Q3 2019 Earnings Call
Ladies and gentlemen, please continue to hold your conference will begin momentarily. Thank you for your patience. Please continue to hold.
Ladies and gentlemen, thank you for standing by and welcome to the Synopsis earnings Conference call for the third quarter of fiscal year 2019. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call. Please press star followed by zero today's call will last one hour five minutes prior to the end of the call. We will announce the amount of time remaining in the conference. As a reminder, today's conference call is being recorded at this time I would like to turn the conference over to Lisa You Bank Vice President of Investor Relations. Please go ahead.
Thank you Anna.
Good afternoon, everyone hosting the call today are art did she is chairman and co CEO of Synopsys and truck from 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 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 and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.
In addition to any risks that we highlight during the call important factors that may affect our future results are described in our most recent FCC reports and todays earnings press release.
In addition, we will refer to non-GAAP financial measures during the discussion reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release and financial supplement and 8-K that we released earlier today.
All of these items plus the most recent investor presentation are available on our website at <unk> Dot com.
In addition to the prepared remarks will be posted on the site at the conclusion of the call.
With that I'll turn the call over to art did yes.
Good afternoon, I'm happy to report that Synopsys continues to execute very well and delivered excellent Q3 results.
Revenue non-GAAP earnings and cash flow were all ahead of plan.
As a result of Q3 Overachievement broad based strength.
We're raising guidance for the fiscal year.
These achievements reflect our increased momentum evidence invisibly strong results and outlook.
<unk> differentiation and technical strength.
And the man for advanced solutions throughout all business are progressing rapidly on our journey towards 4 billion and beyond well increasing value was operating margin expansion already visible in our bottom line results.
Before I discuss the broader landscape, let me say a few words about the U.S. China situation.
The government entities ban has affected our revenue somewhat.
However, even assuming demand remains in place for the rest of the fiscal year, we're raising our targets.
Given the sensitivity for our customers will refrain from making any further comments.
We're confident in our outlook, despite the geopolitical and economic backdrop as global design activity and customer engagements on driving.
<unk> automotive Fiveg I O G cloud and the proliferation of smart everything on not only growing segments, but also very competitive that's requiring the advanced solutions that synopsys has to offer.
Oh, so five years of substantial investments Oh product platforms are the stronger as they've ever been.
Putting us in an ideal position to benefit from the dynamic market trends.
Notably our new EDI products are winning share with competitive displacements at leading systems and semiconductor companies.
We also had a record quarter with our broad portfolio of IP building blocks.
Our IP offering is highly differentiated in driving time to market advantages for customers ranging from the largest market, making companies two fast growing AI startups.
While investing heavily in both he and IP, we've also diversified our business and customer base into the high growth software security Tam.
Oh products and services are increasingly mission critical for the massive amounts of software that permeates our everyday lives.
Our software integrity business is now at 10% overall synopsis revenue.
It's profitable and continues to scale well.
We've accomplished all of this while beating our financial objectives, and raising our near term and long term financial ambitions.
Building on our track record and the stability of our recurring revenue model, we're delivering significant margin expansion and solid double digit earnings growth.
From the perspective, although product platforms, let me provide some highlights from the quarter beginning with <unk>.
As a result of our intense multiyear innovation push in digital design, including new game changing products and major updates our technology is winning benchmarks and driving increased competitive displacements, especially at advanced nodes.
This is evidenced in our results as revenue growth for digital has accelerated.
In particular fusion compiler continues the strong momentum that began with its launch in November .
It has won all head to head benchmarks completed to date was consistently better quality of results Ams runtime across multiple applications.
Be it mobile Fiveg high performance computing data servers automotive AI networking were graphics.
We have several breakthrough competitive wins, a noteworthy large semiconductor companies.
Including a significant competitive adoption as a leading us based mobile Fiveg company.
We also want a decisive benchmark of the very large <unk> at a very large Taiwanese semiconductor company and achieved a win for five nanometer arm based hyper computing designs adds a new well funded European customer.
Also in Q3, the internal IP core group of an international mobile company standardized on fusion compiler for all CPQ and GPU designs at current and upcoming advanced nodes.
And U.S. Largecap systems company has selected fusion compiler as its primary platform for digital implementation.
Finally, a premier U.S. semiconductor company is aggressively expanding deployment of fusion compiler for its mission critical programs, representing more than 95% of its business.
Turning to custom design.
Synopsys is gaining share.
Most of my 30 plus percent revenue growth for custom compiler over the last four quarters.
