Q4 2021 Synopsys Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Synopsys earnings Conference call for fourth quarter of fiscal year 'twenty 'twenty. One at this time all participants are in a listen only mode and 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 the zero.
Today's call 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 is being recorded at this time I'd like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.
Thank you Terry.
Afternoon, everyone with US today are art did Shea 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 this 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 reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release financial supplement and 8-K that we released earlier today.
All of these items plus the most recent investor presentation are available on our web site at Synopsys Dot com.
In addition, the prepared remarks will be posted on the site at the conclusion of the call.
And with that I'll turn the call over to art to J S.
Good afternoon, I'm happy to report that Synopsys delivered another record here substantially exceeding our original goals.
We grew revenue, 14% to $4 2 billion with double digit growth in all product groups and geographies.
We substantially expanded our non-GAAP operating margin was more than 20% earnings growth and generated record cash flow of $1 49 billion.
In addition, disruptive innovation and collaborations accelerated our momentum.
As a number of large customers significantly expanded their commitments with synopsys.
Visible and an outstanding orders here.
As a result, we enter fiscal 2022 with momentum.
Looking forward, we are raising our long term financial objectives to strong double digit revenue growth anchored in a step up in EDA and IP targets.
Non-GAAP operating margin expansion and non-GAAP earnings per share growth in the mid teens range, all of which driving very strong cash flow.
Chuck will discuss the financials in more detail.
Underlying our elevated outlook is not only a vigorous market, but just as importantly, a long term growing demand for smart everything in every vertical segment.
The inherent technical challenges powering this new era are well aligned with Synopsys strength.
Specifically, the smart everything Ara brings together massive amounts of data with the new wonders of machine learning software.
Combined with the metro versus outlook of human machine interaction, they're all off chip centric electronic systems has enormous potential.
This requires highly complex semiconductor chips with massive compute capability.
Evolving semiconductors from system on a chip to tightly integrated systems off chips.
And increased need for security and safety across software and hardware that is across the entire system.
From an economic perspective, new entrants are already designing their own specialized chips.
Traditional vertical market leaders are taking on a more active role in influencing chip and system architecture and design.
At all levels investments in urgency are increasing.
To deliver on this promise our customers are transforming the way they approach design.
Whether its processor or mobile teams, combining multiple compute storage and connectivity chips, together and see the IC structures or hyperscale or investing in their own chip architectures to increase their cloud differentiation.
Our automotive Oems dictating specific safety protocols or financial services companies inserting security testing into their development processes.
All are driven by the urgency of the economic opportunity.
The need for strong partners to master the complexity of the task.
Synopsys connect with all of these and is uniquely equipped to help capitalize this new era.
The center of gravity of the technical challenges is the intersection of hardware and software.
A chip is only as good as its interaction with the software and vice versa.
Other words the system.
This system focus has been at the core of Synopsys innovation for many years and is now fueling mounting customer and business momentum.
Nowhere is systemic complexity more visible than in our IP business.
The sophistication of our IP blocks requires reaching deep down into the understanding of the advanced silicon nodes and also high up to the system architecture and software.
IP is thus a bellwether of systems leadership is new architectures are increasingly jumpstarted by selecting the most important IP building blocks and their configuration.
Benefiting from this we achieved another record year in IP with a revenue surpassing $1 billion and growing approximately 20%.
This momentum is maintained for two reasons first continued strong demand to outsource AP as customers meet their most skilled resources to focus on the differentiating aspect of their chips.
Second an.
An increasing number of new entrants in segments, such as automotive high performance compute and AI accelerates their schedule by whenever possible selecting complex IP building blocks that are commercially available from a company They trust.
As the number one provider of interface Foundation and physical IP Synopsys is in a unique position to provide complete solutions across multiple key segments.
For example, we have the broadest IP portfolio for the fast growing high performance compute and data center market.
Including PCI Express H B M. Three 400, 800 gig Ethernet and many memory interfaces.
We also see continued strength in automotive fueled by the electrification of cars the push to autonomous driving and the explicit demand for higher safety security and reliability.
Our IP has been selected by approximately 50 automotive companies with nearly 500 IP wins to date.
In addition, Synopsys has always driven the leading edge, providing IP and of course EBITDA on the most advanced process nodes.
With the mobile and computer companies were deeply engaged at three nanometer and had over 250 design wins at five nanometer this year.
Let me talk a bit about system verification.
Although our Synopsys logo, our tagline states silicon to software or.
Our unique strengths is to sit at the intersection of validating hardware and software or simply put verifying that the chips and the system do what was intended.
Building on our market, leading vcs chips emulation solution, we were at the forefront of delivering software and hardware based prototyping more than a decade ago.
Since then our offering has rapidly gained technical and market leadership.
2021 was a record hardware year with strength in both emulation and prototyping or.
Our solution set out the sweet spot of hardware software co verification and our emulators are the fastest machines was the highest capacity at the lowest cost of ownership.
This year, we increased our differentiation, we introduced application specific emulation products zebu empower and zebu E. P. One that are significantly faster and higher capacity than any competitive solution in the market.
Meanwhile, our new apps 100 prototyping system now delivers two X faster performance and Forex better debug driving accelerated growth.
During the year, we achieved multiple competitive wins and significantly broadened our customer base as we added more than 50, new logos and 200 repeat orders.
Obviously at the center of enabling the smart everything era sits the promise of AI.
Which begs the question what about applying AI to chip design.
Today machine learning enabled significant capabilities and runtime advances in all of our key products.
About two years ago, we delivered a fundamental disruptive technology.
Very different magnitude.
Using AI to automate not just tools, but entire design flows.
The outcome is remarkable.
Our award winning DSO Dot AI solution is getting great results on production designs with a rapidly growing number of customer partners.
DSO Dot AI, which stands for design space optimization using AI.
Exactly what the name says.
It explores many many design options learns from them using design a tool data and finds designed configurations that a human is unlikely to ever find.
Moreover, since design variables, such as performance power size yields reliability and song old trade off against each other.
<unk> AI can optimize well beyond what the design team can easily fathom.
Through this year results got better and better.
Run by our customers on real production designs DSO. The AI has reduced design times from months to weeks with superior performance and power results.
One. Notable example is Samsung which relied on DSO to have AI for multiple complex projects. The most recent being in advanced production design for our new mobile product.
Applied at every stage of design implementation DSO dot AI deliver performance well beyond their speed target and substantially reduce power consumption, all while saving weeks of manual effort.
Central to DSO about AI as a result.
The powerful engines underneath it our fusion design platform.
The platform is centered around our fusion compiler product the only solution today to seamlessly integrate market, leading synthesis and place and route cross checked and optimized by timing power and physical sign off on.
All in a single tool.
Fusion compiler is full flow proliferation, and competitive wins increased through the year, including major expansions and competitive displacements.
Revenue more than doubled this year.
Seminal to our sustainable differentiation is native integration of our Golden sign of products.
As recognized by multiple awards from our foundry partners are deep collaborations ensure that our mutual customers have well homes and trusted design flows at the most advanced technologies.
In addition to a continued push for smaller geometries.
Smart everything hunger for much more compute storage and data management is so high.
But the economics are physically are bumping and stacking multiple chips or triplets is driving a push towards so called three D. IC design.
This brings about many challenges, including Architected, how to partition into multiple chip loads.
Making the connections between the chapter is blindingly fast.
And predicting and dissipating the heat of so much computation.
Synopsys is at the forefront of this emerging wave.
In 2020, we introduced three D IC compiler, which offerings are modern differentiated approach to this complex design challenge.
Our solution is being deployed in production and cutting edge the IC designs in the industry.
Another new era, showing great promise is our silicon lifecycle management platform, which monitors analyzes and optimizes chips throughout their lifespan.
The option of key sensor IP accelerated during this year it was 25 new logos.
And we've recently added AI powered real time system optimization for infield applications, whereas the acquisition of concert I O.
With the increase in systemic complexity to deliver smart everything security and safety is a rapidly growing theme from chips to application software.
About seven years ago, we invested in software integrity to provide security and quality testing for the massive amount of software in today's world.
Synopsys has since built the broadest portfolio of products and consulting services in the market.
This year, we were recognized for the fifth year in a row as a leader in the Gartner Magic quadrant for application security testing.
Benefiting from the operational enhancements, we've made our software integrity business achieved 10% growth for the full year with particularly strong order flow exceeding our original expectations.
We expect to return to a 15% to 20% revenue growth objective in 2022.
During the year, our focus has been to scale, our go to market strategy and execution.
We launched a new partner program this year, adding dozens of channel partners and systems integrators.
They are already expanding our reach into customer groups and geographies that we haven't reached in the past.
We successfully refined our sales structure and tuned our market priorities.
One proof point is the substantial growth of multiyear multimillion dollar agreements.
This notably includes our largest ever software integrity order with the U S hyperscale or as well as significant renewals in the networking airline and enterprise software segments.
We also made considerable progress with our Polaris software integrity platform.
We delivered intelligent orchestration, which automates security testing within a company specific protocols.
This makes it easier and more efficient to integrate directly into their development pipeline.
