Q4 2020 Synopsys Inc Earnings Call
[laughter].
Ladies and gentlemen, thank you for standing by and welcome to the Synopsys earnings Conference call for fourth quarter and fiscal year 2020. At this time all participants are in a listen only mode.
Later, we'll conduct a question and answer session and you can place yourself into that true by pressing one then zero on your telephone keypad.
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 of the call. We will announce the non time remaining and 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 rich good.
Good afternoon, everyone.
Hosting the call today are art did Ya, chairman and co CEO and synopsis and.
And truck from Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of this conference call Synopsys will discuss for cash 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 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 and 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 Synopsys Dot com.
In addition, the prepared remarks will be posted on the site at the conclusion of the call.
Finally, we are all again participating from different locations. Today. So please forgive any delays or technology glitches or awkward handoffs and acuity session that occur as a result.
And with that I will turn the call over to arcs did you.
Good afternoon, and I'm pleased to report and another outstanding year for Synopsys.
Despite unprecedented macro challenges, we build considerable financial technology and customer momentum.
We substantially exceeded our original plan with business strength coming through the year we.
We grew revenue nearly 10% to 3.685 billion led by each day software and IP.
Spend and non-GAAP operating margin by three percentage points delivered more than 20 per cent non-GAAP earnings growth.
And record cash flow of 991 million.
Contributing to these very positive results with the new EDA and IP products Weve introduced over the past few years.
We expect to further build on this momentum with several groundbreaking technologies that we launched this year.
In addition, our re energize software integrity business is on its way to scaling to the next level and Reaccelerating growth.
And about two years ago, we communicated a three year financial plan to drive double digit non-GAAP earnings growth.
Through a combination of topline growth and operating margin expansion to the high Twentys Mike 2021.
We achieved our initial ops margin target a year early and have consistently delivered high single digit revenue growth.
As we enter 2021, we expect to surpass 4 billion and revenue.
Non-GAAP operating margins of 29% to 30% loans.
Low to mid teens, non-GAAP, EPS growth and more than 1 billion and operating cash flow.
You don't 2021, we will raise our ambition to enroll 45 as.
As we drive revenue growth and for other operating margin expansion.
Jack will discuss the financials in more detail.
Meanwhile, design activity remains strong across the board.
Opportunities and key end markets, such as AI and machine learning high performance computing and cloud Fiveg and automotive are massive.
That's all drive increasing adoption of our advanced solutions at a time that synopsys enjoys particularly strong differentiation.
This includes ambitious companies such as a high startups and cloud Hyperscalers as day position themselves to leverage big data generated by the billions of cloud connected Iot devices.
They need and trusted partner, who not only has the most advanced high impact products today, but complete solutions capable of scaling well beyond the traditional demands of Moore's law and to the powerful interest section of hardware and software.
Let me provide some highlights.
And he D.A.R. unrelenting innovation push and digital design has strength from our longstanding market leadership.
More than 95% of advanced designs today and rely on our fusion design platform and over the past year revenue growth has accelerated.
In particular, we continue to see strong adoption momentum for our fusion compiler product and the streets Premier digital design solution.
Fusion compiler significantly exceeded.
It's orders target, increasing a 140% and 2020.
The progression from technical benchmarks to competitive wins to growing orders and production probably for Asian, it's trending even better than we anticipated.
We've seen and widespread adoptions from customers ranging from the largest global communications processor and graphics firms to high impact cloud Hyperscalers two influential system houses and AI startups.
[laughter].
For all customers for production deployment yielded excellent results as evidenced by five times the number of tape outs and that's why 20 compared to last year and for US a rapidly growing pipeline across many market segments.
The fusion Technology Foundation also docs sales exceptionally well with the challenges inherent in the next wave of chip and system design.
Specifically synopsys is addressing new Tam opportunities in AI, driven design flows in Threed, multi chip design and and the new area of Silicon lifecycle management.
Let me start with our Dsos on AI product, where dsos stands for design space optimization.
Our combination of fusion and AI learns and automatically adjust and optimize the design exploration for both and better results and faster time to market.
With its design teams can also tack a larger blocks and more projects, that's focusing on more value added tasks.
Even in this early stage the power and potential of the episode on AI is being widely recognized as has received a 2020 World Electronics Achievement award for innovative product for the year.
Next is our extremely timely threed IC compiler solution with disruptive technology that enables the design and analysis of multiple die together on a chip.
At the very moments that system architects are augmenting traditional chip complexity by connecting multiple chips very tightly together, our three D. I C product provides far better performance and capacity than conventional this aggregated chip and package approaches.
Finally, we launched the industry's first silicon lifecycle management platform just last month.
On chip sensors, and monitors feed into data analytics engines integrated with leading past and yield management.
This provides visibility into critical performance reliability and security issues for the entirety of the chips life span from design to and field operations.
Early customer interest in all of these new solutions is very high.