Our expansion is fueled by key wins in the Fiveg, AI and server chip markets, including a tier one North American service company.
We've also begun multiple full flow competitive displacements, including a traditional analog customers during the quarter. We won yet another major contract at the large U.S. high speed communication chip maker.
These wins are result of powerful innovations that are driving a threex to fivex productivity benefits, especially for advanced node design.
No unique technical advantage by partnering with our World class mixed signal IP team.
Moving now to our verification continuum platform, where our early vision and technology strings have led to our number one market segment position.
Verification software growth is strong reflecting the impact of tight integration of the fastest simulation with static and debug engines on the market.
Contributing substantially to this growth our large influential cloud hyperscalers in North America. Notable evidence of the power of our solution.
Hardware verification is strong as well.
For the third year in a row, we stand as the number one provider in hardware verification overall as well as in the emulation and S.P.G.A. based prototyping sub categories.
By delivering the fastest highest capacity and lowest cost of ownership solutions. We are the preferred choice for complex hardware software design.
Hardware based systems have broad based appeal from large process or companies to market, leading systems houses to emerging companies optimizing their software on hardware that is still in development.
In addition to high security market demand, we are winning important design slots and customer adoptions continued to grow substantially.
In the first three quarters of this year alone we added 32, new customers and have 74 repeat orders.
This significant broad based growth has offset a year over year decline in hardware revenue from our largest emulation customer driven by the timing of product shipments.
We expect the total hardware revenue this fiscal year will match or even exceed the banner results from last year.
Now onto IB, where strong market demand and our unmatched portfolio are driving double digit growth.
Q3 was a record quarter, including the largest single IP order in our history was a prominent U.S. semiconductor company.
We expect to deliver a record here as well.
We see especially strong momentum in interface IP well, we are four to five times larger than our nearest competitor along with memory and logic IB where we also lead the market.
We are proud of our loan was it positive track record of providing early availability of high quality IP at the key manufacturing processes.
This commitment to vital technologies has driven our ongoing success for one IP generation to the next.
As an example, our U.S be titles alone past 1 billion in cumulative bookings this quarter.
Well computing, particularly AI accelerators, and Hyperscale data centers is driving substantial growth.
Market makers in North America, Europe , and Asia Pacific are adopting IP across our portfolio at a rapid pace.
Also strong our processes, particularly machine learning and they I engines for embedded vision, driven by top semi and semi and systems companies.
After a significant investments to enhance our portfolio for automotive reliability and safety standards. We achieved another important milestone with ISO 9001 certification of our IP quality management system setting the foundation for further growth.
Finally, we saw continued strong momentum in mobile with multimillion dollar agreement at multiple global leaders.
Which brings me to software integrity.
Where the combination of rapidly growing market needs in a wide ranging and evolving portfolio are driving approximately 20% growth this year.
We not only offer the broadest portfolio of tools and services, we're moving to the next level of impact and ease of adoption was our new Polaris software integrity platform.
Announced in Q2, it's a cloud based platform with a compelling integration roadmap will continue rollouts over the next 18 months.
Well honestly is drawing positive and growing interest from a wide range of customers.
Building on the first adoption by a fortune 500 insurance company in May.
We received several new orders in Q3 from customers ranging from financial services to networking to a highly recognized beverage company.
The acquisitions and integration of Black Dawkins Cigital have been essential in building the leadership position. We have today I was recognized by Gartner and Forrester.
Addressing fundamental cold code quality and security analyzing and flagging suspect open source code and engaging with enterprise customers, both technology up and management down are enabling high level strategic relationships.
Renewal rates are up and we continue to see longer duration multimillion dollar agreements.
Building off the current base of more than 300 million in revenue and increasing profitability. We're enthusiastic about the long term potential of this business.
In summary.
Strong execution delivered excellent Q3 results and we are raising our annual revenue non-GAAP earnings and cash flow guidance.
Design activity continues unabated.
I'll, probably platforms are the strongest they've ever been and they have driving technology wins and competitive displacements.
Finally, as sincere. Thank you to our employees for their continued commitment to our customers and to the long term success of our company.
With that I'll turn it over to track.
Thanks, Aart good afternoon, everyone in Q3, we executed another strong quarter.
Delivering record results for revenue non-GAAP earnings and operating cash flow.
We also implemented a $100 million buyback.
Bringing our total repurchases for the year to 229 million.
Further we continue to expand operating margins and expect to deliver nearly 300 basis points of expansion for the year.
