Q3 2021 Synopsys Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Synopsys earnings Conference call for second quarter of fiscal year 2021. At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
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 amount of time remaining in the conference as a reminder, today's call's being recorded at this time I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.
Thank you Eric.
Afternoon, everyone and thanks for joining us.
Speaking today are art did she S chairman and co CEO of Synopsys, and Trac Pham Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of the conference call Synopsys will discuss forecasts targets and other forward looking statements regarding the company and its financial results.
While these statements represent our best current judgment about future results and performance as of today.
Our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.
In addition to any risks that we highlight during the call important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release.
In addition, we will refer to non-GAAP financial measures during the discussion.
Conciliation to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release financial supplement and 8-K that we released earlier today.
All of these items plus the most recent investor presentation are available on our web site at Synopsys Dot com.
In addition, the prepared remarks will be posted on the site at the conclusion of the call.
With that I'll turn it over to art to Jia.
Good afternoon, Synopsys continues to execute very well delivering record revenue and non-GAAP earnings in the third quarter.
Revenue was 1.057 billion with GAAP earnings per share of $1.27, and non-GAAP earnings of $1.81.
We again made excellent progress on our margin expansion goals and generated 422 million of operating cash flow.
Thanks to the hard work of our entire Synopsys team on a TTM basis, we have surpassed the major milestone we set our sights on a few years ago 4 billion in revenue and 30% operating margin.
Reflecting our strong year to date results the vibrant markets, we serve and technology innovation is driving customer mentum in all product groups and all geographies. We are raising fiscal 2021 revenue non-GAAP op margin earnings and cash flow targets.
We are well on the way towards our next goal of crossing 5 billion in revenue by 2023, raising our long term revenue objective to double digit growth with continued margin expansion.
Trac will discuss the financials in more detail.
Meanwhile, the market is not only strong it is transforming in a way that is very positive for synopsys.
Both consumer and business demand for smart everything continue to intensify and grow.
Smart devices intersect many skills and technologies.
Asset amounts of data to be stored transmitted and processed.
Sophisticated machine learning.
In application software specific to each market segment.
And this mega trend semiconductors are absolutely critical.
This means not just more chips, but more advanced chips lower power chips and chips that can be about it or stacked four type implementations.
In addition, security and safety are rapidly, becoming must haves integrating more and more system requirements.
To make smart everything possible companies need more automation, while transforming the way they approach the development of their systems.
New entrants such as large hyperscale us increasingly designed their own specialized chips and our business with them is growing rapidly.
Although systems companies, such as automotive increasingly exert heavy influence on their suppliers by specific specify and key elements of chip performance as well as functional safety and security.
Synopsys is a crucial enabler and the broad economic pool is now augmented augmenting the traditional Moore's law push thus driving more opportunity for us.
Synopsys is ideally suited to capitalize on these tail wins.
Over the past five years, plus we've invested heavily in breakthrough innovations that are now driving excellent customer results and was it accelerated business growth.
Let me highlight three areas.
AI and autonomous design.
Silicon IP and security.
Let's start with AI.
Regarding today's most advanced chips with the additional vertical market requirements is among the most difficult engineering tasks period.
Our schedule pressured designers reached practical limits of human design efforts, we must use the power of AI to automate not just design tasks with entire segments of the design flow.
This is exactly what synopsys has pioneered a year and a half ago.
AI driven autonomous design.
Sitting on top of our fusion design platform we.
We have built in AI design solution that automatically explores implements and optimizes multi months design efforts in a matter of weeks.
Calls DSO dot AI, which stands for design space optimization using AI.
System has been used by customers on a real chips gone through production tape outs and seen silicon back for manufacturing.
DSO that AI is breakthrough technology the results are great.
This we've already achieved important customer renewals.
Not only does it literally reduce design times from months to weeks it improves performance power and area substantially beyond our teams of expert achieve on their own.
In addition to early industry recognition as it won a 2020 World Electronics Achievement award for innovative product of the year.
Customer engagements have been exceptional with early endorsements by Samsung in our NSO.
In addition, this quarter a large Asia Pacific provider of advanced chips achieved was one engineer and one month, where previously required several experts over three months of manual work.
One high profile U S customer using DSO dot AI obtained better quality of results through a remarkable 20% reduction in power consumption.
Next Monday, our keynote the hub chips conference reporting on further great DSO advances and another exciting customer success.
The impact of this AI brain is greatly leveraged by the powerful system that it sits on top of our fusion design platform.
We pioneered the fusion concept several years ago by literally fusing together critical segments of the design flow into a single platform.
The outcome best in class results in terms of chip speed power and area.
Today fusion compiler is the only solution available that seamlessly integrates market, leading synthesis place and route with timing power and physical sign off all into a single tool.
