Q2 2022 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 the second quarter of fiscal year 'twenty 'twenty. Two at this time all participants are in a listen only mode to ask a question on today's call. You May press, one and then zero on your phone if you should require assistance during the call you made press.
Star followed by Zero today's call will last one hour 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 Carolyn and good afternoon, everyone here today, our arch does he is chairman and CEO of Synopsys and Trac Pham Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of the conference call Synopsys will discuss forecasts targets and other forward looking statements regarding the company and its financial results.
While these statements represent our best current judgment about future results and performance as of today.
Our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.
In addition to any risks that we highlight during the call important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release.
In addition, we will refer to non-GAAP financial measures during the discussion.
Reconciliation 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 our website at the conclusion of the call.
With that I'll turn the call over to art to Geos.
Good afternoon, we delivered an outstanding second quarter exceeding all of our guidance targets and reaching a record revenue operating margin earnings per share and cash flow.
For the quarter was 128 billion.
Business was very strong across all product areas and geographies.
<unk> grew to $7 3 billion.
Earnings per share were $1 89 billion with non-GAAP earnings of $2 50, <unk> and.
And non-GAAP op margin of 37%.
We generated $750 million of operating cash flow.
With our significant first half strength and high confidence in our business, we are raising guidance substantially for the year.
We expect to grow annual revenue approximately 20% to past the $5 billion milestone.
Drive further ops margin expansion and grow earnings per share by more than 25%, while generating approximately $1 6 billion in operating cash flow.
Mark will discuss the financials in more detail.
Our financial momentum builds on three drivers.
Unmatched product portfolio was groundbreaking new innovations robust semiconductor and electronics market demands.
And excellent operational execution.
The backdrop for our outlook sits at the intersection of massively growing amounts of data and the demand for smart everything and powered by machine learning and AI.
This is synonymous to stating that in both consumer and business obligations the.
The need for electronics and chips is relentless.
For data capture in Iowa, Ts for data transmission for data storage and of course, we're faster high bandwidth and dedicated computation, plus a huge and intensifying need for more security and safety.
All of this means escalating opportunities for Synopsys, we are seeing growing demand not only from our traditional semi and systems customers, but also from impactful new entrants such as hybrid tailors are mounting number of startups in non traditional systems companies across vertical markets.
Notwithstanding macroeconomic choppiness and an uncertain geopolitical environment. These companies are investing heavily in highly complex chips systems of chips and chip lids and security initiatives.
So and also this is a catalyst and enabling this new smart everything era as many customers raise forward to invent and deliver a highly creative and optimize chips and systems.
Our innovations, particularly in AI, driven design flows and at the intersection of hardware and software are crucial for our customers and have fueled our accelerating momentum.
In addition, our IP focus, particularly in high speed connectivity.
Advanced interfaces supporting multi chip design is second to none and yielding excellent business growth.
Let me begin this quarter's highlights with AI as we continued to deliver groundbreaking results and is machine learning is revolutionizing chip design.
Our DSO dot AI solution, which learns and automates a substantial portion of the design flow youre seeing rapid adoption for production use.
Many of the largest highest profile semiconductor companies are reporting tremendous productivity benefits using DSO dot AI in production today.
At our users conference in March Mediatek, Intel Samsung and Sony shared with fellow engineers impressive achievements using our DSO does AI.
The reported results they reported results were truly remarkable.
As much as 20 ex productivity improvement, 7% to 25% lower power and a dramatic reduction in turnaround time with a single engineered completing four design blocks in half the time that had previously took for engineers.
Critical to the high impact of DSO that AI is our powerful digital design solution.
<unk> in significant cross selling opportunities and competitive wins at cornerstone semiconductor and systems customers.
Orders were well ahead of plan contributing to our backlog growth.
In Q2, two major Hyperscale selected Synopsys highly differentiated fusion compiler product for multiple advanced designs.