We enhanced our black dark software composition analysis solution, which positions us very well for software supply chain risk cases.
Finally, the addition of risk management products that ultimate and accelerate discovery and remediation of software vulnerabilities through codex rounds out our solution well beyond what competitors provide.
In summary.
We delivered excellent results in 2021 substantially greater than our original plan with strength in all product groups and all geographies.
We're entering 2022 with strong technical and market momentum.
We are seeing significantly expanded customer commitments and collaborations as a wave of innovations will be crucial to help capitalize the era of smart everything.
And as a result, we are raising our long term financial objectives.
Let me say, thank you to our entire Synopsys staff for another great year I'm looking forward to an exciting journey into our next phase of growth.
Finally.
I'm sure you all saw our other news earlier today that our CFO Trac Pham has decided to retire in fiscal 2022.
Chuck has been a wonderful partner, an excellent leader and while we understand and support his desire to prioritize time with his family we will miss him.
He will of course remain a good friend to the company and to all of Us personally.
Trac will stay with Synopsys until a successor is in place to ensure a seamless transition.
Do you and your family, we wish the very best and with that I'll turn it over to track.
Thanks, Good afternoon, everyone.
While im looking forward to retirement I will certainly Miss this velocity team and also the relationships I have developed over the years with investors and analysts.
<unk> is in a great position. So this is a good time for me to step away from our long fulfilling career to priorities prioritize time with my family.
I'm confident in the leadership team and then we'll manage the transition well.
Each year for a while still and I look forward to talking to many of you.
Turning to our results FY 'twenty, one was an excellent year and featured record results in all key metrics, including revenue non-GAAP earnings and operating cash flow.
Looking to FY 'twenty, two and beyond we are seeing a step up in revenue growth due to the following.
Strong execution and compelling new innovation.
Second expanding customer commitments.
Third the new market era, and opportunity that art referred to earlier.
Additionally, because of the essential nature of our customers' R&D priorities and our business model, which resulted in nearly 90% recurring revenue and significant noncancelable backlog. We are in the position to have a high level of stability as well.
Ending backlog for Q4 was $6 9 billion.
These dynamics give us the confidence to raise our long term financial objectives, which I'll describe in greater detail momentarily.
First some highlights of our full year 2021 results.
We generated total revenue of $4 2 billion up 14% from the prior year with double digit growth across all products and geographies.
Total GAAP costs and expenses were $3 5 billion and total non-GAAP costs and expenses were $2 9 billion, resulting in a non-GAAP operating margin of 35%.
GAAP earnings per share were $4 81.
And non-GAAP earnings per share were $6 84 sites.
Up 23% over the prior year.
Semiconductor <unk> system design segment revenue was $3 8 billion driven by broad based strength across all product groups and geographies.
Software integrity segment revenue was $394 million up 10% over the prior year and exceeded our original plan.
We expect to return to our 15% to 20% growth objective in 2022.
In addition, following the investments and operational adjustments. We made this past year, we expect to expand adjusted operating margin in 2022.
Turning to cash operating cash flow for the year was a record $1 49 billion, reflecting our strong results and robust collections.
We ended the year with cash and short term investments of $1 815, 8 billion and total debt of $100 million.
During the year, we completed buybacks of $788 million or <unk>, 56% of free cash flow.
Now to our targets.
Based on our current assessment of the timing of hardware and IP deliveries, we expect Q1 to be our highest revenue quarter.
Roughly evenly split.
For the balance of the year.
We expect an expense profile similar to that of revenue for Q2 through Q4.
For fiscal year 2022, the full year targets are.
Revenue of $4 75 to $4 75 billion.
Total GAAP costs and expenses between three 778, and three 835 billion.
Total non-GAAP costs and expenses between 3225, and three to $5 5 billion.
Resulting in a non-GAAP operating margin improvement of more than 100 basis points.
Non-GAAP tax rate of 18%.
GAAP earnings of $5 39 to $5 65 per share.
Non-GAAP earnings of $7 73 to $7 <unk> per share.
Representing mid teen growth, despite a higher tax rate.
Cash flow from operations of one four to $1 5 billion.
I'd like to offer some additional thoughts regarding our long term tax rate or some assumption.
Based on preliminary modeling, we believe the non-GAAP tax rate of 18% is potentially sustainable beyond 2022. However.
However, given the uncertain outcome of tax reform it is premature for us to confirm our longer term tax rate at this time.
Now to the targets for the first quarter.
Revenue of 1.25 at 128 billion.
Total GAAP costs and expenses between 934 and $964 million.
Total non-GAAP costs and expenses between 802 and $812 million.
GAAP earnings of $1 75 to $1 92 per share.
And non-GAAP earnings of $2 35 to $2 40 per share.
Our press release and financial supplement includes additional targets and GAAP to non-GAAP reconciliations.
Finally, we are raising our long term financial objectives all.
All of which are on a multiyear basis with the expectation that particularly years will vary depending on the timing of deliverables and other commitments.
Our goal is to deliver annual double digit revenue growth and non-GAAP EPS growth in the mid teens range.
Reflecting our continued focus on non-GAAP operating margin expansion of more than 100 basis points per year.
In terms of product groups. Our objective is to grow EBITDA revenue in the double digits.
In the mid teens and software integrity between 15% to 20%.
In summary, our.
Our record results. This year are a testament to our strong execution.
So our focus on investing for long term scalability and shareholder value.
And to our commitment and ability to innovate to meet growing customer needs.
This combination is driving a step up to a new level of growth for us.
And our raised long term financial objectives.
<unk> confidence in our ability to succeed.
With that I'll turn it over to the operator for questions.
Alright, Thank you, ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.
Using a speakerphone please pick up the handset before pressing the numbers once again, if you'd like to ask a question. Please press. One then zero at this time.
And before we begin today's 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.
And our first question comes from Gal Munda. Please go ahead.
Hello, Hi, Thank you for taking my questions. The first one is just when you look at the new long term guidance for Q2.
Two kind of upgrading and I was wondering if you can help us understand.
In comparison to the previous guidance that you had called that what is making you confident.
<unk> to make those changes.
Long term trends that you were talking about between <unk>.
Between the demand.
Of the leading edge.
Customers versus kind of the system and maybe specifically on that.
Trends that youre talking about the electrification in the Hyperscale demand.
Which one stand out for you.
It.
Changes in.
And what you expected previously.
Art and mute.
Okay.
Amazing I'm still learning sorry, sorry about that thank you.
The question is very broad and let me start from the inside to the outside.
On the inside we have a high degree of confidence because many of the investments that we've put in place over a number of years are really coming together well because the vision of where our field towards heading towards is actually.
Moving alone and so this notion of transforming the world towards smart capabilities in every vertical market requires the whole set of technologies that we've been investing in and so be it in the area of design implementation, including the AI capabilities be it in the various <unk>.
<unk> validation of the entire systems, including the intersection of hardware and software, but also in the in the in the deep investments and advanced technologies in the over arching investments in quality of software and security all of these trends are really manifesting themselves very actively and we.
We see it manifest itself in many collaborations and increased commitments of customers to us as also witness than a strong backlog and so right. There that gives us a sense for the coming year from the outside it is very clearly visible that.
The semiconductor industry itself is doing well not only because.
Visible shoot some shortages that are may be painful, but illustrate how important semiconductors are but because so many companies, including the ones you mentioned hyperscale or automotive companies industrial companies are all starting to invest and albeit either architectures that contemplate.
The semiconductors or semiconductor development themselves and.
So it is a time, where the alignment between our capabilities and the need of the market are very active.
John can I also ask that.
Operationally no over the last three years as we've increased operating margins by over 800 basis points. We have also been very active in investing in the business across all areas and what Youre seeing this year and certainly the over achievement really is a reflection of the momentum that we're seeing in the business and that's what's giving us a lot.
The conference operationally.
And while we've raised we're raising our long term growth objectives. We are simultaneously committed to driving margin expansion as well. So we really do believe theres going to be significant.
Significant opportunities to create value over the long term.
And maybe just.
Carrying on from <unk> comment on the margin if I kind of look at the <unk>.
<unk> for the last few years to be very very close to 50% incremental margins.
Going forward, you kind of more towards the low forty's implied.
Uh huh.
Does that imply potentially a bit of conservatism or is it just continued reinvestment in the business in order to achieve that growth that you are basically guiding pool.
I would characterize it more.
As not providing a cap on margins reduce we do see opportunities for us to expand margins over time.
And with this long term financial model, we're giving you even more clarity and specific.
Details about how we're going to deliver mid teens earnings growth over time.
There is no change in terms of how we're approaching margins will continue to drive it.
Very actively.
Thank you and now to actually Mercury from Wells Fargo. Please go ahead.
Hi, This is Ashley Mccurry Entre Gary Mobley integral has that $6 9 billion ending backlog for Q4 I'm not sure that you guys called out is there anything else you any additional color you can give as far as the average license duration.
Any other color on that backlog that check.
In terms of Macs.
Sure the $6 9 billion I would characterize it as two fold one is really strong.
Our strong business momentum and very good growth.
Annual run rates for the business that we renewed this year. In addition, we also saw several large customers expand their commitments to us and it's just really a reflection of their confidence in our product and technology that we're delivering so very good.