It's the fastest ramping new design solution and Synopsys history already surpassing 500 tape outs across multiple verticals, including AI <unk> and high performance compute for process nodes from 40 nanometer down to three nanometer.
Notably our leading foundry partners are already actively leveraging fusion compiler towards two nanometer enablement.
Our fusion design platform has relied on by the world's largest influential and hard driving companies.
Production successes include advanced tape out by Samsung foundry for its next generation chip and three nanometer gate all around technology.
In parallel to autonomous design, another way to reduce risk and speed time to market for complex chips is by using a readymade IP.
Our broad market, leading IP portfolio is delivering excellent double digit growth towards what will be another outstanding year.
Demand is very strong with customer substantially expanding their reliance on us and renewing multiyear commitments faster than ever before.
High performance compute automotive and mobile markets are especially strong wondering both more and more advanced IP.
Let me highlight three areas.
First with growth in cloud data, we're seeing high demand for faster high performance interfaces, such as <unk> PCI Express five <unk> and six <unk>.
And 800 gig Ethernet.
We saw great momentum this quarter with multiple customers selecting our first to market next generation PCI Express six point or IP for advanced high performance compute chips.
This is a testament to the success of our PCI Express five point, our IP, which is nearly 200 design wins.
This quarter. We also saw immediate traction for our 400.800 gig Ethernet IP solution through multiple design wins that include our 112 gig <unk>.
Second the number of highly advanced chip designs across cloud AI and <unk> application has been growing rapidly.
Our large and experienced R&D team remains at the forefront of delivering highly differentiated IP at the cutting edge of technology.
And five nanometer, we've secured nearly 400 design ins across 33 customers.
In this quarter, a significant driver of our physical IP business came from five four and three nanometer.
Lastly, we're also seeing our customers integrating more security capabilities into their chips.
This is driving excellent momentum with our security IP portfolio, including strong demand for IV IP to secure PCI Express and CX <unk> interfaces.
Which is a natural segue to software integrity.
We're doing well with increasing momentum following the significant execution and operational improvements we've made.
In fact, Q3 was our highest order quarter ever and we expect to eclipse our original revenue goal for the year.
As Matt said ongoing security threats to business safety and health become almost commonplace comp.
Companies are rethinking their protection strategy.
It's no longer effective to pick and choose point tools with partial capabilities.
Protection now requires a holistic strategic approach.
Synopsys is at the forefront of this evolution was the industry's only portfolio that features the broadest set of application testing solutions strategic consulting to assist executives and boards and charging their software security plan.
And now an innovative offering that elevates the impact of the Polaris platform.
With the recent introduction of intelligent orchestration, a pliers platform can seamlessly integrate and automate security testing within each company's protocol.
We took another significant step in Q3 with the acquisition of Cogent Dx.
As a leading provider of application security risk management products that automate and accelerate the discovery prioritization and remediation of software vulnerabilities.
This combination elevates our capabilities beyond what competitors can provide a comprehensive easy to adopt holistic solution.
On the go to market side, we see very good progress from the enhancements we've made.
Our services business again did better than plan with over 20, new logo wins in North America alone.
Our win and renewal rates continued to improve and we are encouraged by the progress we've made.
Industry analysts continue to recognize the strength of our strategy and portfolio.
For the fifth year in a row Synopsys was named the leader in the Gartner Magic quadrant for application security testing.
And today, we were again recognized as a leader in the Forrester wave for software composition analysis.
So far I have highlighted three major areas.
IP and security.
Can you point out a couple of other innovations that enable this new era.
One of the strengths is focused on the intersection of hardware and software, which is inherently crucial in smart everything.
Our hardware based verification systems continued to generate very strong business with year to year year to date 36, new logos and about 150 of repeat orders.
In addition.
With innovation spanning both emulation and FPGA based prototyping, we're off to a solid start to our multi year product upgrade cycle.
Over the last two quarters, we introduced new application specific emulation products.
The Zeebo empower system enables early power analysis to reduce power related risks.
<unk> is the first of its kind high performance compute for mobile GPU CPU and AI design.
Both are substantially faster with higher capacity than any competitive solution in the market today.
And we're already seeing strong demand and deployments of large influential customers around the world.
Q3 was our largest orders quarter ever for our haps prototyping product line.
<unk> by the new Haps, one hundreds.
With highest performance and unmatched enterprise scalability, we closed multiple competitive wins in the quarter.
With the momentum in both emulation and prototyping, we expect another record revenue year, extending our market and technology leadership.
With increasing chip and system complexity growing reliability requirements are now demanding ongoing post silicon analysis maintenance and optimization.
