Q3 2020 Synopsys Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Novices earnings conference call for the third quarter of fish, we 20.
I'm all participants are to listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time.
Maybe should require assistance during the call. Please press <unk> followed by zero.
Today's call will last one hour five minutes prior to the other call we will announce the amount of time remaining in the conference.
As a reminder, today's call is being recorded.
This time I would like to turn the conference over to these you Bank Vice President of Investor Relations. Please go ahead.
Thank you love the good afternoon, everyone.
Hosting the call today are art did Ya chairman and co CEO of synopsis.
On trucks bomb Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of this conference call synopsis will discuss forecast target and other forward looking statements regarding the company and its financial results.
While these statements represent our best current judgment about future result, and performance out there today.
Our actual results and 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 our 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 an 8-K that we released earlier today.
All of these items plus the most recent investor presentation on our available on our website at <unk> Dot com.
In addition, the prepared remarks will be posted on the site at the conclusion of the call.
Finally, we're all again participating from different locations today, please forgive any delays or technology glitches or awkward handoffs and acuity session that might occur as a result.
With that I'll turn the call over to art to Jia.
Good afternoon, Synopsys continues to execute very well and delivered record revenue non-GAAP earnings and cash flow in the third quarter.
Revenue was 964 million with GAAP earnings per share or $1.62 non-GAAP earnings per share, Paul $1.74, and 399 million operating cash flow.
Revenue growth was strong across all product groups and geography.
Orders were greater than our internal plan with particular strength in EDA software.
We also continue to make excellent progress on our margin expansion goals.
As a result solve this overachievement and broad based strength, we are raising fiscal 2020 your revenue operating margin non-GAAP earnings and cash flow targets truck will discuss the financials in more detail.
Alright will result in confidence reflex product differentiation and technical strength bolstered by an intense multiyear innovation push in high demand for our advanced solutions.
We're progressing rapidly towards crossing the 4 billion revenue milestone, while simultaneously increasing bottom line value through continued operating margin expansion.
Even as the world navigates through the pandemic is slowing economy and geopolitical uncertainty the market in which we operate remains robust.
Global design activity and customer engagements, all flourishing driven by unrelenting complexity of chip and system design under both five listen vertically integrated strategy.
Growing segments, such as a are you Fiveg high performance compute cloud and the proliferation of smart everything are especially strong for synopsis.
As the result of extensive technology investments our product platforms are the best they've ever been.
Okay. All right for example, in addition to being a leading provider to this market, we ourselves apply AI and machine learning throughout our portfolio. The results are excellent.
Oh, no D.S., so dot AI product announced last quarter is just the latest example of machine learning directly benefiting our customers time to market.
With that backdrop, let me provide some highlights from the quarter beginning with D.A.
We delivered double digit revenue growth driven by both design and verification software.
Digital design, our intense multi innovation push is bearing fruit was accelerated product adoption and revenue growth across our fusion design platform.
Most notably our fusion compiler product continues to win benchmarks and drive increased competitive displacements, that's solidify plan a record status.
When we announced this groundbreaking new solution about 18 months ago, we expected it to be highly differentiating and delivered great results.
Quarter by quarter. This has proven to be true as customers are consistently realizing the best result, with lowest onetime.
Consequently, the adoption rate in production design is accelerating especially in new projects and for the most advanced process nodes that required this high level of integration.
And this quarter alone, we literally saw a doubling of tape outs.
Proliferation momentum is broad across many different markets ranging from very large global semis specializing in automotive and communication chips to promising AI startups, and notably in <unk> microprocessor leader with expanding fusion compiler usage of Plano record across next generation projects.
The fusion vision and impact extend well beyond fusion compiler.
For example, our industry gold standard sign off which is used in approximately 95% of all advanced designs today is highly integrated with fusion compiler and throughout the entire flow.
Another dimension of continuous innovation is cloud enablement.
Oh collaboration with industry leaders, Microsoft and TSMC has delivered cloud enabled sign off product.
Growing dramatically higher throughput and two X savings on cloud computing resources.
Let me know turn to custom design, which again grew by double digits.
We continue to secure a full flow competitive displacements with multiple high profile advanced customers choosing synopsis.
Panasonic for example adopted our full flow custom design platform, where its analog mixed signal and RF design.
We also have a record number of new evaluations underway.
These include several traditional analog companies as well as the advanced node customers, we have historically been close to.
Moving now to all verification continuum platform, where significant technology innovation sustains our market share leadership.
Verification software growth continues unabated, reflecting tight integration of the fastest engines on the market infused with multi core machine learning and cloud technologies.
Contributing substantially to this growth our large influential cloud hyperscalers and global systems companies.
The power Vcs performance in throughput also led to key competitive displacements in the AI and security IP verticals.
Hardware base verification continues to perform well.