I think a very good confidence in terms of establishing the growth rates for the next several years.
Thank you.
Youre welcome. Thank you and now to Joe <unk> from Baird. Please go ahead.
Great Hi, everyone, maybe I'll just pick up on the last plant with these renewals that are.
Obviously seeing quite a bit of upsizing on renewal.
What our customers typically engaging you on <unk>.
To engage with you on the direction they want to take them product development. What are the key themes and I guess, how are they investing specifically in your product portfolio.
Well, it's actually a quite broad because as an earlier question.
Related to the people that in the past, we're not necessarily big customers such as Hyperscale is an automotive. These are people that fundamentally think down from the system being they have big objectives to run big complex software and now they need more compute more capacity better throughput and all that and.
All of that sells the same thing, which is advanced chips or combination of chips and so the intersect with us mostly in two areas. One is how can you predict how fast the system will run by actually running software on emulators or prototypes and secondly, how can you actually make the actual chips then.
Even faster by really implementing the latest state of the art technology and optimizing your architecture for just the tasks that they want to do.
And this is where the use of AI to the design flow becomes particularly interesting because very often people start with chips that they already have and then they moved to a new node technology node and simultaneously. They say Oh, let me optimized for a specific set of staff and that optimization.
<unk> largely be automated with our tools and so you see an acceleration everywhere and acceleration has always been the name of the game in our field and I would say those are the two biggest drivers of our business.
And since you brought up.
As in hardware.
I appreciate kind of the timing dynamic within guidance here and one Q I would imagine this investment cycle for the new generation of hardware at that that's not going to be at one.
One quarter phenomenon.
Fact that kind of the guidance as it stands today it just implies.
Similar revenue Q to Q3 of <unk>, what sort of delivery assumptions.
Is there any maybe.
A bit of hedging on perhaps you have the ability to procure why do you need to actually deliver the finished equipment.
And could that potentially be a driver of upside as we get into the back half of the year.
Well I'll, let Chuck answer the financial side of your question I think in general our business is fairly regular the exception of that being Lumpiness and hardware as you highlighted but also sometimes in IP.
So these things come in clumps and whereas right now we're not looking at any major delivery issues.
We are obviously very sensitive to all the supply chains, and we continue to check those well.
So you.
You can call. It caution at this point in time, where we're planning on the basis of the numbers that we already have in hand.
Chuck you want to add to them certainly head Joe.
Two things.
One is we had visibility too to the profile of hardware and IP in that just given the timing of deliveries.
And this is just really the first time for us to give you specific specific guidance on that.
And it just happens to be we've been seeing the momentum.
For IP and hardware buildup as well as the rest of the business buildup.
Q1 reflects the timing of when they're actually pulling down the IP and when they want their hardware deliveries.
To your broader question I would just say that the.
The results in 'twenty, one and the outlook that we have for 'twenty two relievers reflects strong momentum in both hardware and IP.
Hit record, we had record revenues for hardware in 'twenty one.
And keep in mind that as compared to a year in 'twenty, where it was pretty significantly backend loaded and so for us to grow on top of that is pretty significant and then.
As art mentioned earlier, it's $1 billion business growing at 20%. So it's really showing really good momentum.
Alright, Thank you and now to Jackson Ader from Jpmorgan. Please go ahead.
Alright. Thanks.
Thanks for taking my questions guys.
Track I don't know if anybody.
As often congratulations yet from our side so.
Yes, congratulations on your retirement youll be missed but at least you're sticking around for a little while.
I am actually going to do my best Jaguar shall impersonation here, but with a multi part question.
So.
On the.
The double digit growth in EMEA.
I'm just curious.
What EDA market growth. It was assumed in that double digits are you planning on taking share and then.
Second what particular facet of.
Core EDA, whether you want to break it out of front end versus back end or fusion hardware or software. However, you want to break down like what facets of core EBITDA do you expect to.
Maybe outgrow others.
Okay, well, let's start with your question.
It's hard to predict how well others will do and in many ways, we do well when the entire industry as well, but we do have suddenly position, where many of our technologies are extremely competitive at this point in time and it is a point in time, where a number of customers are looking to our lineup with suppliers that.
Trust over a longer haul because they clearly see that the advances that are happening right now oncoming demand a lot of technology and a lot of support now you mentioned fusion and I'm glad you did because as you will know this is an area that we have invested in for many many years with the concept being that instead.
Overrunning suggestions of independent tools.
Having multiple tools essentially collaborate if I can use that term.
To get to a better result.
What was the essence of fusion and fusion is working very well and as we mentioned in the preamble growing very well, but it is doubly meaningful because a fusion is also a key ingredient and now layering on top of that there is notion of artificially driving.
Panama's design flows.
And the fact that we can access many many different technologies inside of fusion to have an AI algorithm learn and get a better get better results as this being just the astoundingly exciting to see and in many ways to me feels like literally the early days of Synopsys, where at that time synthesis with almost.
Like America, well there was a lot of medical was a lot of hard work, but it was capabilities of computer had that exceeded what a human can do and we see exactly the same here. So I expect that this will be an area that brings many of the things that we have together to drive things forward now not.
To repeat too much what I said earlier the other half of that equation is what are the chips for and the chips are fundamentally for executing task given by a system that runs software.
And so.
The desire to make that software run faster is unstoppable well one way to do that is to say well what if we designed this system to hardware system just for certain types of software and that is what is everybody is doing right now essentially creating new architectures for specific applications.
Then Ken run blindingly fast and so the intersection between the application and the hardware is therefore, a place where one needs to be able to predict how good the results will be and that is what all of these efforts have been in the.
The prototyping emulation and so on now the third area I want to mention and I understand it's slightly adjacent to <unk>, Although I would look at it as EDA surrounds it is IP.
And one of the great accelerators in the history of design has been to have more and more accomplished IP blocks that have enormous functionality in the most advanced silicon technologies, which are difficult to build.
And so the combination of those things is what gives us a sense.
For the coming years, we're in a very strong position and by the way. We are applying that same AI that I mentioned before also to our IP blocks. So there's a there's an integration of the whole solution space.
Thank you and now to the line of Jason Celaeno of Keybanc. Please go ahead.
Great. Thanks for taking my questions and track.
Forward to working with you for a couple more quarters.
<unk>.
So my first question. This is more of a clarification because double digits can mean a lot.
Sort of things, but just calculating it out here.
EBITDA is growing at least double digit IP in the mid teens and at least mid teen <unk> growth. This implies really low double digit kind of growth framework is.
Is that a fair assessment.
It depends on how you are looking to IP, Jason just keep in mind that the in our supplement we.
The IP systems line includes other other businesses as well.
Okay, but overall.
I think the segments you're spot on with regards to the segment growth.
Okay.
Perfect and then maybe just.
Clarification on Joe's earlier question on Q1.
Q1 is typically the lowest revenue quarter on an absolute basis for EBITDA and across a lot of industries and software.
As it relates to the hardware deliveries in the IP deliveries concentrated in this quarter or is it these customers pushing out or maybe possibly pulling forward.
Some of the delivery. Thank you.
Certainly there were really anything unusual about it either from a of our ability to fulfill or the customer pushing our point in its really its just the timing of how things match up.
And.
From a seasonality perspective, we typically don't see much seasonality.
Over the last couple of years Q4 in the back half as has been the business has been more back end loaded, particularly in Q4.
This year other than the unusually strong Q1.
First half second half profile is pretty pretty even it's like a 50 149 split.
In line with what we've seen in the past in terms of the balance. So it is other than the Q1, which is a reflection of normal standard timing of demand.
It's actually a pretty good profile for the year I think is certainly a better risk profile than we've seen in the last couple of years.
Thank you and now to G reached an hour from Griffin Securities. Please go ahead.
Thank you good evening.
With respect to the track with.
With respect to the.
The enlarged growth expectations, you referred to a number of internal investments that you've made over the last number of years that have gotten you to this point.
The question is how are you thinking incrementally about.
Our investment priorities or initiatives for example.
When we look at some of the things you appear to have been investing in.
There's been a substantial increase in your.
Your AE investor.
Investments in support of your customers' deployment requirements.
Yes.
Big software consulting seems to be increasing and as the purely technical level you appear to have been increasing substantially in areas like synthesis and custom.
So perhaps you could comment on those or any other priorities that you feel that you need to invest incrementally.
To sustain the growth that you are speaking of what we're expecting for the next number of years.
Excellent question and your question had some of the answers in it you mentioned essentially support and consulting and I would put those together, which is that no matter what the business.
How the business grows some of that goes with it but on top of that there is an additional benefit of using our consulting which is that we bring skills that a number of our customers have difficulty getting themselves or growing themselves.
And if these skills can be used to actually help them reduce their time.
Delay until the chips had done that is of extremely high value. So that that will continue you mentioned a synthesis of custom and of course synthesis was our very first product. So after 34 years, we're still investing in that because theres still upside except that synthesizes is now more and more called the El Super AI right that that's the new version.
This customer is an area that we have invested in for quite a while and actually has done well this year and continues to grow in an excellent fashion. So good area. There's two that you didn't mention one is <unk>, which is the ability to bring together very very tightly extremely complex.
