Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Q1 of Fiscal Year 2020. 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. We ask that you limit yourself to one question and one follow-up so that we can accommodate. Today's call will last 1 hour.
5 minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Eubank, Vice President of Investor Relations. Please go ahead.
Thank you, Laurie. Good afternoon. Hosting the call today are Art De Geus, Chairman and Co CEO of Synopsys and Trac Pham, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsis 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 SEC reports and today's earnings press release. In addition, we will refer to non GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement and 8 ks that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at synopsys.com. In addition, 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 De Geus.
Good afternoon. Q1 was an excellent start to the year as we met or exceeded all of our guidance targets. Revenue was $834,000,000 with GAAP earnings per share of $0.67 and non GAAP earnings above our target range at $1.01 In December, we communicated our fiscal 2020 guidance, high single digit revenue growth, substantial ops margin expansion, mid teens non GAAP earnings per share growth and more than $800,000,000 in operating cash flow. We are reaffirming our guidance for the year. Trac will discuss the financials in more detail.
Looking at the overall landscape, ongoing geopolitical tension and the recent coronavirus outbreak have generated heightened uncertainty around the world. Regarding the virus outbreak, our first priority has been the safety and health of our employees, customers and partners. We continue to monitor the situation and support our China teams as they continue to drive business execution. Undeterred by those challenges, electronics companies ranging from traditional semiconductor and systems companies to new startups and hyperscalers persist in designing ever more complex chips and devices with a high degree of market urgency. Driven by AI and machine learning, automotive, 5 gs, IoT and cloud expansion, the proliferation of smart everything is and will be the central driver for years to come.
As a result, robust demand for our solutions has continued in 2020. Our innovation and technologies spanning the spectrum from silicon to software absolutely central to the ambitious products and systems being built. Let me share some product highlights from the quarter, starting with EDA. An important differentiator for Synopsys continues to be our leading position in enabling manufacturing process development. With highly sophisticated simulation of new technologies, new transistors and the structures needed for the most advanced fabs in the world, we not only assist our manufacturing partners, but we also lay the groundwork for our design tools to be tuned and ready well before these technologies go into production design.
On top of that, over the last several years, Synopsys has pioneered a new approach called Fusion that literally fuses algorithms from different tools, resulting in faster and lower power chips in far less time. A showcase example of this is our Fusion Compiler product introduced about a year ago. Within just a few months of its introduction, Fusion Compiler revealed itself as a revolutionary product. It is winning head to head benchmarks with consistently superior performance, power and area results across a broad set of applications. Results thus far are ahead of our initial plan with many customer engagements progressing very well from exploring the tool to usage on a few live design blocks to production rollout.
In Q1, we built upon several breakthrough competitive wins ranging from the largest global communications, processing and graphics firms to high impact cloud hyperscalers to multiple influential system houses. For example, AMD chose Fusion Compiler for its full flow digital design implementation of its next generation processors. Fusion Compiler is displacing the competition at a large hyperscaler for next generation ARM core based graphics design at 5 nanometer and below. We achieved a significant win at a large multinational consumer electronics company on next gen ARM CPU core. We're expanding displacement and deployment at a leading mobile company for critical 5 gs design at 5 and 4 nanometer.
A leading U. S. Semiconductor company is deploying fusion compiler on all new graphics designs, taking advantage of better run time and quality of results. We displaced the competition for ARM core designs at a leading automotive semiconductor company. And we expanded proliferation as a large U.
S. Semiconductor leader with a new win in wireless design. While still relatively early in our multiyear product cycle, these important wins represent significant momentum and usage share gains, which will flow into revenue over time. The Fusion concept is very powerful and it's getting great results across Synopsys as our innovation continues at a rapid pace. Stay tuned for some exciting new product announcements as we approach our March Silicon Valley user group event.
Let me now turn to custom design, a product area that underwent a multiyear innovation push and has seen excellent progress over the last 18 months. Not only are we now highly competitive for advanced nodes, we continue to see a growing number of displacements and full flow engagements. Our expansion is driven by fresh innovations focused on maximizing designer productivity. Customers are experiencing this benefit, and we saw excellent growth in revenue from our custom compiler product again this quarter. For example, a high impact global systems company expanded its full flow usage in Q1, proliferating after a significant competitive displacement.
