Q1 2023 Synopsys Inc Earnings Call
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Ladies and gentlemen, and welcome to the Synopsys earnings Conference call for the first quarter of fiscal year 2023.
At this time all participants are in a listen only mode. If he would like to ask a question. Please press star one on your telephone keypad remove yourself from the queue you can press star one again.
If you should require operator assistance during the call. Please press star followed by zero.
Today's call will last one hour and as a reminder, today's call is being recorded at this time I would like to turn the conference over to Phil <unk> Director of Investor Relations. Please go ahead.
Good afternoon everybody.
With us today are art, the Jews chair and CEO of Synopsys, and Sheila Glaser, Chief Financial Officer.
Before we begin I'd like to remind everyone that during the course of this conference call Synopsys will discuss forecasts targets and other forward looking information 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 this call important risk factors that may affect our future results and performance.
Are described in our most recent filings with the SEC, including our most recent annual report on Form 10-K.
Subsequently filed quarterly reports on Form 10-Q.
In addition, we will refer to non-GAAP financial measures during the discussion.
Conciliation.
These non-GAAP financial measures to their most directly comparable GAAP financial measures.
A discussion of certain non-GAAP financial measures that we are not able to reconcile without unreasonable effort 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 readily available on our website at www Dot 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 the Geos.
Good afternoon, Q1 delivered a very solid start to the year.
Building on our strength and momentum from 2022, we met or exceeded all of our guidance targets.
Revenue was $1 36 billion with non-GAAP operating margin at 35, 2%.
<unk> and GAAP earnings per share of $1 75.
And non-GAAP earnings above the high end of our target range at $2 62.
Based on the continued robust design activity, we remain confident in our business. We are reaffirming our full year guidance for revenue and non-GAAP op margin improvement, while raising guidance for non-GAAP EPS.
In the last few years Synopsys has grown and evolved substantially.
Commensurately, we are evolving our financial reporting.
Starting in Q1, we are reporting our business in three segments design.
Design automation, which includes design software verification software and hardware and other EDA products.
Design, IP, a broad portfolio, including libraries embedded memory connectivity solutions processor cores and security devices.
And software integrity, which remains unchanged from previous reporting and deliver solutions to improve software quality and security.
To give you a relative sense of proportion design automation is about 65% of our revenue design idea is approximately 25% and software integrity is about 10%.
All these numbers are approximate 65 25, 10% split is easy to remember and represents well, how we think of our present business.
We have leadership positions and excellent outlooks in all three segments.
As the market leader in design automation, we see continued technical innovation towards still much much more complex silicon and system designs.
As the company with the broadest portfolio of IP, we see a continuation of designs needing more communication bandwidth processing storage and security.
Still more advanced Silicon technologies.
And for our software integrity business.
We are a key enabler of modern software security with a leading portfolio of products for developers the Dev ops groups and the corporate security teams.
Sheila will discuss the financials in more detail.
Looking at the overall market picture already 12 years ago, we identified the intersection of Big data and machine learning as leading us into the age of smart everything.
Today's smart everything is in full swing.
You may have seen the fantastic new capabilities showcased recently by applications such as chat GPT is.
It clearly shows how far smart everything is calm and also how much further opportunity space reaches.
Indeed, this is playing out as every vertical market is now driving towards more and more sophisticated solutions with an insatiable need for compute.
While some present market undercurrent drive many companies to strive for efficiency are.
Our semiconductor and systems customers continue to prioritize investments in the design of complex chips and software to make all of this possible.
Synopsys is in the midst of this quest and we see our purpose to be a key catalyst, enabling the smart everything world.
With our customers and partners our role is to make this all work to the state of the art solutions ranging from deep physics of silicon to the heights of performance power and security of complex hardware software systems.
Over the past several years, we have successfully invested in groundbreaking innovations that's radically advance how silicon and system design is done.
So let me begin with the design automation segment, which accounts for about 65% of our revenue and share some highlights around our groundbreaking DSO dot AI artificial intelligence design solution.
We are already well over 100 commercial production designs DSO that AI continues to deliver amazing results for our customers.
Applied simultaneously to multiple steps of the design flow it reduces effort for months or weeks, while simultaneously delivering higher performance and lower power.
Customer adoption continues to accelerate across a wide range of process nodes and market verticals.
Already put in production designed by nine of the top 10 semiconductor leaders customers such as Samsung Intel Mediatek ft, Microelectronics, and many others are reporting impressive achievements.
In Q1, we saw multiple additional deployments across verticals, including mobile data center and memory designs.