Reaching approximately 25% non-GAAP operating margin at the midpoint of guidance.
We are on track for another outstanding year, reflecting the strength of the first three quarters and a robust outlook that I will provide shortly.
First I'll review, our Q3 results all comparisons are year over year, unless otherwise stated.
We generated consolidated total revenue of $853 million or 9% growth with a broad based strength across both our segments.
Semiconductor and system design revenue was 769 million well software integrity revenue was 84 million.
This quarter, our semiconductor and system design segment was bolstered by strong customer demand and the timing of customer pull downs of our IP products.
The D.A. software continues to perform very well.
Within the semiconductor and system design segment, although you did hardware revenue decline year over year against a strong Q3 and 2018.
Despite quarterly hardware variability, we do expect our total hardware business for the year to meet or exceed last year's record results.
Consolidated total GAAP costs and expenses were 725 million, which includes approximately 19 million in restructuring costs as we work to optimize our resource allocation for sustainable long term growth.
Total non-GAAP costs and expenses were 636 million, resulting in a non-GAAP operating margin of approximately 25.4%.
At the segment level adjusting adjusted operating margins were 27.1% for semiconductor and system design.
And 10.5% for software integrity.
Note that certain operating expenses, such as stock based compensation amortization of intangibles and other expenses their advantage at the consolidated level have not been allocated to our segments.
GAAP earnings per share were 65 cents and non-GAAP earnings per share were $1.18 cents.
Turning to cash operating cash flow was 370 million and we ended the quarter with a cash balance of 687 million and total debt of 142 million.
Now to our targets, which excludes any revenue in Q4 from companies currently on the governance entity lists.
For fiscal 2019 revenue, a 3.34 to 3.37 billion.
Total GAAP costs and expenses between 2.82 and 2.852 billion.
Total non-GAAP costs and expenses between 2.512, and 2.532 billion, resulting in a non-GAAP operating margin at the midpoint of approximately 25%.
Other income and expenses between a minus 4 million and minus 2 million.
Our non-GAAP normalized tax rate of 16%.
Operating margins.
Outstanding shares between 153 and 156 million.
GAAP earnings of three Dollarsone 11 to $3.24 per share.
non-GAAP earnings of $4 and 52 to $4.57 per share.
Cash flow from operations of approximately 750 million.
And capital expenditures of approximately $230 million.
As 40 million the spending was shifted to fiscal 2020 due to project timing.
Now to the targets for the fourth quarter revenue between 830 and 860 million.
Total GAAP costs and expenses between 701 and 733 million.
Total non-GAAP costs and expenses between 630 and 650 million.
Other income and expenses between minus 2 million and zero.
Our non-GAAP normalized tax rate of 16%.
Outstanding shares between 153 and $166 million.
GAAP earnings of 69 to 82 cents per share and non-GAAP earnings of $1.10 to $1.15 cents per ship.
To conclude.
Our execution through three quarters demonstrates our ability to pursue growth in a variety of macro <unk>.
Macroeconomic conditions, while maintaining focus on our longer term operating objectives.
We continue to execute very well both financially and operationally.
We are significantly exceeding our beginning of year objectives with high single digit revenue growth substantial operating margin expansion.
At solid double digit double digit EPS growth.
And Weve continues to return a large portion of our free cash flow to shareholders in the fourth buybacks.
With the power of our portfolio and business model, we are confident in our ability to deliver sustainable long term shareholder value.
And with that I'll turn it over to the operator for questions.
Ladies and gentlemen at this time, if he would like to ask a question. Please press star followed by one you will hear a tone, indicating that you have in place. Thank you and you may remove yourself from Q at any time by pressing the pound key.
One moment for our first question.
Our first question comes from Rich Valera with Needham and company. Please go ahead.
Thank you.
Maybe just to start off from art. Your your tone on the digital side was perhaps surprisingly a positive you you mentioned that you basically one I guess all of your head to head benchmarks, which is pretty significant.
So just just wanted to sort of get a.
You should have state of the market there in digital and your thoughts on you know how that's going to play out over the next year or two and you know you guys think you sort of admittedly came from the addition of perhaps being behind and obviously invested a lot here. So just wanted to sort of get your updated thoughts on on the digital marketplace.
Well you know we've had the the lead position actually for multiple decades.
