Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys earnings conference call for the second 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 begin at that time. If you should require assistance during today's 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 call is being recorded. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.
Thanks, Anna. Good afternoon, everyone. Hosting the call today are Aart 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, 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 this call, important factors that may affect our future results are described in our most recent SEC report 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, 8-K, and financial supplement that we released earlier today. Also included in the financial supplement is detailed information around our long-term financial objectives, the transition to ASC 606 this year, and operating segment results. 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 Aart de Geus.
Good afternoon. I'm happy to report excellent second quarter results. Revenue was a record $836 million, with strength across both operating segments. In semiconductor system design, software revenue growth was particularly strong, moderated somewhat by a tough hardware comparison versus the second quarter of 2018. Software integrity revenue tracks right to plan with greater than 20% growth and is expected to be profitable for the year. Non-GAAP EPS was $1.15, and we repurchased $100 million of our stock, bringing the total so far this year to $129 million. If the U.S. export restrictions that were announced last week do have an impact, we are raising our non-GAAP earnings guidance at the top end of our revenue range to reflect the strength of our business. Trac will provide some additional color on this topic and discuss the financials in more detail.
As geopolitical tension has escalated, the overall customer environment for us is quite solid. The hunger for advanced technology, design tools, IP, and security solutions is strong, creating a robust market opportunity. The growing impact of AI, 5G, Internet of Things, and big data is profound and is driving substantial investment in new compute and machine learning architectures. Virtually all vertical markets are engaging with AI, and the potential economic impact is forecast to be in the trillions of dollars. In addition, for the first time semiconductor vendors, very large system companies, and cloud providers are investing competitively, opening further opportunities for us. The push for AI solutions, along with the growing security issues associated with a highly interconnected world, benefits our entire silicon-to-software product portfolio. Synopsys is ideally positioned to solve these very complex challenges.
Our EDA design and verification solutions are front and center in creating brand-new AI-optimized engines. Our IP is broadly used in the most advanced computing technologies being built. Our prototyping tools run and test software on new subsystems long before silicon is available, and our software security and quality solutions are essential to minimize vulnerability to threats. In that context, let me provide some highlights from the quarter beginning with EDA. The underlying driver of EDA growth is design complexity along two vectors. One. Advanced processes moving to smaller, denser technology nodes such as seven, five, and most recently, three nanometer. Two. Optimizing designs in more established nodes for cost reduction, but also speed and low power. Three. Massive software content that is becoming integrated as part of chip design. Overall, the system challenge is to make sure the chip and the software work well together.
In design, customers rely on Synopsys solutions all of their 12-nanometer and below designs. The key reasons are state-of-the-art tools and also our unmatched collaboration and support. This quarter, we continued our longstanding foundry enablement with TSMC. We certified both our physical and custom design platform for its five-nanometer FinFET process. TSMC also certified our Fusion Design Platform and their innovative System on Integrated Chips, or SoIC, chips stacking technology, delivering design solutions for true 3D design device integration. Samsung used our complete design solution to develop the very first test chip for its brand-new gate-all-around process. In digital design, a rapidly growing highlight is the success of our new Fusion Compiler product, which we launched in November. It's a revolutionary combination of the main pillars of design, all of which are cornerstones for Synopsys.
Physical, place and route, and sign-off into a single solution on a single data model. Fusion Compiler is doing really well from both technical and business perspectives. A rapidly growing set of customers is reporting excellent results, including significantly shorter design time, a higher level of predictability, and better timing, area, and power results. Adopted by 19 different logos across eight different process nodes and used for about 250 active and by now completed designs, the trajectory is impressive. One such customer is Renesas, who deployed Fusion Compiler across its high-value automotive portfolio. Renesas cited consistently superior power, performance, and full flow productivity on its production design. The versatility and potential of the Fusion Design Platform is living up to its promise, which includes continuously adding of new Fusion technology capabilities to broaden its impact.