Meanwhile, we have extended our machine learning capabilities to other EDA workloads, ranging from verification to test to custom design.
These new solutions are already in customer hands, showing excellent impact and promise.
Critical to the success of DSO Dot AI are the powerful design engines that sit underneath.
DSO that AI is this also driving significant cross selling and accelerated growth across our EDA products.
Specifically, our fusion compiler momentum is manifest across a wide spectrum of market verticals and manufacturing processes.
During the quarter, we achieved multiple advanced node design wins, including a key win at a large hyperscale or and the three nanometer node design at a leading mobile provider.
Fusion compiler is used in 95% of advanced node designs at three nanometer and below with the majority exclusively using synopsys flows.
Stimulated by a wave of high value innovations customers from high performance computing to Hyperscale has continued to expand their reliance on synopsys throughout our portfolio.
Our custom solutions for example saw continued market momentum in Q1, as we added nine new logos in the quarter with a robust market pipeline.
All of these highly complex designs need to work both correctly and work under multiple conditions in scenarios like temperature voltage manufacturing variability and so on.
That's where our verification tools come in.
While verification is fundamentally an unbounded problem.
Our state of the art simulation emulation and prototyping products tackle these tough challenges at unparalleled speed.
It's the fastest engines highest capacity and lowest cost of ownership.
Building on another record year in 2022, we continue to see excellent growth in hardware with both our zebu emulation and haps prototyping products.
This quarter, we achieved major expansions with our zebu EP, one and <unk> 100 hardware at several of the largest semiconductor systems in hyperscale companies in the world.
Meanwhile, <unk>.
Multi di system design, sometimes also called chip that base design is opening a whole new era of silicon complexity.
In Q1, our differentiated multi di solution around the <unk> IC compiler continued its strong momentum deployed on production tape outs.
Top high performance computing chip supplier and a large networking systems company.
Let me move to design IP, which is as I mentioned about 25% of our business.
Third party IP think of it as the Lego blocks of chip design continues to grow in complexity and importance.
Our market, leading IP portfolio by far the broadest in the industry continues to grow with high demand and high performance compute automotive and mobile markets.
Fueled by smart everything multi di systems and high speed and secure connectivity.
While maintaining technical leadership, we broadened our portfolio with new high speed interfaces, and three and four nanometer processes to serve HBC and mobile applications at the leading edge.
In the automotive market, we see strong adoption of automotive grade IP solutions by Oems and tier one suppliers now developing their own chips.
Meanwhile, multi di systems require a whole new portfolio of state of the art die to die interface IP.
The recently introduced UCI protocol short for Universal Chip, let interconnect express has become the standard of choice.
Synopsys is leading in this area with an industry milestone the tape out of the first UCI E test chip on a major foundries three nanometer process node.
The increased silicon multi chip and high speed computation push enables enormous advances in the software world.
This brings me to our software integrity segment, which as mentioned accounts for about 10% of our revenue.
As every vertical market is developing highly complex big data driven systems their requirements for security and safety continue to expand.
Our software integrity solutions enable organizations to improve and managed security and quality of software across a wide range of industry verticals from semiconductors and systems to financial services automotive industrial health and more.
While this continues to be one area, where we see some caution from the macro environment. We had a good start to the year with several multi year multi product transactions and sustained momentum in our indirect channel.
We continue to evolve and strengthen our multi product platform to help companies gained more comprehensive insights and drive increasingly robust dropdown software risk management.
Customers, who purchased two or more solutions now account for the majority of our software integrity revenue as we drive cross selling opportunities and continue to scale our application security testing platform.
In summary.
Q1 was a very solid start to the year delivering strong financial results.
We are reiterating our fiscal 'twenty three revenue growth at 14% to 15%.
As well as non-GAAP operating margin expansion of more than 100 basis points.
We are raising guidance for fiscal 'twenty, three non-GAAP EPS growth to 18% 19%.
Notwithstanding continued macroeconomic choppiness, our customers continue to prioritize their investments and chips and systems.
In addition, our resilient business model provides a level of stability uncommon in most software companies.
Meanwhile, our high impact innovation pipeline across our entire portfolio is driving technical differentiation, while solidifying our foundation for continued business growth.
With that I'd like to welcome Sheila laser to a first synopsys earnings call.
Thrilled to have her onboard as our financial operational and scaling experience as well as a deep understanding of the semiconductor industry are a great asset to synopsys as we drive exciting growth ambitions with that I'll turn it over to Sheila great. Thank you art and thank you to the synopsis team for such a warm welcome.
It's an honor to join a company with a long heritage of innovation and market leadership.
