Q3 2023 Synopsys Inc Earnings Call
Speaker 1: Ladies and gentlemen, welcome to the Synopsys Earnings Conference call for the third quarter of fiscal year 2023. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.
Speaker 1: If you would like to ask a question at that time, you may press star 1 on your telephone keypad to remove yourself from that queue. You may press star 1 again.
Speaker 1: If you should return the call, please press star zero and an operator will assist you. 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 Trey Campbell, Senior Vice President in investor relations. Please go ahead, sir. Trey Campbell, Senior Vice President in investment relations.
Speaker 2: Thanks Lisa. Good afternoon everyone. With us today are Art DeGios, Chair and CEO of Synopsys, Saseen Ghazi, President and COO, and Sheila Glaser, CFO . Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts...
Speaker 2: 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.
Speaker 2: In addition to any risks that we highlight during this 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 certain 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 8K that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at www.synopsys.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.
Speaker 3: Good afternoon. We delivered outstanding results in the third quarter, exceeding the midpoint of all our guidance targets, while reaching another quarterly revenue record.
Speaker 3: Revenue of $1.487 billion was in the high end of our guidance, with non-GAAP operating margin at 35.3%.
Speaker 3: GAAP Earnings Per Share was $2.17 while non-GAAP Earnings Per Share was above our target range at $2.88.
Speaker 3: We generated 560 million of operating cash flow and ended Q3 with a backlog of 7.1 billion.
Speaker 3: By now you have all seen our other news. Before I address our segment results in Outlook, let me warmly welcome Fassim Ghazi to the call.
Speaker 3: Today, we announced that the Synopsys board has named Sasin as Synopsys President and CEO starting January 2024, and that I will take the role of Executive Chair of Synopsys board at the same time.
Speaker 3: I'm absolutely thrilled with this transition into the CEO role for Saseem.
Speaker 3: Cecilia is uniquely qualified.
Speaker 3: He's a proven operational leader, a technology innovator, and a trusted partner to our customers and ecosystem friends.
Speaker 3: Did he need so much more than that? He embodies our values and culture and inspires our company, including me, with his results focused leadership.
Speaker 3: So, thank you for your first of many synopsis earning calls.
Speaker 3: Thanks Art, I'm incredibly honored, humbled and profoundly grateful to the Board and you Art for placing your unwavering trust in me.
Speaker 3: You built synopsis from a disruptive startup into one of the world's essential semi-conductor ecosystem companies. You built synopsis from a disruptive startup into one of the world's essential semi-conductor ecosystem companies.
Speaker 3: I'm so proud to have been the part of that journey for the last 25 years working with you, our leadership team and the many colleagues across the organization.
Speaker 3: I'm determined to build upon our song foundation, drive innovation and propel synopsis to even greater heights of success.
Speaker 3: I look forward to engaging with all of you moving forward and to the continuing partnership with art.
Speaker 3: Thank you for seeing. You have my full support. Now let's turn to what we're seeing in the market.
Speaker 3: Technology industry trends are playing to our strength.
Speaker 3: AI driven smart everything era is putting positive pressure on the semiconductor industry to deliver more.
Speaker 3: Despite economic challenges, semiconductor design starts and R&D investments continue on a baited.
Speaker 3: Our relentless innovation drive has made Synopsis a catalyst for our customer success in this new growth era for semiconductor.
Speaker 3: In fact, the market is playing out much as we expected when we plan the year and we are executing accordingly.
Speaker 3: Based on continued strong design activity, our high confidence and high confidence in our business, we are raising our full year revenue guidance range to between $5.81 and $5.84 billion.
Speaker 3: We are increasing our year-to-year non-GARP of SMARGEN improvement expectation to 200 basis points.
Speaker 3: This is approximately half a point up versus prior guidance.
Speaker 3: We're raising our full year non-GAAP EPS range to between $11.4 and $11.9.
Speaker 3: Tsunar will discuss the financials in more detail.
Speaker 3: Prior to getting color on our segment results, let me update you on our AI program.
Speaker 3: I know, I hope that we all understand that AI can, and does, and has further potential to unlock massive new productivity gains.
Speaker 3: So while we continue to embed AI in everything we do, not surprisingly, one consistent question most of you are asking is how will monetize our AI leadership?
Speaker 3: Let me address that question head on to the tech-onomic lens of product differentiation and business model framework, including some early proof points.
Speaker 3: I'm monetization. We see three distinct value streams. First
Speaker 3: Through our design participation in the explosive growth in the man for AI chips.
Speaker 3: Second, my progressively embedding our pioneering AI across our full EVA stack, which we call synopsis.ai.
Speaker 3: And third, through AI-driven efficiency transformation as we optimize and automate our own internal workflow.
Speaker 3: Let's start with the E outchips.