Differentiated by unmatched speed high reliability, easy installation and maintenance and lower cost of ownership, where the solution of choice for complex hardware software design.
In Q3 alone we continue to broaden our customer base, adding 11, new hardware customers and more than 25 repeat orders ranging from the largest systems and semiconductor companies in the world too high impact AI chip designers hyperscalers and automotive suppliers.
One example is Fuji Xerox, where our zebu emulation accelerated development over the advance Multifunction printers chip by two months.
We expect to deliver another strong year for hardware.
Be it in design or in verification, the completeness and strengths about 88 portfolio is key to many important ecosystem partnerships and collaborations.
During the quarter, we extended our strategic team work with arm to help accelerate design and verification of arm based designs for our mutual customers.
Also synopsis was selected as a prime contractor for the government DARPA Oh dramatic implementation of secure Silicon program.
The offices will collaborate with researchers from commercial academic and defense leaders to increase security of the semiconductor supply chain.
Now to IP, which again delivered outstanding results was record revenue in the quarter contributing to what we expect will be another year of excellent growth.
I'll success is driven by high market demand and then on rivals portfolio.
Specifically synopsis have the broader set of critical IP for two days, most dynamic verticals, a longstanding track record of high reliability and quality and early availability of titles at the Viki advanced manufacturing processes.
This quarter, we saw especially strong momentum in both interface and foundation IP.
Bolstering our market leading interface portfolio, we introduced the industry's first complete U.S. before IP solution production ready for advance five nanometer processes.
With a record orders quarter. We also for the extended I'll eat in foundation, IP, which includes critical embedded memories and advanced logic libraries.
And the automotive space, which continues its designed investments even during the current revenue downturn. Our years of investment are driving continued success with our arc processors.
Perhaps the hottest vertical in the current cobot era is heis high performance compute.
Widespread work from home environments mean, greater need for huge amounts of servers Gpus accelerators data centers and enterprise storage.
For Synopsys it drives significant IP demand for protocols, such SPC I Express one on and 12 gig Ethernet and DDR.
And video for example, selected our advance DDR fly IP for its high performance cloud computing networking chips from multiple processes, including seven nanometer.
We had multiple design wins for our new 112 gig high speed Saturday's offerings.
And Meanwhile, we taped out all full IP portfolio for high performance compute in the five nanometer process.
Which brings me to software integrity.
Which delivered double digit revenue growth in the quarter.
Orders remain softer than plan as we navigate cobot related delays and our ongoing field adjustments.
Our long term value proposition and market opportunity are very compelling.
The need for security and quality testing as high as the impact of a breach is immense.
The breath and roadmap of our portfolio are well suited for evolving does pick ups requirements.
We have the broadest portfolio of key products that we are integrating onto a cloud native platform.
While our strategic consulting services are an important differentiator to enable high level value added engagements.
This business has grown to roughly 350 million in annual revenue was expanding profitability.
As we've mentioned in the past several quarters, our ambition is to now scale to our next objective of 500 to 1 billion.
We've made good progress ramping up consulting sales and support to better serve large enterprise companies and upgrading our systems to enable faster more nimble engagements.
In Q3, we saw an increasing number of customers who want to move from a desperate collection of individual tools to vendors, who can deliver multiple products.
We signed nine new Polaris platform agreements this quarter.
And we saw customers, replacing incumbent point tools for example in expanded agreement with a large U.S. software provider and a new engagement with a global hospitality company.
Two weeks ago, we also welcomed our new general manager, Jason Schmidt to help drive the business to the next level of impact.
In his 20 plus years off security industry experience, Jason has scaled or manage sizable security businesses, both inside a large organization and most recently as CEO of a successful start up.
Jason has hit the ground running and has begun to implement his 90 day plan.
Our team is eager to move into this next phase.
As we head into the final quarter of this eventful year, we're already planning for next year and beyond.
A key element of that planning is another announcement, we made today.
We are promoting the theme Ghazi to Chief operating officer.
As most of you know scene has led the design group for the past three and a half years.
During that time, he has made a great impacts on our innovation focus and capability.
Accelerating development of market changing new products that are now seeing excellent momentum and revenue growth.
With experience that spans R&D customer support sales management and corporate leadership.
He is the right person at the right time with the right team to help solidify and increase our momentum even more.
It was accelerated innovation across the board.
Complemented by execution excellence, we look forward to growing synopsis, well beyond 4 billion in revenue, while further expanding profitability.
In summary.
Compelling new products and strong execution resulted in outstanding and record third quarter results.
We are raising our annual guidance for revenue operating margin non-GAAP earnings per share and operating cash flow.
Design activity is robust and expected to remain so for the foreseeable future.
The momentum of our technology innovation is palpable and resonating very well with customers and we're well on track to reaching the financial objectives, we communicated last year.