Turning to come from design momentum for our custom compiler product accelerated with more than 30, new logos and 15, plus full flow competitive displacements during the year debt.
This resulted in over 50 per cent revenue growth.
Having seen the power of our innovations targeting advanced Finfet designs and number of the highest impact semiconductor and systems companies and putting their trust in us.
Let me now moved to other verification continuum and platform.
Which combines market leading anchor products into a seamless high efficiency solution.
With the complexity increase of intersecting chips systems and software the need for verification and continues to rise.
Our number one market share position and both software and hardware puts us at the center of this wave.
As we continue to innovate aggressively and state of the art native integration of the fastest engines.
But from your team to our solid growth on the software side are influential high profile customers ranging from hyperscalers to AI to automotive and mobile.
Our hardware based verification products are totally focused on unmatched speed highest capacity lowest cost of ownership and lowest power consumption for high complexity designs.
Building on our record year in 2019, and 2020, we again expanded our customer base, adding more than 50, new customers and well over 100 repeat orders.
This includes major expansions at some of the world's largest semiconductor and systems companies.
Now to IP with strong market demand for our rich portfolio drove another record year growing approximately 20% to two more than 900 million and revenue.
Our strength is broad based across all regions and key market segments, particularly high performance compute cloud and networking AI and automotive.
And automotive momentum continued in 2020 as we have achieved more than 400 wins on advanced processes across more than 30 major segment conductor companies.
And area of particular automotive strength for arc processor.
This year, we extended our lead and automotive qualified title by delivering the industry's first processor certified for for ISO to six to six to automotive safety integrity level D. compliance.
We also broadened our portfolio introducing dsps high performance embedded vision, and a 64 bit processor family.
And the undisputed leader and interface IP, we continue to see very strong adoption of and generation up on generation of important titles.
Including PCI express memory interfaces, and maybe which had an exceptional year.
And you must be we extended our leadership by introducing the industry's first you as before IP.
We also saw continued traction in very high speed Thirtys with multiple 56 and 112 gig with.
Building on our lead and foundation IP, we extended our portfolio to include specialty memory fuse and AI and cloud compute and general purpose, Io, which had an excellent year.
Finally, our track record of being first to market with IP and advance process nodes continues and is highly valued by our customers.
We announced a full portfolio of five nanometer IP with multiple silicon proof points, including our industry, leading PC PC I eat 5.0, and U.S. before solutions.
With already more than 55 nanometer design wins, we started development of next generation three nanometer product targeting high and mobile and high performance commute.
And I'll just talk to integrity testing software code for security vulnerabilities and quality issues.
This area contributed approximately 10% of our revenue.
The market opportunity is vast with the need to address critical security challenges steadily increasing and importance.
And the industry leader with the broadest portfolio of product and services available today, we're well positioned to serve this growing space.
Over the past several years, we have successfully expanded our customer base with enterprise companies now representing about 75% of revenue.
And 2020, we saw an increasing number of customers adopting multiple products and services leveraging our broad portfolio.
And the important example is a fortune 100 technology industrial and aerospace conglomerates.
The depth and breadth of our products and services allow them to consolidate from multiple vendors to synopsys whilst.
While significantly expanding their investment and user base.
Having said that so for integrity is the one area that saw and impact from Cove, it as well and some near term operational transitions.
Oh, No general manager hit the ground running a little over three months ago and has already made significant enhancements in three areas.
First we evolved our go to market strategy and customer success organization to better address and serve new and existing customers.
This includes timing our sales coverage and building and indirect sales channel.
Second we are bolstering our strategic consulting capabilities.
And third we are evolving our product roadmap to capitalize on security trends and Dev ops and cloud adoption.
The recent moves are encouraging and we expect to see continuous progress towards ending the year with reaccelerated growth.
We are very optimistic about the long term opportunity as we work to scale past the half billion dollar Mark next.
In summary.
We're entering 2021 with significant momentum.
Market demand is strong fueled by complex technologies, and a multitude of high profile verticals.
Innovation engine continues to deliver advanced capabilities as our product offering is increasing and differentiation while seeing strong adoption.
Financially, we're executing very well and raising our long term ambition.
Thank you to our and dedicated employees, who quickly and effectively adapt it to unprecedented challenges this year and draw for customers and partners for their commitment and support.
With that I'll turn it over to track.
Thanks Aart good.
Good afternoon, everyone 2020 was another excellent year, we reported record results in all key metrics, including revenue non-GAAP EPS and operating cash flow we.
We finished the year well ahead of our initial expectations.
Our ongoing financial success reflects.
A dynamic and markets our portfolio of best in class solutions.
Our resilient business model with nearly 90% recurring revenue and our return already term and execution.
We're entering 2021, well position to exceed 4 billion and annual revenue and further expand non-GAAP operating margin.
As a result, we are on track to deliver strong double digit non-GAAP earnings gross and more than 1 billion and operating cash flow.
Ill now review, our full year, a 2020 results.