Speaker 3: Use cases for AI are proliferating rapidly, as are the number of companies designing AI chips.
Speaker 3: Novel architectures are multiplying, stimulated by vertical markets, all wanting solutions optimized for their specific application.
Speaker 3: Third parties estimate that today's $20 to $30 billion market for AI chips will exceed $100 billion by 2030.
Speaker 3: In this new era of smart everything, these chips in turn drive growth in surrounding semiconductors for storage, connectivity, sensing, H2D2 and D2A converters, power management, etc. Growth predictions for the entire semi-market to pass 1 trillion by 2030 are thus quite credible.
Speaker 3: We are uniquely positioned to benefit. In the semi-ego system, synopsis is the leading EDA provider to AI CHEP designers. Designers requiring unmatched capabilities in design tools, particularly at the most advanced process nodes.
Speaker 3: They also need our leading interface IP portfolio, as AI chips are banking on enormous amounts of data, driving new, faster, and lower power into connect protocols.
Speaker 3: Synopsis excels at this.
Speaker 3: In summary, AI chips are a core value stream for synopsis, already accounting on a training 12 month basis for well over a half a billion dollars.
Speaker 3: We see this growth continuing throughout the decade.
Speaker 3: Let's move to our second value stream, synopsis.ai. This is where starting in 2017, synopsis, incidentally led by Sassim, pioneered AI driven chip design.
Speaker 3: and we have relentlessly advanced the state of the art ever since. Using our AI to automate entire design subflows, our customers report scheduled reductions from months to weeks, while simultaneously also achieving better results in terms of speed, power, and area of the chips.
Speaker 3: In February , we reported that our customers had passed 100 commercial tap outs using our AI.
Speaker 3: Today the tally costs 270 as adoption continues rapidly.
Speaker 3: 9 out of 10 of the top semiconductor vendors are using Synopsys AI in production, and the tenth one is already testing our solution.
Speaker 3: What makes this doubly relevant is that the worldwide semi-industry has a thickness-trickened resource shorted.
Speaker 3: Third parties estimate a design engineering gap of between 15 to 30% by 2030.
Speaker 3: Even the multiplicity of National Chip Act recognizes this, an AI in design automation will be critical to help bridge the gap.
Speaker 3: That's why the industry's first AI driven full EDA suite, synopsis.ai, comes in.
Speaker 3: Initially launched in 2020 for design optimization, we have since added AI-driven tests and verification flows now in commercial adoption.
Speaker 3: Usage is expanding rapidly. As customers are seeing stunning results.
Speaker 3: In the last quarter, our customers have demonstrated up to 10x faster turnaround time and double-digit improvements in verification coverage.
Speaker 3: The customer is also reporting more than 20% silicon test cost reduction.
Speaker 3: Recently, we engage Synopsys.AI for analog and custom design.
Speaker 3: One of our top customers used our AI Optimized Custom Compiler to achieve a 6% performance improvement over manually crafted custom circuits.
Speaker 3: Further completing our synopsis.ai stack, more AI-driven manufacturing flow extensions are coming soon.
Speaker 3: our synopsis.ai stack, more AI driven manufacturing flow extensions are coming soon. Good back to economics.
Speaker 3: So not so that AI revenue is just starting to ramp, but early proof points give us high confidence in its long-term growth prospect.
Speaker 3: We've moved from project-based experimentation to customers now adding synopsis.ai subscription.
Speaker 3: Synopsis AI has driven more than 20% value increases in several recent digital implementation renewals, often leveraging significant growth for the underlying core tools used by Synopsis.AI.
Speaker 3: This quarter we saw multiple full flow displacements two synopsis of that AI driven by up to 10 x productivity differentiation versus the competition.
Speaker 3: which brings me to generative AI.
Speaker 3: Over our history, key disruptive technologies have catalyzed innovation opportunities for synopsis to deliver leaps and productivity.
Speaker 3: Genie I is such a technology.
Anchored in 35 plus years of experience in developing model-based solutions, now with unparalleled data-affet portfolio, we intend to harness Gen AI capabilities into Synopsys.AI.
We see this delivering further advances in design assistance, design exploration and design generation.
On the design's flow spectrum, from optionality to optimality, in other words, moving from many options in early architectures to highly tuned, error-free tape outs.
Gen A.I. techniques will augment the exploration, accelerate design choices, and automate some design generation.
This will further broaden the intelligence dimensions in our synopsis.ai.
These okay, abilities represent additional customer value opening multiple new monetization opportunities.
We will elaborate more on our roadmap in the coming quarter.
which brings me to our third monetization value stream.
Operational Efficiency Transformation
Gen AI isn't just an opportunity for our customers. We ourselves fully intend to eat at our own AI restaurant, so to speak.
We see significant operational efficiency and automation potential in processes across the company so that our employees can focus on higher ROI tasks.