Our new Silicon lifecycle management platform Leverages, our leadership in both EDA and IP as it monitors analyzes and Optimizes chips from design to manufacturing to infield adjustments.
This innovative approach opens up a substantial new Tam for us with business ramping ahead of expectations.
Even at this early stage, we achieved two large expanded renewals this quarter.
In summary.
Q3 results were excellent and we are raising our full year objectives substantially.
Vibrant markets compelling innovation and strong execution position us to continue to increase shareholder value going forward.
While we will provide specific long term objectives next quarter, we aimed to crossed $5 billion in revenue by 2023.
We are raising our annual revenue growth objectives to double digits with continued margin expansion.
These results are not possible without our global team through the pandemic they have demonstrated commitment resilience and compassion for others, while executing very well.
Lastly, I hope you and your families are vaccinated healthy and staying safe.
Ill turn it over to truck.
Thanks Art.
Good afternoon, everyone.
Third quarter results, including record revenue and non-GAAP earnings reflect strong momentum across the company.
For the full year, we are on track to deliver mid teens revenue growth.
An increase in non-GAAP operating margin more than 200 basis points.
Non-GAAP earnings per share growth of more than 20% and approximately 135 billion in operating cash flow.
The combination of the dynamic markets, we serve the powerful impact of our products and solutions and customer results.
And our history of strong execution is the basis for us setting the goal of crossing $5 billion of revenue by 2023.
Now to the third quarter results.
All comparisons are year over year, unless otherwise stated.
We generated total revenue of 1.0, $5.7 billion up 10% driven by broad based strength across all product groups and geographies.
Semiconductor <unk> system design segment revenue was $969 million with solid growth in both EDA and IP.
Software integrity segment revenue was $98 million and we are executing better than expected against our bookings plan for the year.
As a result, we project that software integrity revenue growth will approach double digits for the full year and.
And we are solidly on a path.
To accelerate revenue growth to the 15% to 20% range long term.
Moving on to expenses total.
Total GAAP costs and expenses were $855 million, which includes approximately $15 million in restructuring costs.
Total non-GAAP costs and expenses were $720 million, resulting in a non-GAAP operating margin of 31, 9%.
We are on track to deliver operating margin expansion to approximately 35% for the year.
Adjusted operating margin for the semiconductor and systems design segment was 34% and software integrity margin was 9%.
Wrapping up the income statement.
GAAP earnings per share were $1.27.
Non-GAAP earnings per share were $1 <unk>.
Turning to cash we generated $422 million in operating cash flow.
We recently completed a $175 million stock buyback, bringing the total to the fiscal year to $573 million.
And we ended the quarter with a cash balance of 153 billion with total debt of $107 million.
For fiscal 2021, we are raising our revenue and non-GAAP operating margin and earnings guidance.
Our targets are.
Revenue.
For 109 to $4.2 billion, an increase of $145 million at the midpoint, representing mid teens growth.
Total GAAP costs and expenses between $3.41, and $3.45.9 billion.
Total non-GAAP costs and expenses between $2.91, five or $2.95 billion.
Our non-GAAP operating margin of approximately 35%.
Other income and expenses between minus six and minus $4 million.
Non-GAAP normalized tax rate of 16%.
GAAP earnings of $4.63 to $4.79 per share.
Non-GAAP earnings of $6.78 to $6.83 per share representing over 20% growth.
Cash flow from operations of approximately 135 billion.
And capital expenditures of approximately $90 million.
Now to the targets for the fourth quarter.
Revenue between $1.138, and $1.168 billion.
Total GAAP costs and expenses between $1876 million.
Total non-GAAP costs and expenses between $1620 million.
GAAP earnings of $1 nine to $1.25 per share.
And non-GAAP earnings of $1.75 to $1.80 per share.
We will provide detailed 2020 guidance and our updated long term financial objectives and assumptions when we report next quarter.
As part of that discussion we will also provide an update of our normalized.
Of our three year normalized non-GAAP tax rate, which is under review.
Although we have not completed the assessment I want to highlight that the rate may increase in life of your assumptions under review.
In conclusion, we delivered record revenue and non-GAAP earnings and strong operating cash flow.
Based on our excellent results year to date and our outlook for Q4, we are substantially raising our targets for the full year and setting the goal of crossing $5 billion in revenue by 2023.
This reflects an increase in our long term revenue growth objectives to double digits and is also complemented by ongoing margin expansion.
At the same time, we will continue to invest to further scale the business and drive increasing shareholder value going forward with that I'll turn it over to the operator for questions.
Yeah.
Ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your Touchtone phone you may remove yourself from queue at any time by pressing one zero again, if using a speakerphone. Please pick up the handset before pressing the numbers.