We generated total revenue of $3.685 billion up nearly 10% over the prior year with strength across all geographies.
Backlog grew approximately $500 million during the year to $4.9 billion.
Total consolidated GAAP costs and expenses.
For $3.065 billion.
And total non-GAAP costs and expenses for 2.654 billion, resulting in a non-GAAP operating margin of 28%.
GAAP earnings per share were for dollars and 27 cents and non-GAAP earnings per share for $5.55 up nearly 22% over the prior year.
Semiconductor and system design segment revenue was $3.3 billion with particular strength and media software and IP.
Adjusted operating margin was 30%.
Software integrity group segment revenue was 385.
368 million with adjusted operating margin of 11%.
While software integrity results for affected by coated and our near term operations operational transition, we are enthusiastic about the dynamic market and our leading industry position.
Our long term objective remains to grow software integrity, and the 15% to 20% range exceeding market growth as we and the industry volume we.
We believe operating margin can reach or exceed our corporate average over time.
For 2021, as our operational adjustments take hold we expect business levels to ramp throughout the year and to achieve 15%, 20% orders gross for the full year.
Revenue for southern and over time due to our time based model.
Our objective is to exit the year with double digit growth in Q4 with a full year and the high single digit range then accelerate in 2022.
Well increase the level of internal investments and 2021 and as we implement our adjustments and we intend to resume margin expansion in 2022.
Turning to cash operating cash flow for the year, which a record $991 million, reflecting our strong results as well as robust collections.
We ended the year with a cash balance of $1.2 billion with total debt of 128 million.
During the year, we completed buybacks of $242 million.
At this time, we expect to increase our total buyback and 2021 versus 2020.
Now to guidance, which assumes there are no changes to the current entity lifts restrictions.
For fiscal 2021 Red.
Revenue of 4.0 to for 4.05 billion.
Total GAAP costs and expenses between 3.2 to six and 3.271 billion.
Total non-GAAP costs and expenses between 2.852, 0.825 and 2.85 billion.
Non-GAAP operating margin of 29% to 30%.
Other income and expenses between minus 11 and minus $7 million.
Non-GAAP normalized tax rate of 16%.
GAAP earnings of $4 and 39 to $4.54 per share now.
Non-GAAP earnings of $6 and 23 to $6.30 per share.
Cash flow from operations of 1.2 to 1.3 billion and.
Capital expenditures of approximately 100 billion.
Now to the targets for the first quarter.
Revenue between 935 and 965 million.
Total GAAP costs and expenses between 767 and $785 million.
Total GAAP non-GAAP costs and expenses between 674 and 684 million.
GAAP earnings of one dollar and five to $1.16 cents per share.
And non-GAAP earnings of $1.44 to $1.49 cents per share.
Longer term, we are raising our financial objectives.
We intend to manage to a rule 45 over the next several years through a combination of solid revenue growth and continued operating margin expansion beyond 30%.
In conclusion, we entered 2021 with excellent momentum.
Reflecting the strong markets we serve.
For the resiliency of our business model and the outstanding execution of our team.
And with that I'll turn it over to the operator questions.
Certainly thank you.
Ladies and gentlemen.
Before ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad. Please note that this may be different than previous calls you are used to.
You may withdraw your question at any time by repeating the one zero command if.
If youre using a speakerphone, please pick up the handset before price and the numbers. Once again, if you have a question and you May press one zero at this time.
Before we begin the Q and a session and would like to ask everyone to please limit yourself to one question and one follow up to allow us to accommodate all participants if you have additional questions. Please reenter the queue and we'll take as many as time permits.
And we will start the Q and and with rich Valera with Needham. Please go ahead.
[noise] queue.
Hi, congratulations on delivering some really solid results and challenging conditions this year.
And with that you finished off the year with another really strong quarter and Asia Pac second quarter in a row and Im guessing China was a factor in that and one of the concerns. That's raised is that maybe some of that business is being pulled forward for.
For various reasons. They just wanted to get your thoughts on the strength out of Asia, Pac and particularly China and if you guys have any concerns about maybe some of that business, having been pulled forward and what that implies for next year.
Thank you rich and was indeed, a very good year and to China definitely contributed to substantially in General Asia. Pac overall was very very strong we have no indication of a pull forward from China.
Yes, Lee Theres always questions around that but nothing really out of the ordinary except the fact that we had pretty strong business, which is also quite a number of additional new customers.
Got it thanks, and just a follow up on the ESI business.
Are there any sort of green shoots you can point to at this point I know you've made a lot of nice due to organizational and structural changes are you seeing anything and kind of the bookings pipeline or funnel that might show. Some of those are actually starting to to have an impact.
No we cannot say that yet because Jason Smith, and who GM has been there for just about a 100 days you have made already a lot of very good changes specifically on the whole go to market side, where we have been able I think to optimize much about ourselves as indicated our expectation is that through this year we'll.
It will gradually see the the growth rate accelerate again, because the business is fundamentally actually.