Our experimentation in full swing, and we are rapidly learning the strength and challenging of these new approaches.
Overall, class progress on our AI journey, and it is great to have seen on the call for Q&A as he is very focused on our AI business strategy and monetization.
Let me now give some color on our segments of design automation at roughly 65% of our business, design IP at about 25% and software integrity at around 10%.
Starting with design automation, we saw strong revenue momentum and the segment delivered its first $1 billion quarter.
Fusion compiler momentum continues to grow with increased customer share and synopsis enabled customers taping out first to a number of leading manufacturing nodes, including TSMCN2 and N5A, Samsung SF3 and Intel 188.
Fusion Leadership at Advanced Node has also translated into key HPC core wins at both Symmic Inductor and Hyperscale Company.
Transitioning to multi-dye chip design.
Our 3DIC Compiler Platform continues momentum across verticals, achieving deployment on the industry's first advanced 3D stacked heterogeneous design for smartphone.
We also expand it our multi-dig ecosystem enablement.
including qualification for leading foundries, latest multi-diflo and support for key 3D design standards.
Of note, we deepen our collaboration with Samsung Foundry to accelerate multi-dysystem design for advanced processes.
Let's move to verification where the need for acceleration is paramount.
In Q3 we want a Zebu hardware-assisted verification engagement with a RISC-V AI chip provider, and so HAPS deployments for prototyping AI chips at a large hyperscaler and a large HPC company.
The Note says Cloud continues to deliver substantial differentiation and time to market games for our customers.
Our SaaS solution, which accounts for 70% of our cloud users, continues to gain strong adoption with multiple AI chip startups leading new SaaS deployments.
Now turning to design IP, which is roughly 25% of our revenue, we have an excellent quarter working closely with some of our partners to enable the most advanced process nodes in the design ecosystem.
Just this week, Synopsis and Intel announced a very significant expansion of our longstanding strategic partnership in EDA and IT to speed the design and manufacturing of advanced FACs and multi-dysystems for Intel processes.
This comprehensive agreement enables Intel's internal IDM 2.0 team and their external foundry customers to accelerate chip and system design with a powerful portfolio of essential IP evolved by Synopsys for Intel 3 and 18A Processes.
Synopsys IP is now key to ramping and filling multi-billion dollar rate for fabs as the advanced node IP supplier of choice of customers and the manufacturing ecosystem.
Further supporting this, in Q3, we also announced the industry's broadest portfolio of silicon-proven IP for TSMC's N3E process.
as well as an extensive portfolio of IP for all of Samsung Foundry's advanced process technologies.
In automotive, eponymous driving ADAS systems continue to drive strong demand for our IP.
This quarter we exceeded 30 design wins in 5nm and won our first 3nm design at the Marquis Automotive OEM.
All in all we have won IP sockets on more than 100 ADAS chips.
Byrd, the software integrity segment, which represents 10% of our revenue.
Against the continued challenging macro environment for enterprise software, the business delivered solid results.
The imperative for security and quality in software has always been critical, and with the rise in Gen AI generated code, big new risks are emerging.
Racing forward, we continue to develop innovative new solutions like our AI Code Analysis API offering on our Polaris SaaS platform.
AI Code Analysis API enables developers to automatically submit code snippets from code assistants such as GitHub Copilot and ChatGPT to receive instant feedback on whether the code may originate from risky open source projects.
In summary, we had outstanding Q3 financial results and operational execution and are confident in our strong close to the year.
We are raising our guidance for full-year revenue and year-over-year up margin, as well as non-gap earnings per share expectations.
We have a resilient business model and our customers continue to prioritize investments in the chips and systems that position them for future growth.
We continue to invest in technology leadership, multi-die design solutions, state-of-the-art IP, and the leading-edge AI-driven EDA suite to help catalyze this decade of smart, secure, and safe products.
And last, but certainly not least, I am just delighted to welcome Saseen as our new CEO .
I would like to thank our employees and our partners for their passion and commitment.
That's all 20 over to Sheila.
Thank you, Art, and congratulations to Cine. I look forward to continuing to partner with you as you transition to CEO and scale the company to the next level of growth.ama. Couple numbers.
Q3 was another outstanding quarter with record, revenue, and earnings. EPS was above the high end of our range.
We continue to execute well, which is a testament to our execution and leadership position across our segment, robust chip and system design activity by our customers who continue to invest through semiconductor cycles, and with $7.1 billion in non-cancellable backlog, the stability and resilience of our time-based business model.
With our continued confidence in the business, we are raising our full-year targets for revenue, non-GAAP operating margin improvement, and EPS. I'll now review our third quarter results. All comparisons are year over year unless otherwise stated.
We generated total revenue of $1.49 billion. Total gap costs and expenses were $1.19 billion.