This quarter, for example, we launched a fully integrated test flow, obtaining next-generation capabilities for automotive tests and functional safety. Stay tuned as we deliver further enhancements over the next 12 months. Turning to verification, where we continue to see outstanding results and a strong outlook for the year. Thanks to years of great technology advances and excellent customer support, we are the market leader. Verification is a huge bottleneck for chip and system design. Customers tell us that you can't get enough verification as design complexity is getting more difficult and more time-consuming by the day. Synopsys is fortunate to have the fastest software and hardware solutions and the broadest size for our Verification Continuum platform. Improved strength in verification software was driven in part by accelerating demand from influential system companies who are reinventing how to design and verify their next-generation products.
Our decade-long leadership is an important indicator of our impact. 12 of the top 15 semiconductor companies in the world use our franchise VCS simulator as their primary verification solution. Demand for our hardware-based verification is also high and increasingly broad-based. The ability to validate chips together with the software and the need for early software development are paramount. Our new ZeBu Server 4 emulator, launched late last year, is doing very well, with early demand exceeding expectations and outpacing that of previous solutions. Adoption of our HAPS FPGA-based prototyping solution, which targets early software development, was again robust in the quarter. As a result of our differentiation, we are market leader in both emulation and prototyping. To IP, which had another very strong quarter and is poised for an excellent year of double-digit growth.
As the number 2 vendor in the world and the market leader in interface, analog, embedded memory, and foundry-specific IP, we provide the industry's broadest set of building blocks to address today's most complex design requirements for AI, automotive, Internet of Things, cloud computing, and more. The quarter featured a number of important milestones at advanced nodes. We announced that we have achieved more than 250 IP wins on TSMC's 7 nanometer FinFET process across a broad range of applications. In addition, we signed a multi-year agreement with a marquee global customer for 5 nanometer IP. Our portfolio continues to expand. Further building on our strength in automotive, we announced a collaboration with GlobalFoundries to develop the industry's first automotive-grade IP for their 22 nanometer FDX process. We announced a complete solution for one of the hottest markets around, Narrowband IoT, enabling the next wave of connected devices.
We taped out two key IP cycles for cloud computing and AI applications, including 112G SerDes and ultra-high-speed connection for hyperscale data centers. With the rising complexity and time to market challenges inherent in delivering today's electronic systems, Synopsys fills a critical and growing need for sophisticated low-risk IP. This brings me to our Software Integrity Group, which has now reached 10% of Synopsys revenue milestone, and it's scaling nicely. As software security issues continue to increase in both number and severity, testing during the development process becomes a necessity. This is true not only for electronics, but for anyone who develops software in financial services, medical, automotive, industrial, and beyond. The progress our team has made in building this business over the past five years is striking.
While we acquired compelling technology and added substantial organic investment, we also focused our deep knowledge on building a compelling software security and quality platform. In March, we announced our new Polaris Software Integrity Platform. It brings product and services together into an integrated, user-friendly, cloud-based solution that makes deployment and scalability easy. While we will continue to deliver enhancements to the platform over the next 12-18 months, the initial release is already showing great promise. We are engaged with customers across all regions, and early reaction has been very positive. This includes a Fortune 500 insurance company who placed a multi-year, multi-million dollar order for Coverity delivered on Polaris. The power of our portfolio, the broadest in the industry, is evident in the growing number of high-value contracts and companies adopting multiple products. Industry recognition of our solution also continues to grow.
Last month, for the first year in a row, Synopsys was named a leader in Gartner's Magic Quadrant for Application Security Testing. In fact, we were placed at the highest level. We are also again recognized as a leader in the fourth wave of Software Composition Analysis for open source software. Important rankings such as these substantiate our leadership for customers who are investing significantly in choosing their preferred partners. To summarize, we delivered another very strong quarter and are raising the top end of revenue and non-GAAP EPS guidance for the year. We're making step-by-step progress in expanding our ops margin. Our new EDA products in the early stages of a multi-year adoption cycle are experiencing rapid and substantial adoption. Demand for our IP portfolio is high, and we expect to deliver another year of low double-digit growth.
Our software security and quality business is scaling well, reaching about 10% of total revenue and expected to reach profitability for the full year. Finally, I want to say thank you to the global Synopsys team for its continued hard work and commitment to helping our customers meet their important and always urgent objectives. Let me now turn the call over to Trac.