The pricing at the right time, and so I think as our execution improve so we will see the results.
Probably fairly quickly.
Got it thank you.
You're welcome.
Well now go to line of Tom Diffely with D.A. Davidson. Please go ahead.
Yes, good afternoon, and thanks for taking my call. So our first question for you is based on the news we got out of Intel This summer little hiccup and a node transition. So just a bigger broader question what is the impact you and he and his tree when a large customer stalls out a bit and no transition I know that they will yes.
Design at the current note for a while but just in general what how does that impact EPA.
Well, Tom a as you know I never comment about individual customers, but one of the things that we know well for for many decades is if anybody at any point in time stumbles a bit or or gets ahead.
Races on along everybody and at this point in time, I think all the companies that aspire to be at the leading into it and technology are investing and moving very fast to move the ball forward. Now. This is not just because they want to be first in line with their technology is that the the demand of the market is very.
Hi, so as not only.
Do you have the the latest node, it's also get and you deliver and volume.
The right level of yield because the production rates are pretty high so to US. This is all good news.
It is a good news because we see a strong wave of new designs and the new designs are very much aimed at the latest technology. So people are taking advantage of that and in parallel to this day factor continuation off let me call. It a Moore's law classic we also see more and more customers now very actively looking at multi chip or multi.
Chip lets and in a design and so I think the hunger for more capability is an insatiable.
Great and Thats on this basis. This is true because you want to add that to you you're going to see this and the 10-K and a couple of weeks I'll highlight that we continue to do very well and Intel and our business. There is growth has grown and 2020.
Okay, Great and reiterate arts points.
No that makes sense and then trac I.
I guess the comments.
Transcript you talked a bit about.
The other software integrity and putting in a and indirect sales channel is that a different sales line and sales approach than before and is that going to have any impact on the margin for profitability.
If I may chime in I think I may have misspoken about the indirect chase down is really a parallel utilization of a channel that typically goes to a large companies that actually help install things that our customers and so it's really a sort of working more closely with the exist.
And ecosystem and not really a different set of sales channel.
Okay, great. Thanks for that clarification, yes.
Yeah, sorry, I I got in the middle of it and almost cough and Thats due Myspace mis speak my apologies [laughter].
We'll now go line of Joe Vruwink with Baird. Please go ahead.
Great Hi, everyone.
I wanted to start with free cash flow outlook for next year its.
And it's quite strong and a pretty nice step up can you maybe provide a bit other greg other than just the improvement and net income and the reduction and capex odd that that factors and to the improvement and cash conversion next year.
Hi, Joe that's.
Those two things for you highlight or really the biggest contributor. The fact that we are growing up income and.
And reducing our capex.
Capex spend the other thing I'll highlight is over the last couple of years as I've mentioned, we've had some unusual onetime events that has hit us and we've always described that.
Heading into 2021 things will start to normalize a bit with.
With regards to onetime adjustments, whether its tax related or some legal settlement related or build out of our facilities.
But going back to the point is that the biggest parts and the fact that we are driving margin expansion up and 21, that's contributing to.
The strong cash flows.
Okay, Great and then.
It's a really strong improvement and backlog you're at yearend nice to see the acceleration.
And I'm wondering if you could maybe help decompose some of the bigger contributors as I'm sure. There is quite hit that contributing but if I kind of step back and think it probably helps that a broader in buyer and that seems to be improving now and in terms of R&D activity accelerating into next year.
I'm sure that helps across the portfolio, but in terms of any of the individual product and tributaries is it really it just increased momentum behind the arts and other things you called out in your prepared remarks, so things like huge and and verification and continue on that and anything else you and maybe point to.
As being Oh say extra good here at year end.
Sure well you know if if I were to find a common denominator among all of those things. It is the adoption of advanced technologies.
And and the reason for that is that the race is so much on and everything that has to do with Big day Dhabi. Its for all from a transport to to to storage and of course, especially to computation and I various forms of machine learning et cetera that.
People wanting to adopt the most advanced technologies in order to do that they really needs to have the most advanced tools and fusion compiler is really doing terrifically well, we could we can see the benefits our customers see that and and it's and broad deployment, but the other thing is the building blocks and the building blocks for IP blocks and those IP blocks.
As the advanced nodes are becoming more and more difficult to do for many of our customers or just economically not all that viable and they do it themselves and we are absolutely ready for our for the the most advanced nodes as they come out and so those are the areas that stand out the last one I would just highlight is that with all these.
Systems that use more and more and more transistors and they these for this has had one thing and mission and life, which is have software run on it and so the intersection between hardware and software, which we often refer to as a prototype and overall is also very healthy.
Joe right and we also add that I'd also add that the it's great to have $4.9 billion of backlog and have that certainty and the visibility.
To the future.
And it does reflect and bought broad based strength debt arch described and more importantly, I think were critical measure for US is run rate and that was up pretty substantially for the quarter and the year as well, which is the one thing that we are more encouraged by what we look at the key metrics for our business.
