Q2 2021 Synopsys Inc Earnings Call
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Thank you.
We continue to ship our products and support our customers with no material disruptions and our business is doing well.
Looking at your overall market demand for semiconductors is very strong.
Well some of the near term demand can be attributed to segments, such as automotive catching up after a year of COVID-19 slowing.
There is an undeniable new wave of growth on the horizon as every vertical market demands machine learning chips to harvest their big data for their specific needs.
In other words, the early technical successes of machine learning and the cloud and now moving to the edge attracted by the economic promise of smart everything.
The technology push has grown into a vertical economic pool.
All segments are impacted and the race is on to provide smart solutions and automotive health consumer 5 G and so on.
This bush pool opens a whole new era for semiconductors, and software and with it great opportunities for Synopsys.
First the foundational building blocks our complex chips chip.
Chips for data generation and sensors for storage for transport and for compute.
All needing IP blocks speed low power and security this is great for Synopsys.
Second not just chips systems of chips.
While the complexity of our system on a chip continues to grow the leading edge is moving to systems of chips.
By abutting them seamlessly and stacking them on top of each other massive transistor accounts opened the door to brand new functionality.
This growing systemic complexity is great for Synopsys.
Third chips differentiated by vertical market.
Each vertical has its own needs automotive is safety requirements and mobile requires extreme low power aerospace and industrial ones built in lifecycle diagnostics hi.
High powered new entrants, such as hyper scaler and AI design their own chips for Super performance.
And everybody be at medical and health markets financial sector Communications, our infrastructure everybody needs much better security.
All of these are disciplines that we have invested in for years great for Synopsys.
And lastly software and silicon are tightly linked and must be tuned for each other.
Software to be written to consume less power and the chips.
Chips to be optimized for huge amount of sensor data.
Software to be day bogged on prototypes of chips that had not been built yet to speed time to market.
Chips to be optimized for blindingly fast computation, and all with software and chips must be secure together.
These are all technologies, we are leading and great for Synopsys.
So we're perfectly placed and our mission is to catalyze the smart everything ambitions of our semiconductor partners and vertical customers by delivering a thousand ex system performance and this decade.
And in that context, let me share some highlights beginning with E D E, which delivered another strong quarter, both and design and verification.
And digital design proliferation, and competitive displacement by hour fusion design platform again drove strong growth and.
In particular strong momentum for fusion compiler for.
For example arm is leveraging fusion compiler on its next generation neo versus the 1 and and 2 infrastructure cores.
Fusion Kabbalah was also selected for advanced mobile designs at Samsung driven by superior throughput and performance per watt results.
Our momentum and the most advanced 3 nanometer node is also evident with 5 new test chip tape outs of price.
Officer graphics, and mobile technology leaders as well as next wave 3 nanometer adopters.
We see strong innovation and market disruption with our custom designed platform as well.
And Q2, we announced our prime time continue and platform for analog mixed signal simulation.
And with the industry's brand new graphics processor based acceleration it cuts time to results by 10 ex.
Endorsed by Samsung Electronics, and VDI and Chiacchia Prime time deliver significant productivity gains at companies such as Nanya technology, where it is deployed on DRAM design.
In addition, we again secured multiple full flow displacements in the quarter, including another large analog design company and Japan.
And verification software, we had strong growth with our verification continuum platform driven by adoption momentum with Hyperscale.
Our hardware verification solutions drove excellent results as well.
Including 14, new logos and more than 50 of repeat orders and Q2.
Fueling our ongoing strong growth and continuous innovation.
Including new turbocharged application specific emulation systems, 2 of which went to market in the quarter.
The zebu empower emulation system lets customers perform power analysis earlier in the design cycle dramatically reducing power related risks.
Also just last week, we launched zebu EP 1 the industry's first ultra fast 10 megahertz emulation system.
It targets high performance compute for 5 G GPU, AI and automotive handling designs up to 2 billion gates.
We also shipped the latest generation of prototyping haps and 100.
With the fastest performance and unmatched enterprise scalability, it accelerates software development system validation and verification.
Customers like Nvidia and pure GOSE are already rely on house 100 for their most demanding projects.
Now to IP, which again achieved excellent revenue growth driven by technical leadership and strong market dynamics.
And Q2, we extended our advantage and the high performance compute market.
We acquired more than IP, and it's 400 gig 800 gig Ethernet controllers.
Combined with our existing 112 gig Ethernet Fi, we now offer a full Ethernet solution for high performance data center applications.
Advancing our lead and next generation PCI Express interfaces, we delivered the industry's first complete PCI Express 6.0 IP solution.
Needed for huge bandwidth demands, we see strong market traction with leading customers.
And in addition to the EDA adoption and I referenced earlier, we announced a strategic collaboration with arm to closely align our probe on product Roadmaps and enhance our interface IP solutions with specific features for the arm neo versus platform.
Our interface and foundation IP are also gaining broad industry adoption on the advanced 5 nanometer finfet process, driven by vertical segments, such as high performance compute automotive and AI.