Total non-GAAP cost and expenses were $963 million, resulting in non-GAAP operating margin of 35.3%.
GAAP earnings per share were $2.17 and non-GAAP earnings per share were $2.88.
Now, onto our segment.
Design automation segment revenue was $1 billion, up 23%, driven by broad-based strength. Design automation adjusted operating margin was 41.4%.
Design IP segment revenue was $350 million, up 12%. Adjusted operating margin was 24.7%.
Software integrity revenue was $133 million, up 12%, and adjusted operating margin was 16.9%.
Due to continued macro impact on this segment, we now expect software integrity revenue growth in 2023 to be below our long-term guidance of 15 to 20 percent.
Turning to cash, we generated $560 million in operating cash flow and used $300 million for stock buybacks.
Our balance sheet is very strong. We ended the quarter with cash and short-term investments of 1.8 billion dollars and total debt of 18 million dollars.
Now to guidance.
As we have previously communicated, we had expected a strong second half. We are again raising our full-year outlook for revenue, non-GAAP operating margin improvement, and earnings.
For fiscal year 2023, the full year targets are revenue of $5.81 to $5.84 billion.
Total gap cost in expenses between $4.544 and $4.564 billion.
Total non-GAAP costs and expenses between $3.78 and $3.79 billion, resulting in non-GAAP operating margin improvement of 200 basis.
non-GAAP tax rate of 16%, GAAP earnings of $7.85 to $7.96 per share.
non-GAAP earnings of $11.04 to $11.09 per share.
Cash flow from operations of approximately $1.65 billion.
Now to targets for the fourth quarter.
Revenue between $1.567 and $1.597 billion.
Total gap costs and expenses between $1.184 and $1.204 billion.
Total non-GAAP costs and expenses between $1.005 and $1.015 billion.
gap earnings of $2.17 to $2.28 per share, and non-gap earnings of $3.01 to $3.06 per share.
Consistent with prior years, we will provide additional comments and guidance for 2024 when we report next quarter.
In conclusion, we delivered record quarterly revenue and earnings.
Based on our outstanding results year-to-date and strong outlook, we are again raising our targets for the full year. We continue to see strong momentum in the business, reflecting our leadership position across our segment, robust 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 questions.
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 as time permits. And with that, it is star 1 to ask a question.
We'll take our first question from Jason Salino with KeyBank Capital Markets.
Great, thanks for taking my question. Frankly, I don't know where to begin. Art, what a run and Saseen, well deserved. Maybe Saseen, sorry to put you on the spot here, but can you just frame your vision around AI and how closely you've been working with the AI strategy?
Sure, first, thank you Jason. And as Art mentioned, actually the AI journey for Synopsys started around 2017. I was the general manager of our EDA business at the time and no one in our industry was talking about AI in 2017.
for EDA applications. Around the 2020 timeframe, we actually had customers using it in early production stages. And now, as you saw, the number of many, many tape outs.
At the time, we started with the design space as the early stage of high impact using AI. And as you have seen us talk about the last couple quarters with Synopsys.ai, where we're expanding the impact into test verification.
analog custom manufacturing, et cetera. And Art mentioned in his remarks that we have customers at this point buying our AI solution as part of their subscription license.
And you know when a customer does that, they already see the value and the impact and they're willing to pay for it. And that's the stage we're in at this point.
Okay, no, that's great. And then my brief follow-up, I think it was mentioned that in some renewals you're seeing a 20% increase because of AI. Is this mainly driven from the tools themselves or is this more related to the upsell of the core because of the…
I'm sorry, the 20% increase in what? I missed the first part of the question. I think Art mentioned that in some renewals you were seeing 20% increases in value. I'm just curious on the drivers of that. Or maybe I missed her. I'm just curious on the drivers of that.
We are seeing absolutely two factors. One, there's a pull-through of the technology that our AI system uses, like fusion compiler, primetime, et cetera, et cetera. And the customer is adding...
money, new money in the agreement based on the AI system that we are selling them. So it's not only an upsell and a pull through of the license. It's incremental value that the customers are adding to their renewal with Synopsys.
Okay, great. Thank you very much.
Thank you, Jason.
We'll take our next question from Gary Mobley with Wells Fargo.
Good afternoon, everybody, and thank you for taking my questions and congrats to both Art and Sissy on the transition.
I want to pick up where the last discussion point left off. I wanted to maybe probe into maybe how many renewals have come up since you went from on a per design subscription for AI tools to it rolling into baseline license renewals.
I just want to get a sense of how many of these license renewals are now including AI.
As you know, an average EDA contract is about three years. So 2020 when we started with customers and we have a number of those customers included it in their renewal. So we're already in that first stage with number of customers.