Okay that is helpful. Thank you about.
You're welcome true.
We'll now go to the line of Mitch Steves with RBC capital markets. Please go ahead.
Okay.
Hey, great quarter, guys, just wanted to double click a little bit on the operating margin implied guidance here and look at the EPS growth it looks like you're implying from around 12%, 13% and it would be kind of the lowest share that put up over the last four years five years or so just looking for with cost performance just curious as to why the incremental margin.
And driving for 21 and be lower.
Lower relative to the last three years or so.
Yes, the margin the margin story I think is very constructive we're we're driving margins up.
Between one or two points and remember and that she is coming home sales, what I consider a pretty extraordinary year right. Both in terms of a strong revenue growth and margin improvement.
This point this is the best visibility that we have and the business and I think it's a pretty constructive outlook for for gross.
Profitability as well as marchex as well as cash flow so I for.
Ladies and prescribers and for the year and we feel pretty good about it at this point.
Okay Fair enough and then just on other software integrity business is there any sort of updating and give us and like the long term trajectory. There I know you guys moved over a lot of the sales people and kind of the strategy there and maybe you can put other big picture with and what that should look like for the next few years, though.
Sure so.
So aside of the and the go to market improvements and accelerations in some areas. The two other things that we look at one is to increase our consulting capabilities, because theres demand for that and they have a big impact on how well the rest of the business does and secondly on the product side.
And sort of a double a focus and focus on one hand, and making sure that each one of our individual product.
Increase more and more of their differentiation because they do battle with a lot of small companies and simultaneously. That's the overall platform really becomes more and more integrated because there's a lot of demand from the larger companies to be able to look at their overall risk management picture as it.
Applies to software and the more we can provide multiple tools that are integrated and that tick and jointly report on the status that is very helpful to see yourselves or heads of IP that that typically in charge of that.
Understood. Okay. Thank you so much.
Welcome.
Well now go to the line of Jackson Ader with JP Morgan. Please go ahead.
One moment please.
Go ahead Mr. Your line is open now okay.
Okay great.
Thanks for taking my question just are on the on the growth infusion I think you mentioned it was like 140% growth and in orders.
And that is that order count.
And is that also I mean, there are asps.
Basically coming in line with what you would expect and so total contract value is also.
Exceeding your expectations with fusion compiler.
Yeah fusion is doing very well in every dementia and and as you know this was a long road to get.
It's not only a products, but it's a whole platform.
To get its too really to the point that certainly has crossed the bridge where it became markedly.
Differentiated versus any competition and we see that not only with fusion compiler as the core product, which for those of you not familiar does both synthesis and place and route but also has embedded in it to timing and power and test and a number of other things with other words at the intersection of many things that you look for on a day.
Hi, and it is also.
The linchpin for Brian who products, such such as Threed IC and also connected very well to the silicon lifecycle management capabilities and so in many ways. We feel that we have literally entered now the next decade of being able to build on that backbone that we have invested and.
For quite a number of years and so both the the the technical stats the booking stats and the revenues Thats all looking very encouraging.
Okay great.
Great and then a financial follow up.
Time based license was you.
Based licenses actually came down sequentially, but a pretty rare phenomenon and type and Doesnt Malik and never happened, but the.
And a fourth quarter, I think and even rare and than than in other quarters. So anything that.
And we should be aware of just and in the mix between time bait and service.
Oh, no no checks and there's really nothing unusual there.
Over time, the time basis pretty steady, but from quarter to quarter, you will see it.
Yes, a little bit more volatile given the oh, good timing as contracts and what would get added or for Oh.
Falls off so it's really nothing unusual and the business.
Okay, Alright, great. Thank you.
Thank you, we'll now go to the line of call Munda with bare and bird capital markets. Please go ahead.
Hi, good evening, Thanks for taking my questions and.
First one for the team is just around the China, if I did make the creation and bright based and your disclosure moudry.
Moudry grew about 30% here even more than that.
I guess I'm trying to look a few years out and it now represents low teens and your revenue and.
As a proportion of total revenue and.
We've seen that it can reach if it continues to grow at that rate it could be up to kind of high teens with that is it.
Something that you would expect to happen in the long term, especially considering.
Your comment earlier that you have been read info for it but that is the structural growth the way this year.
Well as you know the and the Chinese economy has rebounded to post a cove it but in general is in a phase of growth, where where technology is important to where that country is going and.
And we see many new companies entering the free for chip design and other areas.
Areas that we can provide them with tools with and of course, we see many of the up the other companies that have now and number of years under their belt designing much more sophisticated chips. So.
I expect that to continue for a long long long time, and when you say a decade. It does and phase me at all on the contrary I think thats, absolutely, what's going to happen and so our job will be to service that market as as well as we can because it's a great opportunity now I would add to that that the countries around China.
Are doing quite well also and so there's a whole Asia and.
