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, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Lisa Ewbank, Vice President of Investor Relations. Please go ahead.
Thank you, Susan. Good afternoon, everyone. With us 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, 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 8-K earnings press release and financial supplement that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at synopsys.com. 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, thank you for joining us. Q1 was an excellent start to the year as we delivered double-digit growth in both revenue and earnings. Revenue was $769 million, and non-GAAP earnings per share were $1.10, both above our target ranges. We continued to return capital to shareholders, initiating a 200 million share repurchase, and we closed the important acquisition of Black Duck Software. Trac will discuss the financials in more detail. The market we serve through our three customer groups, semiconductors, systems companies, and software developers, had a very strong 2017. The semi industry grew 19%. Analysts forecast a positive outlook for 2018 and beyond, with growth expectations in the high single digits. Driving the market are three important dynamics: smart everything, sophisticated hardware-software interaction, and the universal need for software security. First, the new age of smart everything or digital intelligence is unfolding rapidly.
Applying machine learning to massive quantities of big data requires dedicated high-performance processing, huge storage capacity, and broad connectivity bandwidth. Innovation and investments in AI chips are growing rapidly. Moreover, digitization and early results in verticals such as automotive, industrial, medical, financial, virtual reality, and many others are readily visible. The race is very much on, Synopsys is front and center with tools and IP to support the development of extremely advanced machine learning chips. Second, the intersection of dedicated high-performance hardware with vast amounts of sophisticated software is at the core of both challenges and opportunities, manifested in particular with systems companies. Simply stated, faster compute enables more sophisticated software, rapidly advancing software demands still faster compute. The intersection of hardware and software is the center of gravity of Synopsys' strategy in verification, emulation, and prototyping.
Third, the proliferation of connected devices across virtually every aspect of life makes finding security vulnerabilities early in the software development process an imperative. This is certainly paramount for systems that touch human life, society's infrastructure, and high-value industrial and financial systems. Here too, Synopsys has carved out a unique technical and market leadership position, our Software Integrity Group has been growing well. Summarizing the opportunities, Synopsys is in a position today to address all of these dynamics and participate in this exciting wave. We have a unique combination of leading technologies reaching from silicon to software, with particular emphasis on the intersection of the two. Our company is global, with a strong and experienced field and support team, over the years, we've executed well while having the courage to invest in adjacent growth opportunities ahead of the curve.
Now to some Q1 product highlights spanning silicon to software. At the foundation of silicon, Synopsys continues to help drive the development of state-of-the-art new technologies, enabling the most complex chips. FinFET designs require highly advanced performance, area, yield, and low power capabilities. As a pioneer and leader in FinFET design enablement, we are relied on for over 90% of these chips. Supporting development of the most advanced devices, our TCAD, technology computer-aided design, continues to advance to smaller and smaller circuits, now including 5, 3, and 2 nanometer nodes. At these dimensions, traditional TCAD needs to evolve in order to simulate individual layers of atoms. Over the last two years Synopsys has invested in this capability, our TCAD is now capable of doing so-called atomistic simulation. Our digital design platform, centered around synthesis, place and route, and sign-off, continues to drive advanced customer results and growth.
During the quarter, we won a business-critical AI-targeted design and had a significant competitive displacement at a high-profile U.S. systems company, both driven by excellent low-power results. Success with advanced process technology also continues. One example was a competitive win on an Arm CPU implementation in China, driven by better total power consumption results. Reflecting the compelling benefits of integration of physical verification into our core digital flow, iC-Haus, known for its ASICs for industrial, automotive, and medical technology, selected IC Validator replacing incumbent tools. Our custom analog product group also posted a strong quarter. Custom Compiler continues to grow. We've made inroads in two large Asian semiconductor companies, expanding our footprint versus the incumbent. In addition, demand for analog mixed signal simulation in memory and automotive segments is high as customers accelerate their move into next-generation DRAM and 3D NAND memory designs.
To verification, where we continue to deliver outstanding results and growth. Our Verification Continuum platform is the most comprehensive solution in the market today, utilizing the fastest engines across the board and with the number one position in both software and hardware verification. In Q1, our franchise VCS simulator displaced the incumbent at a marquee U.S. systems company and a large broad-based semiconductor provider. Our hardware-based ZeBu emulation and HAPS prototyping again delivered very strong growth and broad-based customer adoption. In Q1, ZeBu deployments included leading companies such as AMD, Broadcom, HiSilicon, and NXP. In addition, we announced a partnership with the French Alternative Energies and Atomic Energy Commission, a key player in technology research. The partnership enables advancements of ZeBu as the leading SoC emulation tool for the European automotive industry. Moving to our IP products, we continue to deliver double-digit revenue growth with strength across the board.