Thanks, Aart. Good afternoon, everyone. We continued to execute well, delivering good top and bottom-line growth and non-GAAP operating margin of 25%. Operationally, we are on track for another outstanding year and an outlook that reflects high single-digit revenue growth on an apples-to-apples ASC 605 basis, substantial operating margin expansion, and double-digit non-GAAP EPS growth. Last week's government action to restrict trade with one of our customers and its affiliates does have an impact on the business, as we are currently unable to ship product, deliver software updates, or provide support. As a result, we are not able to take new business and recognition of currently contracted revenue is on hold. However, due to the strength of the first half, we're still able to raise our non-GAAP EPS guidance and the top end of our revenue range. I'll provide more details in a moment. Now to our Q2 numbers.
All comparisons are year-over-year unless otherwise stated, and all results are reported under ASC topic 606. For a summary of these results, as well as the implicit financial metrics under ASC 605, please refer to our financial supplement. We generated consolidated total revenue of $856 million or 8% growth and saw broad-based strength across both segments. Semiconductor and system design revenue was $753 million, up 6% or high single digits excluding hardware, which had a record quarter last year. For Software Integrity, revenue was $83 million, an increase of 23% as the business continues to capitalize on market dynamics and gain share in high-growth accounts. Continuing down the income statement, consolidated GAAP costs and expenses were $721 million. Total non-GAAP costs and expenses were $626 million, resulting in a non-GAAP operating margin of approximately 25%.
At the segment level, semiconductor and system design delivered an adjusted operating margin of 26.2%, with Software Integrity at 10.1%, reflecting both underlying strength and quarterly variability of revenue and expenses. Note that certain operating expenses, such as stock-based compensation, amortization of intangibles, and other expenses that are managed at the consolidated level have not been allocated to our segments. We continue to expect Software Integrity to be profitable for the full year, with a goal of reaching at least our consolidated profit margin over the long term. These operating results returned growth GAAP earnings per share of $0.77 and non-GAAP earnings per share of $1.15. Turning to cash, operating cash flow was $353 million, driven by strong collections in the quarter. We ended the quarter with a cash balance of $651 million and total debt of $292 million.
Before moving to guidance, let me provide some additional color around the impact of last week's government action. As I mentioned, we are not able to take new business with this customer and its affiliates, and revenue recognition for current contracts is on hold until either the contract expires or the restriction is lifted. Because the duration of the ban is unclear, we've expanded our ranges to account for an array of potential impacts. We believe that we will eventually be able to recognize the revenue, depending on the timing and ultimate resolution of the government action. Our targets based on ASC 606 for the full year 2019 are revenue of $3.29 billion and $3.25 billion. Total GAAP costs and expenses between $2.798 billion and $2.853 billion. Total non-GAAP costs and expenses between $2.505 billion and $2.525 billion, resulting in a non-GAAP operating margin between 4.0% and just over 24%.
Other income and expenses between negative $12 million and negative $8 million. A non-GAAP normalized tax rate of 15%. Outstanding shares between 150 million and 156 million. GAAP earnings of $2.85 to $3.27 per share. Non-GAAP earnings of $4.23 to $4.27 per share, an increase at the midpoint of $0.08 over our prior guidance. Cash flow from operations of $670 million to $700 million, which reflects additional uncertainty due to the trade restrictions and some restructuring costs as we reallocate resources for future growth. Capital expenditures of approximately $250 million. You can see that total CapEx has dropped by roughly half in 2020. Now to the targets for third quarter. Revenue between $810 million and $850 million. Total GAAP costs and expenses between $700 million and $746 million. Total non-GAAP costs and expenses between $620 million and $640 million. Other income and expenses between negative $4 million and negative $2 million.
A non-GAAP normalized tax rate of 15%. Outstanding shares between 153 million and 156 million. GAAP earnings of $0.60 to $0.82 per share, and non-GAAP earnings of $1.07 to $1.12 per share. I'll conclude by reiterating our long-term financial objectives. Annual double-digit non-GAAP earnings growth driven by revenue growth in high single digits. Selected mid to high single digits for EDA. Low double digits for IP. Software and services growth in the 20% range. An operating margin expansion to the high 20s by 2021, and in the 30% range longer term. Our execution in the first half reflects our commitment to driving durable results that will put us on a path to achieving our longer-term operating objectives. Our capital allocation strategy enables us to meet dual objectives while returning substantial value to shareholders.