Before we begin the Q&A session I 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 once again if he has a question. Please press one to zero at this time.
One moment please for the first question.
Okay.
And our first question comes from the line of Joe <unk>.
Are we pleased with Baird. Please go ahead.
Oh great.
Everyone.
Wanted to start on just kind of recalibrate AD revenue growth framework can you maybe discuss some of the ways. The composition of the growth profile is different than it has been in the past you spent a lot of time in prepared remarks, highlighting new products.
Is vitality better today than it maybe was in the past or.
Is this <unk>.
<unk> wave of domain specific applications specific development is that just a magnitude proving to be much greater than it has been in the past.
Thanks for the question.
Its a bit all of that I think the Synopsys has a high degree of vitality right now largely as a result of many years of complex investments that solely are intersecting in a positive way and so you may recall, the many times, we talked about fusion.
Fusion compiler for example, as sort of a platform to do very advanced design with well once you intersect that with the ability to automate some of that with other words put sort of a brain on top of it.
That brain if it functions well can do a lot because the fusion compiler is very very powerful tool and so all of these efforts took many years to get to this point and now they are showing results.
And what is powerful about showing results as you learned very quickly from the results to get better results and improve and so this is moving forward very rapidly.
Simultaneously you opened up a very good other comment which is that.
A number of efforts become maybe not entirely domain specific but certainly more domain sensitive and so when you talk about automotive or.
Industrial or other areas that require a.
A certain degree of security and safety well those are additional demands that come in and in general if you buy into my picture of saying Hey, the whole world is heading towards smart everything well all the smart is applied in those verticals in different ways and so some have a lot of data others have very difficult.
To deal with and others just require instantaneous SaaS computing those are all a bit different and so.
So yes, there will be an increase for gradual specializations in the vertical markets, but at the same time you can only do that if you have an extremely strong and capable foundation and I think we suddenly in a good spot for that.
Okay, Great. That's helpful. And then maybe just more of a near term focus question.
Guidance for the fourth quarter.
Does imply a pretty big step up just relative to where the implied guidance was last quarter I would imagine you touched on the strength on the hardware I would assume that's a contributor can you just talk about the expected performance of the software business into the fourth quarter and I'll leave it there. Thank you.
Let me take that one Joe that the core fourth quarter really reflects our continuing strength across all the businesses, we continue to ramp up.
On software hardware is better than expected same with IP.
And then you're also seeing.
Our progression on the software integrity business as well so it's coming from all areas of the business.
Okay, great. Thank you very much.
Youre welcome.
Okay.
And the next question comes from the line of Jackson Ader with Jpmorgan. Please go ahead.
Alright, thanks for taking my questions.
The first one is on Dsos AI art.
I'm just curious can we get a little bit more color on maybe.
How this is priced on a per seat basis and weather.
Only available to those customers.
That are on the fusion compiler platform or is it also available elsewhere.
Well, it's a it's a bit of a complicated question because we are in the in the first wave of making a successful and suddenly we have built one of its capabilities on fusion compiler and since we have.
Pretty much all of the advanced customers using fusion compiler, we have plenty of opportunity to to continue with that and Theres a lot of runway in terms of what we can accomplish what I did not mention is that DSO dot AI is actually a capability that can also be applied in other domains and.
And over time, we will use some of that technology.
And the ability to design better Silicon technologies for example oriented clarification space. So there are many directions that we can take with that.
Yes.
We are strongly engaged now with some of the most advanced design teams in the world and.
Maybe the only comment I want to make right now on pricing and so on is that it has already helped us see some growth in renewals and that is really the direction that we count on.
For technology that truly has a big impact with our customers.
Okay, all right great and then.
Follow up on the regions is there.
This is kind of second and third quarter in a row that China had this thing.
A big sequential jump in and just curious whether there is a distinct.
Seasonal purchasing pattern in China that might be different from the other regions that you see.
To be honest I think for the last 15 years I've said, we've never had really seasonal patterns.
It just continues.
Continues wave.
And when a certain region is not as big as another it is more often than not just the fact that the renewals at that time.
Our difference than in other regions now, commenting specifically about China.
The very very good results and continued good results are due to a very broad adoption. So by many companies and of course, many companies themselves are investing heavily in the future and driving business very hard so sorry, it's just a very active.
And I expect that to continue.
Okay, great. Thank you.
And the next question comes from the line of Tom Diffley with D. A Davidson. Please go ahead.
Yes. Good afternoon. Thanks for the question Chuck I was hoping you could give me a little bit more about your view on operating leverage going forward and what do you see as the key drivers segments of product mix.
Into a hybrid office model whatever.
Do you think is important.
I think all of those things that you touched on John to Tom will will help the operating leverage.
They are really the two biggest ones are.
