possible that they.
Now accounting for design methodologies that use substantially more IP than they did in the past.
We expect that to continue and we also expects to continue that the IP will become more complex because the smaller nodes. It's really takes a lot of efforts to make them a work very well, but is it is now absolutely a distinguishing capability of the company. So essentially what I'm trying to express to you is the IP a busy.
This is difficult, but it is a great business for us to be and because it will continue to grow it will continue to do be demanding and therefore, a good area for us to be in and we have a long term relationships with these customers, where they acquire more and more pieces from us.
That's helpful as my follow up truck.
There will always correct, what the current environments of the full fiscal year that's understandable.
Ben.
Her current quarter guidance to the except the preferred equity.
Not a part of the op margin expansion going this year, how are we thinking about that business closer to 2021 kind of what revenue level would you expect there to be.
Good question at all at once business.
So the question is first question is related to Q2 are my comment on the CRE a virus or to the numbers is consistent with Q2 and a four year. It's not meaningful. This is our best outlook for the year and I think it's a pretty consistent with how we've been planting.
The year with regards to sick margins.
We should be improving margins in F. Why 21, and that's going to be a combination of us.
Like growing that business and continue to scale loaded up and be more productive with the investments.
Thank you.
Okay, well John.
And our next question from the line of change when you shower with Griffin Securities. Please go ahead.
Thank you good evening art for you first in your answer just now to a question regarding the evolution of design methodologies you put it largely in the context of the role or adoption of IP could you also speak to that in terms of core EPA and in terms of how customers are.
Differentiating themselves vis-a-vis.
Design process and the employment of the tools I'm sure. This has been.
The case into the primordial days or be a three decades ago, but when you look at the.
Multiple applications and needs that you talked about.
In what way do you think core EDI, a design flows processes methodologies are evolving or need to evolve for customers to.
We continue to distinguish themselves.
Aside from the incorporation of standard IP.
For you track.
With regard to IP.
In fiscal 19, according to the 10-K.
It was a 235 million dollar positive impact from upfront IP revenue.
Although total IP revenues increased by just over 100 million how are you thinking about those wonderful six so six mechanics in 2020.
Regard to be tough comp you would have on IP upfront revenue versus perhaps somewhat easier comps on IP subs revenue.
Okay. Let me start to of course your question Ken leads to a half an hour dissertation will show will not do but the first thing to start with is that a D. There's still a continuation of adoption of extremely advance nodes and and with that comes a non stop demand for all of.
I'll tools, all the ones, reaching deep into the physics, and certainly all the physical design tools to be up to speed with these nodes and by the way that development is is less clearly defined in time, meaning that a new denote comes out and then within a three month. There's a version another version of that node and another see month another version.
And so there's constant adaptation as people are really squeezing out to Max now in parallel to that maybe less relevant but still a worthwhile to note is that some of the older nodes are also being put a more to use as people figure out that was the new tools. They can squeeze out more value out of those nodes and not all the products need them.
Most advanced capabilities.
Having said that are on the advanced capabilities or if there are two or three trends I could highlight for the tools. One is is this notion that the capacity of the tools needs to continue to increase because on Moore's law. The one the one factor that really has not slowed down is the notion of increased density still more transistors per chip.
And that that's a adds a lot of value for what you can do in order to do that we need to make sure that our tools interact well with each other and so the notion of fusion is really profound because it tends to have every tool understand somewhat what the other tools will do and.
Essentially have better our team play so to speak what comes on top of that is that now the application of AI is absolutely deeply anchored already in our business.
And we have capabilities in every one of our tools at our impacted by improvements through AI and increasingly LC capabilities between the tools. The last comment I'll make is a into verification space, where a trend that we had diagnosed early on continues at high speed, which is with the.
Strengthening of the chips and the combinations of chips and I'm looking here at things that are assembled in a three D. A fashion of multiple chips talking to each other such as processors and memories and may be sensors.
The importance of being able to verify both the hardware and software at the same time continues to grow because whichever is the slowest or the worst off in quality will determine when something goes to market and so that is the area, where where advance stimulation techniques emulation prototype being a plan. So those are.
One of the forces that that govern what we do and I can bet that Joe by next week to will be up another demand for something to keep going because there's no deceleration insight.
So Jay and your question regarding IP, let me start by saying that were very positive about our art our IP business.
This is a as we describe a low double digit growth business.
And everything we're seeing in the marketplace and and our bookings continue to reflect that outlook.
That said the six or six transition does introduce more variability to to the numbers on a quarterly basis, but on a four year basis and on a multi year basis. This is a very good gross said business for us as reflected in the guidance for full year.
Also track could you update or from your backlog number.
Well I know you interviewed our Q this coming out shortly and you'll see that the backlog is.
It's pretty steady at 4.4, and Directionally up versus last quarter, and then within that the run rate that we have the business that we book was actually very positive.
Okay. Thank you.
You're welcome Thank you Jay.
And our next question from the line of Jason Filipino with Keybanc capital markets. Please go ahead.
Hi, guys. Thanks for taking my question the acquisition of 10 foil fills a nice hall and then dynamic testing sign fears thing portfolio can you talk about how that acquisition came to Mount and maybe any other small wholesale your parent offering has.
It is a very nice acquisition and you know in in these new markets everybody knows everybody and so then the question is always a or are there. Some acquisitions that are both timely that I economically a reasonable and where we can integrate rapidly in the broader solution and of course.
You know we have had experience in this in the D.A. business for many [laughter] really decades, and so are there some similarity in that.