We maintain a balance of internal and external investments for growth and return and a robust share repurchase program. With that, I'll turn it over to the operator for questions.
Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. Again, if you'd like to ask a question, please press star followed by one. We apologize for this delay online. Our first question comes from Richard Valera with Needham & Company. Please go ahead.
Thank you. Good afternoon. Mark, aside from the ban, which has some specific implications, would you say there's any other change in the outlook or the demand from your customers relative to a quarter ago?
Actually, I would say no. I don't think that there's material other change. There was some worry about three months ago that seems to have settled a bit. I think the market is just readjusting itself, among the companies, some doing better than others. The end demand, I think remains just as strong as it was before.
Got it. Just a clarification on the guidance for the rev rec with Huawei. Can we assume that the low end of your revenue range, that there's no rev rec assumed for Huawei for the balance of the year? Is that correct?
That's correct, Rich. We tried to widen the range to capture the possibilities of the restrictions remaining in effect. The higher end of the range, which reflects the execution in the first half, which has been pretty strong, and the possibility that gets completed in some reasonable amount of time.
Right. Is it fair to say that the low end would have been going up had not you had this change with respect to Huawei?
That's correct.
With respect to the hardware business, which obviously had a tough comp in Q2, but generally, I think has a kind of a tough comp for all of next year. When you came into this year, you were thinking that that would be flattish. I don't know if you gave that specific guidance, but my sense was you were sort of thinking about that being flattish. Any change in thoughts on the hardware business, now that we're a couple quarters into the year?
No, I think fundamentally, I think we have predicted it reasonably well. While we didn't use those words, your words are not all that far away from where we are. We do see good demand and broader demand than in Q4. In the long term, I think that will just come back. Last year was just particularly strong and actually overall so far this year is good in general. I think you characterize it correctly.
Got it. Thanks very much, gentlemen.
You're welcome.
Our next question comes from Tom Diffely. He's with D.A. Davidson. Please go ahead.
Yes, good afternoon. Following up on Rich's question on Huawei, were there application engineers on location that have been removed at this point?
Well, I don't think we want to go into the intricacies or the individual actions. With all of our customers, we have essentially constantly applications engineers helping them. Right now we're just following exactly the rules set by the government, and they include not giving specific support.
Okay. Then just one more question on that. With the combination of both kind of traditional EDA tools as well as IP, was one more significant than the other?
Yeah. While we wouldn't break it into individual pieces, large companies typically are participants in all of our portfolios, so that certainly would include IP.
Okay. I just remember you saying at some point there was some of the strong interest in IP comes from a lot of the Chinese customers as they're filling pieces. Okay, I guess moving on, do you see any other impacts from the trade war, the tariffs on your business? If you do, is there a difference between delivering traditionally versus over the cloud?
No, we don't see any changes, I think it's too early to see any changes in the market period. Obviously, there will be some readjustment of how different suppliers act, I'm talking about semiconductor companies. I think it's really much too early to speculate because even in the last few days, there have been changes.
Okay. Then, Trac, when I look at your full-year view, obviously you've got the damping effect of Huawei. Was there any other piece it takes that created the spread, or was it really just that one particular event?
It's pretty hard isolating the issue, because when you look at the first half results, you're seeing very good growth in top line margin, improving very well against last year. You can see on guidance for Q3, it's very disruptive. The widening of the guidance range really reflects the trade restriction that went into effect last month.
Great. Okay. Thank you.
You're welcome.
Our next question comes from Mitch Steves with RBC Capital Markets. Please go ahead.
Can you hear me?
Yes, we can.
Okay. I apologize. I'm on the road. I only have two questions. The first one's pretty high level. Obviously the U.S. and China are going to have higher tensions here. Maybe I'm thinking this too much, but is there a chance that potentially the Chinese vendors you guys are selling to outside of Huawei would want to push and kind of go into the higher-end nodes now that there's potential for it to ban, it makes sense to try to invest in their tech? Any thoughts on that?
Well, I think that all companies that are in the semiconductor arena are continually racing forward to try to provide products with the high-end nodes and more sophisticated technology. I don't think that goes away under any economic scenario. This is one of the reasons why we think that overall our business outlook is very solid or strong because the demand, given the applications that are being developed, requires strong investment on the part of our customers in advanced technologies. Different companies will get there in different ways. The race is definitely on.