Additional custom compiler wins include a leading silicon photonics developer, and a CMOS image sensor company. Let me now move to our verification continuum platform, where we maintain our number one market share position. In verification software, we gained share in Q1 at a large global hyperscaler driven by their growing needs for verification capacity across our platform. Meanwhile, demand for hardware based verification is high across the board, driven by continued complexity growth in new designs. The speed and capacity of our solutions are particularly well suited whenever software bring up is involved.
While a strong Q1 last year makes for a tough year over year hardware comparison, we continue to gain momentum with both new and existing customers. In Q1, we gained 9 new logos and 34 repeat orders, including very high profile systems and semiconductor companies. NEC, for example, chose our Zebu emulation system over the incumbent for their high performance compute solutions due to our superior performance, very fast bring up time and unique debug visibility. In Q1, we also announced the acquisition of the Digi Group, which further expands our HAPS FPGA based prototyping portfolio. Now to IP, which continues to deliver strong results.
As the number one provider of interface, embedded memory, analog and foundry specific IP, we provide the industry's broadest portfolio covering all key markets, AI, automotive, cloud, IoT and 5 gs Mobile. Our demonstrated strength in high performance cloud computing applications is evident in several areas. We've already achieved more than 60 design wins in PCI Express 5.0. Our new die to die 56 and 112 gig SerDes continues to gain market traction. We also had a significant IP portfolio win with a major China e commerce company for microserver applications.
Our leadership position in USB led to multiple Tier 1 processor semiconductor companies adopting our newest generation USB 4.0 IP in a leading 5 nanometer process. We're also seeing unmatched leadership and momentum in automotive, where our automotive grade IP is being used by 10 of the 11 semiconductor suppliers to that industry. One notable example is Qualcomm, which selected our automotive IP portfolio, including interface, ARC processors and embedded test and repair solutions for the new Snapdragon ride platform for autonomous driving. Finally, we continue to expand our IP portfolio with the acquisition of technologies from eSilicon and Invecos, the latter closing just last week. Along with valuable technology, these acquisitions also enable us to further scale our IP development to meet high customer demand across growing markets.
Now to software integrity, the tools that test software code for security, vulnerabilities and quality issues. We delivered a solid beginning to the year with business levels up more than 30% over the same period last year. We see we saw continued progress in driving multiyear, multimillion dollar agreements, booking several across multiple verticals. As I mentioned in December, we've entered Phase 2 of our strategy, scaling into the $500,000,000 to $1,000,000,000 revenue space. To accomplish this, we're focused on 4 areas: 1, expanding our cloud based Polaris Software Integrity platform through additional product integrations 2, scaling consulting engagements to fully leverage a key differentiator in the software and DevOps market 3, refining our channel to better serve large enterprise customers, key market verticals and new regional business and 4, evolving our management team for the complexity and size of a larger business.
We're moving fast on all of these. Just last week, we announced the expansion of the Polaris platform, bringing static testing and software composition analysis directly to the developer's desktop. This first of its kind solution enables developers to seamlessly find and fix security weaknesses in proprietary code and known vulnerabilities in open source code, all within their desktop development environment. We also added the team and products from Tinfoil Security, broadening our product offerings for dynamic application security testing, or DAST, and adding API scanning capability. Our scaling efforts in the field are also progressing well as we ramp up hiring activity and are excited about the sales energy in the organization.
A good example of the power of the combination of products in consulting is one of the largest pharmaceutical companies in the world. Our relationship that began with a small initial service engagement to help them respond to a security breach has grown to include both product purchases and now additional services to help them proliferate our solutions. We're also moving fast to scale our leadership and management team to the next level. We have launched an external search for a new general manager to lead the organization into the $500,000,000 to $1,000,000,000 level. While these efforts will flow into revenue over time, we're encouraged by the positive start.
There's a tremendous opportunity in this space, and we're well positioned to enable companies to improve the security and quality of their software with a combination of high value products, a great new platform and enabling consulting services. In closing, Q1 was a very good start to the year. We delivered strong financial results and are reaffirming our outlook for fiscal 2020. Even with some caution around global markets, electronics companies continue to invest in critical chip and system designs as well as immense amounts of sophisticated software. Our innovation engine is prolific.
And this quarter, we will be introducing a number of exciting new products and differentiating capabilities. We are committed and on track towards our mid- and long term growth and margin expansion targets. Finally, let me thank our customers for their business and our employees for their dedication and hard work in delivering continued strong results. Trac will now highlight the financial perspective.