I look forward and taking part to drive Synopsys into the next phase of growth in the era of smart everything as well as meeting all of you in the investment community.
We delivered a very solid start to the year with revenue above the midpoint of our guided range non-GAAP operating margin of 35, 2% and non-GAAP earnings above the high end of our target range.
Our Q1 results were driven by our execution and strong technology portfolio that is expanding customer commitments robust chip and system design activity, despite lower semiconductor industry revenue growth and a resilient stable time base.
Business model with $6 9 billion and noncancelable backlog.
We remain confident in our business and as a result, we are reaffirming our full year 2023 targets for revenue and non-GAAP operating margin improvement and raising our full year outlook for non-GAAP EPS due to a lower tax rate.
I will now review our first quarter results.
All comparisons are year over year, unless otherwise stated.
We generated total revenue of $136 billion.
Total GAAP costs and expenses were $111 billion, which includes approximately $41 million and restructuring cost.
Total non-GAAP costs and expenses were $882 million, resulting in non-GAAP operating margin of 35, 2%.
Earnings per share were $1.75.
non-GAAP earnings per share were $2 and 62 sites.
As art mentioned, we are expanding our segment reporting to align with how we're managing the business.
Starting in Q1, we are now reporting three segments design animation design IP and software integrity.
Automation segment revenue was $890 million with both EDA software and hardware performing well.
Design automation adjusted operating margin was 38, 9%.
Design IP segment revenue was $344 million and adjusted operating margin was 34, 2%.
Software integrity revenue was $128 million and adjusted operating margin was 12, 1%.
We are on track to reach our 15% to 20% revenue growth objective for software integrity with increased adjusted operating margin in 2023.
Turning to cash we generated $115 million in operating cash flow, we used $306 million of our cash for stock buybacks.
We ended the quarter with cash and short term investments of $1 3 billion and total debt of $21 million.
Targets now to guidance for fiscal year 2023, the full year targets are revenue of 5.7 hundred 75 to $5.8 billion to $5 billion.
Total GAAP costs and expenses between 454 and $459 billion.
Total non-GAAP costs and expenses between 381 and $384 billion.
Resulting in non-GAAP operating margin improvement of more than 100 basis points non.
non-GAAP tax rate of 16%.
GAAP earnings of $7 and 12 to.
To $7 30 per share.
non-GAAP earnings of $10 53.
To $10 60.
For sure.
Cash flow of operations of approximately $1 $65 billion, which includes approximately $40 million to $50 million in restructuring costs.
Now to targets for the second quarter revenue between 136 and $1 three $9 billion.
Total GAAP costs and expenses between 1.085.
110 $5 billion.
Total non-GAAP costs and expenses between 917 and $927 million.
GAAP earnings of $1 60 to.
To $1 72 per share and non-GAAP earnings of $2 45.
Two $2 50 per share.
In conclusion, we delivered a very solid start to the year.
The underlying macro economic environment is choppy, we continue to execute and for the year expect 14% to 15% revenue growth non-GAAP operating margin improvement of more than 100 basis points and 18% to 19% non-GAAP EPS growth.
Our confidence reflects our innovative technology portfolio ongoing design activity by our customers, who continue to invest through semiconductor cycles, and the stability and resiliency of our time based business model with that I'll turn it over to the operator for <unk>.
Questions.
Thank you 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.
You have additional questions. Please reenter the queue and we'll take as many as time permits.
That it is star one to ask a question.
We will take our first question from Joe <unk> with Baird.
Okay.
Oh, great. Thanks, everyone wanted to begin maybe with how.
The nature of your relationship with customers is changing as they adopt DSO that AI.
How does this alter the share of our project wallet you are able to achieve and then how close might we'd be to this product receiving maybe Marvin enterprise wide buyer as opposed to project specific volumes I guess at the heart of those question.
When you next entered the period of Big Enterprise renewals, when we would typically expect your backlog.
Flat tire.
You think tools like DSO drive.
Pretty meaningful and visible step up in total contract values.
Well going backwards on your question, Yes, I think it will drive positive growth for us in offices and starting at the beginning of your question, which was how does it change the relationship has been actually quite remarkable as we started to travel again this year that after a number of years of being at least physically distance the relationship with <unk>.
Any of our customers has evolved substantially and I think a big piece of that comes from the fact that they all realize that the technology is becoming way more complex and actually in a good way, meaning that bolsters continuation on the traditional Moore's law, but theres also a whole settle systems interactions you had when you have multiple down.
<unk>.
You have hardware software interactions that all demand a degree of automation that is way more sophisticated and so in the midst of that becomes the entry now for us.