Got it. If you want to give a little Trac, keep the limelight for this one. When I look at the Software Integrity, it's got a 10% margin already. That seems pretty substantial on a year-over-year basis. Can you maybe help us understand how that's going to ramp? I think that going 50% growth on in terms of a margin perspective is pretty high. How do we model that going forward in the next couple of years?
Sorry. Let's focus on this year. We're showing a good trend on Software Integrity, and that's heading in the right direction after roughly five years of investment in that area. The profitability or the OM for that business could be noisy from quarter to quarter. Keep in mind it's a nascent market that's growing, and the profile of that business will vary from quarter to quarter as the revenue grows. It's still very strong, and we continue to invest in this area. You'll see us talking in terms of revenue growth and investments. For this year, though, we are certainly on track for profitability for the business. I just would be cautious about extrapolating too quickly on the Q1 results heading to Q2, but we definitely will be profitable.
Longer term, given the dynamics and the nature of that business, we do expect it to be at least at the corporate average in terms of ROA.
Okay, thank you.
You're welcome.
Our next question comes from Sterling Auty with JPMorgan. Please go ahead.
Thanks. Hi, guys. I apologize, I don't know if it's the static or I didn't quite catch the following two questions around the China situation. The first one is it all revenue related to all products currently with that customer that's put on hold? Is there anything else that potentially could come out of the revenue line over the coming quarters? I got one follow-up.
The revenue guidance includes all revenues for all products related to that one customer.
Okay. There's no revenue at all coming for that customer in the income statement? All right, perfect. The other one is, I didn't catch, what about cash flow? In terms of cash collections and payments.
Yeah. Our cash flow guidance of $650 million-$700 million does reflect a couple of new items. One is an impact of cash collections for that customer, partly it's a reflection of the fact that we are able to provide additional support for them. Improved outlook, assuming that collections will be delayed. The other part is the restructuring that we took in Q2, a minor restructuring we took in Q2.
I think that's very fair. That last element, FX impact on top and bottom line in the quarter and the outlook?
Generally, immaterial to the overall results. Keep in mind that the one currency that's not going to be in USD is the yen, and that is hedged at the beginning of the year. The top and bottom line is pretty much dampened by FX.
Sounds good. Thank you so much.
You're welcome.
Our next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hi, everyone. Thanks for taking my question. A follow-up question on the operating margin for the Software Integrity Group. You mentioned the long-term target of being at corporate average, presumably high 20%. What revenue level has to be achieved to get to that target?
Really, the model that we described for Software Integrity Group is roughly about 20%-plus growth. If we continue on that path, the growth will be there. Over the last few years, not only have we invested in the product portfolio and our go-to-market infrastructure, but we have also spent time building out the organizational infrastructure, the back office, whether it's the systems or the processes, et cetera. You continue to see improvement in operating margin through a combination of revenue growth in that 20% range and operating leverage as that business scales.
Okay. Trac, you mentioned a minor restructuring in the second quarter. I think the charge was the highest charge you've had in at least a few years. Could you shed some more light on what the restructuring was and just what headcount and product groups might be impacted?
Yeah, Gary, it's pretty much fine-tuning. We've committed to driving operating margin expansion with a focus on hitting the high 20s by 2021. We continue to invest in the business, in fact, in important part across all areas. As we tweak and tune it, our focus is making sure that we're emphasizing the business areas that is going to deliver the best combination of top-line growth and margin expansion. Q2 was just a function of that.
Okay. Last question. I'll ask it quickly. Hopefully, it's a quick answer. Do you have handy the mix between merchant chip vendors and system OEMs and captively developed integrated circuits?
I'm sorry, I don't follow that question.
What's your sales mix between merchant integrated circuit companies and system OEMs?
Oh. That ratio has never changed all that much. It was always sort of in the 40-ish percentage for the system houses. In all fairness, those definitions are becoming much fuzzier because a number of system companies that in the past didn't do any chip design have now started to invest in chip teams. I think you mentioned some of those as being some of the big cloud providers, for example, or some of the very large companies in the world. At the same time, the people that are dedicated to chip design are spending more money because it's more challenging. Fundamentally for us, the picture is changing, but it's not evolving away from those numbers.