Thanks, Art. Good afternoon, everyone. We delivered a strong start to the year, meeting or exceeding our guidance targets for the quarter, and we are at pace for our full year plan. We remain relentlessly focused on execution, generating revenue for the quarter at the high end of our target range and non GAAP earnings per share well above the range. We produced another quarter of strong collections, which contributed to positive cash flow in a quarter that is typically an outflow due to variable compensation payouts, and we launched a $100,000,000 share repurchase.
Our increasingly diverse customer base and strong product portfolio, combined with our nearly 90% recurring revenue model, position us for success in periods of high demand as well as those of greater uncertainty. Multiple factors, including the entity list export restrictions and broader trade tensions, as well as the coronavirus situation, have added to market volatility. Based on our current view and the strength of our business, we are confident in our ability to manage through this uncertainty and we are reiterating our guidance for the year. I'll now review our Q1 results. All comparisons are year over year unless otherwise stated.
We generated total revenue of $834,000,000 Semiconductor and System Design segment revenue was $749,000,000 with strong growth in IP and a tough hardware comparison over strong Q1 of last year. Excluding hardware and the impact of entity list trade restrictions, EDA software results remain within our long term target range of mid to high single digits. Software Integrity segment revenue was $86,000,000 10% of total and business levels for the quarter increased more than 30%. Because of our largely time based model, the associated revenue will be recognized over the life of the contracts. Moving on to expenses.
Total GAAP costs and expenses were $747,000,000 which includes approximately $9,000,000 in restructuring costs. Total non GAAP costs and expenses were $647,000,000 resulting in a non GAAP operating margin of 22.4%. Our Q1 margin reflects revenue profile this year as well as a change in the timing of general salary increases now in Q1. We are on track to generate approximately 200 basis points of op margin expansion for the year. Adjusted operating margin for Semiconductor and System Design was 23.9% and software integrity was 9.4%.
Finally, GAAP earnings per share were $0.67 and non GAAP earnings per share were 1.01 Turning to cash. We generated a $10,000,000 in operating cash flow. Including the $100,000,000 Q1 ASR, we've repurchased $1,900,000,000 of our stock since 2015 or approximately 80% of our free cash flow returned to shareholders over that period. We ended the quarter with a cash balance of $700,000,000 and total debt of $331,000,000 A couple of comments before I move on to our targets. As I've noted, we delivered a strong start to the year and we are reiterating our full year guidance.
We are maintaining our first half, second half revenue split of roughly 45%, 55%, which reflects forecasted timing of IP and hardware deliveries as well as general prudence given the uncertainty around the unfolding coronavirus situation. For fiscal 2020, we are targeting revenue of $3,600,000,000 to $3,650,000,000 total GAAP costs and expenses between $2,950,000,000 $3,000,000,000 total non GAAP costs and expenses between $2,630,000,000 and $2,660,000,000 resulting in a non GAAP operating margin of approximately 27%. GAAP earnings of $3.68 to $3.87 per share non GAAP earnings of $5.18 to $5.25 per share cash flow from operations of $800,000,000 to 825,000,000 and capital expenditures of approximately $180,000,000 We expect capital expenditures to decline in 2021. Now to the targets for the Q2. Revenue between $820,000,000 $850,000,000 total GAAP costs and expenses between $724,000,000 $758,000,000 total non GAAP costs and expenses between $645,000,000 $665,000,000 GAAP earnings of $0.49 to $0.62 per share and non GAAP earnings of $0.96 to $1.01 per share.
In conclusion, our focused execution enabled us to again deliver strong results, meeting or exceeding our targets. With a very good start in Q1, we are reaffirming the full year guidance provided in December. We are also tracking well to our goals of high-20s operating margin by 2021 and profitability at 30% range longer term as we move towards our next milestone of $4,000,000,000 in revenue. We remain committed to a balanced capital allocation strategy consisting of investing in the business for growth, while continuing to return capital shareholders as we focus on driving sustainable long term shareholder value. And with that, I'll turn it over to the operator for questions.
You. And before we begin the Q and A session, I would like to ask everyone to please limit yourself to 2 questions And our first question from the line of Rich Valera with Needham and Company. Please go ahead.
Thank you. Our question on software integrity. So you mentioned you had very good business levels. I think you said 30% increase in business levels, but it looked like revenue decelerated pretty sharply in the business. So just wanted to understand if business levels refer to bookings and why the deceleration in revenue and what might drive that to reaccelerate?