Our excellent results are derived from the high reliability and quality of our broad portfolio of interface, memory, analog, security, and processor IP, along with our very skilled and dedicated global support teams. Over the past several months, we further expanded our IP portfolio with the acquisitions of Kilopass and Sidense, augmenting our non-volatile memory offering. Solid adoption of our security IP continues, with significant wins at several leading semiconductor companies, one of which is using our IP for its high-value autonomous driving SoCs. Also in automotive, we see continued traction of our embedded vision processor and certified interfaces. Let me pause for a moment on automotive. Many verticals are racing towards a world of smart everything, automotive is simultaneously moving to car electrification and autonomous driving while having to maintain and extend safety and security requirements.
The tongue-in-cheek quip of the car becoming a computer on wheels is actually not an exaggeration at all. In the last few years, we have therefore significantly increased our focus on this sector. To date, a growing customer base ranging from car OEMs to tier 1 suppliers, to semiconductor providers, to AI chip and algorithm specialists rely on Synopsys across our EDA, IP, and Software Integrity platforms. Synopsys tools are used to address critical safety and security requirements across the automotive development life cycle, including virtual prototyping and verification to aid in system development, safety standard certified IP, ISO-certified EDA tools, optical solutions for automotive lighting, and software security testing to drive secure, high-quality code. This leads me to our Software Integrity Group, whose goal it is to provide products and services to build security and quality into the software development life cycle and across the entire cyber supply chain.
Our strategy to accomplish this is twofold. First, offer a Software Integrity platform that covers a broad range of programming languages and security testing solutions. In this highly fragmented market, with scores of point tools for sale, a comprehensive platform from a global, reliable supplier is highly valuable. Second, provide company leaders with high-level consulting and benchmarking to help them assess their current threat environment and devise plans of attack to address the security problem throughout their software development process. In the last four years, we've systematically built our Software Integrity Group to critical mass through both organic execution and strategic acquisitions. Topped off by the acquisition of Black Duck this quarter, our brand is solidifying, and industry experts are recognizing the strength of Synopsys's strategy and portfolio. At this point, we've been rated by Gartner as leader in their Magic Quadrant for application security testing.
Just last quarter, we were also named a leader in the Forrester Wave for static application security testing, while we also achieved a leadership designation in IDC's MarketScape for quality analysis. These recognitions make a difference as they facilitate gaining access to the top levels of company executives across many industries. We experienced product strength across the board and continued to close large new and renewal contracts with companies in industries ranging from financial service to automotive. Our consulting business group is working at capacity, and the value of our engagement is steadily increasing. As mentioned, we closed the acquisition of Black Duck, a leader in open source testing for both security vulnerabilities and license compliance. The integration is progressing smoothly, with bookings and revenue well on track.
The highly respected Black Duck brand and market position have also brought further positive attention to Synopsys as the emerging software quality and security company. In summary, we started fiscal 2018 on a strong note, exceeding expectations and raising our full year guidance. We're seeing very good momentum with our EDA platforms, continued strength and expansion of our IP portfolio, and excellent progress in software integrity as we continue to invest and broaden our TAM in this emerging market. Let me now turn the call over to Trac.
Thanks, Aart. Good afternoon, everyone. Q1 results were very strong, we continue to see good momentum in the business. Our financial results met or exceeded our expectations across all key metrics. Let me provide a few highlights from the quarter. We achieved our highest quarterly revenue and non-GAAP earnings per share to date, even when excluding the impact of an extra fiscal week, which contributed $46 million to revenue and $0.07 to EPS. We also initiated a $200 million accelerated share repurchase, continuing our commitment to a balanced strategy of internal investments, M&A for long-term growth, and buybacks. Based on our record Q1 operating performance and a favorable new corporate tax rate, which I'll discuss in more detail shortly, we are raising our 2018 revenue and non-GAAP EPS outlook. Now to the numbers.
As I talk through the results and targets, all comparisons will be year-over-year unless I specify otherwise. Total revenue increased 18% to $769 million. The results were above our guided range and reflect strength across our broad product portfolio. Excluding the extra week in Q1, revenue grew 11%. The weighted average license duration was approximately three years, which we forecast to be our annual average as well. Total GAAP costs and expenses were $662 million. Total non-GAAP costs and expenses were $573 million, with operating margin at 25.5%. GAAP earnings per share were a negative $0.02, reflecting a one-time GAAP-only expense due to tax reform. The impact was twofold. A $46 million write-down of our deferred tax assets to reflect the new U.S. statutory rate, and a one-time transition tax of $73 million on our offshore earnings that remained after we repatriated cash in Q4.