Continue to grow grow revenues and in fact, we are raising the outlook for revenue growth.
Secondly, the things that really move the needle on investments in the business and making sure that we're investing in the areas that already gives us the biggest returns.
You are also seeing strong results and the growth in revenues for this year because of changes and improvements that we've made on the go to market side, both on the semi and <unk> side software integrity side.
Those big drivers as well as a <unk>.
None of work across the company in so many different areas, including the items that you mentioned is what is going to help us continue drive.
Operating margins up over the next several years.
Okay. Thanks, that's helpful. And then Arthur I was hoping you could give us a little bit more about the competitive landscape in the IP market and what you're seeing from a pricing point of view or just no real competition point of view.
Well I think we continue to outperform well others because of both the breadth and the complexity of our platform.
I want to say, though arm is also doing very very well.
We are sort of almost a 100% complementary to what they do and so what I think we see as aid out there many more designs that there, especially much more complex designs and the second comment is important because the value and the cost but also the necessity for very advanced.
Nodes is has increased and so we observe that in multiple ways of course by what our customers order, but also at the speed with which they absorb it and some of the numbers I gave in the preamble you could see that a significant portion of our business is already at 504 and three nanometer.
And these are invariably extremely sophisticated customers that need large complex blocks and do a lot of design.
So in general for US the market is doing extremely well and IP has definitely been a.
Chinese thorough synopsis for for a number of quarters now.
Okay do you see pricing strength.
Anyway.
I don't think that it has changed the the more complex things are more expensive and customers expect expect up.
But fundamentally it's a business of almost constant renewals and I think we must be okay with our pricing because.
Our customers consume what they buy often faster than the timeframe that the allocated and then they renew and.
A lot of this business is built on the trust that we will deliver something that they can count on at the right time and and so a lot of it is very sophisticated repeat business.
Alright, thank you.
You're welcome.
And the next question comes from the line of Gary Mobley with Wells Fargo. Please go ahead.
Hey, everybody. Good afternoon, thanks for taking my question.
Since you guys mentioned it in your prepared remarks, and your press release.
Hopefully you can give us some additional color on your your long term view of revenue $5 billion in fiscal year 'twenty three.
Can get to double digit percent comp.
Compound annual growth.
Depending on what what your starting point is if its fiscal year 'twenty you can get there, but are we talking about double digit percent growth on average for the next two years in other words. This is a preliminary view.
A double digit percent revenue growth for next fiscal year.
Well I want to be careful about getting into the details on next year, but the math over the next couple of years really is offer.
The current guidance for 'twenty one.
Gotcha Okay.
It makes it very clear then very bullish.
And.
And then I'm surprised it hasn't been asked yet but.
You are raising the the implied fourth quarter revenue guide from the previous implied I guess I should say by 11%.
The sleep, perhaps supported by some stronger backlog. So my question is what what is the backlog can you share I would say out of the 10-Q filing.
Yes, certainly.
When we file the Q the backlog, you'll see is $4.7 billion and.
And as we would caution you and others on the past backlog.
While it is a big number will move from quarter to quarter, depending on what gets renewed and what gets recognized as revenue I think this quarter to see.
Various static.
Supportive, but we can raise the year by $145 million at the midpoint and see backlog move move the other way.
So overall really the guidance and the outlook for the year is reflection of the strong growth in the deals that were booking and our confidence in our ability to continue to drive that.
With strong renewals.
Alright, great. Thank you guys.
We want to welcome.
And the next question comes from the line of Jay the slower from Griffin Securities. Please go ahead.
Thank you good evening.
With regard to that.
Very interesting target now for 2023.
Couple of things.
Internally, how are you thinking about any structural or capacity or operational changes that you might need to put in place.
With respect to let's say RMB or go to market.
Similarly, you have one customer that it's well known as a matter of public record is fairly consistently over 10% of your revenue.
<unk> also has not grown necessarily every period also a matter of public record.
Does your growth forecast for 2023, necessitate that that large customer keep pace or can you.
Grow the business to the degree you're talking about even if that large one lags and you can grow with others or perhaps substantially increase the total number of customers, particularly in core EDA and then a follow up for trac.
Well, so as you well know we never comment about an individual customer.
Certainly not from a business point of view, but I would just highlight that.
The most advanced customers the largest customers in the world are also far and away the most aggressive in technology adoption.
Good reason that is why they are the most successful ones and and continue to grow and so I expect that to be the case for multiple of our top customers in terms of structural changes.
We have had the good fortune to be able to somewhat continually inside of synopsys evolve the structure as technologies either gained strength or are better put together with other product and we've continued to do quite a bit of that under a <unk> hour.
Sure.
Yes.