More than 20, leading semiconductor companies use our 5 nanometer IP with multiple first path silicon and successes attesting to the robustness and reliability of our portfolio.
Lastly to address the above mentioned safety and security requirements for automotive, we launched a new design, where hardware secure module and arent safety and security processor IP solutions with integrated functional safety features.
Let me now turn to 2 exciting and disruptive technologies, we recently introduced.
First is DSO Dot AI, Our award winning AI powered design system that hits right at the foundation of the new growth era very complex chips.
DSO Dot AI autonomously searches the vast design space for optimal solutions in terms of chip performance power and area.
It does this using very sophisticated machine learning.
This is not only substantially accelerates the schedule of human design teams, but it enables them to push the technology envelope towards better solutions.
The improvements and results over the last 2 quarters have been extraordinary.
1 example is a very large influential U S company, who reported what I like to call a productivity world record.
On a leading edge chip a single engineer using DSO dot AI was able to achieve in weeks, what typically takes an entire team months to complete.
Another global leader recently highlighted unprecedented 3 ex designer productivity and meeting timing specs weeks ahead of schedule.
Results like these are driving notable adoptions for example, Renaissance now use a DSO dot AI for its advanced automotive chip design environment.
The other innovation push is our silicon lifecycle management platform or SLM for short.
This end to end solution monitors analyzes and optimize this chips as they are designed manufactured and tested and deployed in the field.
As Selim Leverages, our long standing unique expertise to give customers visibility into performance reliability safety and security issues for chips and tire life span.
We're actively engaged with multiple customers at 5 and 3 nanometer that seek to use SLM to optimize their design flow with data collected during test.
The vertical market pool by Hyperscale is for example is a strong driver of important adoptions.
And Q2.10, new customers adopt at a variety of SLM capabilities.
Several of them, having adopted 1 element of our portfolio are already broadening to other aspects of our platform.
Stay tuned as we continue to rollout new capabilities.
Now on to software integrity, which had another very solid quarter towards meeting its financial 'twenty, 1 goal and accelerating growth.
Revenue was ahead of plan and every region, reflecting strong orders momentum.
We're seeing good results from the changes, we've made and our go to market strategy and execution.
And Q2, we added 100, new logos and retention exceeded our targets.
The services business was particularly strong and is driving comprehensive service plus product engagements.
A great example is an important multimillion dollar and new business win with a large transportation company, who replaced incumbent products with Synopsys for the end to end value we provide.
We also launched our channel partner program to expand our reach into geographies and verticals not currently touched through direct sales the.
And the benefits are apparent.
For example, we closed a multimillion dollar new adoption and South America, where we didn't have any selling capability 6 months ago.
On the technology front, we delivered a significant enhancement to our Polaris platform intelligent orchestration.
It's a set of processes within plants that run parallel to our customers' Dev ops pipeline.
Intelligent orchestration communicates and automate security testing and synchronization, which each company specific protocols.
And is built for easier and efficient integration into their development pipeline.
The opportunity in this space is vast and we are encouraged by the steady progress the team is making.
In summary, we.
We delivered an outstanding Q2 and are raising our outlook for fiscal 'twenty 1.
Our markets are strong, reflecting extensive customer investments and critical chip and system designs with an increasing need for safety and security.
As we look beyond this year is $4 billion revenue milestone.
We see a new era at the intersection of Silicon and software that will deliver smart everything to old vertical market segments.
We see technology challenges that demands the cooperation and teamwork around many complex disciplines disciplines, we are strong and.
And we see Synopsys and the depths of this vision as a well equipped catalysts to our customers and partners success.
Finally, I want to recognize the efforts of our global team, who over the past year and a half have adopted and succeeded despite despite upheaval and uncertainty. Thank you all for your solidarity and hard work.
With that I'll turn it over to track.
Thanks, Kurt and good afternoon, everyone.
As we report another outstanding quarter, let me Echo <unk>, thanks to our team not only for their dedication, but also for their unwavering focus on innovation to fuel the exciting opportunities we have ahead.
We are on a great position as we set our sights on the next level financial ambitions.
On top of a solid foundation of nearly 90% recurring revenue a diverse and growing customer base and market and technology leadership, and our track record and excellent execution and continued in Q2.
We are and increasingly confident in our outlook and are raising our revenue non-GAAP earnings non-GAAP operating margin and cash flow guidance for the year.
Now to our second quarter results all comparisons are year over year, unless otherwise stated.
We generated total revenue of $1.0 billion to $4 billion up 19% and above our target range driven by broad based strength across product groups and geographies.
Semiconductor and system design segment revenue was $930 million with strong growth from both EDA software and hardware and IP.
Software integrity segment revenue was $94 million.
Positive order momentum we saw on the quarter shows that the adjustments we've made and the business are taking hold.
We are on track to meet our 2020, 1 expectations of 15% to 20% orders growth and share.
Accident year with double digit revenue growth and fourth quarter.
We're on a good path to accelerate revenue growth back to the 15 to 20 per cent range long term.