And at any point in time, a one has to look at when to make big investments and over the last few years, we made some very big investments because we have come to the <unk> come to the conclusion that individual products would gradually start to not get as good results and instead of bringing them together and so a fusion compiler is the Prime example for that where the intersection off Center says, which is a place and route and a few other capabilities is now generating really good results and of course I know you have you have high hopes for such a thing but its until you have actually real results that customers pay attention and even then they go through benchmark and then to trying a few blocks and then to gradually institutionalize a plan of record utilization over a much broader set of chips and so we introduced using up all I believe last November or so and so far the results are truly stellar and we're making very rapid advances so that doesn't mean, there's not a lot of work.
So if we do nothing but it also means that I think we have still that our results are two to deliver because this is the new platform for us.
Got it and then just on software integrity. It sounds like you're seeing what you'd hope to see with Polaris, which is more sort of larger and longer duration deals, but it does look like the growth may have slipped a little bit in the third quarter I'm, assuming that's just sort of lumpiness in that you still see this as a 20% growth business I'm sort of medium medium term here.
Yes, that's the way we're looking at it so of course from quarter to quarter. It can vary. It is a it is useful that you highlighted polaris, though because I'm a strong believer that.
Right now there's so many companies all dealing with sort of a snip itself security all over the place and for all the large companies at some point in time, they want to have some more stability and how the the head of Ti or the c., so or anybody else who's in charge of all the software in a company to Evan ability to not only a bottom up bring productivity because you can destroy productivity. If you you're not going off to security pretty well, but just as much bring some degree of Controllership top down as to what portions of the code have actually been verified and so it's in that context that while the development of Polaris is a multiyear effort and we will gradually bring in more and more of our products. The division is clearly viewed positively and the first implementation with the Coverity tools.
It is actually doing well.
Got it thanks, Thank you very much art.
Thank you rich.
Our next question comes from Tom Diffely with D.A. Davidson. Please go ahead.
Yeah. Good afternoon, I was hoping to get a little bit of clarity on.
How do you see customers during times, so it didn't slow down a little bit.
Yes, I wouldn't your normal course of action, but the gap trimming the Deborah concurrent projects they work on.
How long does that take to impact you and yet completely offset by just the complexity of designs today.
Okay. There's a there's a multifaceted question, but generically speaking in the semiconductor industry or the variability as a function of up and down revenue is highest for people that supply everything that has to do is volume. So equipment. For example, and he is actually the lowest for people that have to deal with R&D because all the R&D plans on multi year plans and just because a year is particularly strong or weak doesn't really change that all that much. The first ones to say, yeah, rich customers are better than poor customers, but nonetheless, the the fact remains that we are in a segment and synopsis, particularly has benefited from that of bringing stability in times of questions and the ability to really scale rapidly when things go well no simultaneous I think you asked also question on the growth of complexity and there you know in many ways then the good old Moore's law more transistors, we sort of know how to do that.
And not that it's ever gets easier, but it's never gotten easier and we've always manage just fine I think the interesting new problems that is at the intersection of semiconductors and systems. Specifically when you also connected to to software and we are investing substantially in that to be honest I forget if I mentioned that the automotive efforts, where we're doing very well and that's a perfect example off people wanting to test are they automotive software before the electronics are done so systemic complexities is as much of an opportunity for us as anything.
Okay. So you don't see any kind of major material impact to R&D budgets when customers go through a tough period, it's you might know gimmick after world.
Well you know everybody when they go through a tough time, they do look at their budgets and they they re orient towards what will have the most impact, but it's actually fairly rare that people would cut R&D people and so it's more that's that's the reprioritize those things that have the biggest potential as a downturn fades away to come back up the other maybe comment to make is that this is also a good time, where people re look at the IP because a lot of companies do their own IP still and and they discover that we can provide a large number of extremely sophisticated logs and that accelerates their ability to go to market, while not having to use their most valuable engineers on these difficult blocks, so down downturns actually have interesting enough opportunity for us because fundamentally we are a productivity, enabling company and that's what they need.
Okay, well, thanks, a lot good clarity helps.
You're welcome Thank you Tom.
Our next question comes from Mitch Steves RBC. Please go ahead.
Hi, guys. Thanks, taking my question, so I got to but the first one I'm going to start I was kind of a a tougher one given the accounting changes when we look at the core EDA business.
It's actually down year over year for a couple of quarters now.
Can you maybe help us one I understand the accounting behind it and then secondly, how we get comfortable around high single digit growth considering it's been down for a couple of quarters now.
Yeah, let me start with.
Answer your question directly the when you look at the profile for E.D.A., what you're seeing this year is just the variability in emulation hardware keep in mind that the hardware piece shows up in two places emulation is in India, and then haps.