Over two years ago of capabilities that really change how design is done and Moreover, it changes them in a very similar fashion like synthesis literally many decades ago automate things that previously were thought to not be automate them all.
It does this infection of the time and with better results and so the engagements have been extremely fast and the very fact that we can point at so many production designs, we're not talking people trying stuff out many.
He tried it out and then in the midst of the trial, they said well I want to reuse. These results because they are better than what I had before and that project is not finished yet and so the adoption as fast at the same time, you would say well what could slow it down well what slows it down as are they assure them. The tools don't make mistakes that it's actually proven technology and the answer has been a re.
Sounding yes, that's why all these production designs are using it so I see extremely high opportunity space for us there and Moreover, I think that we're just touching the tip of the iceberg now hope that turns into contract evolution as well.
That's the that's the negotiation scale that we will need to bring to bear and they will need to bring to bear, but fundamentally I think we add a lot of value to what they can do and I think we will.
B suddenly rewarded in some way from that.
Okay. That's great. Thanks, all right.
Just in terms of the forecasts are presenting for the April quarter, how did.
<unk> much different.
Then maybe why you internally were planning for a quarter ago. I guess has anything changed in terms of design starts influencing the IP business.
Obviously, you're reiterating the full year. So do you still see the volumes unchanged, but maybe a bit more in the second half than you were originally assuming.
So.
This year, we are more back half weighted and that actually is traditionally what we were in 2020 in 2021 2022 was a bit unusual and that was quite balanced between the first half in the second half.
I would say, we're not seeing any change in designs, we're not seeing.
Jack could be cancelled or projects shifted out we're seeing robust design activity and as you note I mean really the timing of revenue and the timing for US is aligned with when we sign the big deals and when the customers have pulled down thanks for their own product schedules.
Okay. Thank you very much.
Thank you you're welcome.
We will take our next question from Jason <unk> with Keybanc capital markets.
Great. Thanks for taking my question I think first of all.
Thanks for breaking out the design.
Automation margins in the IP margin interesting to see that.
When I think about the improvement potential for both.
Why.
What are the levers that you have or how should we think about the improvement.
One versus the other.
Well I'll take the first one is if you think about it is.
While this was not visible individually for these pieces over the last four or five years, we have substantially improved the margin throughout the company and by disclosing some of the numbers specifically on the IP, which you probably haven't seen before I hope that you realize that this was probably better than you were expecting because.
As you know developing IP is actually a very sophisticated and somewhat labor intense job, having said that I think we have improved steadily largely because we're actually getting better at what we do and we do more of it and so there is the benefit of scaling in the benefit of improving our processes and hopeful.
From our preamble as you understood that we will continue to continue to improve the company from a profitability point of view and in IP, we see actually a very fertile horizon because.
With the increase in complexity that I mentioned earlier there are a lot of companies that are coming into doing chips that have never done it before and they have no history, nor reason to start doing a lot of IP themselves actually they move very quickly by acquiring IP.
And then taking it from there.
In many ways. The same is true on the software integrity side, but from a different perspective, which is the perspective that as you grow as a software company, you'll get leverage out of the <unk> business model and the leverage on the work that you have to do and so we have said all along that by the time.
Software integrity would be around the 10% of our business, which it is.
We'll continue to push on the ops margin, while continuing to push on growth and there is opportunity on both sides.
Okay, maybe just as my quick one follow up do you feel that.
Margin profile on the core design automation side still has some room.
Yes.
Theres always room, right and when you look at yourself, you're always saying Wow. There's so many things we could do better and then the key is how to implement it and move it forward and so yes, I do think that there is opportunity there as well, but all three cylinders on three segments here all of the engine.
Two to all.
Push themselves forward in the same direction in order to improve the company and I think we are well on track with that yeah, and I would just reiterate that our goal that we have for the year is to improve greater than 100 basis points and not margin. So we're very committed to driving that.
Perfect perfect. Thank you both thanks.
Thank you Jason.
We'll take our next question is from Charles <unk> with Needham <unk> Company.
Hi, good afternoon. Thank you for taking my questions.
Really want to come back and ask you around.
AI on the chat GPT I'm, just using that as an example, I think some people are thinking.
Thinking about this as the competition between Microsoft and Google, but there are some other people think this is actually a.
Compete competition between GPU TPU tensor processing units that Google internally developed.
What is your view there.
The reason why I tried to ask this is that as everybody knows TPU is kind of like what you're seeing house designs.
Hyperscale is that while in house designs by the system companies.