So you're correct. Business levels refer to bookings. And you may recall that last quarter reported that 2019 had been relatively weak in terms of bookings. And so what you saw is the result of that plus whatever was transacted during the quarter. And so our objective obviously is to now build back to a higher level and we will actively pursue that.
Any thoughts or commentary on when that business might reaccelerate sort of into the double digits routines?
Well, I mean, we just finished what we thought was a strong quarter. So it's easier said than done to just keep doing that. But that's obviously the objective, right, is to invest in some of the channel areas specifically that I think can be more balanced for the opportunity space and make sure that we move fast on the deployment of the Polaris platform and the integration of new capabilities. Those are sort of some of the cornerstones to the success of the long term business.
Andrew, just keep in mind that in December, we also highlighted that the in December, we highlighted the long term growth for this business. On the multiyear period, it's 15% to 20%, and we are committed to that and we should be able to grow at least with the marker
Just a quick follow-up to that. Art, you've talked about the sales force realignment and it sounds like some new personnel being brought in. Where do you think that both that sales force is in terms of structure and personnel relative to where you want it to be? Is there more you need to bring? And do you think you feel like you've got pretty much sort of the headcount you need to drive the business forward?
Well, we're now in active hiring. We have hired a number of people. It's both a combination of tuning, meaning putting it in the right organization and simultaneously filling the holes as we see opportunities and there are plenty of opportunities. So no, we're far from done, but we have a good start. And actually, some of the changes that we made in 2019 appear to have generally takes quite a bit of energy on the part of the sales force that feels that they have a better shot this year than last year.
Let's also reiterate that as part of our plan, we did contemplate the hiring, the additional hiring in that business. We'll continue to invest in that business as it scales and as we said in December, which we're still on track for is maintaining margins relatively flat year over year. So all the commentary that we described is consistent with how we're managing the business.
Got it. Yes, the bookings sound encouraging. Look forward to seeing the progress there. Thank you.
Thank you.
And our next question from the line of Joe Vruwink with Baird. Your line is open.
That's one of the easier questions. It sounds like we have no connection operator.
Let me check if Joe Vruink, your line is open. Okay. He may pop back into the queue here momentarily. We'll go to our next person, Mitch Steves with RBC Capital Markets. Your line is open.
Hey, guys. Thanks for taking my question. The first one I kind of wanted to point to is for Track. So given the coronavirus and some of the other macro concerns, my question is, continue to beat pretty nicely in the Q1. Would you have raised the full year assuming that there is no macro change?
Or do you believe that this is already encapsulated in your full year guide?
It's factored into our guidance. I would say that it's not a meaningful impact to the year. We did get a very strong start of the year. So after 90 days, we feel very good about the outlook for the business on a full year basis. As we typically do describe, after 1 quarter, it's a good start and it gives us good progress to the year, but there's still a lot of business left to book.
If I may add to that, our business is actually mostly multiyear. And so we have actually a fairly high degree of stability in our business towards events like this. At the same time, it is clear that some of the customers or the customers' customers are impacted because they may not be able to ship products. And so it remains to be seen if that makes its way all the way to us. But mostly, we're quite isolated or insulated, I should say, from these type of problems.
Okay. Got you. And then my second one just on the core EDA business. You guys have talked about mid to high single digit growth. But if I look at this, it looks like for the last about 6 quarters now it's been below about 4%.
So I guess why is the time based revenue flat year over year if EDA software is still growing mid to high singles? Is that just going to accelerate in the back half? And if so, I'm just trying to understand why that would be the case.
Yes, Mitch, I would separate that question to 2 parts. The first part is, keep in mind that emulation does show up in the EDA line. So from a product group perspective, we've continued to grow very nicely in hardware and that tends to be lumpy quarter to quarter, but it's continued growth on a multiyear basis. That will affect the comparison. The second part, which you're trying to connect to, is the license type or time based.
Remember that in last year, we did transition to 606 and the mix that you're going
to see
in the time base versus the upfront line is affected by that revenue transition. As we described, the numbers and the comparisons for EDA is colored by the timing of hardware this year as well as the entity list that was affecting both the EDA and IP line. But we still feel very comfortable about our long term and our model to drive in the mid- to high single digits.
Go back to Joe Veringk's line. He is with Baird. Please go ahead.
Can you hear me now?
We can.