Environment is absolutely moving forward on technology and we have.
We're thankful that we have very good connection and in all these countries be it a ranging from Korea, Taiwan, but also a Japan that is rebounding somewhat with the China phenomenon.
Got you. Thank you and then the second one I just wanted to follow up a little bit on the margin itself. If I look at incremental margins you guys achieved and 58 and.
And quite remarkable around 60%.
Your higher end of that guide and kind of implies 45% for next year is that really a reflection of the fact that you know, perhaps koby titration made it a little bit of a.
A little bit of and more inexpensive here this year and some of the investments might come back just generally in terms of the hiring and stuff.
And you know its 45% something that you feel comfortable and then.
Achieving on a on an ongoing basis and.
As we as we move to.
Anyone.
Okay and took on margin.
Yes, Scott I would say that you're right with regard to code and we did get some benefit of code and in 2020, So and that was from most of the year and as we look at a 2021 would you expect things to sort of stay that way for for the first half, but knows we do expect some resumption of.
You know normal activities and so thats a bit of a drag on margins, but overall as we said.
Expect and truck margins up this year with regards to the question regarding income on margins well have more to say throughout the year because we're in the process of.
For the refining our next multi year financial plan, but if you think about our you know the objective of rule 45, and the idea of driving really strong gross while expanding margins towards a real 40 side, you're going to see pretty healthy income incremental margin improvements year over year.
And we will have like us and will have a for two more specific details provide as we progress in the year.
Thank you for that I appreciate you on that.
You're welcome you all cash.
Well now go to the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Doug Thank you good evening and.
Alright, let me start with you on the Silicon lifecycle management.
Strategy and platform.
When we look at the stack of that platform and as you depicted at your design symposia and a couple of months ago.
It looks like there would seem to be some logical connections.
Connections that you could make between that and core EBITDA and or perhaps even sig.
So perhaps talk about what your plans might be with the roadmap might be for connecting SLM into one or both of for the remainder of the of the businesses and then for per tractor clarify on your comment earlier about the business with your largest customer I assume you meant in dollar is not necessarily as a percentage of.
Revenue, but given the extent of the decline of that business in 2019 versus 2018 and dollars could you say, whether you got back to the 2018 level or not and in 2020.
Okay. Jay you opened a a very big box with Silicon lifecycle management, because there are multiple entry points for that one of the entry points that sort of obvious and actually have been asked for for many years is for chips that are in the midst of a situation that could be life threatening.
He is.
Charger for car or the brake system or a car. So you really would like to know is that ships still working and if the answer is no you really want to know what to do with that and there or how do you stop the car or whatever you have to do and and so that is already a first example, where for a number of years people have started to put different mechanism inside.
For the chip.
The test connections to Juno is something broken is the software still running correctly or other heat situations and so on and so from there to go to the notion of well why don't we start to add some additional sensors and by the way since there's a very little things. So you can easily find a corner somewhere to put them in.
And.
That brings very quickly. The next question well why don't we then take some data inside of the chip and can we make the decision if the chip still works inside of it with other words can you have some machine learning that gets interpreted inside of the chip in contrast to say Oh, we can now read out a lot of this data from the chip that comes from these sensors and use.
External learning or external interpretation of the data so that we can make better chips going forward.
And so I'm trying to just give you a little bit of a visceral sense that the minute you put observation points in anything but certainly on the inside of a chip and you you have a way to either bring the data out or use it on site. So to speak all kinds of new doors open up.
And that is why why this is exciting because on one hand, you could say well nothing new here on the other hand, you say, there's a lot to new here and a lot of new opportunity and specifically the AI that can be applied with it. So hopefully that gives you a little bit of a sense that the opportunity is space is a very big the good news is.
No we are in a leading position with our test capabilities. So we have good connectors. There we have very strong machine learning capabilities, we can use that and by the way our own IP has already use and number of these type of mechanisms for a number of years. So so technically.
Technically we know what to do.
Hi, Jay This is Chuck so on your question you're right. Thanks for clarifying that the.
The dollar revenues at our largest customer is up this year.
I know that you like reading or cash so I don't want to give away too much that's going to come out and a couple of weeks and you can see the details of that relative to the prior years.
Okay and.
Just a quick follow up if I may I don't think you used the word record to talk about either hardware or IP revenues for the quarter, but certainly for hardware and looks like you had a record quarter and possibly for IP as well if you could clarify those.
No we haven't really could you good year for good quarter and good year for hardware and it was down slightly versus a record year in 2019, but nonetheless, it really strong revenue year for us and seen seem with IP I.
Pete I want to say actually is a record year for us overall.
Okay. Good thank you.
Okay. Thank you will note for the line of Jason Selena with Keybanc capital markets. Please go ahead.
And thanks for taking my questions.
Yeah, the personal and going into the introduction of the rule 45, and a little net.
From achieving that goal and they've been saying business being higher margin and.
<unk>.