And what was a particularly intriguing is that tin foil fits so nicely in the Polaris platform now of course, we have to to do the integration, but Oh. This is exactly the type of capabilities that we'd love to have there because it makes the platform more useful more versatile for our customers as they adopt.
And it was designed to make these type of integrations possible and not too costly. So oh, if I if I add to that the fact that a tenfold is truly remarkable high quality a company with some stunning individuals in terms of their ability to look at the future.
We are and by the way the local so it makes it easier to integrate so far it looks really promising.
Okay, and then similar topic you know the acquisition out of the IP assets over the last few months.
How should we think about those as far as complementary to the growth opportunity in IP or kind of margin expansion opportunity in IP.
Very good question so.
He business is is really two components one is to continually drive both with breath, but I would say just as much the depth of what we do an IP and EPS would be of the new technologies.
New versions of the technology et cetera, but the other part is that actually IP does require quite a bit of work, they're very often statement of works on delivering IP that fits exactly the needs of a customer so maybe some small variations or some tuning for for a specific technology and.
And so continuing to grow our workforce that can do this is just part of continuing to scale. It overall and so in both the cases of index has an E silica and there was a combination of some technologies.
And but most importantly also workforce that was very well suited for the type of needs that we have so we see it to us essentially just and other way of continuing to broaden and grow our business.
Great. Thanks for the color.
Welcome.
And ladies and gentlemen, as reminder, if you have additional questions you May press one than zero at this time well go next to Krish Sankar with Cowen and company. Your line is open.
Yes, hi, Thanks for taking my question I two of them first one for arc.
Out if you look at it like high performance computing older last several years of swung from being centralized cloud and now it's more distributed towards the edge really curious how does this change the E.D. landscape if at all.
Under the requirements what media change at the age I'm just curious on that and then a follow up flip truck.
Well, yeah, most of the Super High performance computing is reasonably a centralized but it is true that a number of the edge application. If you call a car an edge theres lot of a computation that's going into into that and so I would say in general the difference of design is not that marks and less.
Do you have to two things that change one is the need for low power I know battery operated to type things and so there you have the never ending a challenge of how much performance can you squeeze out without draining the battery in no time, and that's not a new problem. It's really started to come up when mobility came up.
And you know early two thousands but the other thing is that in a number of edge applications. Now. These these computational devices can be used in machines that can actually be liesl any owe a car definitely potential leasehold, but so could be a robot or so and so with that.
Comes a whole set of other rules that won't have to.
Serve in the design of the chips such has as having the capability for chip to diagnose itself as faulty.
And in some cases to diagnose itself and at least temporarily repair itself by having for example, duplications off some capabilities now it took us a while to catch up on all those rules because many of those rules are very old they come from the automotive industry, but now and I think we highlighted maybe in the.
The script on automotive synopsis is really well on top all of this and so much. So that we now participate in the premiums were with the next set of rules are being developed and pioneer.
So those are sort of the differences, but you know for their assets like it's never good enough. It's never fast enough, it's never low power enough.
That continues and while the sound like negative words, there the music to our years lot more opportunity for us.
Got it that's very helpful out and then a quick follow up what truck no looks like you're just going to trend you revenue guide is largely unaffected because the virus.
I understand the stability of your revenue stream, but I would've thought that there would have been some impact on the hardware emulation business given that Slimeball media, both kind of curious.
Not seeing any of that impact and I'll go to inflation.
Well our guidance reflects the best information, we have right now and the demand from our customers continues to be very strong.
I think part of it is is that it's going to be the variability it's going to be mostly on the timing of it but that's contemplated in the guidance.
As far as a growth goes keep in mind every year, we look at the year and we say that's can be hard to to grow off of a a record year, which is what we had in 2019.
But we feel very good about where we are and the pipeline that we've gotten please.
Thanks Chuck.
Welcome.
We have a question from the line of Josh children with Berenberg capital markets. The line is open.
Hi, Thanks for taking my question.
First on software integrity, just how many months are left on the total Polaris rollout.
What key functionality remains to be integrated and should we expect a step up in margins. Once the platform is fully rolled out.
Yes, maybe is changing hands answer, but that rollout will continue hopefully for a long long time meeting many years, the reason being that the basic capabilities of Polaris as a platform are there now the question is how well do we integrate multiple applications and the powerful platform is precisely.
The because it handles multiple applications in a way that makes life is much easier for the user instead of having to deal with different products that may have different interfaces data representations et cetera et cetera. So what was what is encouraging is that we now have already multiple capabilities on there and you may.
Realize that I mentioned that the 10 for acquisition is slated to be integrated or next and so that's that's a good way to think about it hopefully we can do many more things now the platform itself will continue to evolve they all do and it's hard for me to say whats the lifecycle for.
Platform in this area, which is still new to us, but if you look at sort of E.D.A. a our platforms typically have lost at somewhere between 10 to 15 years.
And your was helping to drive margin expansion overtime as we ramp up on the platform.
But it's going to come across a for a variety of things both revenue growth operating efficiencies and then getting the benefit of the platform.
Thanks that was helpful. And then just following up on fusion compiler how's it going up head to head specifically against cadences full digital flow and if so how have the win rates than there.
Well, we really have mostly one company competitor in that area and it's a very worthy competitor. So yes, we compete all the time a against cadence and let me just leave it at the fact that I think right now we have a very very strong capability.
Thank you very much in.
You're welcome.
Now I'll turn it back over to our speakers.
Well without a a thank you for all the yeah. The questions and again. Thank you for your support we had a strong quarter, we have a whole rest of the year to go as you know and we look forward to talk to you again in a quarter be aware that have for some of you were also available later on after the call.
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