Okay. All right. That's helpful. Thank you.
You're welcome.
Again, ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one. Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Thank you. Good evening. Trac, just a quick clarification. You did not mention in your prepared remarks an updated backlog number as you did in Q1, if you could provide that. Second, for Aart, with respect to the restructuring, that ties into a couple of questions that we had meant to ask you anyway, that is back in September at an investor meeting in New York, again at the analyst meeting a couple months ago, you referred to improving your internal processes that related to the company's profitability, Trac referred to efficiencies, you didn't really go into much detail as to what you were doing. You're changing your cost structure here, in what other operational and ongoing ways are you in fact going to improve those processes and efficiencies that you alluded to?
Also, it looks now, just a quick spot check this afternoon, once the restructuring news came out, that your current job openings are the lowest in a year and a half. It looks like most of the pullback in openings is in the U.S., and you still have a fair number of openings in China. Maybe just talk about all of those issues together in terms of processes, cost structure, and hiring. Thanks.
Let me start with your first question, Jay. The backlog was around $4.3 billion, pretty consistent with where it was at the end of Q1. Overall, the business, as you can see in the outlook, the business has been pretty healthy. Run rate growth was actually up in Q2 then. I'll make a few comments on the fine-tuning of those that Aart provided, Carlo, but it really ranges across the board. For example, it varies from systems to implementation. A couple years ago, we upgraded our ERP system to be prepared for our ASC 606 transition, as well as the evolution of types of businesses with different portfolios.
Having that platform then allowed us to go in and spend time last year and continue into this year, looking at our infrastructure and the processes around the Software Integrity Group business and allowing us to. Some of that benefit you're seeing, certainly in the profitability improvements in the first half. Really looking at our business processes and then the systems that are supporting that business, the CRM system that supports that business, which is very different than what we traditionally used to. It's much higher volume, lower dollar in absolute terms relative to the EDA business. Those are two examples of the sort of things that we're looking at. As you can see, in some ways, they're big, heavy lifts in terms of creating the infrastructure.
They're appropriate things that you would want to do in terms of scaling the business from where we were today to the next level of ambition.
Yeah. Maybe I can comment a little bit, going back to, I forget exactly if it's two or three quarters ago, when we communicated to you that we had essentially executed on a multi-year investment push with a number of acquisitions, specifically creating the Software Integrity Group, but also a number of pushes on the tool side and broadening our IP portfolio. We are continuing on all these investments because I think we invested in the right direction and things are looking quite good there.
At the same time, as we communicated to you that we were putting additional emphasis on improving the ops margin after this round of investment, we are not only looking at all the infrastructure tasks and all the processes, as Trac mentioned, but literally going through every business and looking at: which products have higher potential, which areas in the world or areas with customers need additional emphasis or can be slightly reduced, and even what verticals are of interest. We did very well, for example, in the automotive side, but there may be others that we could consider. It is actually a long list of a lot of fine-tuning, but the fine-tuning does have an impact. As to the openings, I do think that we have a very large number of openings at this point in time.
They do change from time to time also because business units visit where the needs are, how these have evolved, which positions have been filled, what are we looking for. They also move a little bit from geography to geography as a function of the consideration. I wouldn't say there's anything abnormal on that, but I think we are very serious and well-organized to keep pushing on the ops margin. If you have watched the results the last few quarters, you should at least get an inkling that we're heading in the right direction.
Thank you.
You're welcome.
Our next question comes from Jason Celino of KeyBanc Capital Markets. Please go ahead.
Hi, can you guys hear me?
Yes.
Staying on the margin topic, even your semi and systems operating margins increased by 30 basis points quarter-over-quarter. How should we think about linearity of those margins? I appreciate your comments on profitability of the other segments, but how should we look at the core margins?
Yeah, if you look at it on a multi-year basis, you should see a steady progression from where we were last year to where we want to be in 2020, 2021, which is the high 20s. You'll see a steady progression towards that. On a quarter-to-quarter basis, it can be very highly variable, very lumpy, given the mix of the business that we shipped that particular quarter or the contracts that are in play that quarter. Overall, you see the trend on an upward trajectory.