Moving on to expenses total GAAP costs and expenses were $830 million.
Total non-GAAP costs and expenses were 707 million, resulting in a non-GAAP operating margin of 31%.
We are on track to again deliver operating margin expansion for the year and are raising the bottom and if our guidance range.
Adjusted operating margin from semiconductor and system design segment was 33% and software integrity margin was 9%.
Finally, GAAP earnings per share were $1.24, and non-GAAP earnings per share were $1.7 and.
Well above our target range.
Turning to cash we generated a record $526 million and operating cash flow.
We completed $145 million and stock buybacks, bringing the total for the year to $398 million.
And we ended the quarter with a cash balance of 1.46 billion and total debt of $116 million.
Now to guidance for fiscal 2021.
Revenue of 4.035 to 4.085 billion and increase of $35 million representing double digit growth.
On a GAAP costs and expenses between 3 point to 4.1 and $3.2.6 billion.
Total non-GAAP costs and expenses between $2.8 refi and $2.86 5 billion.
Our non-GAAP operating margin of $29, 5% to 30%.
Other income and expenses between -5 and minus $9 million.
Non-GAAP and homeless tax rate 16%.
GAAP earnings of $4 and 55 to $4.72 per share.
Non-GAAP earnings of $6.38 to $6.45 per share representing mid teens growth.
Cash flow from operations of $1, 2.5 to $1.3 billion.
And capital expenditures of approximately 100 billion.
Targets for the third quarter on.
Revenue between 1.03 and 1.06 billion.
Total GAAP costs and expenses between 807 and $825 million.
Total non-GAAP costs and expenses between 707 and $717 million.
GAAP earnings of $1.30 to $1.41 per share and non-GAAP earnings of 1 dollar and satisfying to $1.80 per share.
Our track record is reflective of how we intend to manage the business to exceed the rule of 40.
Based on a vibrant market opportunity, our strong portfolio and our excellent execution, we see an opportunity to accelerate revenue growth expand non-GAAP operating margin beyond 30 per cent.
Our long term financial objective is to manage the rule of 45 over the next several years and we will provide additional details once our long term planning process is complete.
In conclusion, we delivered strong revenue and non-GAAP earnings growth and record operating cash flow.
Our strength is broad based across product groups and geographies and we are raising our guidance for the year.
At the same time, we continue to develop and deliver transformative innovations that enable our customers and deckers and position and position us well for many years to come.
With that I'll turn it over to the operator for questions.
Thank you.
Ladies and gentlemen, if you do have a question. Please press 1 and then zero on your Touchtone phone, you'll hear acknowledgment that you've been placed and Q may remove yourself from queue at any time by pressing 1 zero again.
Before we begin the Q&A session and I would like to ask everyone to please limit yourself to 1 question and 1 follow up to allow us to accommodate all participants.
You have additional questions. Please re enter the queue and we'll take as many as time permits. Our first question is going to come from the line of Jackson Ader from Jpmorgan. Please go ahead.
Great. Thanks for taking my questions.
Art first one's for you.
And you talked about the chip differentiation by vertical and.
It was a nice tailwind for the company.
I'm just curious.
How do we how do we scale the benefits of the or I'm, sorry, not skills square and the benefits of those.
You know those differentiations with the fact that there is there tends to be more increased IP usage from some of these newer entrants.
And so I'm, just curious with differentiation seeming to lead to more custom design and what does that mean for those IP blocks that get designed once and and used by many.
Okay, well, there's 2 ways to look at this from the perspective of the vertical or from the perspective of these the pure semiconductor companies from the verb and called the first thing that people need to choose is will they design their own chips, yes or no.
And if you take the example of the Hyperscale or some not all but some of the automotive companies are the Hyperscale is clearly are doing more and more of their own chip design and automotive are either sort of dabbling in it or looking at some of their suppliers the tier ones and all cases there.
Doing more chip design and so that is good news for us and absolutely you're right that a lot of that design is done by by substantial IP reuse and you saw that our IP business is strong now if you said on the other side of the fence as a semiconductor provider.
You look at these customers are each of them as opportunities to take sort of a core architecture, and then say well how do I take my architecture and do different derivatives that are particularly good for different sub markets.
And essentially you reuse from IP or add some that are just that it's just necessary for that vertical and so I think there's no doubt that therefore, we will see more chips of different type and more design in all cases consumption of IP will continue to grow.
Okay, all right great. That's helpful and then and track quick follow up any day.
Cash flow performance and it's great to see but it was.
So much bigger and I think we expected was there anything that was pulled forward either you know any deals pulled forward at work collection from Portland.
No not at all actually it's the profile is good because the business is pretty healthy and were generating obviously very strong operating margins. The other part and keep in mind is Q2 over the last couple of years rule will be normally our biggest collections quarter, given the profile of renewals and.
What we end up invoicing at the end of Q1, but it was it was a combination of both is definitely a very healthy business right now.
Okay, all right cool thank you.
That's true up.