Companies like a synopsis right. So just wanted to check.
Yes.
I don't exactly want you to comment on your customer but.
Hopefully you can provide your vision on this.
This trend our AI is that the kind of lead to more of the custom chip designs or what's your thought there. Thank you.
Right.
One I agree with every statement you made meaning the the races on in every dimension because whenever in our field and this is true for our history. There is a major breakthrough suddenly everybody realize wow. This is possible therefore, other things must be possible.
And so the the fact that the usual suspects so to speak that you mentioned.
Well suddenly put a major emphasis I'm trying to catch up with each other or I'll do each other.
Also true that we had said for I want to say at.
At least half a decade.
From our perspective chip design is.
Is increasingly driven by verticals down meaning that every end market has by now realize that they need to do something smart and that's their domain can benefit by doing it specifically for their problem.
So optimizing for agriculture is just not the same as for automotive and it is not the same as finance and phone and and of course people want to win and they can win was better algorithms, but they can also win better algorithms multiplied by much better chips and so that's why we see we will see a continuation of all new.
Chips derivatives of chips.
<unk>.
I think a very fertile ground for the semiconductor industry and therefore for us.
Thank you Alan maybe I'll follow up question back to a question.
Another analyst just asked on the operating margin side.
Very pleasantly surprised by the 41% operating margin, which is our IP business in Q1 'twenty two.
Just wanted to really come back to the point I think there is the premise that the IP may be structurally lower margin that.
Well, partly because.
It's more labor intensive audacity mentioned, but looks like.
It's probably not always the case at least on quarterly basis.
On an annual basis going forward shall we be thinking about IP operating margin is kind of in line with design automation or theirs may still be some gap. Despite there may be some quarter to quarter fluctuations, yes. Thank you.
So.
Q2 things I wanted to make sure there are really quarterly fluctuations in IP theirs.
The natural ebb and flow when customers pull down and they've got in a design that we're supporting and that is a bit more labor intensive because we're building at Ips just has already been talked about for multiple nodes multiple IP standards that were always.
Moving to the next domain and there is a lumpiness just an inherent lumpiness with the customers pull down and over time, we think about that margin is slightly lower than the overall corporate margin in EMEA as being slightly higher.
Thank you Sheila Thank you art.
Thank you Ross.
We will take our next question from Gary Mobley with Wells Fargo Securities.
Good afternoon, everybody and thanks for taking my question and welcome to the call Sheila.
Regarding the.
Assumption that.
Second half fiscal year, 'twenty, three revenues, 12% higher than the first half.
I am curious if this assumption is based on higher upfront licensing and I guess more specifically.
Maybe some lumpiness related to the to the hardware verification business or is this fully supported by the remaining performance obligations or in general the backlog.
It's a combination really of all of those things. So as we think about our business. Our design IP business has a lumpiness to it just in terms of aligning with.
Customers.
Product starts.
Our schedule is aligned with that we do as you mentioned has a significant backlog.
That we balanced through the year and then hardware does have some lumpiness with customers depending on when their their schedules to take take possession of it yes.
By the way just building on the comment that I made earlier, if you look at our revenue quarter by quarter. Overall, I'd say 4567 years, you would see that 2022 was actually an anomaly when it was a particularly high push early in the year and you may recall that at that point in time. There was also you beforehand.
In the markets.
Actually the much more normal.
Form is essentially a gradual slope moving up.
And of course, there is some sales phenomena that the first quarter tends to be weaker than the last one because everybody works hard on the last one, but but having said that I think.
This is in many ways the profile of a normal year.
Got it okay.
I Havent heard you mentioned silicon lifecycle management.
Recently or maybe I missed it.
They did that maybe you can just give us an update on where that new products that stands in terms of customer adoption.
Sure actually reasonably must be the last 30 minutes, because it's actually a topic I love to talk about because we're making excellent advances in there and we're finding that the domains of applicability are broader than what initially motivated us and the initial motivation came somewhat from the automotive field.
Which is clearly going into a very deep redo of what a car is all about.
Im not thinking here of the electrification, which is also happening, but the whole notion of essentially a software driven device literally and with that comes the question. When you have very sophisticated chips in there how do you know they still work and that is where the lifecycle management is essentially a settle steps that start.
At the very development of the chip of putting certain sensors inside of the chip having the ability to.
Query them in a smart way about potential failures or abnormally I should say and then do that through lean manufacturing through the installation through the early years, but also the lifecycle literally of the car and so that was a key driver. It turns out that there are other fields that have lifecycle.
Yes.
In a different way just as high such as compute centers that are really very sensitive about.