We also significantly expanded our share at a top U S Communications semiconductor company.
In aggregate the trailing 12 months revenue for fusion compiler more than doubled.
At our user conference I had the opportunity to highlight not only some of the exciting capabilities to come such as using AI and verification, but also how synopsys overall is technically helping to transform EDA design more broadly.
Our custom design solutions for example are seeing strong market disruptions as well.
Including 19 full flow competitive displacements year to date.
Over the past year revenue grew double digit in this area with adoptions ranging from large semiconductor companies designing at advanced nodes to automotive to memory vendors.
With advanced chips.
While advanced chips are the foundation of continued scale complexity.
Electronic systems now increasingly grow systemic complexity by tightly connecting many chips and the software to drive them.
Synopsys excels at this an ideal example of systems leadership and impact is our IP product line.
Here to business momentum continued with another excellent quarter as demand remains very high, especially in the AI high performance compute and automotive markets.
In Q2, we enhanced our comprehensive AI IP portfolio with the introduction of the industry's highest performance neural processor IP.
Simultaneously, we extended our lead in the most advanced commercial processes.
We can report significant traction with our interface and foundation IP, achieving more than 33 nanometer design wins for high performance compute and networking as well as notable wins and mobile applications.
And automotive our decade, plus investments safety certifications and market engagements are not only generating continued momentum with leading semiconductor suppliers, but also as Oems and tier ones now developing their own chips.
We count among our customers.
Top 12, leading automotive semiconductor suppliers.
Automotive Oems and 12 tier one companies worldwide.
For IP, we have close to 600 automotive design wins in advanced nodes, demonstrating the strength of our portfolio.
The hump of the system is the intersection of hardware and software.
This is precisely where our verification solutions are targeted.
Let me highlight three success drivers.
First there is high demand for our market, leading emulation and prototyping hardware products demand is high and we're heading towards another record year.
Fueling this are our new powerful application specific zebu emulation, and perhaps 100 prototyping systems.
While demand is broad based across customers and geographies, we continue to see significant growth in usage expansion as many of the largest hyperscale is in the world.
Second multi die sometimes called triplet based system design is driving a strong need for innovation.
Synopsys is uniquely differentiated with our <unk> IC compiler solution and the industry's leading portfolio of die to die interface IP, both of which are essential.
Our focus and execution are driving adoption momentum was engagements across multiple market segments, including AI servers, automotive telecom and aerospace.
And third cloud enables design.
One of the challenges for chip designers is access to sufficient yet flexible compute power.
Of course, our EDA customers have been using cloud compute for years, but true flexibility hasnt been available until now.
In Q2, we expanded our cloud offering with the industry's first broad scale cloud SaaS solution.
It offers unique flexibility in both access and business model.
So and also in the offers three cloud approaches usable for peak demand to full deployment.
<unk> bring your own cloud with pay per use access on the customers' choice of third party cloud provider.
Through a SaaS model with tools flows and Microsoft Azure based compute.
Three hardware based verification with zebu cloud.
Initial customer reception has been excellent ranging from very small startups to large companies seeking peak compute flexibility.
Now to software integrity, which is both enabling and benefiting from intensifying demand for security and safety across all market verticals.
Bolstered by momentum of products and consulting as well as broadening geography strength we.
We delivered another strong quarter was 20% year over year growth exceeding our internal plan.
Internationally, we had our best quarter ever reaching 10, new countries that we've never sold to before through our channel partners.
We also continue to make good progress improving our renewal rates and new logo engagement metrics.
From a product perspective, our broad portfolio is unique in the market as our three pronged approach provides differentiated value for all stakeholders. The developers the Dev ops group and the corporate security team.
Over the past year, we've launched significant new products in each of these areas and customer response has been excellent.
Industry analysts continue to recognize synopsys strength.
For the fifth year in a row, we were named a leader in the Gartner Magic quadrant for application security testing and for the fourth straight year, we were aided the farthest up and to the right.