<unk> chips that will grow as the hunger for more transistors will be unavailable and lastly, SLM Silicon lifecycle management. This is a new area for US we are investing in it both organically and through some acquisitions and it's particularly interesting because the notion of putting inside of chips the sensors.
Then Ken essentially diagnose if the strip is still healthy grows in importance our systems become more complex and our systems go into applications that could be human endangering such as autonomous driving car for example.
And so this is an area that's finding a lot of interest where we are making very rapid advances.
And with the sensors that we put inside of the chips. We have also put some AI inside of the chip and some AI outside so that one can learn from chips over their lifecycle.
So this will take a little bit of time until its really embedded in broad adoption, but it is extremely powerful.
Capability that we're very excited about it.
Hey, Jay another way that you might look at the investments are we.
We are doing really well across the board.
We're not looking at areas of the business that is problematic over that requires massive investments. So we're in a situation over the next few years, where we're able to thoughtfully and very targeted really across the broad portfolio to us.
And youre going to see.
<unk> improvements across all of the business as a result of that.
Alright, Thank you and now to the line of Isaac Arya from Bank of America Securities. Please go ahead.
Thank you for taking my question and then congratulations and best wishes to attract from my side is right.
So my first question.
You mentioned the acceleration of trends, but when you look at the outlook for EDA growth double digits. It's about the same as what you did.
Last year.
My question is why shouldn't EDA also accelerate and if that's sort of stay at the 10% than more incremental growth comes from IP in cig.
Are they more or less predictable segments than you or the EDA business. So yes. The overall business is accelerating but is the growth.
Coming from perhaps.
Less predictable segment.
Let me start with the numbers and then art can provide some color on the context of <unk>.
Just for a broader view of it historically, we've talked about.
EBITDA growth in the high single digits and that actually was an increase in our model from several years ago. When we described it as a medium.
Mid to high single digit growth business for us.
When we describe it as double digits, we really do see it as a multi here not just one year.
One year effort, but we do see it as a multi year opportunity to grow in the double digits. So that's a pretty substantial.
Pretty substantial substantive increase for us to describe that going from high single digit to double digits over an extended period of time.
And really it reflects the confidence in the portfolio the various pieces of the portfolio that contributes to EDA growth.
Yes, I would second that you know I think it is a gradual increase of the importance of what we do but also the breadth of the capabilities that we offer and so we do see this as a multiyear opportunity and Im certainly on record I have said many times that.
The moments that AI starts that have impacted verticals the hunger from the vertical down for more silicon will be unstoppable and so from that perspective, we are at the right place at the right time with a lot of the very capabilities that will help our customers differentiate themselves. So.
Our expectations are high.
Know that delivering is always hard work.
But.
Tracks heads our overall direction has continued to improve over the last years in terms of the guidance, we're giving you.
Got it and for my follow up you know we have seen.
ASP expansion, you know price appreciation and in other parts of the semiconductor market. So foundries are raising prices across the board. For example, I'm curious is that a positive or negative or neutral for your business. So first.
Are you also able to raise prices right.
Alright.
The other extreme is if let's say your customers are having to pay higher prices for more advanced nodes does.
It does it make them more careful about the adoption of <unk>.
More advanced nodes across their product base I'm, just curious to get your perspective like what does it cost inflation of the other parts of the semiconductor ecosystem does to your.
Pricing.
And the growth opportunity isn't.
Sure.
Sure I believe that as the semiconductor industry is doing better and better. We certainly are close to them and that is a positive for us when you say well you know some of the new technologies become more expensive that is true. They also deliver a lot more capabilities and because they're more expensive you need to be really careful how you design with.
And this is exactly where I think our role increases and importantly doesn't decrease.
So while we have multiyear contracts with our customers.
That is certainly an opportunity to gradually feather up as we deliver more value to this entire industry that in itself is so seminal and what are all the verticals, we'll be able to do over the years to come so I see it as a as a positive I know that some of the the point increases in pricing or just has to do with <unk>.
Short shortages. These will go over way over time, that's not what builds value what builds value is that semiconductors are clearly and visibly so more important to the future that they were perceived in the past and that is a good thing.
Alright, Thank you and now to deep Romani from UBS. Please go ahead.
Hi, Thanks for taking my question.
Congratulations.
I have two questions. So the first one.
Was on the.
The magnitude of shift or the timing impact.
If you would call it.
On IP and hardware I mean, how much.
How much did it shift from what would have been a normalized view of the quarter.
And then as a follow up yes.
Yes.
When I look at such a big pop in the backlog.
Would you.
And then superimpose it against your commentary.
I mean, it feels like that the year is going to be very strong, but would you would you characterize.
The backlog being potentially higher or lower.
End of 2022, I mean, how should we think about the trajectory of our backlog during the course of the year as well.
Okay. Let me start with your first question I E.
There really was no shift in IPR hardware.
And keep in mind that this is the third year that we're operating under the new 606 rules for revenue.
<unk>.
IP gets recognized as revenue when our customers draw down drawdown that IP from our website.
The timing of IP and hardware really reflects when they want those shipments and a wednesday that IP and that hasnt shifted from one quarter to another that just happens to be what it matches up there they are.
Development schedules.
And so theres really no normal normalized profile of that.
And Thats why we kept we often refer to it as being very lumpy.
With regards to backlog of $6 9 billion of backlog, we don't guide on what the projections are going forward, but as we said that.
Quarter to quarter will vary in Q4, we saw.
Strong growth in run rate on the deals that we booked and we also saw significant.
Several large significant renewals.
The duration during the quarter was a little bit longer than the three years, but overall our overall model is about three years. This the $6 90 reflects.
Convergence of strong bookings and several large large renewals.
Alright, Thank you and now to Charles she from Needham. Please go ahead.
Hi, good afternoon.
On track and Lisa and thank you for taking my question I really wanted to go back to the backlog and the renewable contract duration I noticed you did take down the number I mean the year.
Average contract lengths outbound your supplement.
You just said that the duration seems to be a little bit longer than three years, obviously I understand maybe a few large berry.
Large contract could skew that number.
However, I wanted to ask you because since you mentioned your customers are expanding commitments with you.
Which partly resulted in the high backlog number I wonder is that like a long term trend that the contract duration is going to be north of three years going forward or this is just maybe one quarter phenomenon and maybe go back to somewhere between two to three years.
No.
Yes, let me start with our our business continues to be a three year duration type business that hasnt change on any given quarter might run a little lower or higher depending on what the specific customer requirements are but as we've seen if you look at our history it tends to trend around that.
Three year range.
With regards to the expanded commitment is.
It is dollar size. It is the breadth of the products that they are purchasing and in this case in Q4. Some of these deals the length of the deal but they are.
That's not typically the norm and we don't necessarily see our business growing in terms of duration.
Thank you. So maybe the next question I wanted to ask a little bit of longer term.
In terms of EBITDA and.
With regard to DSO.
You guys mentioned that DSO that AI can deliver results faster than human beings and I'm trying to understand.
You guys have largely tracked the industry R&D spend but if you say the use of AI.
Results faster than human beings I could imagine maybe you can go asking our customers Hey, my product can really.
Do things faster than human beings, maybe the fixed R&D budget, you should allocate more to EDA tools, maybe that will change.
The trajectory of EBITDA grow maybe at a high percentage can go.
<unk> expense can go into EMEA.
The right way to think about.
In terms of the impact of a DSO about AI going a little bit longer term. Thank you.
It's absolutely a good way to think about it because for every a major advance we will make exactly the argument that you make which is hey use our tools you will be better off at the same time many of our customers say, yeah. That's great because now I am going to use the engineering time that I saved to become even more competitive against.
My competition and this is a normal phenomenon in our field, which is a constant acceleration of how quick the races, Ron and these explorations invariably happen when there are great opportunities and so we saw that definitely in the early days of computation and the networking the mobility.
Wave the race was onshore faster chips lower power chips and now I think the race is absolutely on for share of computation share of AI and so on and so our customers see a very positive future, but they understand perfectly well that their competitors <unk> and therefore the races on again.
Be it as it may the fact that we have sometimes discontinuous advances. These are great opportunity moments for from a competitive point of view for us.
For a a differentiation point of view for our customers and so we will absolutely tried to do as much as possible. What you suggest and this is one of the reasons why we have a positive confidence also in the in the coming not just year, but years.
Alright, Thank you and that does conclude our portion of the Q&A.
<unk> would you like to have any closing remarks.
Sure first I would like to thank all of you for having a supportive and interacting with us during this past year. The interaction of course is a very COVID-19 limited, but at the same time, we hope that you have all the information that you need from us and the access <unk>.
We also thank you because this was a very strong year for us and we all know that.
At a time like this this is importance in our outlook here is solid as well and lastly, I hope for all of you that you will remain healthy with your families and your.
Data from us in the access secondly, we also thank you because this was a very strong year for us and we all know that.
At a time like this this is importance in our outlook here is solid as well and lastly, I hope for all of you that you will remain healthy with your families and your friends and we all know that this story is unfortunately, not over yet and so we'll do our best to deliver against your expectations.