Okay. There we go. I wanted to revisit the last question just regarding EDA performance. And I think, obviously, appreciating the market uncertainty, but your customers seem to have a more optimistic view on their R and D activity in 2020 and I would argue 2021. If that acceleration does come through, is there any reason why your EDA business wouldn't participate in that trend?
No, there's no reason it would not participate because we as I think somewhat mentioned in the preamble, we see customers be quite aggressive in what they're designing. And so fundamentally, we are in a good market and therefore participation be it in EDA or IP in that is absolutely part of where we should do well. I think we're cautious just because there's been so many changes in the global market that have had some impact. As we gave out the numbers, we encompassed the fact that we thought there would be no change to the entity list. And so those are the type of things that we're dealing with for the year.
But fundamentally, actually, I think that we are in a long term good market, leaving alone massive GDP fluctuation or anything like that. The technology needs are high for us and that's very encouraging.
And then if I can follow-up on software integrity. I'm maybe trying to reconcile the comments a quarter ago that orders were a bit softer to what seems really like a snapback to this 30% type number. Is that just the actions you outlined a quarter ago and you started out the call talking about, are those beginning to bear fruit already? Or are there some other things going on?
Well, partially, the answer is definitely bear fruit because we have invested and made quite a number of changes, certainly in the latter part of 2019. At the same time, I don't want to set the expectation that over 30% is the norm for every quarter. That's not what we're guiding towards. But the fact is, this was a very good quarter from an owner's point of view, and so that will manifest itself in revenue over time. So I think we have a lot of opportunities to evolve the business to be capable of rising above the €500,000,000 mark.
And then you're sort of in a different league of management. And so many of the investments that we're making are really all aimed at the scale of scaling to that next level.
Great. Thank you very much.
You're welcome.
And our next question is from the line of Jackson Ader with JPMorgan. Please go ahead.
Great. Thanks for taking my questions, guys. The first one is on hardware. So coming out of last year, you mentioned that some large hardware deals slipped. And I'm not sure if we've heard an update on what the expectations are for the timing and delivery of those now in 2020.
Well, we typically don't give a specific timing of shipments because some people try to understand which customer did what to whom. But the bottom line is one of the reasons that we think we have a strong year overall is that hardware will be strong and actually the demand continues in that direction. It is also true that the delivery is Log B and that in itself is visible somewhat in the first half, second half of the year.
Okay.
I think I can follow the bread crumbs there. And then just a follow-up on the Fusion wins, the competitive wins, specifically where you were where you mentioned you were displacing a competitor. Can you just give us a sense, either a mix or just identify some of the wins, whether these were brand new customers to Synopsys or whether they were rewinning or winning back a customer that had maybe shifted away in the past?
The answer is yes, yes and yes, meaning that they fall in all categories. In the past, it has been relatively rare that there would be brand new customers because the semiconductor industry was relatively stable and actually partially consolidating. That has changed substantially in 2 ways. 1 is a number of the hyperscalers are becoming interestingly, strongly interested in doing chip design. And secondly, there's a plethora of IP companies that are doing extremely advanced design on an extremely aggressive timescale.
And for those, the utilization of our tools is just imperative to be able to succeed. So we have opportunities in all fronts. And the bottom line is we have to continue to push hard on the technology, but right now it's very, very strong.
Okay. All right. Thank you.
You're welcome.
We'll go to Adam Gonzalez with Bank of America Securities. Please go ahead.
Hi, guys. Yes, thanks for taking my question. First, I just wanted to ask about the China market. Can you just discuss trends there, excluding Huawei and how you see that market moving forward? And then, if you see any potential impact from the proposed changes to the regulatory outlook, whether that's changes to the de minimis rule or the foreign direct product rule?
Thanks.
Sure. Well, if you take away the entity list, then I would say no change, meaning that China continues to be very active moving forward at a rapid pace, adopting new technologies, and our business is strong. Regarding the entity list, we had assumed and somewhat predicted that there would be no radical change in the near future. So far, that has turned out to be true. But as we all know, things can happen in unexpected ways depending on how the tensions between the countries evolve.
We do not expect that any part of the specific rules would have major impact on changes in our business because bottom line is to the entity list, we're not shipping. So that is sort of an all or nothing type situation already today.
Great. And Trac, just wanted to follow-up on the second half revenue outlook. Can you maybe give a little more detail about what your expectations are for split between Q3 and Q4? And then I think on the prior call for the SIG business, you had outlined that you expect to ramp up spending this year such that margins would stay relatively flat throughout the year. Is that still the goal?