We thank all of our employees for an outstanding quarter under challenging global condition.
Chuck will now highlight the financial perspective.
Thanks.
Good afternoon, everyone Q3 was an outstanding quarter. This record revenue non-GAAP earnings and cash flow.
Orders were ahead of plan and business grows it's very strong.
Our ongoing success reflects.
End market demand technology strength and momentum and are focused execution.
In addition, our solid financial foundation of nearly 90% recurring revenue sizable noncancelable backlog positions us well sort of variability in the environment around us.
These dynamic provides us with the confidence to raise guidance for the full year.
Now to a third quarter results.
All comparisons are year over year, unless otherwise stated.
We generated total revenue of 964 million with double digit growth in each of the product groups and strength across all geographies.
Semiconductor system design segment revenue was 871 million an increase of 13%.
While software integrity segment revenue was 93 million up 12%.
Total GAAP costs and expenses were 754 million until the noncash costs and expenses were 641 million, resulting in a non-GAAP operating margin of 33.6%.
By segment adjusted operating margin was 35.4% for semiconductor and system design at 15.8% for software integrity.
As expected margins are higher in the second half of the year due to the quarterly profile of revenue.
Based on our topline over achievement and ongoing expense management, we now expect a non-GAAP operating margin of approximately 28% for the year.
Wrapping up the income statement GAAP earnings per share were $1.62 cents.
And non-GAAP earnings per share were $1.74 cents.
Turning to cash we generated a total.
A record 399 million in total operating cash flow.
Our balance sheet is very strong.
We ended the quarter, where the cash balance of 1.05 billion and total debt of 131 million.
Now to guidance, which it continues to assume that the current entity list restrictions remain in place for the remainder of the year.
For fiscal year 2020, our targets our revenue of 3.66 to 3.69 billion.
Fill the gap costs and expenses between 3.0 for 3.06 billion.
Total non-GAAP cost and expenses between 2.64 or five and 2.655 billion.
Resulting in a non-GAAP operating margin of approximately 28%.
GAAP earnings of $4 intend to $4 at 21 cents per share.
Non-GAAP earnings of $5 48 to $5 at 53 cents per share.
Cash flow from operations of approximately 900 million.
And capital expenditures of approximately 170 million.
Now to the targets for the fourth quarter.
Revenue between one and 1.03 billion.
Total GAAP costs and expenses between 802 and 822 million.
Total non cash costs and expenses between 717 at 727 million.
GAAP earnings of $1.10 to $1.21 cents per share and non-GAAP earnings of $1.51 to $1.66 cents per share.
Based on our strong outlook for the year I realize there will be questions about 2021.
Over the last two years, we've expanded operating margin by six points through a combination of strong revenue growth and excellent expense management.
Having said that there are some onetime expense savings this year that we need to contemplate.
Factored into our 2021 outlook.
Therefore, we would suggest it's premature to update your 2021 estimates at this time.
As is our normal practice, we're in the process of finalizing our budget.
And we'll provide an outlook when when we report in early December.
I will however, reiterate our general multiyear objectives.
Hi single digit revenue gross.
Non-GAAP operating margin expansion to the high Twentys in 2021.
30% range longer term.
I would do that non-GAAP earnings growth and strong cash flow.
In conclusion, we deliver a record quarter across our key metrics.
Based on our strong results year to date and our solid outlook for Q4, we are raising our targets for the year.
Finally, I'd like to thank our team for their commitment to our business and customers. During these unusual and often trying times.
With that I'll turn it over the operator for questions.
Ladies and gentlemen, if you wish to ask a question. Please press one than zero on your telephone keypad you may withdraw your question at any time I repeat the one zero command.
Have you using our speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a questioning the press one at this time before we begin the kinase session I would like to ask everyone to please limit yourself to two questions to allow us to accommodate all participants if you have additional questions. Please reenter the queue.
Take as many as time permits.
Okay.
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My first question comes from a top this Lee.
With D.A. <unk>.
Please go ahead.
Yes. Good afternoon, so wanted to jump on the upside that we saw during the quarter.
Look.
The big drivers there is that true is that a kind of the gross.
I guess the upside from what your expectations were going into the quarter.
Hi, good that's almost north part of that.
So we missed a part of their your question.
Would you mind repeating that please oh sure yes, I'm just looking at what drove the incremental upside during the quarter and it looked like you made a combination of just really strong IP and Asia Pacific maybe China as the two big drivers that were unexpected when the quarter began but just curious if that's true and you know what your view where the big driver.
So what's your that is all through a bet on top of that's the E.D.A. part was also a quite strong and I think that is being the results of the innovation that we've done for a number of years and you may recall that we introduced some new products last year that now are really starting to.
See rapid growth in utilization, but overall the it was really pretty much across the board that we saw strength and suddenly IP stood out, but I would say all of Asia was strong.