Next and we're going to go to the lineup time differently from D. A Davidson. Please go ahead.
Yeah, good afternoon true.
First 1 is for you when you look at your increased guidance, which was a pretty substantial increase is this you know more a factor of passage of time with comfort and your backlog or did you actually see and acceleration of business trends during the quarter.
And Thomas your question Theres, a number of things going on first part is that we're we've got half the year behind us and the.
And the visibility that we have after you know the the business that we booked it certainly improves the outlook.
As art described the overall market share at healthy and we're executing well against that so there's a number of different doctors the backlog.
I would translate the increase in backlog to whether the business is healthier and not the backlog increase this quarter as a function of the renewals that we had planned.
But overall the business that we did book some very good run rate growth and the.
And the growth of that business gave us really strong outlook for the year and our confidence and the year.
Okay great.
And then art just a broad question for you when you enter into a market like we have today with its chip shortages what is the impact of those shortages on design activity either positive or negative.
Actually very little impact there there are some people that do take existing chips and decide that they're going to do modification. So that they can get more capacity with and other vendor people really hate to do that because it's a lot of work and no direct benefit except that if you can't ship to occur.
And what that's great, but it takes some time.
And so I don't think that that is going to be a particularly strong driver, but the the shortages should not be just interpret it I think as a reaction to a market that has been partially asleep. During the COVID-19 time and now is obviously catching up and automotive is the best example, because.
The mistake that was made there is they stopped ordering and and and the path. They were very powerful and then everybody jumped win when they need something now and there was just no capacity left and the reason there's no capacity left us because all the capacity as used by huge demand period.
And that's why I'm trying to differentiate a little bit with the temporary dip.
Demand that comes out of sort of just as historical a year and a half wave versus I think something that is much more profound which is a whole new era of semiconductors impacting verticals and I expect that to continue and by the way you can see how many many places including countries have decided to substantially increase.
The capacity those increases will take a couple of years to actually have impact, but they do illustrate the direction the direction that our field is taking.
Great and just a quick clarification did you say you had virtually no impact in India with your.
Well, where do you think like everybody else is a humanitarian situation that is very demanding.
We've been able already.
And for for a while to rebalance the activities of our employees and such a fashion that to date, we had zero material impact or delays in shipping anything or supporting anything.
But I expect that for for a number of months, India will still be a from a humanitarian point of view point.
A point of focus where we will give a lot of support to our team.
Okay. Thank you.
Youre welcome and welcome.
Next moving and go to the line of Joe Verbal Inc. From Baird. Please go ahead.
Oh, great Hello, everyone.
And maybe wanted to start.
New technologies like.
And so these up and getting called out and more regularly over recent quarters.
Is there a way to characterize or maybe compare to products and your past and the consequence of these new technologies and is this just the natural evolution of Synopsys or is there something different and.
And perhaps it's specifically about AI and AR.
Adoption and the industry, but it is there something different about these technologies, where you know that the ramification and later on could be more consequential.
That's a that's a really really interesting question actually let me start with SLM because what's interesting about SLM is is this worth lifecycle, because if you just take a chip and you say and I'll put it on the phone or put it in a car and we all know, which 1 has the longer lifecycle and so and in the case of the car.
Of course safety that that is part of it and so suddenly the ability to put inside of the chip sensors and the diagnostic system that by the way. He gets trained by AI, so that the chip and self diagnose as well and I'm not feeling so good you better start stopping the car so to speak he is going to be up.
Very high value, maybe even more practical it immediately is in and cloud centers, where where people will run compute at at the Max speed and they want to know is a certain set of our processors gonna go down so that I replace them before it happens.
So in essence preventive maintenance and so.
And that sense SLM is interesting because we touch these chips literally at the early days of even what are the type of transistors. So very minute physics, but now we also have very meaningful interaction with very large companies that are exactly in those verticals I described.
DSO AI I think is is breakthrough technology, and it's always difficult to compare something that we did over 30 years ago, but the early days of synthesis had something similar which is it took a set of human tasks, where where complexity just was outrunning the human and automated it.
And overnight, we could do a circuits that were better than what a human could do and a fraction of the time and we're faster and smaller now we're talking all off of entire chip pieces and very large designs with many many different constraints and the fact that we can take tasks that takes people.
For multiple months and bring them down literally 2 a few weeks with fewer people and in the last few quarters, even better results suddenly sounds very similar but to me, it's sort of essentially a 30 years later, many orders of magnitude more complexity and I think it fits well.
Well, the very moment, where the semiconductor industry will want to do many more chips fall these verticals and so.
We use sometimes the frontline of using AI to design AI chips, but that is exactly what this is and it's exciting and we're just at the beginning of that but.
The impact is already economically felt by the users.
Okay that that's really interesting color and <unk>.
Question is there anything about the sequencing by corridor of this particular fiscal year that maybe is a bit different than you. Originally expected you know thinking about things like and it was another very strong quarter and China, you occasionally hear about maybe pulling forward some future.