Some servers going down and wanting to hide that from their customers or I should say protect their customers from that and so.
So the opportunities abroad, and this fits very well I think the synopsys profile because one of our skill set is that we have skills and many different phases of the whole system design development.
And utilization.
And.
There are things that are truly close to silicon physics here, all the way to very sophisticated techniques and AI utilization to assess the results and so we see excellent growth here and.
This will be a long term broad project for us.
Thank you.
Thank you Gary.
Our next question comes from Jay Please shower with Griffin Securities.
Thank you good evening.
Alright.
One of the interesting phenomena in your organic head count growth over the last number of years.
Has been the seemingly large investments you've made in AE capacity.
And so the question is could you speak generally about the utilization that you're seeing of that.
Capacity investment and specifically.
What kind of AE resources are being called upon for DSO.
SLM, which you just mentioned or any other or <unk>.
Sure.
Areas.
To which AE capacity is being directed.
Then I'll ask my follow up.
Well, it's a great question, because whenever we introduce new technology you.
You have two or three different steps. The first thing is obviously how quickly can one make it useful for a customer given their flows their ways of doing things and adopted essentially to their situation. While at the same time teaching them the basics of how to run it to get good results.
Once you have done that it never ends because once you get good results. They want greater results and of course, there's a lot we can do by optimizing things for their circumstances and this is.
Going to be somewhat different for different types of products of course by the time you were talking about something like SLM.
It goes in many different directions, because now you have the intersection of testing techniques built in sensor or techniques all the way to how ultimately does get designed into the system with.
Learning capabilities enhanced interpretation on chip.
So.
In general I think we're going to broaden the skill set to be more and more multi disciplinary as we have some people and obviously a very deep in different areas.
The people that can handle a broader swath of the design flow for the customer with the customer I should say is important.
Last two comments is with some of the <unk>.
Sure.
Aaron's into chip design there. They really are looking for a lot of automation as much as possible upfront and sometimes that's helpful. Because there also no preconceived notions of how things should be done and we won't get started right away with brand new flows reuse of IP.
And so on so.
Uh huh.
It's a multiplier on our business and the quality of our people and the trust relationship becomes more and more important as we are working deep into production designs of our customers.
Okay.
So with regard to segment reporting.
Once upon a time, which is to say back in the primordial.
And team.
One of the segments you used to report.
DSM.
Which was reasonably sizable at the time and I imagine that's grown as a whole physical verification category has grown.
With all of the new fab construction activity, that's underway, particularly here in the U S.
Could you perhaps talk about the.
Progress of that business or how you're looking at the growth of that DFM business.
Since you last talked about it at which time it was already over a quarter billion.
While we don't disclose in detail what the sizes of this it is part of our design automation segment and.
As you can imagine the technology has become dramatically more complex as we also go to much smaller.
Life Sciences, but that very complexity is also the reason why we are more and more involved in the development of advanced technologies with the customer and there is absolutely great return for the customer in doing that because more and more doing experimentation in our fab is extremely expensive, but it also takes out.
Long time before you have results and so the more you can essentially.
Build what today would be called digital twins of how things are manufactured and modeled this electrically.
The better. So this is an area that we see good growth in and certainly very high strengths for Synopsys and again I'll use the word trust because.
This.
Really very very much inside of the silicon kitchen here.
Yeah.
Okay. Thank you Ed.
Thank you Jerry.
We'll take our next question from Vivek Arya with Bank of America Securities.
Thanks for taking my question I'm, probably nitpicking here, but if I go with the last few years.
You were able to raise full year sales outlook almost consistently every quarter and even when I go to the last call.
There was a statement about steady growth throughout the year, that's why I find it surprising you or not.
Raising your outlook for the year I mean, 40 years, 15% is obviously still very impressive.
But what is different or do you think between this year versus the last few years in terms of how you saw steady upside throughout the year, but youre not seeing it so far this year.
Well, let me just remind you that last quarter. Many of you've commented that they were surprised actually grew 14% to 15% given the.
Uncertainty in the market.
I think where we stand right now is that we have a solid understanding of what our customers are doing.
We all understand that Theres still some open questions on the market.
It feels at least in our domain that we are relatively correct in estimating what would be reasonable to shoot for for this year and so at this point in time, we don't see a need to change those numbers.
It's it's almost impossible to compare one year to another because all the years are so different.
But right now I think we're in a really good track.
Alright, and then as the cost to move to more advanced nodes becomes expensive is that a positive or had been here.
Does it mean fewer design starts because it's very expensive to do.