Okay and then when you look at the the orders themselves you said the orders came in ahead of plan.
Similar profile to the strength that we saw in the revenue during the quarter.
Yes, Cimarron again emphasis on E.D.A. as being particularly strong.
Okay and then just finally, a quick maybe technical question. The recent acquisition called Terra what is post silicon optimization.
You are more and more as silicon Entres places, where human life is a involve such as cars for example, but also robotics insulin.
It becomes important for the silicon to be able to self diagnose if it's still working so just imagine sitting in your car and one of the chip says hey, I'm not working quite well anymore better start a parking the car well in order to do that you need to put all kinds of things all much out that can then diagnose itself.
I'm still okay, I'm still okay, I'm still okay until it's not of course, we hope that that's never the case, but those are the capabilities that we're aiming at.
It's interesting alright, well thank you for your time.
You're welcome.
Next we go to line of Joe Vruwink with Baird. Please go ahead.
I'm sorry your line is open now.
Joe will link with Baird. Your line is open.
Yes can you hear me.
Now we cabinets.
Okay perfect.
Hope you are doing well.
I'd be curious just given some of the headlines that I've come out a with your customers recently.
Just changes and strategic direction, maybe development and technology trends as the chip industry moves.
New advanced process he is.
Given the nature of D.A. and the proximity to your customers.
Some of these develop men necessarily Oh surprise.
Would you and perhaps thought just given the direction of certain customers and trends that there was a srdan inevitability behind.
Some of the technology updates we've heard a over recent months and not a if all of that is perhaps true. How is this synopsis portfolio maybe position to capitalize on some of the current events were all hearing and reading about.
Well there's of course, many many events right now and in.
The base level fundamentally the quest for faster cheaper lower power chips is is unabated unabated largely because the amount of computation continues to grow massively. So that means there's a lot of opportunity for many providers. If you throw on top of that AI capable.
Hello Teas now now the desire for compute is even more extreme now having said that are there a variety of technology developments that continue and technology.
Developments are never quite linear meaning did the new as silicon technologies get push towards dimensions that are so small that there's a certain degree of its uncertainty every time somebody introduces a new a new node and what we see more often than not is that the first introduction get some results and then Theres a second version and.
At version, but in aggregate that pushed forward is still very very fast and we we have seen this back and forth. Many many times now there's one more trends that I would like to signal although at the I don't think gets massively big gaps that I think it's important is that more and more providers are now looking at.
Doing multiple chips not just in APAC edge, but literally sitting on top of other chips to bring them in high proximity.
This used to be called in the late Ninetys in early 2000 more than more referring to Moore's law, meaning it's not just more transistors on the chip that is actually multiple chips really squeezed together maximally also referred to as three D. IC and so this is a trend that oh, what sort of difficult for for a long time.
Because it's difficult to do technically and now it's only we see it's growing very rapidly and all of that tells me that AI is starting to drive the architectures because AI has a lot of data and so you want to bring the data as close as possible to the processing and.
Those efforts are massively moving forward right now so I see we have a lot of opportunities frankly.
That's right it's true that just.
I just add that in general I think the points you raise an art provided a very thoughtful commentary that technology, but from a classical business perspective, you know what your what you're seeing our results to date. The fact that despite the macro environment that design activity continues to be very strong.
And I wouldn't necessarily associate.
Are you factoring challenges with any impact on design because ultimately that's what drives our business and that's that's been very healthy year to date.
Great and drag if I can follow up with one question just in regards to the implied.
Operating margins in Q4 relative to the very strong levels. You side Q3 is that a function of intended product mix is that a function of just timing uncertain incremental investments just any thoughts there.
No. It's a combination is a few things there's variability the margin is really a combination of Soc that the outlook for the years really strong and so you're seeing it did have a true up in general comp expenses in Q4.
There are some impact of a mix related to the to hardware and IP and then lastly, we'll continue to prudently add to our headcount.
Other than that its inaugural a normal transition.
Very good thanks, Thank you about very much.
You're welcome.
Next we got a line of Mitch Steves with RBC capital markets. Please go ahead.
Hey, guys. Thanks for taking my question I really had to so first kind of addressing the server market I mean, there's been a lot of changes over there and then potentially army become more viable solution, but in terms. So my question is really just.
If we draw parallels between what happened in mobile and that's starting to take off and we assume just I'm going to elevate your assumption that the server and buyer because we're competitive where it would be mediate space see ASP increases in additional demand and if so why would that be or why wouldn't that be the case, we have more different server chips coming out.
Looking at the next few years.
Well, it's an interesting question and the first part isn't obvious positive which is more servers is good for our market because.
Even if this competition among the providers they all going to raise forwards to Ah two high performance on low power and high high density, but the second observation or the second thing I think you alluded to is also interesting which is there will be more diversity in the type of computations and so a variety of accelerate.