<unk> leadership, and I think that that has been very effective because.
Not only does the high degree of vitality. It also opens up.
New doors and you've seen for example, a lot of the design effort the SLM the silicon lifecycle management.
Suddenly emerge in a number of other capabilities a great example of course is DSO because it intersects with really the entire company.
<unk> right now in design because they are the results are just fantastic.
And a very high value and so.
We will continue in that in that vein.
On the field side. They are too we continue to optimize for the customers driving different technologies and making sure that the coverage is very good and in many ways. The good news is that despite all the restrictions with Covid I think we have not really missed any beat and covering the knee.
Needs of our customers well and so.
Right now I would consider that Synopsys is actually a pretty good spot.
Okay.
Attract Jake can I can I, just emphasize art's comment on the restructuring if I could to your question because.
If you look at the operating margin.
Results over the last three years, we've increased it.
About eight points since the low of 18 right and so there has been a lot of changes across the company and so while we have been able to grow that business to reinvest in the business. We're simultaneously, making a lot of that changed. So there is good opportunity for us to sustain that going forward and so it's not a new skills at that.
We have to acquire developed this is something that we've been.
Working on it for many years now and so this practice of driving to higher profitability. In the next few years is going to be more of the same but more hard work because were off were working off a pretty high base.
With regards to the customer concentration I think.
While the reality is we're still working on finalizing the budgets for next year and the plans for the next couple of years, where.
What we are seeing is really strong strength across the broad product set some strength across the product broad customer base.
And there is enough confidence in our ability to execute against that that we feel.
Willing to go out and go out and commit to 5 billion by 'twenty three so it's very very much broad base.
Okay for you Trac, you spoke positively about the performance and the outlook.
What would seem to corroborate that is there has been over the last few months.
A very significant increase in the number of openings software security consulting positions, you're looking to fill.
Q3 over Q2, and so fairly fairly material, including the particular for Asia positions related to cig. So have you seen over the last quarter or so therefore.
A material increase in the pipelines for cig engagements and deployments to warrant that kind of opening the aperture report Theres inquiry.
Short answer is yes. It is.
Some color about how we're thinking about Sig.
If you remember at the beginning of the year, we said that we were going to make some changes and to get the business back on a growth.
Our growth path.
15% to 20%.
And what we said was for this current year that we would exit the year at double digits right because it would take time for the improvements in bookings to translate to revenue and that by Q4. Our goal was to exit the year double digits. We are now in fact approaching double digits for the full year.
And I just exiting so I think the momentum clearly has been progressively improving.
And I think if you call the tone throughout the.
The year I think it was kind of cautiously optimistic is youre seeing good progression and impacting the changes that.
One quarter two quarter I think it's too early to call that.
Our quarters in industrial like we're really are on the right path and we continue executing this.
The goal of 15% growth long term feels very very doable with the cards to the investments I think same thing. There. We are we have been progressing progressively feeling positive and again if you remember the commentary on operating margins. We thought we would have to invest more this year and then bring margins.
Now in <unk>.
<unk> two.
Drive growth in fact, the team's done a really good job balancing the changes in the business while managing their investments.
To keep margins relatively flat and so.
The hiring that Youre seeing certainly reflects an emphasis of hiring in the areas, where we can get the most impact.
And it's just very very disciplined approach in terms of hiring so.
Overall it just give results that supports continued investments in that business, but the outlook is very good growth in the next few years as well as margin improvements.
Okay. Thank you both.
You're welcome thank you.
And the next question comes from the line of Gal Munda with <unk>. Please go ahead.
Hey, Thank you for taking my question.
The first one is just I'd like to go back on the bullishness of the.
Full year guidance upgrade and just kind of thinking about to make sure it's clear.
Not just that you were surprised by the amount of hardware orders that you're seeing in Q4.
The mix of all different.
The business segment that allowed you to raise the guidance by a $145 million.
At the midpoint is that correct.
That's correct yes.
And then just as a follow up to that.
It's a big revenue number to raise with one quarter to go by the same time when I look at the operating cash flow raised again.
Yes.
Just as impressive as implied more than 50% incremental operating cash margin.
So that revenue base.
Just to be how much of that is kind of sustainable when you look at the operating cash flow incrementals.
Versus any one offs that kind of play and potentially help you this year, a little bit because of the fact that.
It's a little hard to do it then.
Operating cash flow margin that you've been generating recently, thank you yeah. No overall, both on the P&L and the cash flows I would characterize it as just very good.
Good results.
Across the board as opposed to being driven by one time items or any unusual items.
But keep in mind, the cash flow will be.
Lumpy just given that.
Depending on the day that we think it comes in it can slip from one quarter to the next or one year to the next but over the long term if we continue to drive.