Three nanometer or two nanometer design, but then maybe they become more tool intensive. So I'm just curious how is that netting out for synopsys.
Well for starters I don't think that there are fewer design starts I think the race is very much on secondly, we've always.
Believe that complexity is a good thing for us because we are an enabler and I saw is that in all of the people developing the new technologies, but hopefully they had at least a little bit of all of us to the fact that we have learned how to use massive number of transistors and I think we have now a fabulous new horizon, which is.
Going from one to multiple chips that are in very close proximity is actually technology feat in itself and we're in the midst of that and it is really exciting that a number of the top leaders in this field are doing production design with us already and so this is active learning.
And so.
I'm not worried that this is going to get in the way on the country I think.
I'm on record as having said many times now that.
It's a whole new age of systemic complexity has opened up and has retained one characteristics from the past which is this one.
And believe it will exponential ambition.
Formulated by Gordon more many years ago now in a completely different context, absolutely continues the races on the new opportunities. So I wont almost say bring it on.
Yeah.
Thank you.
Thank you.
We will take our next question from Ruben Roy with Stifel.
Thank you I had a follow up on the DSO AI question that was asked.
Beginning part of the Q&A and I guess the first part of my question is in terms of implementation of the tool.
Can you talk a little bit about how your customer expect to see a 100 commercial Paypal, but I'm wondering about how customers are using the tool.
Or is it more a cloud based implementation that your customers are asking for that or as on Prem.
Love to understand kind of so far how thats working and then I have a quick follow up following that thank you.
Great Great question actually it's both.
Remember, though that the most advanced customers the biggest ones have themselves enormous clouds, but it's interesting even there we see a number of people that say well you know.
What it had way more compute for a for a couple of weeks could you just feel better and the very fact that they are experimenting with that is very exciting because you can still do better but we are also a number of customers that are now really driving towards.
Wanting to move their company to more cloud based computation.
We are completely capable and on top of running it in those circumstances.
I think we will continue to see both but overall, it's going to be spreading among more and more customers. There's no doubt about that.
Right Okay.
And then the follow up to that is the beauty of AI.
Been hearing a lot about it.
The last few weeks and months.
Is the concept of learning.
As the systems.
Good.
More information and so I would think that that would tend to EMEA.
I mean that as we move forward here.
The system gets better on learning, whether it's physical layout or improving from the specification that you've talked about that it should accelerate use cases is that the right way to think about DSO that AI.
Absolutely good way to think about it because you are absolutely right.
When the product can essentially improve itself over time.
What is there.
To find negative about that idea that is great. The results do get better, but it's not only the product thats getting better. It is also the product understanding of the specific design, it's working on getting better and we often forget that while a lot of people talk about Oh is it new design, we are doing a new design with doing this.
Lastly, as many of designs are derivatives of already existing designs and we have fantastic evidence of demonstrating that when DSO dot AI was used on an earlier version that it has a lot of stuff that it can learn from that version and directly apply.
So the next incarnation of the chip and that includes by the way if that chip needs to go to a different silicon technology or if that ship gets a few other additional blocks to let's say personalize it to a different customer of the customer.
And I think there is a lot of potential in all of these things to still do way way way better, but Steve the advances are remarkable and we're tracking this and we see quarter by quarter, new breakthroughs in many things.
That's absolutely exciting.
I appreciate that detailer. Thanks.
Youre welcome. Thank you.
We will take our next question from Jeremy <unk> with Deutsche Bank.
Yes, hi.
Thank you for taking my questions.
Maybe starting with <unk>.
Could you maybe share some more color on its performance this quarter and whether you've seen any new wins versus backdrop from clients pushing way, maybe some projects that were in the pipeline previously.
The professional services on maybe some of those initial cities.
We'll beat those are suffering a little bit more however, I mean, it's still great to see that growth is higher.
Hum from all breakdown sort of margin improvement so maybe just give me.
A little sense of how is that development.
In terms of projects and then I'll ask a follow up after thank you.
Sure.
So always a couple of dimensions to the.
The progress because what has been interesting we have invested now for a few years and a platform that brings multiple tools together and the reason this is important is that.
Security problems are not simple to diagnose and there are many different types of problems.
Increasingly what's the people would want to have that are in charge of security. So more top down in the company as an overview of which what gets caught where and how do you bring these diagnostic together to have a better assessment of the risks that they have to manage and so the indirect impacts on US who is doing this better than.
Better is the fact that we also are seeing that our customers are starting to increasingly buy multiple products from us rather than initially buying one that.
They may use for a while so that is a side effect essentially of ourselves providing more systemic complexity assessment.