Actions are going to make their way more and more into the Oh, the cloud and that includes of course, all kinds of different AI algorithms and because these things are so a compute hungry, they're all going to be get optimized for some aspects that is off particularly a high value. So if nothing else I think.
The the whole compute space itself will have many providers with many different chips and both the word many of the where different all but a very good for synopsys because they all need to be optimize then designed and verified and deficit.
Okay, Yeah, My second one.
Just on on the software integrity business. So it's actually starting to turn up a bit yearoveryear growth. So I'm. Just curious about maybe you can give us an update on how the sales process is working there I know you guys have hired a bunch of new people et cetera, but maybe you could talk about when rates I think that's probably the more relevant item because not really possible for you guys.
When it to new accounts because at the current environment, but can you maybe update us on what the win rates look like in a competent you are getting that back to kind of mid cap mid teen, but essentially 20% growth long term again.
Well.
So there's two aspects one is I think the situation over the last few quarters has been a little murky just because.
The attention of people on these type of tools has been a little lower than it was a before I think that we'll we'll come back I think pretty substantially as the market now has stabilized and as people will come back to having to be defensive about this chips. The second aspect is much more internal Oh, we grew.
The company or that part of the company very very fast we pushed very hard on ops margin last year and and came to the conclusion that we needed to do a bit of a reset in terms of how we managing this and how do we scale all of the processes that includes the the field processes. It also includes.
We look at a integrations and the clear focus for the platform and it's in that context that we are really a very enthusiastic about Jason joining because he brings a an experienced space that we didnt have there in the past and therefore, a we can see that in a matter all.
A couple of quarters I expect that we'll see the impact of just some corrections that we're making a in that business unit.
The initial reactions have been very very positive and I must say, having interacted with them I can immediately see that theres a degree of confidence that will benefit us greatly as the business itself is actually in a very good physician and yes, you've seen a a good quarter.
That is not as good as we wanted to be so there's work to be done.
Okay. Thank you.
You're welcome.
So questions from line of Jackson Adder with JMP. Please go ahead.
Great. Thanks for taking my questions got.
Without.
Any customer.
I think.
Yes.
What what impact does.
Thats right.
On your.
Which is their fabrication.
Sure well, we touch manufacturing in many places.
The most profound place with some customers we are very involved in the actual little development of there.
They are process to create advanced transistors, because we have the capability to simulate those before they get built from there we move up in terms of helping customers create what are essentially the descriptions off their process. So that it can be linked to the design tools.
And we're very proficient in that and this is the area, where you see constant change even a new process gets introduced.
Matter of a month or two later, they're modifications because people are constantly driving not so much to performance off the process anymore, but the yield meaning initially to or the early chips don't yield very well and then the yield better and better and better overtime and so we're involved in that where where our engagement grows.
Very very rapidly is right after that which is making sure that our tools.
Interest SEC well with the process with other words that our tools, bringing the best out of the manufacturing process, but the same can be said identically for our IP, meaning that we provide building blocks that get highly optimized for the different processes and as we go to smaller and smaller geometries.
This is a more and more differentiated and difficult task and difficult is actually good for us because synopsis is uniquely competent a add that as we then move to yet them higher level as people design chips, we of course assist.
The different design companies with how they designed their circuits in light of the processes that we know very well so and then the probably the last level where that into effect is that these chips have to also be tested and different testing techniques get approach used for different silicon that technologies.
So it's another way of saying that you know we are both the connector and a buffer throughout the entire design flow and complexity flow and the experience that we bring helps.
At any level make up for some of the shortcomings that invariably happen and im not pointing fingers at any of this level is just all substantially challenging stuff to do and so our support teams.
Help people bridge towards the new nodes on a constant basis and so the fact that you do you see a time sort of disruptions or accelerations in silicon development is a very natural phenomenon in silicon design for the last 20 years.
The fact that these things are very large investments is of course are always of concern because one hopes to get high yield as soon as possible, but invariably. It just takes time for that to happen in all cases or we are involved.
Moved to the point that it is beneficial to us to support many different silicon notes from many different vendors and at the end of the day. It's the end customer does semiconductor chip designers that decide which nodes they will be using and of course, we listen carefully to them.
Hey, Jackson this is Chuck independent of the manufacturing challenge as though right. The the demand for our tools continues to be really strong because any and it's about the technical challenges of design those chips, whether your manufacturing it in house are outsourcing it and we're we remain very often.
Mystic about our business considered where our portfolio is and the fact that were we continue to see really good demand for our products. So that's it's a new so items, but we've seen affected our business.
Got it thanks for the additional color quick follow up.
Sure.
Got it to me.
Are you seeing much.
Demand at all.
Hi.
Basis.
Yes.
Sure.