Finally, a few weeks ago, we announced a definitive agreement to acquire Whitehead security, a leading provider of SaaS based dynamic application security testing or adapt technology.
This acquisition will further expand our portfolio and accelerate the build out of our SaaS solutions.
We look forward to welcoming the <unk> team after the close which we currently expect to be in our third fiscal quarter.
In summary, we delivered a high momentum quarter and are substantially raising our outlook for fiscal 'twenty two.
Building on a wave of technology innovations fueling growth strong and resilient markets and excellent operational and financial execution, we're poised to cross the $5 billion, Mark 5 billion Mark revenue milestone this fiscal year.
These results are not possible without the unwavering commitment and diligence of our employee teams. We thank you all with that I'll turn it over to Chuck.
Thanks Art good afternoon, everyone.
Yeah.
Thanks, Good afternoon, everyone. In Q2, we delivered record revenue operating margin non-GAAP EPS and cash flow.
We continue to execute exceptionally well despite uncertainties in the macro environment.
This is a testament to our robust portfolio healthy markets our financial discipline.
Australia execution is also enhanced by the stability and resiliency of our time based business model and $7 3 billion of noncancelable backlog.
Our results and growing confidence in our business lead us to again raise our full year 2022 targets.
After surpassing $4 billion in revenue in 2021, we expect to grow 20% and cross $5 billion in 2022, as our growth accelerates for the third straight year.
I will now review our second quarter results.
All comparisons are year over year, unless otherwise stated.
We generated total revenue of $1 $2 8 billion.
25% over the prior year with strength across all product groups and geographies.
Total GAAP costs and expenses were $916 million.
Total non-GAAP costs and expenses were $809 million, resulting in a non-GAAP operating margin of 36, 8%.
GAAP earnings per share were $1 89.
non-GAAP earnings per share were $2 50.
Up 47% over the prior year.
Semiconductor <unk> system design segment revenue was $1 $1 7 billion, a 25% with robust demand for EDA software and hardware and IP.
Semiconductor <unk> system design adjusted operating margin was 39, 2%.
Software integrity segment revenue was $113 million up 20%.
And adjusted operating margin was 11, 5%.
Turning to cash we generated a record $750 million in operating cash flow.
We used $250 million of our cash for buybacks and have repurchased $890 million of stock in the trailing 12 months.
Our balance sheet remains very strong.
We ended the quarter with cash and short term investments of $1 70 billion and debt of $24 million.
Before providing guidance, let me briefly comment on a white hat acquisition, which is subject.
Two regulatory review and customary closing conditions.
We will pay approximately $330 million in cash when the transaction closes.
Which we expect to occur this quarter.
Based on our preliminary review, we expect the acquisition to be roughly neutral to non-GAAP earnings this year.
Now to the guidance, which excludes any impact from the Whitehead acquisitions.
We are raising our full year outlook for revenue operating margins earnings and cash flow.
For fiscal year 2022, the full year targets are rare.
Revenue of 5250 5 billion.
This represents 19% to 20% growth and a $225 million increase versus our prior outlook.
Total GAAP costs and expenses between $3 98 to $3 97 5 billion.
Total non-GAAP costs and expenses between 335 and $3 38 billion.
Resulting in a non-GAAP operating margin improvement of approximately 250 basis points.
non-GAAP tax rate of 18% GAAP.
GAAP earnings of $6 22 to $6 40 per share.
non-GAAP earnings of $8 63 to $8 70 per share representing 26% to 27% growth.
Cash flow from operations of one five to $1 6 billion.
Capital expenditures of approximately $145 million.
Up from our prior guidance as we consolidate our campus at headquarters to create a more efficient and economical footprint.
Now to the targets for the third quarter <unk>.
Revenue between one one and $1 4 billion.
Total GAAP costs and expenses between 981 and $1 billion totaled.