And then the way the margin guidance appears to sequence this year.
Like perhaps for Q has a bit more incremental costs, maybe not just hiring related and so I suppose. It is there anything that is maybe different timing wise or just the sequencing of your quarters. Thanks.
Hey, Joe This is Chuck on overall, the profiling of the quarters is very much close to what we are and.
We had a plan around that.
Really happy with the profile this year, given how backend loaded last year was a.
Most of the things you described are the revenue pretty pretty linear this year as far as a margin profile. That's just a function of higher largely a function of hiring and throughout the year.
But we're pretty pleased with true with how it is shaping up relative to the plan that we had at the beginning of the year.
Great. Thank you very much.
Well, thank you Joe.
Yeah.
And once again, ladies and gentlemen, if you do wish to ask a question. Please press 1 and zero on you touched on phone and we're pleased to ask everybody to limit themselves to 1 question and 1 from us to help accommodate all other participants next.
Next we're going to go to the line of Gary Mobley from Wells Fargo Securities. Please go ahead.
Everybody. Thanks for taking my question and congrats on a strong first half of the fiscal year I.
I see that China was up strong again and I wanted to ask about I wanted to ask your personal view are and.
And perhaps to get some color from you on the change and geopolitical diet dynamic between the U S. China seemingly now more so influenced by the you know the.
Broad supply shortage, we have on the semiconductor side and this renewed focus on onshoring.
Chip production to the U S and I realize that you're not so much a line to expansion chip production, but I think a lot of these are.
Are these measures that are proposed these bills and.
And whatnot are focused on growing you know R&D investments as well. So I'm wondering perhaps if you were starting to see any sort of influence from that and your licensing or what may be in order for you guys looking down the road.
Well you know the first comment is that when a market is strong and it typically tends to be strong for everybody and and the very fact that even politicians now.
Not only know what a chip is that may have seen 1.
It is certainly encouraging and the fact that nations want to invest more because they think it's strategically important to be close to this whole next age of smart everything and AI. I think this is all very encouraging for us and so while there may be pension between different countries of who does what.
With us on and the fact that the shortages.
It is just accentuated by some of those that the attention, but I think I think the most interesting part of all of this is that the there is gradually now a broader understanding that the the whole next wave of human product impact and so on and is very very much.
Linked to the notion of big data intersecting with.
AI I E. Smart result, and it's interesting that now even electronics I'll refer to as infrastructure in our country well all of these words are encouraging because I totally believe that while.
While it is not the panacea to Oh human problems by any means it has enormous power to evolve.
Oh vertical fields and so.
I'm not surprised really that the degree of attention has gone up but right now the fact that people want to spend more on R&D or manufacturing capacity. It's all good news for semiconductors.
I appreciate that are Trac, you mentioned that backlog was up sequentially and I know you haven't got your Q, yet, but specifically what was what were the remaining performance obligations for the end of the quarter and related to that would you expect revenue growth and backlog to trend sort of.
And in line with each other or would you expect over time to generate a larger percentage of revenue from turns business like emulation and whatnot.
We've made a change or you saw a change in the turns mix.
And largely at the beginning of FY 19, as a result of $6.6 or 6 transition and I would say from the most part the business had been relatively stable and it'll be the that percentage might move from quarter to quarter depending on on.
And their hardware IP deliveries, but I think we're in a pretty good stable stable level right now.
Backlog is up and we should be filing our Q on Q next week. So you will see the the Astral and now.
And.
But I think we were going to disclose that's about a $4.8 billion or north of $4.8 billion.
I appreciate it thank you.
Youre welcome.
Next we're going to go to the line of Gail Monday from Vandenberg. Please go ahead.
Yeah, Hi, Thanks for taking my questions. The first 1 is just when I look at your performance in Q and H, 1 actually and total like you said.
It's really the opposite of what we had last year when it was very very back end loaded.
And so nice recovery that but then.
So look into Q3 guide, which is very solid and.
And I'm thinking you know and.
And when you look at for the rest of the year and you have a pretty good visibility, especially into Q3 is it fair to say that you know and <unk>.
Especially some of the hardware orders and some other stuff comes in you could consider the guidance is fairly conservative.
Or do you think that's kind of a time representation of what you're seeing.
Yeah. That's a good question that the the profile we laid out there called the profile that we laid out for Q3 and for Q4.
Is largely a reflection of the record revenue recognition profile of IP and hardware.
We actually have very good visibility on the second half and that's why we raised the guidance for the full year.
At this point and you keep in mind, given the day, new revenue rules, you're going to see some variability from quarter to quarter, depending on when a hardware or IP is deliberate and.
But there's nothing unusual on the profile and the second half other than that.
And actually Brian the business is really doing really well.
Right, Yeah that makes that makes sense and and yeah, that's what kind of thinking and then the second 1.
You talked again about double digit growth for this year now and <unk>.
And then your guidance last year were virtually and that level as well and you know how do we think about synopsys is effectively sustainable double digit.