You know really enough for the answer is yes, and yes, and so let me start with fusion compiler I think it's doing terrifically, well and we do see that a lot of the future will be heading in that direction.
Results I, just very very compelling at the same time a completely by accident. This morning, I was reading writing a little note to the team that's working on the IC compiler because they had some stellar results out a very important large customer that actually I decided to have a significant.
Portion of their chips done with a I see too and so it just shows that different people have different forms of flows that some people like to have the integrated version some people.
Have maybe a design close that they have optimized in the past for the individual tools and both are absolutely at the state of the yard and.
It's been a good choice for us to to be able to maintain both of those directions.
All right.
You're welcome.
Next we done line of J lease.
Issue Fowler with Griffin Securities. Please go ahead.
Thanks, Good afternoon Heartened track.
Aren't a technology question to start for you and then track.
Thank you.
Arc your comments on the application of AI and design space exploration were quite interesting.
My question for you is what do you think the resource requirements or implications might be for you for your customers to implement that.
Are you in particular for example, what might it mean in terms of your capacity needs for applications engineers.
In terms of having to still that up as you can do in any way. The last couple of years group with the general business.
Might it has any effect in fact on where you have eased because today.
The bulk of your hiring anyway for Eightys has been very heavily in Asia.
So when you think about where it might be adopted geographically how might that affect your resource.
Requirements not just for a ease but also of course group R&D.
And then for you track I don't think you mentioned backlog number if you could update us on that and then with respect to the strong IP numbers.
Upfront, perhaps even more upfront than it's been and is there any.
Geographic differences in terms of upfront IP revenue in other words is Asia more heavily upfront than perhaps other reasons.
Consumer IP business. Thanks.
Okay. Jay you have about 17 questions in about a one question.
Let me, let me try to split it like this you know there's two types of AI. One is the AI that we apply inside of our tools and in many ways for the application engineers, that's not any different than what they did in the past of course, they need to be knowledgeable about the tools they need to know how to use it well in what's.
Circumstances, they you get the highest return, but fundamentally it's a continuation of being experts in some phase of the design flow.
One of the other aspects of AI is to now look more assets at sections of the design flow and they're engaging with the design community is actually of high value now many of our A's do that part of their daily job anyway, even so everybody is sort of working from home today.
It's quite amazing how good the connectivity continues with the design community and so overtime. It it's possible that that we will see gradually an emphasis to look a little bit more at the the complete flows because there's a lot of benefit from an AI point of view there over time.
But right now I think it's mostly a continuation of the type of people that we have because they have to be very versatile anyway, no. The tools know how to customers design know the urgencies.
Et cetera, as to where I don't think that they'd changes the profile.
It's the most advanced people that will also be idea, though the early adopters now there's no question that Asia in General China Korea, Taiwan continue to be the areas of of rapid adoption of new technologies and I don't expect that to change all that much either in all cases.
It's a great opportunity space for us, where where are we making really quite astounding us progress.
Yes.
Hey, Jay regarding your questions backlog, we finished at 4.6 billion for the quarter.
As we mentioned in in our prepared remarks.
Bookings were better than planned for the quarter, but more importantly, though that the the run rate for the business was up pretty significantly. So that's that's a good indicator of the health of business.
With regards to IP.
But you're going to see a little bit more variability as we've talked about over the last year and a half with with IP you to six six.
The of slot profile is really a function of when our customers are logging on to our site and downloading IP. So some quarters, maybe a bigger than others, depending on their development schedule and that's what you saw this quarter with regards to the Geo mix.
Really not to not focus on any particularly area.
That issue is kind of broad base.
Yes, the business continues to be very much recurring in nature and.
Based on a multiyear multi year subscription.
Does that help.
Yes. Thank you both.
Great.
Hum.
Next to their line of Jason Selena with Keybanc. Please go ahead.
Hi, Thanks for taking my question really just one for track.
You mentioned that the beginning some onetime cost savings this year.
Are you seeing those cost savings in one side of the business versus the other kind of referencing the miseq business, 15% margins. There, it's no big improvement over last quarter, which was a bigger proven or the quarter before that.
Hi, no Jason be the onetime savings related to the Covance right.
Across the board and and similar to other companies, it's mostly around travel obviously with us working remotely and we're not seeing that level of travel that we've had in the past.
On a net we realize savings for the year, but there are some incremental costs.
That we incur costs incremental costs and investments that we've had to make.
To support.
The company working remotely.
And that's as we think through what those ongoing costs are going to do that's going to be factored into our guidance for next year. That's one is referring to but overall the strong margin improvement that we're showing for this year is largely a function of see a really good revenue growth and expense management.
Okay, and then relative to the Sig margins being up quarter over quarter.
It's under the impression that we wouldn't see as much improvement in that.
This year.
Not a because that wasn't deliberate we'll continue to invest in that business as we said beginning the year.