Well.
Yes.
Thank you and ladies and gentlemen that does conclude our call for today. Thank you for your participation and for using AT&T event conference.
Ladies and gentlemen, thank you for standing by and welcome to the Synopsys earnings Conference call for fourth quarter of fiscal year 2021. At this time all participants are in a listen only mode and 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 is 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 Carrie and good afternoon, everyone with US today are art Kgs, 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 this 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.
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 reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release financial supplement and 8-K that we released earlier today.
All of these items plus the most recent investor presentation are available on our website at Synopsys Dot com.
In addition, the prepared remarks will be posted on the site at the conclusion of the call.
And with that I'll turn the call over to art teaching us.
Good afternoon, I'm happy to report that Synopsys delivered another record year substantially exceeding our original goals.
We grew revenue, 14% to $4 2 billion with double digit growth in all product groups and geographies.
We substantially expanded our non-GAAP operating margin was more than 20% earnings growth and generated record cash flow of $1 49 billion.
In addition, disruptive innovation and collaborations accelerated our momentum as alive as a number of large customers significantly expanded their commitments with synopsys as visible in an outstanding order here.
As a result, we enter fiscal 2022 with momentum.
Looking forward, we are raising our long term financial objectives to strong double digit revenue growth anchored in a step up in EDA and IP targets.
Ongoing non-GAAP operating margin expansion and non-GAAP earnings per share growth in the mid teens range, all of which driving very strong cash flow.
Chuck will discuss the financials in more detail.
Underlying our elevated outlook is not only a vigorous market, but just as importantly, a long term growing demand for smart everything in every vertical segment.
The inherent technical challenges powering this new era are well aligned with Synopsys strengths.
Specifically, the smart everything Ara brings together massive amounts of data with the new wonders of machine learning software.
Combined with the metro versus outlook of human machine interaction there all of chip centric electronic systems has enormous potential.
This requires highly complex semiconductor chips with massive compute capability.
Evolving semiconductors from system on a chip to tightly integrated systems off chips.
And increased need for security and safety across software and hardware that is across the entire system.
From an economic perspective, new entrants are already designing their own specialized chips traditional.
Traditional vertical market leaders are taking on a more active role in influencing chip and system architecture and design.
At all levels investments in urgency are increasing.
To deliver on this promise our customers are transforming the way we approach design.
We're very it's processor, our mobile teams combining multiple compute storage and connectivity chips together and see the IC structures or hyperscale is investing in their own chip architectures to increase their cloud differentiation or automotive Oems dictating specific safety protocols or financial services companies in.
<unk> security testing into their development processes.
All are driven by the urgency of the economic opportunity and the need for strong partners to master the complexity of the task.
Synopsys connects with all of these and is uniquely equipped to help capitalize this new era.
The center of gravity of the technical challenges is the intersection of hardware and software.
Our chip is only as good as its interaction with the software and vice versa in other words the system.
This is from focus has been at the core of Synopsys innovation for many years and is now fueling mounting customer and business momentum.
Nowhere is systemic complexity more visible than in our IP business does.
The sophistication of our IP blocks requires reaching deep down into the understanding of the advanced silicon nodes and also high up to the system architecture and software.
IP is thus a bellwether of systems leadership as new architectures are increasingly jumpstarted by selecting the most important IP building blocks and their configuration.
Benefiting from this we achieved another record year in IP with revenues, surpassing $1 billion and growing approximately 20%.
This momentum is maintained for two reasons first continued strong demand to outsource IP as customers need their most skilled resources to focus on the differentiating aspect of their chips.
Second.
An increasing number of new entrants in segments, such as automotive high performance compute and AI accelerates their schedule by whenever possible selecting complex IP building blocks that are commercially available from a company They trust.
As the number one provider of interface Foundation and physical IP Synopsys is in a unique position to provide complete solutions across multiple key segments.
For example, we have the broadest IP portfolio for the fast growing high performance compute and data center market, including PCI Express H B M. Three 400, 800 gig Ethernet and many memory interfaces.
We also see continued strength in automotive fueled by the electrification of cars to push to autonomous driving and your explicit demand for higher safety security and reliability.
Our IP is being selected by approximately 50 automotive companies.
Nearly 500 IP wins to date.
In addition, Synopsys has always driven the leading edge, providing IP and of course EBITDA on the most advanced process nodes.
With the mobile and compute companies were deeply engaged at three nanometer and had over 250 design wins at five nanometer this year.
Let me talk a bit about system verification.
Although our Synopsys logo, our tagline states silicon to software are.
Our unique strengths is to sit at the intersection of validating hardware and software or simply put verifying that the chips and the system do what was intended.
Building on our market, leading vcs chips emulation solution, we were at the forefront of delivering software and hardware based prototyping more than a decade ago.
Since then our offering has rapidly gained technical and market leadership.
2021 was a record hardware year with strength in both emulation and prototyping or.
Our solution set at the sweet spot of hardware software co verification and our emulators are the fastest machines was the highest capacity and the lowest cost of ownership.
This year, we increased our differentiation, we introduced application specific emulation products zebu, empower and <unk> that are significantly faster and higher capacity than any competitive solution in the market.
Meanwhile, our new apps 100 prototyping system now delivers two X faster performance and Forex better debug driving accelerated growth.
During the year, we achieved multiple competitive wins and significantly broadened our customer base as we added more than 50, new logos and 200 repeat orders.
Obviously at the center of enabling the smart everything era ships the promise of AI.
Which begs the question what about applying AI to chip design.
Today machine learning enabled significant capabilities and runtime advances in all of our key products.
About two years ago, we delivered a fundamental disruptive technology.
Very different magnitude.
Using AI to automate not just tools, but entire design flows.
The outcome is remarkable.
Our award winning DSO Dot AI solution is getting great results on production designs with a rapidly growing number of customer partners.
DSO Dot AI, which stands for design space optimization using AI.
Exactly what the name says it explores many many design options learns from them using design tool data and finds designed configurations that a human is unlikely to ever find.
Moreover, since design variables, such as performance power size yields reliability and so on all trade off against each other DSO.
DSO dot AI can optimize well beyond what the design team can easily fathom.
Through this year results got better and better.
Run by our customers on real production designs DSO. The AI has reduced design times from months to weeks with superior performance and power results.
One. Notable example is Samsung which relied on DSO to AI for multiple complex projects. The most recent being in advanced production design for our new mobile product.
Applied at every stage of design implementation DSO dot AI deliver performance well beyond their speed target and substantially reduce power consumption, all while saving weeks of manual effort.
Central to DSO about AI as a result, the powerful engines underneath it our fusion design platform.
The platform is centered around our fusion compiler product the only solution today to seamlessly integrate market, leading synthesis and place and route cross checked and optimized by timing power and physical sign off all in a single tool.
Fusion compiler full flow proliferation, and competitive wins increased through the year, including major expansions and competitive displacements.
Revenue more than doubled this year.
Seminal to our sustainable differentiation is native integration of our Golden sign of products.
I was recognized by multiple awards from our foundry partners are deep collaborations ensure that our mutual customers have well homes and trusted design flows at the most advanced technologies.
In addition to a continued push for smaller geometries.
The smart everything hunger for much more compute storage and data management is so high.
But the economics are physically abutting and stacking multiple chips or triplets is driving a push towards so called <unk> IC design.
This brings about many challenges, including Architected, how to partition into multiple chaplains, making the connections between the chapter is blindingly fast.
And predicting and dissipating the heat of so much computation.
Synopsys is at the forefront of this emerging wave.
In 2020, we introduced <unk> IC compiler, which offerings are modern differentiated approach to this complex design challenge.
Our solution is being deployed in production and cutting edge <unk> IC designs in the industry.
Another new era, showing great promise is our silicon lifecycle management platform, which monitors analyzes and optimizes chips throughout their lifespan.
Option of key sensor IP accelerated during this year it was 25 new logos.
And we recently added AI powered real time system optimization for infield applications, whereas the acquisition of concert I O.
With the increase in systemic complexity to deliver smart everything security and safety is a rapidly growing theme from chips to application software.
About seven years ago, we invested in software integrity to provide security and quality testing for the massive amounts of software in today's world.
Synopsys has since builds the broadest portfolio of products and consulting services in the market.
This year, we were recognized for the fifth year in a row as a leader in the Gartner Magic quadrant for application security testing.
Benefiting from the operational enhancements, we've made our software integrity business achieved 10% growth for the full year was particularly strong order flow exceeding our original expectations we expect.
To return to our 15% to 20% revenue growth objective in 2022.
During the year, our focus has been to scale, our go to market strategy and execution.
We launched a new partner program this year, adding dozens of channel partners and systems integrators. They are all.
Already expanding our reach into customer groups and geographies that we haven't reached in the past.
We successfully refined our sales structure and tuned our market priorities.
One proof point is the substantial growth of multiyear multimillion dollar agreements.
This notably includes our largest ever software integrity order with the U S hyperscale or as well as significant rural renewals in the networking airline and enterprise software segments.
We also made considerable progress with our Polaris software integrity platform.