Thank you for that, Saseem. I wanted to change topics and move to the different
trends in the operating margin for the different business segments. I know that you called out in the past quarter-to-quarter volatility in the op margins for the IP business but we now have a trend with the...
trend downward for the past two quarters, so maybe you can speak to that specific to the IP business. And then conversely, you're showing nice gains in the software integrity business with seemingly not much revenue ramps. So maybe you can speak to the undercurrents there and as it relates to OPEX controls on the software integrity side.
Sure, so I think it is, you know, this is the change that Art and Sateen drove in the organization, so that's why we've got this more comprehensive segment reporting and you're able to see what is going on in our three large segments. So if I talk about Design IP specifically, we really think about that business.
each new node for each different boundary, for each different customer. Think of us as constantly investing in IP. When we're signing contracts with customers, we're signing an agreement for a specific amount of dollars with a specific term. When the customers pull down the IP is based on when their design.
is needing to integrate that IP into the design. Over time, we expect that IP margin is slightly below our corporate margin. What you're seeing is what we've always called lumpy. You're able to see what lumpy looks like now with our new segment reporting. So the expectation hasn't changed.
As we're looking out, we're seeing customers deep into their designs and we understand the timing of when the IP would be pulled down. We feel strongly about that business, plus it's an incredible strategic asset for us to be so deeply involved and engaged in our customers design. So we've got strong view of.
positive view on that margin. For software integrity, we've talked about, we've been focused on improving the margins in that business as we scale the business, and you're seeing some of the pull through for that in the Q3 timeframe.
Thanks, you all. Thank you.
We'll take our next question from Joshua Tilton with Wolf.
Hey guys, thanks for taking my questions. First, Art, I guess, not I guess, but you'll definitely be missed, and congrats to seeing on the new role.
Not like I'm completely disappearing, right? Just to be clear.
It will definitely happen.
I guess my first question is just it seems like as of January we're going to have a bit of a new regime in place. Maybe what are some of the things you can either do differently or just some levers that you feel that you could pull to maybe drive some meaningful margin expansion in the model come next year?
Joshua, I've been part of this company for 25 years and the last three years it's really been the start of what we call a momentum journey and we'll continue that phase of the journey moving forward. But Art and I, when I was appointed to COO, have been very supportive of the momentum journey.
one is focused on the growth ambition. The second one is scaling and how do we scale efficiently as a company, free technology leadership and innovation. And if you look at the results, they're really amazing. Over that period of time, we're able to grow revenue 17% bigger.
700 basis points in non-GAAP operating margin, and 26% CAGR EPS. And doing all of this while pioneering industry first technologies like the AI solutions that we are talking about, plus 3D IC from a multi-die, both IT and design tools, et cetera, et cetera.
So as we look ahead, January 1st, as you commented, it's just a continuity of that pace at the time where the market, the semiconductor chip activity is so exciting, driven by the AI demand that requires more compute, either data center, cloud, or edge.
as well as everything going smart, smart everything in a car, in a home, in the industry, etc. So it's really continuing that pace of momentum we created on all three vectors.
And I would add that we're committed to both short- and long-term operating margin improvements. That's what you're seeing, the improvement in the second half of the year. And we, of course, will guide 24 next quarter, but our long-term guide is at least 100 basis points improvement a year. So we're committed to that. Thank you for joining us, and we will see you in the next minute. Bye.
Super helpful and I think just a quick follow up to that talk track. When you guys started buying up all these SIG assets, I think the bullish take was, you know, we have this...
portion of the business that's growing a lot faster than the core EDA and we could see this nice mix shift effect as SIG becomes a bigger piece of the total pie, but I guess how do we think about when, from an investor perspective, we should kind of expect STIG growth to be back above
the corporate average. Like maybe help us out with a little color there.
You know, the thesis behind SIG remains very strong, which is software quality and security. And actually right now you can argue, and the future is as strong or stronger with AI to code and the need.
or any developer to ensure that it's secure software that are using in their product.
What happened over the last 12 months or so is not unique to Synopsys, is you're seeing it in the industry, especially at the software enterprise industry, is a slowdown and that headwind is really what you're seeing right now. And as Sheila mentioned,
even though we're not speaking about long-term projection and guidance for any part of the business, but we are, last quarter if you recall, we said we'll be at the lower end of 15 to 20 percent, and now it will be slightly below that number.
But it's not due to the portfolio or the execution, it's truly the headwind we're facing in the market.
Makes sense. Thanks guys.
Thank you. Thank you. Thank you.
We'll take our next question from Joe Ruink with Baird.
Great, and big congrats to Saseen and Art. I maybe wanted to start just, Art, in your opening comments, the three sources of monetizing AI chips and that market opportunity.
So that's more market growth for customers, your AI products, that's wallet share for Synopsys, and then how you can employ AI internally. I take that as meaning higher margins. I guess when you just add all of those things together, can you maybe comment on how it could start to influence your long term.
in 2021 when the framework was first debuted.