Total non-GAAP costs and expenses between 830 and $840 million.
GAAP earnings of $1 32 to $1 44 per share.
And non-GAAP earnings of $2, one to $2 <unk> per share.
In conclusion, we continue to execute exceptionally well and based on our strong momentum we expect to deliver.
20% revenue growth.
250 basis points of non-GAAP operating margin improvement.
More than 25% non-GAAP earnings growth.
And $1 6 billion of operating cash flow in fiscal 2022.
With that I'll turn it over to the operator for questions.
Ladies and gentlemen, if you wish to ask a question you May press, one and then zero on your phone you are using a speakerphone. Please pick up the handset before pressing the numbers and once again if you do have a question you May press, one and then Jeremy at this time.
Before we begin the Q&A session I would like to ask everyone to please limit yourself to one question and one brief follow up to allow us to accommodate all participants.
If you have additional questions. Please reenter the queue and we'll take as many permit.
One moment for our first question please.
Our first question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open. Please go ahead.
Hello, everybody.
Extend my congratulations on good execution to say the least.
Thank you asked about I wanted to ask a multipart question on the backlog.
I believe roughly 50% year over year and <unk>.
Single digit percent or high single digit percent sequentially.
To what extent is that backlog number growing as a result of longer duration average longer longer average duration excuse me.
Maybe we can start there.
Gary the backlog is up due to overall run rate growth duration remains within the model we communicated in the past, which is two five to three three years.
Okay.
And here, we sit today with.
The potential for your company to grow 20% this year and that's obviously much well I guess, it's technically within your long term view of double digit percent growth, but that could mean a lot of different things to different people. So I'm wondering if we can get an updated view on your on your long term revenue growth target.
Well right now, we're not changing any targets for the long term, but clearly.
And of the double digit.
And Sir and in General I would say that.
We feel that we're in a strong position that has a potential to continue for quite a while by virtue of not only building up the backlog, but more importantly, so by the conjunction of the demand in the market and what we have to offer being particularly well aligned.
No.
The company is very strong right now and you saw that we changed the objective for the year considerably from where we started the year.
Got it thank you guys.
Youre welcome.
Our next question comes from the line of Jason <unk> with Keybanc. Your line is open. Please go ahead.
Great. Thanks for taking my questions.
Really impressive guidance range here I think as we kind of second.
Cross into the second half.
Maybe if we take a step back six bonds coming into the year versus now what exactly and your visibility.
<unk> level has improved so.
How much I guess what has surprised you.
At this point.
Well I wouldn't say, it's a surprise it's been hard work that has worked really well I think we're executing.
Extremely well at this point in time.
Having the products that are needed at the right time, including some that have truly.
Breakpoints in innovation that are very valuable for the future serves us well, obviously the markets around us have a lot of noise up and down and sideways, but we cater to a part of the market that is highly competitive where there is a renewed understanding of how important chips are for differentiation in <unk>.
Literally every field you can think of.
And so.
That is an area, where the customers want to move faster with better tools was faster fastener solutions.
And I think we're well positioned in that.
Hey, Jason we keep in mind when we entered the year, we are feeling very bullish about the business right because in December .
Coming off of several years of very strong growth and margin improvement and based on that we had are you raised our long term outlook for the business whats different now six months in.
Book six months for the business and we continue to see the momentum be very strong and consistent with what we have communicated so right now we're feeling we're feeling like we're executing well against the opportunity ahead of us and the outlook is really positive.
Okay.
And then maybe just a quick one on margins, if we kind of back into the <unk> kind of implied framework.
And I know Q4 is typically kind of one at a lower points on margins, but this year it seems a little bit.
Lower than on a sequential basis, maybe can you maybe speak to maybe some of your hiring plans or timing of investments, which may impact that.
Well I'll start and the fact that we are raising the overall margins for the year by 250 basis points versus 21. So it's really really strong improvement with regards to the Q4 profile. We continue to invest in the business in the second half good hiring and frankly, the other part that's contributing to it as the the fact that the <unk>.