I think on most part Jason and we'll we'll provide more details throughout the year as I said because for.
We are in the midst of developing that multi year view, but for us to continue to drive margin is north of 30, a lot of its going to come from the rest of the business and 90% of the business that is driving the growth and profitability and longer term there as we've said pretty consistently theres nothing structural about.
About software integrity that would present and from converging towards the corporate margins, but that's a that's a bit yeah, but some time out in the next few years as we think about it you know a lot of it is going to come across some of that's going to contribute to the large portion will continued to be driven by the semi business.
Okay and.
And in General I would say you know throughout the company everybody understands presently our objective of the rule 40, and so it really applies to all of the businesses to do their best to move in that direction, but sick is only about 10% of synopsis and that's a it's a high potential 10% and so your conjecture.
Sure that it will need to both grow and improve its margin is absolutely true, but for the numbers that we or the direction were indicating to you.
We think that we have a number of engines that are doing quite well.
Okay, great. Thank you and then one more quick one.
20% growth and the IP and.
I think thats, what you mentioned and prepared remarks.
Widely understood the tailwind for design and outsourcing, but what are you seeing on the competitive side any any competitive changes on the I'd side.
Oh, no not really and there are a number of other companies that provide to either a very specialized capabilities and I could mention arm as they actually very good partner to Synopsys and then we have some direct competitors that compete on some of the blocks that we do and in general that if the market is there competitive.
That's actually a good sign that there is opportunity for growth and and doing more I think we will all be very busy.
Because I do think that there's a lot of market demand and I think it will increase I think synopsys is particularly well placed because increasingly IP is very much a trust business. These things are very complex and somewhat tongue and cheek I've often said that you know, it's a little bit like organ transplants, you want to make.
Really sure that you're getting some very good quality.
Solutions into your chip because otherwise they it causes all side kinds of other issues and so it is very much a trust business and I think synopsys doing very well in that regard.
Great. Thank you both.
You're welcome you're welcome.
Next we'll go to the line of Vic ARIA with Banc of America Securities. Please go ahead.
Thank you for taking my question I think for you.
You have given us a nice sales gross number for next year about just over 9% I was hoping if you could give us some relative indication of growth and and the different segments and I think art and your prepared remarks.
Talk you said growth acceleration from 2022, and I'm not sure whether you meant just in the sink business or whether youre talking about the overall company growth rate.
Well, let me start with that part what I meant by that point in time for what I was talking about sick, because obviously say a is lower than our intent and our expectations are and so are the changes that we've made I think are all in the direction to vitalize specifically the the go to market.
Function and release a line better other products consulting and go to market three steps for bigger business. So.
I was talking about that that part of Synopsys accelerating back to where it should be.
For the rest of other company I think we're doing very well.
And I must say that it's very difficult to predict what a 2021 will look like and general there is a high hopes that a as you heard and second half of the year not only the the far east will do better from an economic point of view, but also Europe and the U.S.
Is becoming about of other vaccines, but it's not a simple situation of having.
Having said that I think I think the semiconductor segment and the technologies around that are almost immune to that.
That part of the economy, because the needs are so high and many of the very things that got started under Cove. It such as the work from home such as the massive communication. The massive amounts of data being used are just going to continue to be accelerated themselves.
Got it and for my follow up you know, we are starting to see arm expand into new markets, Max and and you know other high performance markets and the data center and even even supercomputing is that and net positive for you or does it just cannibalize your presence and the X 86 market.
No no.
We ourselves are not in the X. 86 market Oh, we provide all the building blocks around these key processes right and so if a if for that part of the market wants to go accelerate themselves through a massive food fight.
Ill means go at it because the acceleration in general tends to use more technology and newer technologies and and so I don't want to handicap any of the players. There. These are all very very very competent and and great companies, but I think that's the applicability of various for.
Forms of cloud computing is broadening and what we're going to see is that it will be more and more specialty areas.
Not only in general and processing, but various applications of course of graphics processors, but let's not forget to you know we are serving a.
200, or so companies all doing the best ever AI chip and these are all specialized computation machines that will and many of those will be very valuable for certain specific applications. So.
There's no slowdown by any means here.
Thank you.
You're welcome.
Right.
Next we'll go to the line of pretty per money with US. Please go ahead.
Hi, Thanks for taking the question what segments.
Right can you just sort of help us shape, the other and build it out and revenues and we're going to be weighted with top words and second how.
And on the margin from it it almost feels like if my math is correct.
Most of the upside and margin is going to come from your Oh semiconductor and Oh and the EBIT.
Basically all.
Is that correct or and like what I'm missing something there.
Yes, you are right for you Oh, sorry for the second part of it the where the margin expansion is coming from for 21, specifically given that we will.
Makes and additional investments and software integrity ticket and so on.
And the to Reaccelerate gross you'll see more of that margin improvement being driven by the semi business with regards to the quarterly profile, it's certainly going to be and better profile. This year than what we saw in 2020.
It's true.