Growth company, and now, especially if I'm thinking potentially software integrity ramping up growth, a little bit and and start contributing incremental increment. There you know.
And maybe.
A few bps.
Of growth like.
Is that is that a profile that you're happy with when you're kind of thinking about the midterm I think.
Yeah, I want to be cautious about getting cheese specific about the net.
The numbers looking forward, but overall, what youre seeing and the results for this year and last year.
Yeah. This is why we feel really optimistic about the future and why we are have communicated our confidence in and being able to drive the business towards our rule of 45, and that's really going to come through a combination of and really strong revenue growth and margin expansion.
And so you've touched on a little bit you are seeing some really good acceleration and the business and as.
Our software integrity ramps up and gets back to where we believe it's capable of operating and that should help the overall mix, but keep in mind. It's only 10 per cent of the business. The overall growth rate is a reflection on what we're how well we're doing in EDA and IP as well.
Right.
What I was thinking rate, that's 10 per cent starts growing and Oh I see.
On points faster, obviously doesn't.
Nice contribution yeah. Thank you thanks for taking my questions and congrats again.
Thank you you're welcome.
Yeah.
Yes.
Thank you next we're going to go to the line of Jay and shower from Griffin Securities. Please go ahead.
Thank you good evening all.
Let me ask you.
2 related questions regarding the evolution of E B, a and your markets.
And Tonight, you referred to a new era of EBITDA and we've heard similar remarks from you and others and the industry for some time now or.
On Silicon Renaissance and so forth.
The question is how that affects you.
Your business profile, specifically with respect to services that is to say.
As you move into this new era.
And does this tend to increase the kinds of services and AE support that you necessarily have to provide to encompass or support.
And this new era.
And if so what.
And what could be the margin implications of having to provide that incrementally higher degree of and.
To support Relatedly with respect to the next generation of chips. The domain specific chips that you've talked about now fractured on 2 or 3 years what.
What does that mean and during the design process in terms of license consumption. If we think about your model is now prospectively and kind of consumption model as is often the case and simulation you know.
Do you think that the consumption or utilization intensity per design per run. However, you want to think about it necessarily goes up.
Well I think.
Question and brings that up together everything that we.
We would refer to as systemic complexity, meaning that of course chips continue to be more complex and and bigger and more transistors, but you know been there done that and by the way that will continue for a while what makes systemic complexity interesting is that you get multiple players intersecting suddenly you have companies.
That are sitting on these verticals that are highly interested and knowing how does this the chips will actually work because they write their own software for example, and vice versa. The people providing 2 chips are really interested so what software does this car manufacturer really want to run on it that has to be really fast so that I can.
And the architecture of my trip to accommodate that and our role is interestingly broadened because we're sitting at the intersection of all of that and you may recall that a number of years ago under our logo, we literally put silicon to software well that was essentially the summary at that time of this vision that theres a can.
That ultimately brings the power of chips to end users that have that are not really interested and chips, except that they need them to get smart outcomes.
And so when you move into that space, it's not so much that support is increasing but that their new service opportunities as a number of the new players. Initially may not know so much about these domains, but they know a lot about their opportunity space and helping them connect isn't.
Opportunity that will continue to grow for us and we will certainly be able to manage it so that including with the tools the profitability will be very reasonable or even good on this.
Second part of your question, which ties directly to this is this notion of domain specific and.
If I can take 1 example that is well understood and yet and its infancy.
Oh day motive and as you know a number of years ago. A car started to think about this whole notion of autonomous driving or at least at the beginning defensive driving.
And and chip manufacturers Z O quickly figured out that it may be a long term big opportunity there.
Except automotive guys also have rules such as safety rules and they've had those for a long long time pharma was somewhat simple from are becoming very complex and suddenly what does it mean well it means for companies such as Synopsys that we have a whole effort on the IP side and on the tool side to build and whats.
Called few soft functional safety.
And this is partially mandated by the automotive guys, partially it is being developed on the fly with the complexity and so these are great opportunities for us because our IP collection, we must have invested in functional safety, therefore, 5 or 6 years and there are enormous amount of effort, but now that we have that it's a.
Differentiation and so I see our role to be very much a catalyst in the middle of these different factions that we all understand.
And I think there will be more and more vertical and that will engage suddenly at high speed and the races on.
Okay.
Thank you Mark.
You're welcome Jay.
Next time, we'll go to line of John Pitzer from Credit Suisse. Please go ahead.
Yeah. Good afternoon, guys. Thanks for letting me ask the questions. Congratulations on the solid results tracked. This question was asked a little bit earlier, but maybe I can ask it and in a less politically correct way and despite the beat and raise this is the quarter, where the full year guide gives us some insight into.
And the last quarter as well and relative to that full year Guide you you are kind of embedding a pretty low.
A meaningful deceleration, if not and topline and EPS is this nothing more than normal conservatism or are you really trying to signal that there's something bottoms up that just makes Q4, a little bit softer this year than it might have been in other years.
No not at all where we don't see any deceleration and the business at all and in fact.