Outlook is so strong that we are increasing our variable comp compensation accrual in the back half year.
Okay.
And our next question comes from the line of Ruben Roy from West Park Capital. Your line is open. Please go ahead.
Hi, yes. Thank you for letting me ask a question and I'd like to extend my congratulations.
Congratulations too on solid execution first question.
<unk>.
Just kind of around something that you mentioned last quarter, and just thinking about iterations haven't changed but.
Backlog orders well ahead of plan et cetera, you had talked about being able to extract more value and negotiations.
I'm just wondering if you could comment a little bit about kind of pricing environment as youre seeing expansion of tools across large customers et cetera is the pricing dynamics across the business or product areas changed much between last year and this year.
I'd say the pricing environment is pretty healthy for us right now.
It starts with the fact that we are.
Products are incredibly competitive and.
As you heard in <unk> commentary prepared remarks, there are creating a lot of value for our customers and the ability. When you are coming to an engagement with a customer with really good products.
Solving their problems in a much more.
And effective.
Scalable way.
It's a much more constructive conversation on pricing.
Yes in general I would add to it.
It is just a lot of demand people are designing much more complex not just chips, but systems of chips <unk> section between those chimps and the software is more important meaning that they want to optimize the chips for certain software and optimize certain software for the chips and vice versa and so these are all around.
Currently difficult problems that require a lot of our tools and a lot of our IP.
And.
I think the semiconductor market overall is heading towards continued growth by the sheer need of all of these parts.
Alright, it's helpful. Thanks, Bart I guess, just a quick follow up on that aren't around.
The IP itself.
As IP continues to grow for you and your competitor.
And a lot of companies that are obviously talking about IP or using IP.
Going forward as this system complexity has continued to move up into the right.
How should we I guess think about IP as sort of a driver for your tool sales is it or.
Is it kind of the other way around.
Human rights with both meaning that.
In decades ago, clearly was EDA driving things and then you would sell some IP and some of the regions that have come online, let's say in the last 10 years IP has often been the first decision, making that point and then the EBITDA followed and in the system well, it's a little bit of both.
Very often when people decide about what architecture, they're going to build they make big decisions on the building blocks and then the immediate look in the catalog from Synopsys, Okay, which building blocks can I have ready to go and which ones can I get with some modifications and that is of course, a dramatic shortcuts in design and.
An effort. So I think there's sort of 2% and my perspective, two sides of the same coin.
Need both and both need to be working very well.
Yes.
Our next question comes from the line of Charles <unk> from Needham <unk> Company.
Line is open. Please go ahead.
Hi, good afternoon, congratulations on the strong results I wanted to start with another question on IP.
Thanks Art.
Your answer on the synergy between EDA and IP when I looked at your numbers it looks like <unk>.
Grow so far in this fiscal year has been.
Are.
Your long term target like mid teens.
Just wonder.
To use still holding the view that IP is mid teens kind of growth long term or do you think may grow faster than that given how strong. The results are so far in the year.
Well as you know so far we want to hold onto the general directives that we've given for the long term.
At the same time, there is no no doubt whatsoever that IP was particularly strong this quarter and actually has been strong for quite a while and so I'd be tends to be a little lumpy because you often sell IP over a period of time and then the the customers pick it up as they need it or some of the things thats subject to milestones if they want to have.
<unk> modified for their their purpose. So it's not always as easy to predict as some of the other things that are more time based but overall they reflect very well the new designs. The new chips, but also the new types of chips, and we particularly strong already in those into <unk>.
Activity blocks that will be used when you put chips in a very very tight proximity sometimes also referred to as chip labs, and so that's a whole new wave of opportunity for us.
Thank you art, maybe a second question.
I know during the quarter there was a press article about.
The subpoena.