The P.J. prototyping should show up in the IP and systems integration and so you're seeing variability in that number.
If you were to adjust for the hardware piece, that's showing up in E.D.A.
And keep in mind that last year was a record year for emulation, you should see a very good.
Mid to high single digit growth in that area and that's very much in line with the DTA software is growing in that range pretty much in line with what we've previously communicated.
Okay Perfect and then the second one I had is just more of a technical ones for you this more for art, but.
Got a hot chips, we can't give you came out with some other interesting design, including the large plotters of 1.2 trillion transistors and they kind of made their own tools are either toll. So I guess, maybe you can comment on that if that's a viable model in the future and then maybe how it's an officer would fit into potentially designing something like that in the future.
Well, we happen to know them very well and so I would be careful what what we comment you may know that I think is already in the eightys that there was a sort of an effort to see could one make essentially chips that would cover a whole wafer and connect them creatively and at that time. The yields were just two question them all to be able to do that to effectively oh, yeah, depending on what node you pick now the the yields can be actually very very good and so the fact that said that they are attempting to put to such an astronomical number of transistors on that wafer is to say the least a one for the Guinness books of of records.
But it will be interesting to see how well this finds utilization by the customer and have not yet seen any of the results that you can get in terms of using this on AI and machine learning problems, but that's clearly what they are going after and.
Generically speaking I think there is no doubt whatsoever that in the next multiple decades, the hunger for more machine learning computation will be unstoppable. The challenge is going to be so how do you actually do it in practice, how do you do it at manageable levels of power. How do you connect all of those things and there's a plethora of of efforts was different packaging forms and the whole wafer approach I think or at least the pictures I would say were pretty cool I must say that.
Perfect. Thank you.
Our next question comes from Sterling Auty with JP Morgan. Please go ahead.
Yes, Thanks, Hi, guys I'm wondering if you could just going give us a little bit more color on you mentioned the strength in IP words from the timing of I'd draw down any additional color as to the areas and if we should think that that strengthen drawdown will continue into the fourth quarter.
Well I think in general what we've seen over multiple years is that the reason IP is growing is not only because reuse of IP is completely acceptable. So there's no longer any sort of form of a macho has got to do my own IP. There is eight use your best people to solve problems that you can solve by acquisition as long as the price is right of course, and so that has continued from a different two different dimensions. One is that many of these I, but be blocks themselves have grown and complexity dramatically and so you know that the U.S.B. family that I mentioned, a went through different versions and the first ones look pretty simple, but the last ones I'd most definitely not simple and then on top of that these different generations of computation and these blocks are implemented in the most advanced silicon technology, and so you get sort of a multiplicative effect of difficulty and this is precisely why I think this is.
A very strong business for synopsis, because we've gone to pretty much every challenge and difficulty in getting these things to work and far from me to say that it's perfect that we have a trust relationship was the customer we're at the end of the day, we make things work and I think we are great provider to continue to see that maybe one more comment.
Large companies have I have used IP, often on and now starting to grow a they up utilization and actually it ties directly to the previous question of how can you increase productivity and market times that may be more challenging.
But the other up June yes.
Observation is that new startup companies. They never think twice about it. It's immediately what can I put on the shopping list and now I have to do all the rest and certainly all the the AI startups fall in that category. So I do think that we have a very good run run path or a roadmap for this not that these IP box will ever be simple, but I think the very fact that they've complex is good for us.
Sounds good and then one just follow up track for you.
Looking at the buildup to the cash flow in the quarter. It looks like deferred revenue. It was actually a cash outflow for the second straight quarter anything that we should think about either in terms of timing of renewals or anything else that would have contributed to that.
No I wouldn't look at the deferred as a as an issue when I look at the business for Q3, and the quality of our bookings run rate was up healthily.
And well we're going to.
Show this in our Q next week, when we reported backlog was actually steady from quarter to quarter.
So from that perspective now the business is growing very nicely.
Okay. Thank you.
Our next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hi, everyone I wanted to start with the question to start with the question about the repeatability of VIP strength and you mentioned.
The large largest order in the company's history I presume this with some sort of <unk> multi tens of billions tens of million dollar.
Platform license agreement with.
The key U.S. customer I think you specifically cited so I'm just curious if there's going to be more of these types of.
License agreements and and then related to the increase in IP revenue specifically the mix was up rather substantially in spite of that you showed a sequential improvement in the operating margin for the semiconductor and systems design business. So I'm wondering you know what's the.