Then before.
At the same time.
<unk>.
Normal business continues.
Mentioned in the economics.
Surroundings, what do we see essentially is that the levels of <unk>.
Signatures needed to close deals takes a little bit longer but overall there is no doubt that this is an area that continues to grow and has still a lot of potential because a lot of customers are barely at stage one of ultimate meeting this.
Yes.
Our technology progress is actually quite strong.
So we are looking at growing between 15% and 20% this year, which is exactly on the target that we had told you before.
Oh, it's exciting it's.
Close to 10% of Synopsys.
With a little luck, we'll pass they have $1 billion Mark pretty soon.
Great that was really helpful.
My follow up would be maybe on on DSO.
Could you maybe talk a little bit about the training time for existing engineered using the new tools that are undergoing a new design is it time consuming or are they using pretty much the same in <unk> and.
And also maybe if you could just share a little bit on how does that compared to competition such as cerebral to say it.
It seems like you guys have both both the sort of like rates towards capturing the most amount of the market.
And it seems to be great growth opportunities. So maybe it's basically two questions and one about training time.
You can send it to phase III versus competition as well. Thank you.
Sure well I'm training of course, the two types of training right. There's training of the tool and in its training of the user and I must say I've personally been surprised because initially when we have these fantastic results in early 2020.
Okay, well, that's great, but you're always going to take a while before they adopt it.
But the results were so good that people actually couldnt resist adopting it even not having fully appreciated what it would take to do things and of course our own.
As Jay.
Mentioned earlier, we are well trained to help them, but initially we didn't do it with too many customers and so that first year year and a half we had a limited set of.
Advanced customers and we followed the same recipe whoever on SaaS sales with US we will run in house with them and so the training has never made it to be a real issue in the discussions we've had now that doesn't mean that that this is just a super easy it means that I think we are.
Well equipped to take the design processes that our customers have which we by the way know very well and adopt the tool to it and modify slightly the process for the tool. So I think we've done well.
It's hard for me to compare to competition and it always feels like difficult to to be objective about that but I would say that we had the benefit of getting fantastic results already a number of years ago, and we are very very rapidly moving to next generations of our tool and solution and the very far.
Steps, we are now well over 100 production designs should tell you that this is not driving was training wheels would just speak.
This bike is going down the hill at high speeds is only kids, who dare to do and.
I think we will continue to see excellent results.
I think I had also mentioned in the preamble that we've broadened substantially the applicability not only in the digital space, but some of the the parallel spaces of passenger verification and also our mixed signal and so these are these are broad open areas of opportunity for us.
Great. Thank you appreciate it.
Youre welcome.
We will take our next question from Blair Abernethy with Rosenblatt Securities.
Thank you.
Nice results I, just want to thank you with DSO DSO AI a question for Mike.
Synopsys perspective.
Is the margin opportunity.
Is it similar to your core EDA tools do you have to put more resources to get this product in the market and ramp in orders or is it oh.
On the line with the same along the same lines as your core business.
Yes.
Maybe somewhat simplistic terms I would say when you suddenly have a step that does work and a third of the time and gets you another 10% or so better speed and.
And lower power.
Margin issues are not really the driver it's more like okay, where can they find the budget to keep moving here.
I.
I don't want to be too light about a statement like that because we.
We work with People's for many many many years and it's very important that we feather in the ability for our customers to adopt be successful themselves and good in tougher times, but overall I think there's no question. These are technical advances of extremely high value and the directly multi.
Supply the opportunity space that our customers have so.
I think we will be okay.
Okay great.
Just one quick one for you Sheila you'd mentioned.
40% to 50.
<unk> million dollars in restructuring costs can you just tell us sort of what areas.
Are impacted and does that.
Okay.
When is that coming through in Q1 Q3, when those expenses can be recognized.
It'll come through over the first three quarters of the year a portion of it is sitting in Q1 about $41 million of that is in Q1 and what we're really doing is we're doing a small reduction and then we're taking that invest in it and shifting it into some of the growth areas that we've talked about today. So.
We're using this as a way to rebalance and set ourselves up for that future growth trajectory.
Got it thanks very much.
Thank you.
And that concludes the question and answer session I would like to turn the call back over to our chair and CEO Rds.
Well. Thank you very much for participating in the call. If nothing else you probably heard in our voice some degree of Hamptons Gazzam for the advances that we're making and as you know we will be looking forward to speaking to some of you later on today with that stay safe and have a great day Bye bye.
And that concludes today's presentation. Thank you for your participation you may now disconnect.
Okay.
Yes.