Thanks.
Yes. That's still the goal. So the let me start with the first question, the first half, second half. We do expect Q4 to be our directionally the largest quarter for revenues and EPS, and that's consistent with the guidance. With regards to SIG, we do expect the hiring ramp to continue throughout the year, and that's reflected in the 200 basis point improvement.
But quarter to quarter, it can get a little noisy, but generally flattish with last year.
Great. Thank you.
And we'll go next to John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon, guys. Thanks for taking the question. Art, my first question, the large North American CPU guy where you called historically in a good position seems to be going through kind of a fundamental change in their design philosophy over the next couple of years where they're going to move away from doing everything, their own IP to maybe using some more off the shelf block IPs within their design. I'm kind of curious, what are the puts and takes for the opportunities that, that might create for you as EDA flows?
John, my apologies, but we sort of understood every second word. And so we sort of made out the words IP and the word trend, I think. I apologize. Is it possible to try to summarize just sort of the 3 or 4 words that are most interest to you? And I'll try to fabricate a response to that.
Yes, there's sort of this wobbly sound as if you were underwater.
Yes. I apologize. I'm on a cell phone. Is this any better or not?
Marginally so. Did I get the word IP correctly?
Yes. The question is that the large North American CPU guy is moving to kind of a different design philosophy methodology. They're going to be using lots of their own kind of internal IP design, more off the shelf blocks. I'm kind of curious as to what that means for you or the U. S.
Base?
I think I understand the question. I'll try to re answer it re ask it a little bit, which is essentially of the North American CPU guys, are they changing their design methodology to use more reusable IP? Well, I want to broaden the question slightly because answering for there are not that many North American CPU guys, and it's not appropriate for me to answer in a fashion that recognizes the customers. But what I can say in general is there's no question that around CPU design and including that GPU and all the PUs that are specialized for AI, the design methodology is definitely evolving. There's certainly some people that continue the old way to massively optimize for the last gigahertz.
But for a majority, there's definitely a drift towards applications that use much more data, so that tend to be more machine learning oriented. And with that comes architectures that are very much focused on getting data in and off chip. And so that in itself brings about a natural increase of potentially reasonable IP. And yes, I think the quality of the IP, the advanced nature, meaning the advanced nodes that our IP is available today, and the close collaboration we have with all of these customers has made it possible that they're now counting for design methodologies that use substantially more IP than they did in the past. We expect that to continue.
And we also expect to continue that the IP will become more complex because with the smaller nodes, it really takes a lot of efforts to make them work very well. But it is now absolutely a distinguishing because it will continue to grow, it will continue to be demanding and therefore a good area for us to be in. And we have long term relationships with these customers where they acquire more and more pieces from us.
That's helpful. And then as my follow-up, Chuck, you said there was no impact from the coronavirus on the full fiscal year, and that's understandable. Is there any cushion that you are getting in the current quarter guidance? And to the extent that software integrity is not a part of the op margin expansion still this year, how do we think about that business going into 2021? And kind of at what revenue level would you expect there to be a significant inflection in our margins in that business?
So the question is first question is related to Q2. My comment on the coronavirus to the numbers is consistent
with Q2 and the full year.
It's not meaningful. This is our best outlook for the year, and I think it's pretty consistent with how we've been planning this year. With regards to SIG margins, we should be improving margins in FY 'twenty one, and that's going to be a combination of us growing that business and continue to scale that up and be more productive with the investments.
And our next question from the line of Dave Leshower with Griffin Securities. Please go ahead.
Thank you. Good evening. Art, for you first. In your answer just now to a question regarding the evolution of design methodologies,
you put it largely in
the context of the role or adoption of IT. Could you also speak to that in terms of core EDA and in terms of how customers are differentiating themselves vis a vis design process and the employment of the tools. I'm sure this has been the case since the primordial days of EDA, 3 decades ago. But when you look at the multiple applications and needs that you talk about, in what way do you think core EDA design flows, processes, methodologies are evolving or need to evolve for customers to continue to distinguish themselves aside from their incorporation of standard IT. For YouTrack, with regard to IT, in fiscal 2019 according to the 10 ks, there was a $235,000,000 positive impact from upfront IP revenue, although total IT revenues increased by just over $100,000,000 How are you thinking about those wonderful 606 mechanics in 2020 with regard to the tough comp you have on IP at foot revenue versus perhaps a somewhat easier comp on IP subs revenue?