I would say that's a function of us getting some.
Savings on the travel size at some events and in addition to that the team's doing a really good job managing their expenses in light of where we are with.
With revenues and bookings as we've mentioned, it's not it's improving since since Q1, but still below where we want it to be and so the team's doing a good job managing both sides of the business.
Okay, Great I appreciate the color. Thank you.
You're welcome.
And once again, if you have a question you May press one zero at this time.
We go to line of.
Or D rahmani with you've yes. Please go ahead.
Hi, Thanks for taking my question.
I guess first one for Scott maybe.
You bet beat.
The midpoint organs.
Midpoint in Q3 by 75 million and yet.
Full year was right.
Roughly about 50 million.
I guess, what's driving that sort of conservative crop so.
Thats the first one.
And then I will follow.
Yes. So overall the business is doing really well I mean, we're seeing that in the mix of.
The geo growth and product gross but there were some elements of timing as well that we saw some of the revenues that were originally planned for Q4 shift into Q3.
And I would say that it's shaping up to be another.
Good quarter for us, that's a pretty big quarter in Q4 so.
I think on the whole typically ballots outlet for the year, we're providing the best I'll look at this point.
Okay and.
The second one sort of a bigger picture question I guess.
You talked about Hyperscalers in autos and system company or other drug can go.
Yes.
Roughly what percent of your revenue accounted for today and how we should think about that thrives on each side, especially growing Oh I guess can you provide some color on that.
Well, we don't break out the Hyperscalers, but we've said the already quite a number of years ago that system companies, which is really are the people that we lump together that do more than just chips that also add software in some cases have brought our value proposition.
It has been a about 40 plus percent of our revenue for quite a number of years I would put to the hyperscalers in that domain because they have many different a interest and actually may be making their money not so much by selling the jobs by using them themselves and so right. There that's a bit of a different a category.
Having said that I think they are interesting because for the earlier question that that's one of you asked about how many different servers are you seeing are you seeing people investing a in a broad set of architecture as well. They all are and they all are as a function of whatever their customer base has as workload.
Codes and so there's a very big difference between you had been doing let's say a credit card checks to versus doing a high research for some oil exploration both require a lot of computation, but it's very different computation and so so I.
I think that the hyperscalers because they have so much opportunity are going to continue to be more I'm more interested in.
If not influencing even controlling some of the architectures and and have an opportunity to literally.
Create a lot of different chips that food just their need and in that regard we have just excellent relationships, there and we see a lot of growth opportunity.
Thank you.
You're welcome.
Next to the Atlanta, Rich Valera with Needham. Please go ahead.
Thank you.
Somebody get a little more color on the hardware business in the quarter.
I know you had some pretty significant backlog that slipped out of last year was expected to ship in the second half of this year from a large customer I believe that was on the emulation side and I was wondering if SPG prototyping was one of the contributing factors to the very strong performance in the IP in system integration side, you're just wondering how hardware or.
Overall did.
If you could give any sense of growth and if you're seeing those emulation orders that that.
Pushed into this year shipping as expected.
Let me, let me take that one I'd say, yes.
I would say overall this year shaping up to be a another strong year for for hardware and that's it that's a really strong state that considering that last year was a record year for hardware despite that push out.
We're not going to break down the emulation versus has that we're seeing good good growth on both sides.
Got it and then track just wanted to clarify on your commentary on fiscal 21, since onetime expense saving but the risk, stating the obvious impact revenue for fiscal 20 or 21.
When you said you don't want to change your EPS were you referring to your op margins or specifically your EPS, which I would think could be did go up if you changed your revenue, but not your op margin assumption.
No ideally I'd like you all your patience.
That's much across the board until we report in December but most is typically I just want you to.
Focus on on margins be uncertain trajectory.
Appreciate the color there it was off smart ups margin focused.
Got it thank you.
Next question comes from Atlanta, Gary Mobley with Wells Fargo Securities.
Yeah.
Good afternoon, everybody. Thanks for squeezing me in.
Some questions about China, and I know you don't break out your China revenue from the APAC category, but it obviously Asia Pac was at a record level by pretty wide margin. So I'm curious if you saw any pull in activity.
As perhaps some customers dates in China, you know, we're trying to get ahead of the export restrictions the months so to speak.
And.
And maybe if you can give us an update of what you're seeing on the competitive front from some of the startups that are locally based in China.
Sure, let let's start with the entity last as you know there was a bit of an update this week, we analyze that understood it and fundamentally it does not change the outlook that we've given you any outlook encompasses the fact that we expect the entity list to continue where it's been now for the last nine months or so.
Having said that China is strong across the board and that's largely because if the economy has.
Wouldn't say returned to normal, but certainly a degree of normalcy that is a relatively advance and a lot of investments in a lot of company that are not on the the entity list and so throughout the <unk>.