What was the catalyst there.
Well in general we do think that the the IP business will continue to grow Oh, you don't get every day, a very very large deals, but or transactions, but in general yes. It is multi year and it's also broadening in terms of the offering that will we will make available to customers and you know think about as little bit as you know they go to a restaurant and they can sort of pick from the menu, but its prepaid and.
That makes everything simpler over multiple years now having said that the investments will continue quite heavily.
In this area because the evolution is so rapid and that also means that we have to be well aligned with the semiconductor foundries that provides a silicon technology. So that things are ready on time.
I thought that was the second half of the question I forgot what it was he there was a question on a margin Oh, yes, imagine unless you want to address that let me address the margin piece.
Overall, when you look at the margin profile for the business, we've been running pretty steadily at a 25% for the year and when you look at the midpoint for the year. We're on track to hit that number for for F. Y 19. So there is a pretty strong increase in margins from last year to this year. So what you're seeing is less a mix as opposed to.
A deliberate and concerted effort to increase the operations.
Okay. Yeah. This fall to the operating margin question. One thing that is glaring is no mention of the goal to achieve high 20%.
Operating margin for.
Fiscal year 20, so I'm wondering if that was a conscious so omission or or you are you guys still committed to that.
Yeah, absolutely when we talked when we last talked to investors in April we talked about driving margins to the high Twentys by F., why 21 and that 30% over the longer term. We are we remain committed to that Theres no mention specifically about F Y 20, because we'll come back to you in December and give that more specific guidance, but there is no change to our margin outlook. Okay. Last question. If I can your cash flow from operations and maybe not so much the free cash flow this year, but but you're definitely generating more cash flow than you're buying back in stock and almost.
A glaring a mountain.
And and so your debt it presumably paid off in four or five months time and.
With maybe a slower pace of acquisitions or how should we think about your capital allocation is increasingly being skewed to stock buyback.
I think we've done a pretty good job balancing the ER and use of cash over the last few years between M&A organic investments and buybacks.
Our history has shown that were pretty diligent about returning a substantial amount of free cash flow to via buybacks, we haven't changed our approach to that from quarter to quarter. It made it may vary depending on the situation, but our overarching approach to capital allocation and capital returns.
Remains the same okay and congrats on the results. Thanks, guys. Thank you. Thank you.
Our next question comes from Jay Vleeschhouwer with graph and secure Griffin Securities. Please go ahead.
Thank you good evening track first for you just to clarify the answer you gave to Sterling earlier, you're saying that your backlog as of the end of Q3 was again 4.3 billion.
That's correct okay.
Arch and track you mentioned I believe that the you were anticipating that the hardware business for the year will match, what you did in fiscal 18.
Given the magnitude of the decline in hardware year to date.
For combined emulation and prototyping would it be fair to say that.
You are in effect anticipating in fourth quarter, a record or hardware revenues that would impact be substantially beyond the prior record set back in Q2 of fiscal 18.
Sure Jay that's that's not the case we the.
The very hardware has actually been fairly steady throughout the year the mixed routine emulation and the P.J. prototyping is different there was last year, but it we're not anticipating a steep ramp up in Q4.
Okay. Okay, a related question, though on the hardware one of the things that we've observed.
For.
All of the Big curious have you mentor and cadence is a longevity of demand for.
Aging system.
Hardware version that a bit in market for for some time cadence has seen this mentor has had some quite strong quarters over the last couple of years, even though a luxury it's been out where the current version of a luxury has been out for some time.
So my question is what is it that induced its customers to order or reorder.
Somewhat older hardware technology.
And when you look at the possible refresh of your hardware.
Earlier today xilinx to announce a very large PGK, which would seem to be the kind of chip that you would want to incorporate enough.
Next generation chassis for both zebu unhappy, but it's not coming out to all fall of next year.
So assuming you want to incorporate that particular chip into your next generation of hardware, how do you sustain the demand for hardware over the next year or so.
[noise] well starting at the beginning of your question one of the reasons at least for US and I think we are a little different than our competitors because we are focusing a really very hard at the intersection between hardware and software. We think that's where the biggest opportunity space is not that all machines can also be used for just the simulation acceleration and and so that space on its own in my opinion is going to continue to grow because more and more people want to run software and systems, where the time to build the systems is long and the risks if they don't check it out early is that they will miss the windows on the markets. So therefore, the software the hardware have to be developed in parallel.