Well, you know, you have our basic financial outlook because we have communicated that we're focusing on number one growth and continued gradual improvement of ops margin. And in many ways, this is against a backdrop that is fantastically exciting because there's going to be a wave of end users and I mean with that, you know.
us will be unhappy with semiconductors because they want more. And there is nothing better than that because that is what in the early days drove the whole Moore's law at super high growth. And we have a similar feel going on right now. And you may say, well, but is the technology not limited? Well, no, it's not.
What has changed is that the architecture is all changing and that the ability to bring chips immensely close together, including stacking them vertically, is now suddenly opening up. Still difficult, still expensive, but you know that's what FinFETs were before too and then suddenly out of nowhere there were over ten generations of it.
And I think this is exactly the space that we've entered. And so that's another way of saying design is going to become more complex, more engineers are needed, and given that the world supply of engineers is somewhat limited, more automation is the only answer to solve this. Again, not any difference than in the 1980s, 1990s.
2000s and we all feel this drive because the notion of smart everything has shown itself as relevant.
Now a little portion of that is well, how smart are we on the inside and You know, there's a lot that we can learn and obviously anything that we can automate or accelerate In our processes directly goes to the bottom line And at that point in time Sussine's job is to figure out how much of that money to the bottom line goes directly back into AI research, right so
That circle is very active. Okay, that's all great. I wanted to go back and Jason asked about the renewal anecdote. I think that's a pretty interesting one. I guess my question is the 20%
Is that pretty typical or emblematic of what Placent Route has been seeing so far? And maybe if it is, how do you see renewals evolving as customers get more experience, more proof points on things like tests, your new AI verification, analog.
kind of the full Synopsys.ai suite, what could that mean for a typical renewal?
In the early stages of AI, what the customers were struggling with were two things. One, I may not have enough compute and two, I may not have enough licenses, EDA licenses.
On the compute side, there are multiple ways that can be addressed, but most of our customers figured it out given the value that they were able to see.
On the EDA side, the reason we started with project-based, we were really trying to figure out with the customers, what's the combination of
number of licenses needed for an AI job because AI is pulling far more licenses of the technology that is under the hood compared to an individual engineer effort.
So after we learned from that experimentation, let's call it around 2020, and customers wanting to scale it up, we started providing it as part of the subscription license in order to enable broader and easier adoption for the customer.
And with that came monetization to Synopsys. As I said, incremental monetization on two sides. More selling of the licenses, plus selling the AI technology as well. We have now actually many, it's still early stages though, when I say many in terms of renewals.
Remember those are three-year cycles of renewals, and 2020 was just around the corner in terms of a renewal cycle. But we have many customers that they have gone through renewing their subscription license with Synopsys and added more technology, the schooling and the AI license.
Remember those are three years cycles of renewals and 2020 was just around the corner in terms of a renewal cycle. But we have many customers that they have gone through renewing their subscription license with Synopsys and added more technology that's pulling and the AI license. Great, thank you all.
Thank you, Jill. We'll take our next question from Vivek Arya with Bank of America Securities. Thank you, and best wishes to both Art and Saseem on your new roads.
We'll take our next question from Vivek Arya with Bank of America Securities. Thank you and best wishes to both Art and Saseem on your new roads.
Welcome. So I had a near and a longer term question. So on the near term design IP when I look here to date if the model is right, your sales are basically flattish so far this year. I think maybe up 1%. So I'm curious why is it well below your long term growth expectations?
And then when can we see this business get towards your target I think is to grow it kind of in a mid teens annual basis.
So it is a lumpy business as I described before. The contracts we sign with the customers, we have a term and a dollar amount, and then the timing of those pull-downs is really based on customer design. So we're confident in our long-term growth in that business because of the...
and delivering new IP blocks. And then it's really the pull downs are based on the customer design schedule.
And we see robust chip activity and we expect customers pull downs over a near-term horizon.
And for my follow-up, I'm trying to think of what is the right way to think about your sales growth for the next 2 to 3 years. Can it stay mid-teens? Will it decelerate to low double-digit? Will it accelerate? Because AI is growing but that's only 10% of your sales.
Is that really enough to help Synopsys continue to grow at this mid-teen space? Because when I look at a lot of the other parts of CEMI, whether it's consumer or parts of industrial or traditional data center, they have really slowed down. So I'm curious, is this AI enough to help Synopsys continue to grow its sales at kind of this mid-teen space?
over the next two to three years. Thank you. Just one comment, Vivek. You're asking of course the question that you should ask at the end of Q4, right? That's how we give guidance for the coming year. At the same time, overall as we mentioned, we are in a market that we perceive as strong for us.