Administrative subpoena you receive probably like last year by the end of last year can you give us an update as this is the kind of overhang.
I mean in terms of what investors think about Synopsys and.
Any update.
Is it closed or when do you expect it to close thank you.
There is not really an update we received this if im not mistaken then November 21.
And so typically you get a number of questions and then there are some follow up on those questions and by the way a lot of these are being given out to a number of companies and so we have diligence diligently followed up.
It's not to us for us to know actually when these things finish so.
Wait and see but.
We are following up and no issues from our perspective, so far.
And our next question comes from the line of Joe <unk> from Baird. Your line is open. Please go ahead.
Great.
I'm wondering if it is possible to maybe compare.
The new product cycle, we seem to be in at the moment I'm thinking of DSO down AI fusion verification hardware <unk> IC, how does kind of this cycle compared to I think 2019 was a big one I think 2015 with IC compiler was a big one I mean do you get the sense.
That there is greater traction or that this.
Era of product is different and better than some of the prior recent experience.
That's actually a fun question because you seem to know some of our better berth days here.
Yes in <unk> thousand 19, we had absolutely.
Great products that hit the market stats substantially advanced the existing state of the art.
I think when you talk about things like DSO or some of the hardware software interaction you're essentially talking about a new state of the art and having had the privilege to be here for a long time I strongly feel that the early days of synthesis held very similar to what we're doing right now with.
AI applied to our own design flaws because it is so revolutionary from E.
Computer Science point of view as AI has essentially brought a whole new way to look at problems through the lens of Ken you recognize patterns versus can you do deductive calculations.
<unk>.
We have already demonstrated literally month after month, new results that are getting better and better and also broadening the applicability beyond just design, but also in verification and so I think there's a long runway with that but it is also literally fun to watch how exciting our own.
<unk> excited our own teams are every time, they get some better results.
Okay. Okay, that's great.
And then.
You went through a period of time thinking about fiscal 19 and 20.
And actually a lot of 2021.
Or your backlog.
It was solid kind of sequentially stable and now we've had one big step up and actually this quarter is another big sequential step up.
How much of that would be renewal driven and Wednesday in the scope of our renewal getting uptake behind some of these more advanced solutions versus.
What might be new logo growth.
It's a little bit of all of that and we are always warned to say that backlog goes up and down because if you do let's say a large transaction over multiple years you get to your backlog to go up and then it gradually decreases as as the revenue is recognized and then it gets renewed now of course, we have many renewals.
So it's not that spiky in aggregate.
But that's that's the one flag I want to raise for backlog on the other hand Theres no question that our business is strong and that we have many.
Growing renewables and broadening the portfolio of what we offer as a company and so we are very purposefully building the company for growth at this point in time and so we're watching to make sure that the backlog is in sync with the guidance that we gave you going forward.
Ill add to <unk> comments about the backlog that is noisy and it.
It will vary from quarter to quarter, it's great to have $7 3 billion of backlog, it's even better that the backlog is increasing because of run rate growth as art described.
The momentum in terms of run rate growth in the first half is really what's driving the confidence and the outlook for the full year.
And our next question comes from the line of Jay <unk> from Griffin Securities. Your line is open.
Thank you good evening.
Sure.
You cited we all know that there is much that is new.
In terms of so many of accelerated growth.
New customers, new customer requirements through products and alike, but okay.
Overtime EDA history has a way of repeating itself.
And so when you think about for example.
The thing that you started your comments with AI and by the way there is a very interesting synopsys presentation. This morning at the <unk> conference on AI.
The question I have there is a.
About historical precedence for earlier new tools.
So for instance in the early days.
Synthesis and implementation eventually.
Issues with respect to tool capacity for example in terms of <unk>.
Francis blocks for example methodology I'm sure you remember the great debate about flat hierarchical.
And extensibility of the tools to new device types of applications. So the question with respect to AI is.