Operating margins up and drive operating income growth.
Cash flow should track very well to EBITDA less cash taxes over time.
Gotcha, Okay, great. Thank you.
You're welcome.
And the NEC next question comes from the line of Jason <unk> with Keybanc capital markets. Please go ahead.
Yeah.
Yeah.
Jason Your line is open.
Okay.
Okay.
Uh huh.
Yes.
Okay, we'll move onto Pradeep Ramani with UBS. Please go ahead.
Hi, Congrats on the quarter and the guide I just had a couple of questions on the first.
Firstly on the revenue piece.
Based on what you're saying it feels like 1.15 is more of a sort of a new base to think about this.
Looking into October and January.
Is that is that true and then.
If you do the math on your five.
<unk> 5 billion target over let's say a two year period.
That implies roughly a 1.25, a sort of a run rate. So my question really is that Uh huh.
Can we sort of expect just given your.
Sort of broad based growth Youre seeing can you sort of expect a linear progression to from say 115 to one to five a quarter.
As you know over two years.
I wouldn't look at it that way for deep I think youre trying to in part seasonality on the business when there really isn't one.
Our business is very much a recurring 9% of the business would be occurring but it could be a little noisy from quarter to quarter and I think that overall I would look at the trend over a multiyear period and focus on what we're describing for the year.
Within the year, we will give you a very very specific.
Yes.
Okay feedback on what that quarterly profile can look like.
And it will vary and it doesn't really indicate it will vary depending on what the customer requirements are and I'll. Just remind you that last year, we had a Q3 and Q4 that was.
Unusual by historical standards and then this year has trimmed it ought to be a little bit more linear and so it will vary even within a two year span.
Over time, the as you look at the annual trends it tends to be pretty pretty steady.
Okay and.
On the margin front.
The semi.
And system design margins, though.
You know approaching 34, 35%.
How can we think about sort of a ceiling.
Sealing if any to margins on the semi side and sort of the progression of margins EBIT.
Simply.
Backing out the ore from your rule of 45.
And the 11% revenue growth rate youre guiding to.
We'll continue to do so let me start and then add some color, but we'll continue to to look for efficiencies and productivity across all layers of the business. So that will include the semi side and software integrity.
The opportunity is.
We're spending a lot in total as a company and so the more dollars that we can put behind projects and initiatives that are going on.
Drive the best returns, we'll continue to do that there is no reason to think that maintained that.
Discipline.
That served as well as the last few years, because those investments that we've made.
As highlighted in our prepared remarks are a function of the.
The investments that we've made over the last five plus years and so we want to make sure that we're looking at at that business as well too to be more efficient, but that does not at all imply that we won't continue to have that separately, but we will do that we'll do that in a balanced way. So that all areas of the business are contributing to good growth and profit.
Improvements.
Okay, maybe if I can add something you can look at it both outside and inside starting outside of course, the the semi and the systems industries have great opportunities right now because they're this age of smart everything will actually touch everything and in some areas. It's going to go very fast and others are more slowly but it is unavoidable.
That electronics and within that semiconductors, and software will add substantial value to every vertical or that it will touch and so that is one of the reasons why you see the semiconductor industry do so well and the fact that they're in some areas our shortages.
We have nothing to do with that because it has certain specific areas, but in general it does have to do with the fact that demand is high and higher than <unk>.
<unk> ability to satisfy it so we expect that the market in aggregate over time, we will stay very healthy for a while on the inside we have always said that.
You would need to have a portfolio of things that are more mature and with more maturity hope becomes sustainable.
Thanks.
Productivity and margin and certain things that you have to invest best in and by definition investing means putting money in but on balance.
I think that since we communicated to you about two and a half years or so ago that we were going after the rule of 40, we have executed well or was that in many ways I would consider that episode is now over and now we are.
I mentioned to you that rule of 45 is Max though.
The general recipe is clear and the hard work is always hard, but I think we're on a very good track.
Thank you.
Youre welcome.
And the next question comes from the line of John Mcpeak with Rosenblatt. Please go ahead.
Thank you.
Thanks for taking my question nice work guys.
Thank you.
Just along the lines you just mentioned.
Know that a lot of your.
Customers.
Mentioning component shortages.
And you do have some hardware that has some components in it.
I'd just like to ask you if you feel like you have secured enough.
Supply.
<unk>.
Components to you now.
To ship them.
I think the answer is yes, we have said we have some.
Patient, which does not mean that we don't look for every part to see are there alternatives. What's the status are there going to be some challenges.
Can be enough for us we bought the most important parts at the right time and sufficient magnitude that for right now were covered but you know right now is right now and so we will keep.
Being very diligent about this.