Electronics economy, we're doing very well there, but it's partially true for there. This is the the country surrounding China as well so far east in general.
In terms of for competitive endeavors, obviously, there's a lot of talk about every aspect of high Tech China wants to become a independent of the west that will take a long time and so while they're there our efforts suddenly in semiconductor manufacturing are there a few efforts as well in.
On the side are there too it is relatively a very very small.
Compared to what we can provide and I think it will take a long time before it's very competitive.
And so lastly, we are doing well in China in general and do not see that are changing rapidly, but all looking forward to see what happens after the elections and if I talk about point of time, there's a mellowing or or hardening of the situation.
Okay quick follow up question for track.
How should we read into the fact that you guys didn't buyback any stock during the quarter is that not wanting to chase the share price or is it something more strategic in mine.
No I wouldn't read into that at all actually our.
Capital allocation strategy has been pretty consistent and that hasn't changed.
Right now we didn't set out not to do buybacks in Q3.
But it turned out that way.
Mostly by my focus was.
Yes, just making sure the team continues to be very prudent about how we're managing our cash, especially in light of the current macro environment I want to make sure that we're managing our balance sheet in a way.
So that gives us the most stability and flexibility to run the business, but overall.
The the approach in terms of.
Managing the balance sheet for organic investments versus M&A versus buyback that overall approach as a change.
We remain committed we remain committed to to make it out as a key part this strategy.
Thanks.
You're welcome.
Next go line of Krish Sankar with Cowen and co. Please go ahead.
Hi, Thanks for taking my question Art I had a two of them. It's a two part question, so last but Oh right away.
When you look at you Hyperscale customers you know on the move to custom so Lincoln from merchant, how does that impact the need for E D and along the same flat when computing move more towards the edge what are the impacts EDI relative to like a cloud system.
Okay. Let me start with the first one are you know as people learn how to do a design chips themselves of course, they will need a lot more 88, then they have before which was essentially zero and so that this is all upside but what is what is interesting is that in parallel to that these are typically people that get hired from.
Other design companies and they immediately jump on well and I hear all the IP blocks that I need to because I want to designed really fast and so we think that there's the potential in a number of these hyperscalers for them to actually develop very very competent. That's also very driven teams where the.
The the time to market is really what a is going to be a pushing for doing a lot of business and given that said that the opportunity space for them is different they use their own chips. Therefore, they are very they are there still very close to their own market.
I think the will recognize quickly that's being able to differentiate through a electronics is actually going to be of high value. So I expect them to be a big spenders overtime, and let's say I didn't quite understand your second question would you mind a clarifying.
Oh sure like you know as the computing moves more towards the edge, how does that impact the need for <unk>.
Well you know there's always been this debate how much compute goes to the edge and how much closer to the center and the answer I think is yes. Both both the art are growing rapidly and part of that is that a lot of the data that gets now generated on the edge rather than transporting it all to some center compute.
Place gets a at a minimum tree on store simplified or concentrated and so we see a lot of development of AI for the edge.
In a broad broad set of companies so from my perspective.
Sort of the more the merrier, because they're too we're going to see more and more specialties, meaning that.
Because AI can be very compute intensive if you can reduce that intensity by focusing on specific problems specific types of data you cannot only get much better results. You can also do it in a much shorter amount of time and that is why I think we going to see a continued broadening of these type of chips.
And many of those by the way use embedded cores are embedded IP just to reduce their their go to market time, So we actually see growth in both of these camps for us.
Got it Super helpful. It could just squeeze one more and just pick up as the.
Shipped to happen.
Negative for the hops business.
No not at all you know I mean for for most chips the minutes they become sophisticated enough that they have some software running on it.
You cannot go fast enough to some prototypes to at least our developing to software before you actually have the chips and hops is not as expensive as a big alienation machine and very often actually gets used.
To not only.
You know mimic the chip that you're designing but also may make some of their surroundings, maybe a the sensors that that will be connected to that chip you can just plug those into the hops board and so the weren't prototype really is the way you imagine if you know.
I think that he is very compact, but where you can plug in a lot of wires to to bring the reality directly to the chip and that is what happens does particularly well and so I expect it to continue to grow it is growing very well by the way.
Thank you very much out.
You're welcome.
I just wanted to London in Q.
Hello.
Yeah, no others in Q.
Okay, well and okay. Thank you so much for the time you've spent a I hope that you got a sense that we were a blast was a very very strong quarter, but just as much with a very strong outlook forward and that's a much of that is due to the technologies introduced over the last few years doing well, but also with thing.
Thanks to the team and our customers for working under situations that are far from ordinary yet our eminently practical in how we are managing it. So thank you for your attention and we will follow up with the usual Q in a was individuals. Thank you.
This concludes our conference for today. Thank you for your participation increasing 80 anti conferencing service.
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