How confident are you that the platform that you have is valuable for a five to 10 years in terms of capacity performance and meeting the needs of a wider and wider set of <unk>.
Device types, so that the kind of.
Wall, perhaps at some of the earlier tool eventually went into.
AI doesn't necessarily run into.
That's question number one for you track.
You raised the midpoint of your non-GAAP expense expectation for the year.
By $95 million could you talk about that in terms of head count driven.
Growth behind that the raise in guidance for for Opex and.
If for example, you were to fill every one of the more than 2000 physicians, who now have open would you still be able to meet your margin objectives for the year.
Well, let me start with your first part 123 and five of the crash.
All the things that you mentioned I hope, we have exactly those problems because we liked them in our history.
Is that.
Have the good fortune of starting with synthesis has revolutionized the digital design made it possible.
<unk> together with simulation later place and route and those automation kept growing with every success the customer wants to do more and I was like race car drivers you get another fast the car. They drive fashion. The same can you give me something that's faster and the good news is synopsys for its entire history has always stayed up at the state of the art.
So.
In that sense. This is normal evolution, secondly, I think the AI capabilities that we have right now and that we're building are actually.
Quite quite broad in terms of the applicability and.
If you add the very fact that on the side here, we have just announced that we also have a SaaS model for cloud.
Thats theoretically, saying all this infinite compute waiting for you in a few of what I paid the price and I don't know what I want to be lighthearted about this but the fact is that compute.
It is not a limitation for US right now I think what will be the challenging part is that all the problems that we're addressing are highly systemically complex, meaning there are so many different things that play together and you have to nail every single one of them otherwise the system doesn't work and that plays absolutely to synopsys strength, because we are deepening.
Area that we touch and we've put a high degree of emphasis now for a number of years <unk> offices to migrate its thinking from scale complexity to systemic complexity and so.
I actually have no fear in this direction trepidation on the execution is always there but.
I think we're on a roll here.
J T.
With regards to your questions on Opex.
Two parts to the expense decreased one is the investments in the business. We will continue to invest in the business primarily to sustained really strong growth over the next few years and the second part of investment is making sure that we can scale. This business in a way that we can drive margin improvement over time commensurate with that growth.
The second part of what's driving expenses is what I highlighted earlier, which is an increase in with a strong increase in the outlook for the year. It's also.
Allowing us to accrue more for the variable compensation to reflect the over achievement.
On the hiring front our outlook for the year of 250 basis points improvement in op margin contemplates our ability to hire and our ability to continue to invest in the business. So it's all closed loop and factored into the numbers.
Thank you Bob.
Thank you Jay.
Our next question comes from the line of Vivek Arya.
IRA a.
Bank of America Securities. Your line is open. Please go ahead.
Thank you for taking my question I actually had two kind of more conceptual question.
For the first one I'm curious why is there such a large gap between the growth today talking about EDA and IP business conceptually they should be levered to the same underlying trends a wise one outgrowing the other.
So much and when I look at your EDA grew nine 9%.
Full year more like 11 last year with stand so I don't see the same acceleration that you are describing and when I compare it to your peer who is growing in the mid teens. There also appears to be different in growth. So I just wanted to make sure I'm looking at things apples to apples so.
That's the first question that I have.
Well in all areas, we're outgrowing our competition and that includes EDA and IP.
The other areas that we're in.
At the same time.
All of those have historical precedence of how the business is set up and if you recall its not that many quarters ago that we were referring to IP in the mid single digits growth rate.
And today, we're clearly in the double digits. So that has moved up the IP has moved up very fast and part of the explanation I tried to give a little bit earlier is that in a number of situations IP is leading.
As.
It is in many ways the shortcut alleviate right, which is you have designed thats already done and so the combination of IP and EDA actually works really well together and once you take them in aggregates and in aggregate. The company is essentially predicting for this year, which is a 19% to 20% growth and so.
You can split the numbers anyway, you want.