We delivered intelligent orchestration, which automates security testing within a company specific protocols.
This makes it easier and more efficient to integrate directly into their development pipeline.
We enhanced our black dark software composition analysis solution, which positions us very well for software supply chain risk cases.
Finally, the addition of risk management products that automate and accelerate discovery and remediation of software vulnerabilities through codex rounds out our solution well beyond what competitors provide.
In summary.
We delivered excellent results in 2021 substantially greater than our original plan with strength in all product groups and all geographies.
We're entering 2022 with strong technical and market momentum.
We are seeing significantly expanded customer commitments and collaborations as a wave of innovations will be crucial to help capitalize the era of smart everything.
And as a result, we are raising our long term financial objectives.
Let me say, thank you to our entire Synopsys staff for another great year I'm looking forward to an exciting journey into our next phase of growth.
Finally.
I'm sure you all saw our other news earlier today that our CFO Trac Pham has decided to retire in fiscal 2022.
<unk> has been a wonderful partner, an excellent leader and while we understand and support his desire to prioritize time with his family we will miss him.
He will of course remain a good friend to the company and to all of Us personally.
Trac will stay with Synopsys until a successor is in place to ensure a seamless transition.
Do you and your family, we wish the very best and with that I'll turn it over to track.
Thanks good.
Good afternoon, everyone.
While im looking forward to retirement I will certainly Miss this philosophy team and also the relationships I have developed over the years with investors and analysts.
Synopsys is in a great position. So this is a good time for me to step away from our long fulfilling career to prioritize prioritize time with my family.
I'm confident in the leadership team and then we'll manage the transition well.
<unk> here for a while stone and I look forward to talking to many of you.
Turning to our results FY 'twenty, one was an excellent year and featured record results in all key metrics, including revenue non-GAAP earnings and operating cash flow.
Looking to FY 'twenty, two and beyond we are seeing a step up in revenue growth due to the following.
Strong execution and compelling new innovations.
Second expanding customer commitments.
And third the new market era, and opportunity that art referred to earlier.
Additionally, because of the essential nature of our customers' R&D priorities and our business model, which resulted in nearly 90% recurring revenue and significant noncancelable backlog. We are in the position to have a high level of stability as well.
Ending backlog for Q4 was $6 9 billion.
These dynamics give us the confidence to raise our long term financial objectives, which I'll describe in greater detail momentarily.
First some highlights of our full year 2021 results.
We generated total revenue of $4 2 billion up 14% from the prior year with double digit growth across all products and geographies.
Total GAAP costs and expenses were $3 5 billion and total non-GAAP costs and expenses were $2 9 billion, resulting in a non-GAAP operating margin of 35%.
GAAP earnings per share were $4 81.
And non-GAAP earnings per share were $6 84.
Up 23% over the prior year.
Semiconductor <unk> system design segment revenue was $3 8 billion driven by broad based strength across all product groups and geographies.
Software integrity segment revenue was $394 million up 10% over the prior year and exceeded our original plan.
We expect to return to our 15% to 20% growth objective in 2022.
In addition.
Following the investments and operational adjustments, we made this past year, we expect to expand adjusted operating margin in 2022.
Turning to cash operating cash flow for the year was a record $1 49 billion, reflecting our strong results and robust collections.
We ended the year with cash and short term investments of $1 815, 8 billion and total debt of $100 million.
During the year, we completed buybacks of $788 million or <unk>, 56% of free cash flow.
Now to our targets.
First on our current assessment of the timing of hardware and IP deliveries, we expect Q1 to be our highest revenue quarter in.
Roughly evenly split.
For the balance of the year.
We expect an expense profile similar to that of revenue for Q2 through Q4.
For fiscal year 2022, the full year targets are.
Revenue of $4 75 to $4 75 billion.
Total GAAP costs and expenses between three seven and 708 and $3 $83 5 billion.
Total non-GAAP costs and expenses.
3225, and three to $5 5 billion.
Resulting in a non-GAAP operating margin improvement of more than 100 basis points.
Non-GAAP tax rate of 18%.
GAAP earnings of $5 39 to $5 65 per share.
Non-GAAP earnings of $7 73 to $7 <unk> per share representing.
Representing mid teens growth, despite a higher tax rate.
Cash flow from operations of one four to $1 5 billion.
I would like to offer some additional thoughts regarding our long term tax rate or some assumption.
Based on preliminary modeling, we believe our non-GAAP tax rate of 18% is potentially sustainable beyond 2022. However.
However, given the uncertain outcome of tax reform it is premature for us to confirm our longer term tax rate at this time.
Now on to the targets for the first quarter.
Revenue of $1, two five and $1 8 billion.
Total GAAP costs and expenses between 934 and $964 million.
Total non-GAAP costs and expenses between 802 and $812 million.
GAAP earnings of $1 75 to $1 92 per share.
And non-GAAP earnings of $2 35 to $2 40 per share.
Our press release and financial supplement includes additional targets and GAAP to non-GAAP reconciliations.
Finally, we are raising our long term financial objectives all.
All of which are on a multiyear basis with the expectation that particularly years will vary depending on the timing of deliverables and other commitments.
Our goal is to deliver annual double digit revenue growth and non-GAAP EPS growth in the mid teens range, reflecting our continued focus on non-GAAP operating margin expansion of more than 100 basis points per year.
In terms of product groups. Our objective is to grow <unk> revenue in the double digits.
In the mid teens and software integrity between 15% to 20%.
In summary.
Our record results. This year are a testament to our strong execution.
So our focus on investing for long term scalability and shareholder value.
And to our commitment and ability to innovate to meet growing customer needs.
This combination is driving a step up to a new level of growth for us.
And our raised long term financial objectives.
Our confidence in our ability to succeed.
With that I'll turn it over to the operator for questions.
Alright, Thank you, ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command. If you are using a speakerphone. Please pick up the handset before pressing the numbers once again, if you'd like to ask a question. Please press <unk> zero at this time.
Tim.
Before we begin today's 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 will take as many as time permits.
And our first question comes from Gal Munda. Please go ahead.
Hello, Hi, Thank you for taking my questions. The first one is just the part when you look at the new loan from guidance.
Materially kind of upgrading them and I was wondering if you can help us understand.
In comparison to the previous guidance that you had all that what is making you confident.
<unk> to make those changes.
In terms of the long term trends that you were talking about between.
Between the demands.
On the leading edge.
Customers versus kind of the system and maybe specifically on that.
Trends there you're talking about the electrification in the Hyperscale it's months.
Which one.
You too.
Biggest change.
Changes in.
And what you expected previously.
Alright and mute.
Amazing I'm still learning sorry, sorry about that thank you.
<unk>.
The question is very abroad, and let me start from the inside to the outside.
On the inside we have a high degree of confidence because many of the investments that we've put in place over a number of years are really coming together well because the vision of where our field towards heading towards is actually.
Moving alone and so this notion of transforming the world towards smart capabilities in every vertical market requires a whole set of technologies that we've been investing in and so be it in the area of design implementation, including the AI capabilities be it in the various <unk>.
<unk> validation of entire systems, including the intersection of hardware and software, but also in the in the in the deep investments and advanced technologies in the over arching investments in quality of software and security all of these trends are really manifesting themselves very actively and we.
We see it manifest itself in many collaborations and increased commitments of customers to us as also witness in a strong backlog and so right. There that gives us a sense for the coming year from the outside it is very clearly visible that.
The semiconductor industry itself is doing well not only because.
<unk> hu from shortages that are.
May be painful, but illustrate how important semiconductors are but because so many companies, including the ones you mentioned hyper scaler automotive companies industrial companies are all starting to invest and.
Be it either architectures that contemplate the semiconductors or semiconductor development themselves and so it is a time, where the alignment between our capabilities and the need of the market are very active.
Joe can I.
Yes.
Operationally over the last three years as we've increased operating margins by over 800 basis points. We have also been very active in investing in the business across all areas and what Youre seeing this year in terms of the over achievement really is a reflection of the momentum that we're seeing in the business and that's what's giving us a lot of confidence.
Operationally.
And while we've raised we're raising our long term growth objectives. We are simultaneously committed to driving margin expansion as well. So we really do believe theres going to be significant opportunities to create value over the long term.
And maybe just carrying on from <unk> comment from the margin if I kind of look at.
Margins for the last few years, you can be very very close to 50% incremental margins going forward, you kind of more towards the low forties implied.
Does that imply potentially a bit of conservatism or is it just continued reinvestment in the business in order to achieve that growth that you are basically in our guidance.
I would characterize it more.
As not providing a cap on margins reduce we do see opportunities for us to expand margins over time.
And with this long term financial model, we're getting a little more clarity.
Specific details about how we're going to deliver mid teens earnings growth over time.
There is there is no change in terms of how we're approaching margins will continue to drive it.
Very actively.
Thank you and now to Ashley Mercury from Wells Fargo. Please go ahead.
Hi, This is Ashley mccurry, and Gary Mobley entirely have that $6 9 billion and ending backlog for Q4 metrics that you guys called out is there anything else you any additional color you can give I'm sorry.
The average license duration.
Any other color on that backlog net check in.
Terms of snacks.