We don't see any big changes. From year to year of course there's variability, but too early to really talk about that. But fundamentally, what we said in preamble is that fundamentally we have a degree of momentum that shows us that we're in a very strong business at a good time.
And so I wouldn't think that there are any major changes. At the same time, again, we're declining too far out guidance here.
Without giving guidance, I guess what I'm curious about is your insight on the growth in the business, excluding AI. Because you gave a half a billion number over the last month. Sure. Yeah, yeah. Okay. Good point. Sorry, I didn't catch that. Outside of AI, the business is just strong across the board.
You know, we talked earlier about IP. You know, these agreements that we made over the last quarter are very powerful for a long period of time. And they establish us as a provider that is one of necessity for foundries to be successful. Remember, for foundry to be successful with a new node.
It takes fundamentally four things. One, you have to have of course the technology. That's their job. Secondly, you need to have the capacity. Third, the EDA tools, which turns out we are always on time. And fourth, you need the collection of IP ready to go, because otherwise the end users can't do design. And the fact that we have strong agreements to provide this to the leading foundries in the world.
We'll take our next question from Reuben Roy with Stiefel. Thank you and my congrats as well to Art and Saseen. And Art, I hope we get to see you play the guitar more going forward from here. I wait to see you at the gig.
You'll see me there, definitely. Saseem, I wanted to ask on AI as well, around how you're viewing the pervasiveness of AI. Art talked about the $100 billion market potentially in AI chips by the end of the decade.
10% of a trillion dollar semiconductor market, early days, but do you think for now that AI embedded tools are slated better for a certain portion of semiconductor design market? Clearly generative AI has a...
Design helper mechanism can be pervasive across the entire gamut of semiconductor. I would think, but for now, is that the right way to think about it? This kind of large designs with very complicated place in route or do you think it'll be more pervasive than that?
It will be more pervasive than that, but it will definitely be in the stages of the design. So if you think of the design as
three stages. There is the front end of the design, then there is the implementation slash optimization of the design and the sign off. Where we started with DSO.ai and is in the physical implementation because of the space of optimization is so large.
it was such a perfect opportunity for an AI system to look at that large space of optimization and find the right parameters to tune and then give you the most optimized physical implementation. But as we expand into test, for example, and reducing the test pattern or verification.
in that domain and you go into manufacturing, they're there all time and can leverage AI for both productivity as well as the quality of the results that you get. Now, Art mentioned as well in his script as three stages of design assistance, design exploration, and design generation.
I want to say some of those are ambitious, meaning this is where we can see the technology heading in the next one, two years at various levels of R&D in some cases, and customer discussion.
available today from AI models, et cetera, et cetera. And you can open up the door to how do you protect your IP, the customer IP, how does the system learn. So the opportunity is definitely in early stages in terms of impact of AI overall on the chip design.
Very helpful. You know, I may add something, because I love what Cecile just said in terms of these opportunities. It is important to understand that what we have done is we started actually with the single hardest problem, which is all the stuff that sits before tape out. Tape out is when the design is done and gets sent to manufacturing.
Well, the one thing you don't want to happen is any errors in that. And so, as you add more and more and more detail, you're coming to this notion of the absolute necessity to be as close as you can to zero errors. And that's why Suzeen mentioned not only the design, but also the verification steps, the sign-off steps.
and we have integrated all of those under our AI. And I think it's gonna take a long time before many of the other techniques get close to that. But we are gonna of course put those around. So it broadens our opportunity space as Sasina said, but the core of our pioneering was really, we can do it and get.
Correct chips out now that is that is challenging Yeah, it's a very interesting discussion. Thanks for all the detail guys. I can ask what I hope is a quick follow up.
Some of your semiconductor customers have started to show their own accelerated compute platforms as. Platforms for tools and in those demonstrations more efficient than.
Your current standard server farms running EDA, what's your feeling on that? Do you view that? Obviously early days, but as a additional accelerant to EDA use or semiconductor design activity out there as the overall productivity could get faster as we put some of these new systems in place for your tools.
You're right, it's the right observation. Think of it as another tool that you can use to accelerate a workload. We were primarily CPU, then we introduced some GPU acceleration in a number of simulation functions and verification, and some other methods. So, Ruben, you can think of it that way.
Got it. Thank you very much. Thank you. As a reminder, everyone, please limit yourself to one question. We'll take our next question from Jay Fleischauer with Griffin Securities.
Thank you. Art, first, I've always enjoyed our more than 100 quarters of dialogue. And, Faustine, I'm sure you'll look forward to another 100 quarters of multi-part questions on the conference call. But, thank you.