Closer to two fairly even but still a strong second half.
Okay and for my follow up actually you know when I look at our from a different angle or do you feel that.
Customers and sort of indicating a greater interest in our simply because of the uncertainty around arms situation and the data are positive for you guys and maybe a dozen are actually grow that either growing faster than your.
Other IP business.
Well you know I.
I don't really want to comment too much about arm as they are a strong partner I would say that there are many different applications for.
For different types of processors and we have never really competed with arm and its main area, which has been very much the strong processes for mobility that are driven a a low power level in order to work well and and affordable phones and so are we.
You do an enormous number all we do our customers do and it's not an enormous number of the arm cores with our tools I should say and Oh, we drive them as hard as we possibly can arc has done, particularly well in super low power situations or in a number of specialty areas.
Where the processors just suited to build particularly well and the automotive is one of those areas because there's all kinds of other requirements around automotive that have to be followed very strictly and as we put a major effort and quality overall and and quality specifically for automotive.
We paid attention.
For that for ARCC, specifically, and that's where it's doing well.
Thank you.
You're welcome.
Next we'll go to the line of Krish Sankar with Cowen and company. Please go ahead.
Hi, Thanks for taking the question I had two of them one off I just wanted to look for a first question on IP business.
As I mentioned and I decide like building IP blocks is getting more difficult for the balance nuclear customer isn't.
And then a bait to quantify what the books and day, the outsourced IP blog too.
You know the EDI income is was that's like let's say 20 and or 20 nanometer.
And what is it today and lakes high nanometers, other way to quantify that did not and Apollo.
Well you know to be honest, there's probably a very good way to quantify it but I cannot do that live for you here because I don't have the credibility.
I would have to talk to the people in the IP group.
It generically, though I cannot absolutely say that 28 nanometer feels like a long long long long time ago and at that point in time.
Yeah, we we are probably in the 20 or 30% of outsourcing and now we are much higher but that's what has really changed is that the complexity of the blocks since that time, there are certain blocks, especially all these big controller and and communication interfaces, they have become particularly a tough to do.
And they are exactly the area where.
Maybe some customers could do it themselves why would they because they often standards and you know being better than a standard is the same as being worse than a standard you're not the standard and so.
I think that has benefited our taking on more and more of the area and chips. If you add to that the fact that there was a large large number of embedded memories that covers a large swath of a chip as well so from that perspective, we keep moving up and the percentage of what we do but the watch.
We do itself is moving up and its complexity and and it's a trend just a density on an ongoing basis and I think thats. Why this business is very healthy is likely to continue to grow well and we will be very close to the different change inside of our customer.
For us.
Got it and that's helpful and and then this is a follow up you know and so long and dumb question you know and.
The past and customer consolidation happens within the semiconductor customers like.
Avago Broadcom et cetera.
So there's a view that you're going to be negative was 88 companies, which did not happen, but also at the same time.
The EDA companies also consolidated so therefore your customers when did the big and its supplier.
Now when I look forward and you know, there's still a lot of semi and money left to be done.
Oh, good to just put some consolidation day seems like the love the tailwind of the supplier consolidation could you feel like that would make a difference the futile you'd think it doesn't make it up and R&D R&D is going to be spent.
Well, it's a good question because.
And many many years ago, you recall as well and every time that the word M&A and your customer base came up but you know it felt like a for letter word and actually it wasn't because the one thing that doesn't disappear are the very designers that are being emanate around so to speak and so and so from that perspective, it did and harm.
D. and IP businesses as much as initially expected secondly, you're absolutely correct that we have a certain amount of consolidation in our market.
Largely to actually stay at critical mass in order to be able to a for the amount of R&D needed for all of these new capabilities now I think and in our core technology. We are very well equipped to do these things our sales and if and invest in it.
But on the on the sort of what's sitting at the boundary between existing Sam and new Tam a lot of new opportunities that are opening up and so if you take for example, the silicon.
Silicon lifecycle management.
We have acquired some capabilities, we are developing a lot of capabilities ourselves, but its a new terror territory, it's a new Tam maybe a little hard to describe how big it will be but the but the the promise is extremely good and so from that perspective, I think we will grow with our customer base in aggregate and I think that our customer.
Base and doing well because that the center of what the what will drive the technologies over the next decade. So.
Yes, we will race with them.
Got it thanks.
You're welcome.
And with that we have exhausted the Q and acute please continue.
Well with that thank you so much for participating today, we hope of course, that's all of you have a.
Ah stay healthy within your family and and yourself, if not always been and easy time for everybody, but we appreciate to the very fact that so many of you have a state and contact with us through the entire year. We look forward to 2021 with momentum and we hope that for that momentum also includes a euro.
Health and your wellbeing.
We look forward to talk to you so and again.
Ladies and gentlemen, and it does conclude our conference for today. Thank you for your participation and for using 18 to conference and service you may now disconnect.
We're sorry your conference is ending now please hang up.