Sure you know the $6 9 billion.
Would characterize it as two fold one is really strong.
Strong business momentum and very good growth.
Annual run rates for the business that we renewed this year.
In addition, we also saw several large customers expand their commitments to us and it's just really a reflection of their confidence in our product technology that we're delivering so very good.
I think a very good confidence in terms of establishing the growth rates for the next several years.
Thank you.
You're welcome. Thank you and now to Joe <unk> from Baird. Please go ahead.
Great Hi, everyone, maybe I'll just pick up on the last plans with these renewals that are.
Obviously seeing quite a bit of upsizing on renewal what are customers typically engaging you on <unk>.
They engage with you on the direction they want to take them product development. What are the key themes and I guess, how are they investing specifically in your product portfolio.
Well, it's actually a quite broad because as an earlier question.
Related to the people that in the past, we're not necessarily big customer such as Hyperscale is an automotive. These are people that fundamentally think down from the system being they have big objectives to run big complex software and now they need more compute more capacity.
<unk> throughput and all that and all of that smell. The same thing, which is advanced chips or combination of chips and so.
So the intersect with us mostly in two areas. One is how can you predict how fast the system will run by actually running software on emulators or prototypes and secondly, how can you actually make the actual chips then even faster by really implementing the latest state of the art technology.
And optimizing your architecture for just the tasks that they want to do and this is where the use of AI to design flow becomes particularly interesting because very often people start with chips that they already have and then they moved to a new node technology node and simultaneous.
Mostly they say Oh, let me optimized for a specific set of staff and that optimization, we can largely be automated with our tools and so you see an acceleration everywhere and acceleration has always been the name of the game in our field and I would say those are the two biggest drivers of our business.
And I think you brought up.
It is in hardware.
I appreciate it's kind of that timing dynamic with guidance here and <unk>.
I would imagine this investment cycle for the new generation of hardware thats not going to be.
One quarter phenomenon.
Fact that kind of the guidance as it stands today just implies.
Similar revenue Q3 <unk>.
Sort of delivery assumptions is there any maybe.
A bit of hedging on perhaps the ability to procure why do you need to actually deliver the finished equipment and could that potentially be a driver of upside as we get into the back half of the year.
I'll, let Chuck answer the financial side of your question I think in general our business is fairly regular the exception of that being Lumpiness and hardware as you highlighted but also sometimes in IP.
So these things come in clumps and whereas right now we're not looking at any major delivery issues.
We are obviously very sensitive to all the supply chains, and we continue to check those well.
So you.
You can call it caution at this point in time, where we are.
Planning on the basis of the numbers that we already have in hand.
Chuck do you want to add to them certainly hey, Joe.
Two things I will add one is we had visibility too to the profile of hardware and IP that just given the.
The timing of deliveries.
And this is just really the first time for us to give you specific specific guidance on that.
And it just happens to be we've been seeing the momentum.
For IP and hardware buildup as well as the rest of the business buildup in Q1 reflects the timing of when they are actually pulling down the IP and when they want their hardware deliveries.
To your broader question I would just say that the.
The results in 'twenty, one and the outlook that we have for 'twenty two really reflects strong momentum in both hardware and IP. We hit record we had record revenues for hardware in 'twenty one.
And keep in mind that as compared to a year in 'twenty, where it was pretty significantly backend loaded and so for us to grow on top of that is pretty significant and on ITE as art mentioned.
<unk> earlier, it's $1 billion business growing at 20%, So it's really showing really good momentum.
Alright, Thank you and now to Jackson Ader from Jpmorgan. Please go ahead.
Alright.
Thanks for taking my questions guys.
<unk> track I don't know if anybody.
Congratulations yet from our side so.
Yes, congratulations on the retirement, you'll be missed but at least you're sticking around for a little while.
I am actually going to do my best J buoy shall impersonation here with over the multi part question.
So.
So on.
On the.
The double digit growth in EMEA.
I'm just curious.
EMEA market growth single assumed in that double digit and are you planning on taking share and then.
Second what particular facet.
Core EDA, whether you want to break it out of front end versus back end or fusion hardware or software or however, you want to break down like what fashion and core EBITDA do you expect to.
Maybe outgrow others.
Okay, well, let's start with your question.
It's hard to predict how well others will do and in many ways, we do well when the entire industry as well, but we do have suddenly position, where many of our technologies are extremely competitive at this point in time and it is a point in time, where the number of customers are looking to line up with suppliers that.
Trust over a longer haul because they clearly see that the advances that are happening right now oncoming demand a lot of technology and a lot of support.
You mentioned fusion and I'm glad you did because as you will know this is an area that we have invested in for many many years with the concept being that instead of running suggestions of independent tools.
Having multiple tools essentially collaborate if I can use that term.
To get to a better result.
What was the essence of fusion and fusion is working very well and as we mentioned in the preamble growing very well, but it is doubly meaningful because fusion is also a key ingredient and now layering on top of that there is notion of artificially driving.
Economists design flows.
And the fact that we can ask access many many different technologies inside of fusion to have an AI algorithm learn and get a better get better results as this being just the astoundingly exciting to see and in many ways to me feels like literally the early days of Synopsys, where at that time synthesize where almost.
Like America, well it was not a medical was a lot of hard work, but it was capabilities of computer had that exceeded what a human can do and we see exactly the same here. So I expect that this will be a an area that brings many of the things that we have together to drive things forward now not.
To repeat too much what I said earlier the other half of that equation is what are the chips for and the chips are fundamentally for executing task given by a system that runs software.
And so.
The desire to make that software run faster is unstoppable well one way to do that is to say well what if we designed this system. The hardware system just for certain types of software and that is what is everybody is doing right now essentially creating new architectures for specific applications.
Then Ken run blindingly fast and so the intersection between the application and the hardware is therefore, a place where one needs to be able to predict how good the results will be and that is what all of these efforts have been in the.
The prototyping the emulation and so on now the third area I want to mention and I understand it's slightly adjacent to <unk>, Although I would look at it as Adi surrounds it is IP and one of the great accelerators in the history of design has been to have more and more accomplished.
IP blocks that have enormous functionality in the most advanced silicon technologies, which are difficult to build.
And so the combination of those things is what gives us a sense for.
For the coming years, we're in a very strong position and by the way. We are applying that same IAA I that I mentioned before also to IP blocks. So there's a there's an integration of the whole solution space.
Thank you and now to the line of Jason Celaeno of Keybanc. Please go ahead.
Great. Thanks for taking my questions and track.
Forward to working with you for a couple more quarters.
<unk>.
So my first question. This is more of a clarification because double digits can mean.
A lot of things, but just just calculating it out here.
EBITDA is growing at least double digits IP in the mid teens and at least mid teens <unk> growth. This implies really low double digit kind of growth framework.
Is that a fair assessment.
It depends on how you are looking to IP, Jason just keep in mind that the.
In our supplement.
The IP systems line includes other other businesses as well.
Okay, but overall.
Segments, I think the segments you're spot on with regards to segment growth.
Okay, Perfect and then maybe just.
Clarification on Joe's earlier question on Q1, Q1 is typically the lowest revenue quarter on an absolute basis for EBITDA and across a lot of industries and software.
As it relates to the hardware deliveries in the IP deliveries concentrated in this quarter.
These customers pushing out or maybe possibly pulling forward some.
Some of their deliveries thank you.
Yes, certainly there were really anything unusual about it either from a of our ability to fulfill or the customer pushing our point in its really its just the timing of how things match up.
And from.
Seasonality perspective, we typically don't see much seasonality.
Over the last couple of years Q4 in the back half as has been the business has been more backend loaded, particularly in Q4.
This year other than the unusually strong Q1, the first half second half profile is pretty pretty even it's like a 50 149 split in line with what we've seen in the past in terms of the balance. So it is other than the Q1, which is a reflection of normal standards.
With demand.
It's actually a pretty good profile for the year I think is certainly a better risk profile than we've seen in the last couple of years.
Thank you and now to G. Richard from Griffin Securities. Please go ahead.
Thank you good evening.
Alright with.
With respect to the <unk>.
On track with respect to the.
The enlarged growth expectations, you referred to a number of internal investments that you've made over the last number of years.
New to this point.
The question is how are you thinking incrementally about.
Investment priorities or initiatives for example.
When we look at some of the things you appear to have been investing in.
There's been a substantial increase in your.
Your AE investments and supported your customers deployments requirements.
Sig software consulting seems to be increasing and as a purely technical level you appear to have been increasing substantially in areas like synthesis and custom.
Perhaps you could comment on those or any other priorities that you feel that you need to invest incrementally.
To sustain the growth that you are speaking of what we're expecting for the next number of years.
Excellent question and you are.
Your question have some of the answers and Ed you mentioned essentially support and consulting and I would put those together, which is that no matter what the business.
How the business grows some of that goes with it but on top of that there is an additional benefit of using our consulting which is that we bring skills that a number of our customers have difficulty getting themselves or growing themselves.
And if these skills can be used to actually help them reduce their time.
Delay until the chips had done that is of extremely high value. So that that will continue you mentioned a synthesis and custom and of course synthesis was our very first product. So after 34 years, we're still investing in that because theres still upside except that synthesizes now more and more called Super AI right that that's the new version.