Okay. So you don't agree with the market share gains or shifts that your competitor was describing in our last call.
Yes.
I cannot fully.
I cannot critique, what others say about their business.
We are doing well I think the semiconductor industry is growing rapidly. There is no question that most advanced nations in the world have all understood that.
Chips are at the heart of all of the software that's needed to be competitive.
So.
That is a very fundamental change and we are I think playing very well in this who is the technologies, we have and some of the the areas that we've highlighted such as <unk> AI, but I could have also highlighted.
S alarm or a few other areas that are relatively new.
We're doing really well.
Alright.
And just a quick follow up.
The math suggests Q4 earnings could actually be down year on year I imagine its more to do with just the pace of hiring because you stood up pretty strong.
Sales growth, but it has been suggested.
So it has to Q4 earnings based on your implied guidance would be down year on year did I get that math right does it just conservatism is it just kind of the timing of our Opex and hiring is flowing is that the right way to understand.
Yes, I would just look at the profile of it you've got two years that have very different profiles under as a result of comparisons are you comparing any particular quarter. This year relative to last year, it's kind of a standout and seen unusual but if you zoom out and look at the full year.
We're delivering north of 25% EPS growth and that's really on the on the heels of strong revenue growth and margin improvement.
Understood Thanks very much.
Youre welcome.
Our next question comes from the line of Pradeep Ramani from UBS. Your line is open. Please go ahead.
Hi, Thanks for taking my question and congratulations.
I just had a question on <unk>.
Pain ability.
20% revenue growth.
It feels like.
Everything you are saying on the call is that there are structural drivers that accelerating the growth of your business and yet.
Youre not taking up the financing model so.
How are we to interpret this.
Are we a redesign of the enterprises as well.
2022, we're going to be at 20% type growth and then.
You reset back to lower levels.
Obviously, we take the other side, which is.
EBITDA growth and so then at Ada EDA and IP goes to structurally higher than it's been before.
Let me try to put it in this context.
We are executing incredibly well.
And we're showing 20% growth off of a record year last year.
The momentum of the business is really strong we are feeling very confident about the business not only for this year, but over a multiyear period.
Where the questions are.
Coming from with regards to changing our multiyear model. We literally just are six months into this and we updated you all on our raise in the model back in December .
It's premature to be talking about change our model mid year, while we still have six months left in the business to grow but I would just say that we are feeling very bullish and confident in the business over a multiyear period. So I would not read anything in terms of the results and are concerned about our ability to sustain very strong results over the long term.
Great and as a follow up maybe.
I mean soybean us but.
Let me ask it in a different way easier.
No.
Especially in the back half of the year.
Is it being driven by maybe one big customer road pursuing foundry plans or is it broad based both in terms of customer mix and maybe even in terms of.
Our product mix.
With respect to hardware or DDA or IP and so on.
Well you can see in our disclosures that we are seeing very strong growth in all geographies and across all the product lines. So it just gives you a sense of the breadth.
That we have with regards to where.
Where the growth is coming from.
We don't disclose obviously the customer detail, but the growth in all of these areas are driven by really strong growth across the <unk>.
<unk> customer base.
So we're.
We're not attributing the change in the model or the outlook for the year to any one area. That's just not a sustainable way to run the business.
Got it thank you.
Youre welcome.
Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open. Please go ahead.
Mr. I'm, sorry, we did lose Mr Mobley.
The moment.
And if there are any further.
Further questions on the call you May press, one and then.
We have no lines in the queue at this time.
Okay, well I guess, we can finish it on a timely fashion. Thank you very much for interest we had not.
Not only are very strong.
At this time.
Okay, well I guess, we can finish it on a timely fashion. Thank you very much for your interest we had.
Not only a very strong quarter, but more importantly.
Momentum in our entire business at will.
Go forward for US <unk> said, a number of quarters.
So on that basis, who we appreciate your support and we will be talking to you shortly and the one on ones.