Okay. Then relative to the new ZeBu Server 4 product, it seems you're getting some good feedback from customers. Can you maybe provide some more color around that?
Sure. One of the key capabilities of the ZeBu Server 4 is, A, that it is faster, and B, that it can do much larger capacity, and the fact that you can really scale your capacity as required by the needs of the customer. Lastly, the cost per computation is the lowest on the market, so that makes for an attractive solution. It's actually a solution that has also found some really hairy problems to solve, such as can you start running software on hardware that you don't have yet? In other words, can you virtualize your designs? Can you implement them in an emulator before you actually have the silicon? That is turning out to be both a very challenging problem, but one that we are well-equipped for.
We're very encouraged where this is going, and if anything else, we've also seen in the last few quarters that we are broadening the number of customers that are intrigued or that actually have started to use this.
Great. Thanks.
Our next question comes from Gal Munda from Berenberg Capital Markets. Please go ahead.
Hi, this is actually Francois on for Gal. I just wanted to revisit the China contract that you said was on hold. We were just wondering how long do you think that would be on hold? As a follow-up, you mentioned how system companies are driving software verification. Are these customers purchasing hardware as well, or is that not necessary for the complexity of the designs?
Our guidance for is focused on FY 2019, the range, particularly on the lower end, reflects the possibility that the restrictions are in effect for the rest of the year. In the event that it does change, then you can expect it to be on the higher end of our revenue and earnings guidance.
Regarding your question on prototyping. Most customers, if not all, really use both, meaning that Let me say it differently. The people that use hardware invariably also use the software, because that's typically how they got to know us in the first place. For smaller problems, you try to get as far along as you can on the software. Once the speed is hopefully adequate and the complexity has grown, that's where people start using the hardware to get much faster results. We have multiple variations on that theme, by the way. The other comment I would make is that now it's one thing to do very, very fast simulations. It's another thing to actually diagnose what happens when something goes wrong. That's where the debugging is extremely important.
We have a very, very powerful set of software debugging capabilities that work with both our software simulator and with the emulators.
Okay, great. What's the length of those kinds of contracts?
Our duration in general is typically three years. It runs around three years.
Okay. Then I just had one more on your Polaris Platform. Is that platform completely built in? If not, what's left to be integrated, and what is the roadmap for completion, and how should we think about that for the benefit to your margins?
Okay, let me take one step back and say, what is the platform all about? Well, the platform is all about to let software developers use really a multiplicity of tools that can detect a variety of quality and security issues as you develop the code. You have to realize that it's a little bit more than a year ago that we actually acquired one of the bigger pieces of our products. The objective for this year, and it turned out it was early in the spring this year, was to have the first version of the Polaris Platform that aimed to bring all of our products together, including, by the way, some services through that platform also.
What we have today that some customers have already purchased is the platform with the first set of tools and capabilities with the first set of tools that is on there. As we now progress through the next 12 to 18 months, more and more of our tools will become available. The last comment about this is that, why is this particularly relevant for larger companies? Because if you are the CISO or the head of IT in a large company, you have a lot of challenges around security. Of course, for each challenge, there are 10 different companies that have a miracle cure. While we do not participate in many of these remedial situations, what we intend to provide is the best development environment that can constantly diagnose and early indicate issues so that the development is better in the first place.
For that, the ITs or heads of ITs or CISOs would rather have one trusted broader partner as long as the stuff works together. That's so easily said and so difficult to do. This is why we're so excited about the Polaris Platform because we are making things work together really well. Of course, we have 25 years of lessons learned from EDA on how to do that. Now we're applying all of these lessons to the software integrity space.
Okay, great. Thank you very much.
There are no further questions in queue at this time. I'll turn it back over to the host for any closing remarks.
Sure. Let me start by apologizing on the static. While we don't hear any of that, so you've been loud and clear to us. I hope that message at least came across. If nothing else, we all understand that there's quite a bit of noise in the market and most of those things, there's no control we can have over that situation. In general, our business has been strong in the first two quarters of the year. It's looking good for Q3, so we are continuing on for terms on our trajectory, we appreciate all the interest that you had in this earnings release. Have a good afternoon.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and you may now disconnect.