This customer is an area that we have invested in for quite a while and actually has done well this year and continues to grow in an excellent fashion. So.
Good area. There's two that you didn't mention one is three D. IC, which is the ability to bring together very very tightly extremely complex chips and that will grow as the hunger for more transistors will be unavailable and lastly, SLM silicon lifecycle management. This is a new area for US we have invested in it.
Both organically and through some acquisitions, and it's particularly interesting because the notion of putting inside of chips. The sensors that then can essentially diagnose if the strip is still healthy grows in importance our systems become more complex and our systems go into applications that could be human endangering such.
Autonomous driving car for example.
So this is an area that's finding a lot of interest where we are making very rapid advances.
And with the sensors that we put inside of the chimps. We've also put some AI inside of the chip and some AI outside so that one can learn from chips over their lifecycle. So this will take a little bit of time until its really embedded in our broad adoption, but it is extremely powerful.
Capability that we're very excited about it.
Hey, Jay another way that you might look at the investments are we.
We are doing really well across the board.
We're not looking at areas of the business that is problematic over that requires massive investments. So we're in a situation over the next few years, and where we're able to thoughtfully and very targeted really across the broad portfolio into us.
And youre going to see continued improvements across all of the business as a result of that.
Alright, Thank you and now to the line of Vivek Arya from Bank of America Securities. Please go ahead.
Thank you for taking my question and congratulations and best wishes to track from my side is right.
For my first question.
You know you mentioned acceleration of trends, but when you look at the outlook for EDA growth double digits. It's about the same as what you did.
Nasty.
So my question is why shouldn't EDA also accelerate and if thats going to stay at the 10% and more incremental growth comes from IP in cig.
Are they more or less predictable segments, then your EDA business. So yes. The overall business is accelerating but it is the growth.
Coming from perhaps.
Predictable segment.
Let me start with the numbers and then art can provide some color on the context.
Just for a broader view of the historically we've talked about.
EBITDA growth in the high single digits and that actually was an increase in our model from several years ago. When we described it as a medium.
Mid to high single digit growth business for us.
When we describe it as a double digits, we really do see it as a multi here not just one year ago.
A one year effort, but we do see it as a multi year opportunity to grow in the double digits. So that's pretty substantial.
Pretty substantial substantive increase for us to describe that going from high single digit to double digits over an extended period of time.
And really it reflects the confidence in the portfolio the various pieces of the portfolio that contributes to EDA growth.
Yes, I would second that I think it is a gradual increase of the importance of what we do but also of the breadth of the capabilities that we offer.
So we do see this as a multiyear opportunity and I'm certainly on record I have said many times that.
The moments that AI starts that have impacted verticals the hunger from the vertical down for more silicon will be unstoppable and so from that perspective, we are at the right place at the right time with a lot of the very capabilities that will help our customers differentiate themselves. So.
Our expectations are high.
Know that delivering is always hard work.
But.
Attracts heads our overall direction has continued to improve over the last years in terms of the guidance, we're giving you.
Got it and for my follow up you know.
We have seen asps.
ASP expansion price appreciation and in other parts of the semiconductor market some foundries on raising prices across the board for example.
I'm curious is that a positive or negative or neutral for your business. So first.
Are you also able to raise prices.
On the other extreme is if let's say your customers are having to pay higher prices for more advanced nodes.
Does it make them more careful about the adoption of.
More advanced nodes across their product base I'm, just curious to get your perspective on what is cost inflation of the other parts of the semiconductor ecosystem does to your.
Pricing.
And the growth opportunity.
Opportunity isn't.
Sure.
Sure I believe that as the semiconductor industry is doing better and better. We certainly are close to them and that is a positive for us when you say well you know some of the new technologies become more expensive that is true. They also deliver a lot more capabilities and because they're more expensive you read to be really careful how you design with.
And this is exactly where I think our role increases in importance doesn't decrease.
So while we have multiyear contracts with our customers.
It is certainly an opportunity to gradually feather up as we deliver more value to this entire industry that in itself is so seminal and what.
All the verticals, we'll be able to do over the years to come so I see it as a as as a positive I know that some of the the point increases in pricing or just have to do with short shortages. These will go over way over time, that's not what builds value what builds value is that semiconductors are clearly and visibly so more important to them.
Future then they were perceived in the past and that is a good thing.
Alright, Thank you and now to deep Romani from UBS. Please go ahead.
Hi, Thanks for taking my question.
Congratulations.
Guide.
I had two questions. So the first one.
It was on the.
The magnitude of shift or the timing impact if you will.
College.
On IP and hardware I mean, how much.
How much did it shift from what would have been a normalized view of the quarter.
And then as a follow up.
Yes, when I look at such a big pop in the backlog.
Would you.
And then superimpose it against your commentary.
It feels like that the euro is going to be very strong, but would you would you characterize the <unk>.
Backlog as being potentially higher or lower.
At the end of 2022, I mean, how should we think about the trajectory of our backlog during the course of the year as well.
Let me start with your first question I E.
There really was no shift in IP, our hardware and.
And keep in mind that this is the third year that we're operating under the new 606 rules for revenue.
And.
IP gets recognized as revenue when our customers draw down drawdown that IP from our website.
The timing of IP and hardware really reflects when they want those shipments and a wednesday that IP and that hasnt shifted from one quarter to another that just happens to be what it matches up there.
Development schedules.
And so theres really no normal normalized profile of that.
And Thats why we can we often refer to it as being very lumpy.
With regards to backlog of $6 9 billion of backlog, we don't guide on what the projections are going forward, but as we said that quarter.
Quarter to quarter will vary in Q4, we saw.
The strong growth in run rate on the deals that we booked and we also saw significant.
Several large significant renewals the duration during the quarter was a little bit longer than three years, but overall, our overall model is about three years. This the $6 90 reflects.
Convergence is strong bookings and then several large large renewals.
Alright, Thank you and now to Charles she from Needham. Please go ahead.
Hi, good afternoon.
On track and Lisa and thank you for taking my question I really want to go back to the backlog and the renewable contract duration I noticed you did take down the number the year of the average contract length offer on your supplement.
And you just set up the duration seems to be a little bit longer than three years, obviously I understand maybe a few large very large contract could skew that number.
However, I want to ask you because since you mentioned your customers are expanding commitments with you.
Each partly resulted in the high backlog number I wonder is that like a long term trend that the contract duration is going to be more than three years going forward or this is just maybe one quarter phenomenon and they will maybe go back to somewhere between two to three years.
No.
Yes, let me start with our our business continues to be a three year duration type business and that hasnt changed on any given quarter might run a little lower or higher depending on what the specific customer requirements are but as we've seen if you look at our history it tends to trend around that three.
Year range.
With regards to the expanded commitment is.
It is dollar size. It is the breadth of the products that they are purchasing and in this case in Q4. Some of these deals the length of the deal but they are.
Not typically the norm and we don't necessarily see our business growing in terms of duration.
Thank you. So maybe the next question I wanted to ask a little bit of longer term.
In terms of EDA and.
With regard to DSO AI.
You guys mentioned that DSO about AI can deliver results faster than human beings and I'm trying to understand you guys have a largely tracks the industry R&D spend.
If you say the use of AI can get results faster than human beings I could imagine maybe you can go and ask you to our customers Hey, my product and really.
Do things faster than human beings, maybe the fixed R&D budget, you should allocate more to EDA tools, maybe that will change.
The trajectory of EDA growth, maybe the high percentage can go.
<unk> expense can go into EMEA is that.
The right way to think about.
In terms of the impact of a DSO that AI going a little bit longer term. Thank you alright.
It's absolutely a good way to think about it because for every a major advance we will make exactly the argument that you make which is they use our tools you will be better off at the same time many of our customers say, yeah. That's great because now I am going to use the engineering time that I saved to become even more competitive against.
My competition and this is a normal phenomenon in our field, which is a constant acceleration of how quick the races run and these explorations invariably happen when there are great opportunities and so we saw that definitely and in the in the early days of computation and the networking the mobility.
T wave the race was on for faster chips lower power chips and now I think the race is absolutely on for our share of computation share of AI and so on and so our customers see a very positive future, but they understand perfectly well that their competitors see it too and therefore the races on again.
Be it as it may the fact that we have sometimes discontinuous advances. These are great opportunity moments for from a competitive point of view for us.
Four.
A differentiation point of view for our customers and so we will absolutely tried to do as much as possible what you suggest.
And this is one of the reasons why we have a positive confidence also in the coming not just year, but years.
Alright, Thank you and that does conclude our portion of the Q&A. The time would you like to have any closing remarks.
Sure first I would like to thank all of you for having a supportive and interacting with us during this past year. The interaction of course is a very COVID-19 limited, but at the same time, we hope that you have all the information that you needed from us in the access secondly, we also thank you because this was a very strong.
Year for Us and we all know that.
At a time like this this is important in our outlook here is solid as well and lastly, I hope for all of you that you will remain healthy.
With your families and your friends and we all know that this story is unfortunately, not over yet and so we'll do our best to deliver against your expectations.