Okay. Let me start. Of course, your question can lead to an hour dissertation, which is what we'll do. But the first thing to start is that there's still a continuation of adoption of extremely advanced nodes. And with that comes a nonstop demand for all of our tools, all the ones reaching deep into the physics and certainly all the physical design tools to be up to speed with these nodes.
And by the way, their development is less clearly defined in time, meaning that a new node comes out and then within 3 months, there's a version another version of that node and another 3 months, another version. And so there's constant adaptation as people are really squeezing out the Max. Now in parallel to that, maybe less relevant, but still worthwhile to note is that some of the older nodes are also being put more to use as people figure out that with the new tools, they can squeeze out more value out of those nodes and not all the products need the most advanced. Capabilities. Having said that, on the advanced capabilities, if there are 2 or 3 trends I could highlight for the tools, one is this notion that the capacity of the tools needs to continue to increase because on Moore's Law, the one factor that really has not slowed down is the notion of increased density, still more transistors per chip and that adds a lot of value for what you can do.
In order to do that, we need to make sure that our tools interact well with each other. And so the notion of fusion is really profound because it tends to have every tool understand somewhat what the other tools will do and essentially have better team play, so to speak. What comes on top of that is that now the application of AI is absolutely deeply anchored already in our business. And we have capabilities in every one of our tools that are impacted by improvements through AI and increasingly, I'll see capabilities between the tools. The last comment I'll make is in the verification space, where a trend that we have diagnosed early on continues at high speed, which is with the strengthening of the chips and the combinations of chips, and I'm looking here at things that are assembled in a 3 d fashion of multiple chips talking to each other, such as processors and memories and maybe sensors.
The importance of being able to verify both the hardware and the software at the same time continues to grow because whichever is the slowest or the worst off in quality will determine when something goes to market. And so that is the area where advanced simulation techniques, emulation, prototyping play in. So those are sort of the forces that govern what we do. And I can bet that by next week, there will be yet another demand for something to keep going because there's no deceleration in sight.
So Jan, your question regarding IP. Let me start by saying that we're very positive about our IP business. This is a, as we describe, a low double digit growth business. And everything we're seeing in the marketplace and our bookings continue to reflect that outlook. That said, the 606 transition does introduce more variability to the numbers on a quarterly basis.
But on a full year basis and on a multiyear basis, this is a very good growth business for us as reflected in the guidance for the full year.
Also, Track, could you update us on your backlog number?
Well, I know you're going to read our Q that's coming out shortly, and you'll see that the backlog is pretty steady at 4.4 and directionally up versus last quarter. And then within that, the run rate that we the business that we booked was actually very positive.
And our next question is from the line of Jason Celino with KeyBanc Capital Markets. Please go ahead.
Hey, guys. Thanks for taking my question. The acquisition of Tinfoil fills a nice hole on the dynamic testing side for your SIG portfolio. Can you talk about how that acquisition came about? And maybe any other small holes your current offering has?
It is a very nice acquisition. And in these new markets, everybody knows everybody. And so then the question is always, are there some acquisitions that are both timely, that are economically reasonable and where we can integrate rapidly in a broader solution. And of course, we have had experience in this, in the DDA business for many, really decades. And so there's some similarity in that.
And what was particularly intriguing is that tinfoil fits so nicely in the Polaris platform. Of course, we have to do the integration, but this is exactly And it was And it was designed to make these type of integrations possible and not too costly. So if I add to that the fact that Tinfoil is truly a remarkable high quality company with some stunning individuals in terms of their ability to look at the future. We and by the way, the locals, so it makes it easier to integrate. So far, it looks really promising.
Okay. And then similar topic, the acquisition of the IP assets over the last few months, how should we think about those as far as complementary to the growth opportunity in IP or kind of the margin expansion opportunity in IP?
Very good question. So our IP business is really 2 components. 1 is to continually drive both the breadth, but I would say just as much the depth of what we do in IT. And that would be the new technologies, new versions of a technology, etcetera. But the other part is that actually IP does require quite a bit of work.
They're very often statement of works on delivering IP that fits exactly the needs of a customer, so maybe some small variations or some tuning a specific technology. And so continuing to grow our workforce that can do this is just part of continuing to scale it overall. And so in both the cases of INVEKA's and eSilicon was a combination of some technologies and but most importantly, also a workforce that was very well suited for the type of needs that we have. So we see it as essentially just another way of continuing to broaden and grow our business.