And so we support that I think extremely well I literally from day to day.
Better and again, maybe the most visible simple example is automotive where you know putting a car together takes five to seven years and so if you. If you start to software to last late last hour. This thing will never go to market.
The second comment is now specifically on our technology, we are F.P.J. based and so we have the benefit of being able to move forward with the different generations of SPG age we have excellent relationships with the people that provide those and so we we are at any point in time, well clued in as to what will matter and what will not and our developments are just continues.
Lastly, you said that the old systems that can hanging around for a long time, yes, they do and I think nothing wrong with that it's great return on investment for our customers, but at the same time, new new systems are substantially faster and have more capacity and that is precisely what's an opposite has a has driven now for a number of years and unexpectedly a successful ways.
Lastly, with respect to services you may recall, I think with one or two calls ago, we talked about the role of services, particularly in the context of sick and the introduction of Polaris. My question is can you comment on how your services engagement pipeline looks my only pursuing but perhaps for.
P. as well, particularly given the magnitude of demand you're seeing now for IP.
How are you looking at your services engagement pipeline not only for that but again for four Sig.
Okay, well, if we're if we're saying there's no question in our mind that the acquisition of Cigital, but most importantly, the integration of Cigital, which is the the product lines of Coverity and blocked are kind a few others have been absolutely essential because of the 16 is extremely capable of engaging with high level people and companies that that are looking at how do they start getting a handle on security as a software is being developed and that is precisely where were focusing and so I think that that integration has gone in many ways better than we would have hopes and is now in full utilization to continue to sell the product.
It's interesting that use the term services and IP and I think it's it's probably right on because IP is something between products and services a number of the IP cores get optimized for specific customers or specific technologies and increasingly we are assembling subsystems under the directive or together with the customer to drive their capabilities forward and so while we don't really call out a particular service business. The these multi year IP transactions invariably have all kinds of a development plans associated with them.
Thank you very much you're welcome Jay.
Our next question is from John Pitzer with Credit Suisse. Please go ahead.
Yeah. Good afternoon, guys. Thanks me ask the question Im just kind of curious just given how critical year on TV.
And products, our Oregon semiconductor supply chain, and just given how visible well will be Tom what could happen.
Wish other Chinese chip makers are kind of buying ahead.
On an elegant then plans just atmosphere do you see any evidence of that in it that were happening when evidenced UGC and then I have a follow up.
Well you know I think it's a little hard to predict what's going to happen in that situation and as as we said earlier in the preamble, we were sort of cautious to not to make too many comments about China as a number of our customers really need to certain degree of Oh, let's say privacy on their situation in general not just China any place in the world, who will be happy to sell things that people want for a longer duration and a sense most of the larger I repeat transactions are.
Multi years, because the delivery of these large blocks themselves take some time and secondly, the integration of those blocks into very sophisticated chips need support and so multi year transactions are absolutely the norm.
And then I can you know then conversation about sort of base level chips I'm, telling curious when you think about maybe just aggregation of guys that are going on look to chip that strategy and some of the packaging technology isn't even talk to sneak about building left actually upon stats on chips, where you have both memory and logic.
How how does that benefit your business over time.
You know, we're sort of in the category the more the merrier right, meaning that the.
We are believers that the demand for electronic capabilities is unsalable.
But the technology limits are very real and so while conceptually it sounds relatively straightforward why don't you just stack them on top of each other.
Like a high rise.
We often forget that there's a big difference between a memory and lets say processor because the memory is already a stack device today, whereas the process. There is also a massive heat source and so when you stack things and there's also a lot of heat and its unique that suddenly becomes a complicated now out of that nonetheless, there are a lot of efforts to look at different forms of packaging and we've seen this before by the way and we've seen that in the early two thousands when the word was hey, you know we're never going to go to smaller transistors and then out of nowhere came you know 15 years of Finfet and then certainly the interest for for stacking one of the lessons, but I think it's going to come back and and we're very involved in that but it is truly a set of decision, making that has both technology and economic.
Constraints and I do have high hopes that because of the demand that will overtime actually pay for some of these more expensive approaches that's why I know we're all in on this.
And then my last question guys just want to be software integrity business on the op margins still small part of the business and its still amount to 200 plus basis point drag on overall op margins that makes sense given that you guys are driving scale and revenue growth. So I'm kind of curious what's the scale and volume mobile on the software integrity business. When you start to get some more lot more than that vision in the March 30.
So the overall company part of that or is that fair.