Although I expect that had some area of the shortages will gradually vantage.
One thing I've heard is the semi companies don't want to eat their seed corn. So you could be a priority customer because they can't get their designs done without your products.
We are proud of a circle.
Absolutely.
Right. So I guess my second one is on gate all around I did see the tape out of three with a customer.
Do you see that as the future and relative to your AI ml.
Enabled solution.
Getting pretty hairy down there could you just talk about that maybe as a driver for <unk>.
Different segments of the business place now timing I don't know.
Sure.
Let me make two comments first is.
There've been a number of generations of semiconductor transistors play an hour was four for many years the way to do it.
Thought to do Finfet was heresy because these were very difficult to do an impossible and then they became possible and we move forward on that.
The way to look at data all around is essentially it's a sophisticated variation on finfet and <unk>.
A number of advanced customers and manufacturing partners are clearly investing in this and clearly going in this direction and we can absolutely support it all the way from the very beginnings of providing them with tools that allow them to literally simulate and design individual transistors.
All the way to our design system fusion compiler is completely capable of handling. This so that's not going to be a problem.
The second comment is what you're referring to when you say new types of transistor is de facto a form of continuation of Moore's law, meaning still smaller transistors still less power still faster speed and while Moore's law has slowed down.
To emphasize it is still continuing and that.
Of that two for many many times was viewed as impossible, but it is absolutely continuing I would amend it with something though which is you also see more talk of now bringing multiple chip, let's or.
Sometimes called tiles closely together, sometimes on top of other chips.
On other pieces of semiconductor.
And to me that is a mega booster pack to Moore's law, because if you cannot do more transistors on a chip can you do to chip's closely together and there are a number of design issues that synopsys, particularly well equipped for because when you do something in two chips instead of one the biggest problem is the in between right.
Which is how quickly can you get the signals from one to the other and Thats why you want to have them very very closely linked we have a complete <unk> IC.
Design system for that and as we see people do a combination of still smaller devices, but now also multiple chips closely together.
We'll gradually see that growing so I'm very encouraged that.
For the next 10 years, we still going to see way more complex systems.
In our case the word complex as it is a good word.
And just one little follow up there I mean, you you did raise the revenue growth targets of double digits.
I want to give a number but ebay is assumed to be raised as well inside of that if that's fair yes.
Again, our track sort of alluded to the fact that all of our business are doing well and so absolutely EDA is a very very big piece of our business the largest piece and so you cannot get to to double digit and grow from there if that were.
A boat anchor and in this context. It is actually the opposite EDA is doing extremely well for us.
Excellent.
Thanks Manav.
Youre welcome.
Yeah.
And our last question comes from the line of Jason Celaeno with Keybanc. Please go ahead.
Hey, guys can you hear me.
China's again, yes, we.
We can hear you, okay, sorry about that maybe in essence of panels I'll just ask one.
Art, you mentioned Youre seeing your customers renew faster than they have ever before.
I'm trying to understand this a little bit is this because of the products and capabilities that you're adding and they're having to come to the table quicker or is it mainly market appetite to move faster and go to market faster et cetera. Thank you well, yes. The answer is yes, and yes, meaning that they see a lot of opportunity.
There's a lot of demand for many of these new capabilities and at the same time because of the continued growth and complexity. They have to rely on more reuse of IP blocks on more automation in the design process and we are the ones, providing that and so I am I'm sure.
Super enthusiastic about this decade, because I can see the value at the end of this journey for so many vertical markets. Therefore, the economics from the end markets will come down into the systems semiconductor and in our world because we are the enabler.
For that and.
I am also super enthusiastic because I feel that many of the investments that we've made have led synopsys to be at just a unique point of new innovation.
And.
Having had the opportunity to be part of the early beginnings of automation via synthesis many years ago.
Would equate what we're doing right now with AI on not a design step, but a whole design flow to be very very similar and therefore, a long term high impact.
Got it.
Just very exciting to feel the push of the technology and the pull of the <unk> market and having those aligned I think is just perfect for us.
Okay, Great now that that's quite helpful. Thank you.
Thank you.
Well I guess this signifies that we have done for the power.
First I think you guys hear his role for attending this and for following US hopefully you read out of the discussion in the preamble that we feel that we are in a very strong solid.
Business situation, but also very excited about the capabilities that are rolling out and their impact on the future and lastly that we are a market situation. We are in the market really needs. The capabilities, we have and so that leaves only the word execution to finish on them.
That is our job. So thank you very much I hope.
You all stay healthy and a time, where unfortunately, the delta waves are bigger than anybody expected.
Please vaccinate and stay safe. Thank you.
Yeah.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation for using AT&T teleconference. You may now disconnect.
Yeah.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.