Great. Thank you for the color.
You're welcome.
We'll go next to Krish Sankar with Cowen and Company. The line is
open. Yes. Hi. Thanks for taking my question. I have 2 of them.
First one for Art. Art, if you look at it like high performance computing over the last several years, the swung from being centralized cloud and now it's more distributed towards the edge. Kind of curious, how does this change the EDA landscape, if at all? The requirement for EDA change at the edge? I'm just curious on that.
And then I have a follow-up for truck. Well,
most of the super high performance computing is reasonably centralized. But it is true that a number of the edge application, if you call a car an edge, there's a lot of computation that's going into that. And so I would say, in general, the difference of design is not that marked unless you have 2 things that change. 1 is the need for low power, I. E.
Battery operated type things. And so there you have the never ending challenge of how much performance can you squeeze out without draining the battery in no time. And that's not a new problem. It really started to come up when mobility came up in early 2000. But the other thing is that in a number of edge applications now, these computational devices can be used in machines that can actually be lethal.
And a car is definitely potentially lethal, but so could be a robot or so. And so with that comes a whole set of other rules that one has to serve in the design of the chips, such as having the capability for a chip to diagnose itself as faulty. And in some cases, to diagnose itself and at least temporarily repair itself by having, for example, duplication of some capabilities. Now it took us a while to catch up on all those rules because many of those rules are very old. They come from the automotive industry.
But now and I think we highlighted maybe in the script on automotive, Synopsys is really well on top of this and so much so that we now participate in the premiums where the next set of rules are being developed and pioneered. So those are sort of the differences. But for the rest, it's like it's never good enough. It's never fast enough. It's never low power enough.
That continues. And while these sound like negative words there, the music to our ears is a lot more opportunity for us.
Got it. That's very helpful, Art. And then a quick follow-up for Track. It looks like your fiscal 2020 revenue guide is largely unaffected because of the virus. I understand the stability of your revenue stream.
But I would have thought that there would have been some impact on the hardware emulation business given that it's still more variable. Kind of curious, are you not seeing any of that impact in hardware emulation?
Well, our guidance reflects the best information we have right now, and the demand from our customers continues to be very strong. I think part of it is it's going to be the variability is going to be mostly on the timing of it, but that's contemplated in the guidance. As far as growth goes, keep in mind, every year, we look at the year and we say that it's going to be hard to grow off of a record year, which is what we had in 2019. But we feel very good about where we are and the pipeline that we've got in place.
We have
a question from the line of Josh Tilton with Berenberg Capital Markets. The line is open.
Yes. Hi. Thanks for taking my questions. First on software integrity, just how many months are left on the total Polaris rollout? What key functionality or mace be integrated?
And should we expect a step up in margins once the platform is fully rolled out?
Yes. Maybe a strange answer, but that rollout will continue hopefully for a long, long time, meaning many years. The reason being that the basic capabilities of Polaris as a platform are there. Now the question is how well do we integrate multiple applications. And the power of a platform is precisely because it handles multiple applications in a way that makes life much easier for the user instead of having to deal with different products that may have different interfaces, data representations, etcetera, etcetera.
So what was what is encouraging is that we now have already multiple capabilities on there. And you may realize that I mentioned that the Tinfoil acquisition is slated to be integrated next. And so that's a good way to think about it. Hopefully, we can do many more things. Now the platform itself will continue to evolve.
They all do. And it's hard for me to say what's the life cycle for a platform in this area, which is still new to us. But if you look at sort of EDA, our platforms typically have lasted somewhere between 10 to 15 years.
And I was hoping to achieve that it's drive margin expansion over time as we ramp up on the platform. But it's going to come across from a variety of things, both revenue growth, operating efficiencies and then getting the benefit of the platform. Compiler. Has it been going up head to head specifically against Cadence's full digital flow? And if so, have the win rates been there?
Well, we really have mostly one competitor in that area, and it's a very worthy competitor. So yes, we compete all the time against Cadence. And let me just leave it at the fact that I think right now, we have a very, very strong capability.
Thank you very much. You're welcome.
I'll turn it back over to our speakers.
Well, with that, thank you for all the questions. And again, thank you for your support. We had a strong quarter. We have a whole rest of the year to go, as you know. And we look forward to talk to you again in the quarter.
Be aware that for some of you, we're also available later on after the call.
Thank you. And ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT and T conferencing service. And you may now