And quite the reverse we feel really good about the momentum we have and the business and that's reflected in the full year guide you've always caution that the quarter on quarter profile is going to move depending on what the profile of revenues and.
And you know.
From a revenue perspective, and I'm actually really really pleased with how linear it is this year and.
And the fact that we're able to get half almost half the business booked in the and in the first half of the year. So it's a great profile, we'd really good visibility.
We continued to ramp up hiring and the second half and so you're going to see the expense profile go up but asthma.
As we're ramping up hiring and the second half, we're mindful of the trajectory and what implies for our ability to continue.
To drive margin expansion over time, so we're very cognizant of that.
But no there's nothing unusual on the profile and I.
I would characterize it is you saw a deceleration at all I think right now when you look at the year over year comparison, and just keep in mind that last year was unusually low.
Backend loaded so it's going to skew the comparisons, particularly in the second half.
That's helpful and then on I want to go back to an earlier question about sort of the regionalization or domestication of semiconductor production and you know, it's a clear benefit to the equipment and ecosystem, but I'm trying to get a better understanding of what it means to the eighth ecosystem as existing foundries.
And of move from region to region is there sort of redundant or duplicative spend on E. D. A.
Question number 1 and question number 2 you know Theres, a 1 big Guy out there that's trying to to reemerge as a foundry business from just an idea on how does the EDA spend conceptually trend.
As they try to do that.
A good question and so we touch manufacturing a little bit because we have a number of tools that are designed specifically under the the topic of silicon engineering to help optimize circuitry and and chips for manufacturing efficiency and yield.
But you're absolutely right that most of the investments on share capacity on.
Don't touch us so much except if people want to enter the business such as B and a foundry or go after specific segments of the market that they didn't go before or are they are suddenly are our tools matter a great deal to help them get there.
In general, though win win and volume increases with its also the number of designs increases and so the advances and share silicon technology and the number of designs are actually very positive and at this point and time and the fact that more people want to be and the manufacturing means that more people.
And we're also into the investment of R&D around the field. So.
At this point, it's all positive.
And then on if I could sneak 1 more in 1 thing that's kind of unique about this current and semi conductor cycle is how tight trailing capacity is right now and I'm just kind of curious are you seeing any evidence that perhaps design activity on the trailing edge is picking up as customers are using some of this you know tight.
Tightness on the near term to try to rethink about moving down node with.
On the line with that and maybe a faster rate than they've historically see and or how do you see kind of a tam for that trailing edge market over the next several years.
Well, it's an excellent question because yes, some of the trailing edge manufacturing equipment has already gone up in terms of pricing as people try to get capacity and wherever they can but the other comment would be a different foundries are still also are focusing on different type node. Some.
Focus mostly on the most advanced nodes other would be sort of in the middle field and then the.
The truly older trailing edge nodes. They are there. They are typically limited by the amount of capacity at 200 millimeter.
Wafers.
It is interesting in the and the the nodes that are maybe not the leading leading edge, but but let's say 3 or 4 years behind that there. The application of the newer tools that we have actually has a lot of impact on those 2 because newer tools for older nodes still means a lot better designed out of these old and.
Nodes and so it actually gives them a bit on the second life from an efficiency point of view and as you said if people can can do really well with nodes that have been well honed where the yield is high.
The cost equation is very attractive and we see for example, 1 of our most advanced <unk> fusion compiler going back to older nodes with some of our customers and with great delight.
Yeah.
Thank you next we'll go on the line of Jason Celaeno from Keybanc capital markets. Please go ahead.
Great Art Trac, thanks for taking my questions. It.
It seems like a pretty good demand environment for emulation and prototyping just across the board.
But in the past we've seen some customers gravitate towards the latest and greatest products here you know.
1 is that still the case and then 2 and that is still the case, how does the new improvements and the do you believe would be 1.
And you know compared to some and the other announcements and the marketing.
Thank you.
You're welcome so clearly emulation, and prototyping is increasing and value and importance and some parts of the the tasks and especially for us and the path that have to do at this intersection of hardware and software and there's no question whatsoever that that is an area that we'll continue to grow.
And we have mentioned and earlier compensation and specialties for for certain verticals. It's interesting that these are capabilities prototyping that are of high interest and the automotive space. For example, because they started working on the software and many many years before.
A car is even fully conceived and so being able to accelerate all of that is of high importance now underneath that there is invariably always the same demand, which is make it faster and make it faster and that is what emulation and prototyping is all about but it's also give it a larger capacity and it's also are there certain tasks.
That you would like to accelerate such as the question of well if you're right and my software. This way how much power where is it going to consume versus if I write it differently.
Will I be able to do better well those are specialty questions that we now are increasingly answering using emulation and prototyping on.
Couple of that were on the most advanced chips inside of our our machines.
That are available and so this ability to specialize and optimized for specific applications and it turns out to be extremely valuable and we're doing very very well with us.
Yeah.
Okay, great. That's it from me thanks.
Youre welcome.
Yeah.