John the way I think about is that over the next couple of years as we drive margins to the high Twentys Bye Bye have quite 21, I would expect that the software integrity would be approaching closer to the corporate average.
Structurally there's there's nothing in that business that would prevent it from reaching that kind of margins with scale.
But the key for us as we evaluate that business, it's still a very nascent opportunity dynamic opportunity with a lot of competitive environment. So we want to make sure that we're we're making the right tradeoffs between growth and profitability.
Perfect. Thanks, guys.
You're welcome.
Our next question is from Gal Munda Berenberg. Please go ahead.
Hi, guys. This is Josh with open up or down thanks for taking my questions.
Just to follow up on digital you mentioned competitive displacements is fusion. The key driver that and then are you starting to see signs that maybe making customers stickier due to its forward and backward looking capabilities.
Well im using fusion as.
The Best example, because it's the most powerful conjunction of multiple technologies working extremely well together a synthesis creates the structure of a circuit play send out determines the actual location of everything and those are the fundamental problems, but they are more technologies in that and surrounded by it and so for example, you also want to optimize for timing for lower power, maybe for some degree of yields and and so on and so you can already see from that discussion that you have multiple forces interacting and I think the strength of the approach that we've taken is that we have created a.
An environment that allows us to bring all of these forces to bear at the same time and what is exciting is that we are now were winning hard benchmarks on the basis of putting this to use what is also exciting is that I think it still has a long way to go in terms of further advances, but you know our customers are pretty pragmatic. They work very hard to optimize circuits, even a little bit and so if you can get truly better results and you can get that much sooner. They they will move pretty quickly.
Thank you that was helpful and then <unk>.
Just a follow up real quick on China is the is it a fair assumption that the 60 40 split between semi and systems companies hold in that region as well. It just seems like a lot of the focus is on the walk away. If we don't care much about the pop up I do like concept chip initiatives.
You know the split off 60 40, we yeah, it's nothing new we've had that in the in the late Ninetys and it's all a question of what do you call a systems company and what do you call a semi company typically semi is when you stop at at the CEB. You finished the chip and then you sell it to somebody else a system company tends to slow to move from there and add to the chip.
The software the package or whatever all of the electro mechanical things and and now so a phone company if on mobile phone provider would be a system company and so the it's sort of a continuum between those and what is interesting from our perspective is that while many years ago. We clearly started in a very chip centric fashion.
The importance of software was recognized by synopsis already about 10 years ago, and we started at that time to invest in the verification and prototyping a two to verify things together, but we by the way also about five and a half years ago invested in software because we realized that software could become the the killer in terms of getting to market with something that actually works.
Hi, John This is Chuck again, I just want to clarify my my remarks earlier emas less to do with the impression that.
Software integrity was going to hit the corporate average by a quite 21 it certainly can.
It certainly will progress to that but not necessarily be at the same corporate average in in the high Twentys.
And our last question comes from Jason.
So leno with Keybanc. Please go ahead.
Hey, guys. Thanks for fitting me in one question around your Accutronics acquisition I, just want to clarify that thats not in guidance and can you maybe provide some color on how that fits in with the rest of your portfolio and then I have one follow up sure. Yes that is an acquisition does not closed yet and therefore, we would not put it in guidance, but it's also not material in terms of size, but it is an exciting acquisition because it fits right into the center of that picture that I, just think it's off automotive companies looking at the software and hardware simultaneously and this company in particular has very good technology and experts in looking at how you test situations like that for the aficionados in the room is called software in the loop, but has probably going to deep on this topic.
And I mean can you how many employees would that be adding.
About 60, or so okay, great and one quick follow up for track.
The Sig margins for.
10.5% up 40 basis points quarter over quarter, which is pretty good.
But from a seasonality perspective is there anything about Q4 from an investment or spend perspective that would be different than.
Any of the previous quarters than we've seen.
No I don't see I don't see seasonality affecting that number at all I think while weve reached critical mass with that business being about.
10% of overall revenues is still fairly small so from quarter to quarter, depending on the profile of revenues or expenses, you're going to see that bounce around.
But the good news is that over the course of multiple years, it's heading in the right direction.
Great. Thanks, Tom for me.
Welcome.
Okay, I guess that brings us to the end of this earnings release. Thank you. So much for spending time with US hopefully you took away from that we sense a quite good degree of momentum and push forward and that notwithstanding some of the turbulence is around us. So an ops is actually doing both very well and I think very stable in this context. So thank you for your support and questions.
And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and you may now disconnect.