For the two of you, let me ask a product roadmap question. And it does relate to AI. As you may recall from your last analyst meeting back in 2019, in answer to a question at the time, sorry, in answer to a question at the time about what you thought the longevity or useful life of your new data architecture or your new data architecture was like in the past, what you thought was the most important part of your data architecture
with an approximation, but the question is do you think that AI as you embed it in your own products extends that useful life of that architecture that you introduced a few years ago or might it on the other hand require you to accelerate a rebuilding of the architecture as you completed a number of years ago.
You know, Jay, excellent question and I remember that discussion as well.
when we introduced MDM at the time, if you remember, for our digital platform data model, it was around the 2015 timeframe.
So when you look at the decade, it's right around the corner. We continue and this was really the primary foundation to build Fusion, where you bring Prime Time, Fusion Compiler, Star RC, etc. The whole digital platform on one unified data model.
that is helping us accelerate our innovation pace and rhythm because tools are connected and we're able to move much faster in delivering a new technology, new products. And as you can imagine, the team is constantly looking, is there a more efficient new data model that we can build on?
And you mentioned the 2019 investor day, maybe I'll spill the beans. We will have hopefully in the first half of 24, it will be great timing to talk about how we see the future given all the very exciting areas of technology innovation and the market around it.
Would I say investor day? You didn't say an investor day at that time. I was too excited.
Thank you. And then we'll take our next question from Charles. She would need them. Hey, thank you for squeezing me in on Congrats to art. It's really been my great pleasure. I'm honored actually to work with the luminary of the EDA and semiconductor industry as you are.
Also congrats to Siseng. I'm blushing. Yeah, thanks. And congrats to Siseng as well. Looking forward to working with you in the future. Maybe my question, I want to ask again on IT revenue, seems like so far this year it's been tracking to single digit growth this year.
it doesn't sound too right because your long-term guidance is kind of like in the meetings. Unless we are you expecting we get a big bump in Q4 or we're going to be tracking the low that long-term guidance, but maybe next year we should expect that some of the above the long-term guidance kind of growth. That will be my first question. Thank you.
Yeah, thanks for the question. Yeah, we do anticipate a very strong Q4. So our model that we have we think is well intact and that's a long-term model. And so when you look to the quarter and quarter variability, we don't as much manage it in the 90-day increments. We're managing it at the full year and 12-month increments and we do expect a strong Q4 in IP.
We'll take our next question from John Marko Conti with Deutsche Bank. Hi, Art, Safeen, Sule. Thanks for taking the questions and congrats on yet another strong quarter and to Safeen. So perhaps starting with SIG, could you explain whether the new IT solution is
If you simply pass it the math of the mind that you have previously flagged it as something else in the mix, and conversely, what is driving the higher margin for this division right now? Thank you.
Yeah, we set out two priorities for SIG about a year and a half, two years ago. One is building out our Polaris platform, which is an integrated SaaS, which is the static and dynamic, insidious technology where we actually build this for us and introduce your intended
software composition analysis and it's a cloud native, cloud ready system.
So from a go-to-market point of view, we're still in a transition phase, transitioning our customers to Polaris.
while we're selling Coverti, Black Duck, etc., all the other point products that they can be primarily used on plants.
So that's from a technology platform point of view. From a go-to-market standpoint, actually we've done a fairly good job in putting the right investments. How much do we do direct? How much do we do through distribution?
and we're still on that journey of evolving our go-to market. Where we're seeing difficulties right now is the negotiation with the customers. Given the headwind, they're ending up being a shorter renewal and taking longer to close. So that's really the impact we're seeing. Not from a...
price customers. And just a comment on operating margin, we're committed to improving operating margin. We had set out to do that this year to improve year over year and we feel well on path to that. And obviously the strong results on the full year.
Operator, we'll take one more question. We'll take our final question from Blair Abernathy with Rosenblatt.
Thanks very much and let me offer my congratulations on the transition as well, gentlemen.
Just on the IP business, I'm wondering if you can give us a sense of where you're seeing the biggest opportunity over the next three to five years. Is it 3D multi-die interconnects? Is it AI chip design IP? How are you thinking about...
The continuation of technology development is still very fast, even for individual chips. And therefore with those come new speeds, new bandwidths and constant new demand. You're absolutely right to throw in the 3D aspect, because one of my perspectives on that is precisely the fact that 3D is a very fast and fast way of developing the technology.
has improved dramatically in terms of the connectivity, both the number of spin counts and the speed on the pins and the decrease of energy to switch a pin that actually opens that domain for a decade of success. Now the fact that AI is in the midst of that is what's a little bit different about AI processes is just the bandwidth and the enormous amount of data that needs to constantly...
do a lot better. And while the word better of course has many variations, we all know that means that there is more design happening, more new chips, more differentiation among the end customers among themselves. And so these are positive words in our field for sure.
will connect with us later on today. We're ready to talk to you. And again, have a good rest of the day. Thank you. And that concludes today's presentation. Thank you for your participation. And you may now disconnect.