Next we'll go to the line of Vivek Arora from Banc of America Securities. Please go ahead.
Thanks for taking my questions I had 2 as well.
First 1 and also about the growth and the business Ark, you mentioned, you know a fair bit of improving engagement on.
Vertical such as autos coming back up and you know, but when I look at your full year growth outlook of about 10%. It's about the same growth that you did and the last fiscal year. So my question is a more conceptual 1 why aren't your sales accelerating.
And semiconductor designs are getting more complex and when I look at the implied Q4 sales.
Basically flat year on year, and so even if I ignore the quarter to quarter on.
Visibility on volatility.
Full year sales on about the same level of growth as lofty and why aren't you seeing an acceleration and your sales growth.
Well the acceleration tends to come after the orders play themselves out through a multi year a ratable revenue recognition for 1 day.
Other thing is actually right now I think we just increased our projection for you for the guidance I should say towards the end of the year with a high degree of confidence that it is well on track. So we'll have to see where we ultimately land, but there's no doubt that our objective is.
And to move beyond the the single digits to hire we have just not changed our guidance at this point and time and we will do that as we enter next year.
But the message you should take away from everything that we're saying is that right now we feel that we have great opportunity to grow very well.
And in fact I also missed his truck I really want to caution you about looking at Q4, because you remember last year Q4 was extraordinarily high.
Of the schedule of hardware and IP.
In Q4, and so that Kurt and I comparisons not gonna be.
And that comparison in Q4 is not a good indicator of the momentum of the business.
Got it and the next 1 is I'm curious, what's your level of exposure to all the AI startups and do you see any kind of rationalization or a shakeout and and the number of startups because and in previous calls you had mentioned on the systems companies doing a fair bit.
Albeit on a and I work.
Work, especially the Hyperscale.
And then we had the large incumbents that doesn't and video and and others.
Do you think that you know that the industry can really afford to have so many smaller players.
After this market win on the cost of staying and and Sammy is so high and.
So the basic question is what is sort of your exposure to all the work that's being done by these oh.
Starting from and do you see any kind of rationalization and that well.
Well, we exposed extremely broadly to many many many AI companies and yes. It is true that Oh, maybe I was a little bit of a package here every single 1 of them is designing the best ever AI chip and and you know on 1.
And you can say well you know that will consolidate over time or on the other hand, you can say no. This is exactly the behavior that you see and a very high promise early phase of a product or technology development and there's no doubt that a number of them more successful and companies have already.
<unk> been acquired by larger companies.
And you know low and Behold 2 years later you can tell on the same people doing the next 1 and so I think we're in and extremely active phase of invention and development finding and market and then over time. We will also see that the AI itself is going to become more and more specialized to the verticals. So yeah. There were there were.
I'll be consolidation at some point in time.
But the number of designers remained.
Certainly not declining when that happens and we have actually done very well through exactly these type of phases, where there's a lot of activity.
Yeah.
Thank you and our final question is going to come from the line of Pradeep Ramani from UBS. Please go ahead.
Alright, Thanks for taking my question I'm on a couple of.
First on China.
Alright, and ways to think about China and <unk>.
Being contributing to a roughly 12% 13% of your revenues and the back half or do you see any sort of.
Deceleration and the back half I mean, the comps are probably getting harder, but I just wanted a clarification. There on all vessels can think about China and and and.
I'll call on.
But I pretty this is trac a channel continues to do very well for us and.
And we while we disclosed China as a separate country. If we don't guide to that and comment on the outlook by country.
Okay and from.
My follow up I guess.
With respect to the rule of 45, I mean, this year, you're going to be very close to 40 and.
And you.
So tell me if margins are sort of already.
This quarter were 33 per cent, how can we think about sort of just the sustainability of the margins.
Martin and I mean, not just and the backhaul but.
Longer term and.
Within the flow of 45 per cent and put it there.
Rule of 45 per a playbook.
Okay, Let me, let me try and explain it this way the overall, we do see and opportunity to improve margins across the entire business really for us to drive to growth 45, and it really is going to.
And require.
Everyone to contribute and keep in mind that the semi business does represent 90% of the overall mix and so that's going to contribute.
But I would circle back to the fact that it starts with gross yeah. The reason why we do feel good about our ability to drive margins up and all areas of the business that we're seeing really strong growth and the business and that's going to help us.
Effectively get more operating leverage and therefore drive margins up.
Thank you all right if I can add to that fundamentally we said our objective on the rule of 40, we obviously in striking distance to meet that we've and whisper to you a rule of 45, and that's obviously because that forthcoming next where I think we're reasonably well disciplined to make sure that Trac said we focus.
On growth, while increasing our ops margin and the to support each other so.
If nothing else out of this.
Earnings release, you should take away that I think we're well on track with our own plants and that everything we've communicated to you for the last few years.
Executing on them.
Okay I assume that this means that the meeting is over and any case. Thank you so much for participating today.
And we hope that you and your family stay safe and hopefully the world is moving to rapid vaccination.
Be well.
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