Non-GAAP earnings per share were $1.10, a 17% increase that includes an $0.08 benefit from a lower non-GAAP tax rate. Let me pause for a moment on taxes. Because of the reduction of U.S. statutory tax rate, our non-GAAP rate decreased from 19% to 13% for fiscal 2018. As certain parts of the U.S. tax reform and various international changes take effect in fiscal 2019, we expect the non-GAAP rate to increase next year. At this time, we expect the rate to be below our previous 19% normalized rate, but we are still working through the details and will provide more definitive projection later in the year. Operating cash outflow was $59 million for the quarter due to our normal year-end incentive compensation payout, partially offset by strong collections. We ended the quarter with cash and cash equivalents of $606 million, with 24% onshore and total debt of $572 million.
Including the $200 million ASR that we launched in Q1, our trailing 12-month buyback as a share of free cash flow is greater than 100%. We have $200 million remaining on our current authorization and are reaffirming our goal of using buybacks to keep share count roughly flat with last year. M&A was also a significant use of cash in the quarter as we closed two acquisitions, Black Duck and Kilopass. As we mentioned in December, we expect Black Duck to contribute roughly $55 million-$60 million in revenue, which reflects a purchase accounting deferred revenue haircut of $20 million-$25 million. We expect it to be $0.12 dilutive to 2018 non-GAAP EPS, reach break even in the second half of 2019, and be accretive thereafter.
Before I turn to guidance, I'll briefly comment on the upcoming transition from Accounting Standard Topic 605 to Topic 606, which will go into effect for us in fiscal 2019, beginning in November. Because the actual impact of the transition will depend on future bookings throughout this year, we cannot provide concrete guidance on expected impact. However, based on what we know now and our expectations for the year, we expect the revenue impact to be immaterial. We will provide more definitive commentary with our fiscal 2019 guidance. As a reminder, this is an accounting change only. It will not impact our cash flow or how we think about our business. Now to second quarter and updated fiscal 2018 guidance. As we mentioned in December, we expect first half revenue and earnings to be greater than the second half.
Because of a shift in timing of customer hardware requirements, Q2 is expected to be even stronger than our original expectations, creating a more pronounced difference between first and second half. As you've seen in the past couple of years, as our hardware revenue has grown, the profile of revenue has become more variable and will fluctuate due to changes in customer schedules. For Q2, the targets are revenue between $765 million-$790 million. Total GAAP costs and expenses between $637 million-$653 million. Total non-GAAP costs and expenses between $575 million-$585 million. Other income between -$1 billion and +$1 billion. A non-GAAP tax rate of 13%. Outstanding shares between 153 million-156 million. GAAP earnings of $0.69-$0.77 per share, and non-GAAP earnings of $1.06-$1.10 per share.
For 2018, the revised guidance are revenue of $2.92 billion-$2.95 billion, an increase of $40 million over our previous target. Other income expenses between -$6 million and -$2 million. An annualized non-GAAP tax rate of 13%. Outstanding shares between 153 million and 156 million. GAAP earnings of $1.59-$1.69 per share. Non-GAAP earnings of $3.67-$3.74 per share due to the favorable effects of tax reform. Capital expenditures of approximately $110 million, and cash flow from operations of $500 million-$550 million. To summarize, we delivered a record quarter for revenue and non-GAAP earnings based on our excellent Q1 performance and strong 2018 outlook, amplified by favorable tax reform. We're raising our guidance for 2018. Finally, we continue to execute well on our capital allocation strategy, striking an appropriate balance of organic and inorganic investments, plus returning capital to shareholders to drive sustainable long-term value.
With that, I'll turn it over to the operator for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star, then followed by the one. You will hear a tone indicating you have been placed in queue. To remove yourself from queue, please press the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. The first question comes from the line of Gary Mobley with Benchmark. Your line is open. Please go ahead.
Hi, guys. Thanks for taking my question. Congrats on a strong start to the year.
Thank you.
If I do the math right, it looks like if you adjust for the additional week in Q1, your guidance implies a second half that is, what, 6% lower than the first half? Could you confirm that first of all, then give us the parameters that are causing you to be so conservative with respect to the second half?
That's right, Gary. You are looking at a first half that is going to be stronger than the second half. I wouldn't characterize the second half as being weak. It's more just the fact that the timing of our hardware shipments has skewed more to the first half as a result of what the customer schedules are requiring.
Okay. Just to confirm, is the Software Integrity Group on pace for roughly $260 million, considering the purchase accounting headwind and roughly $300 million without the headwind?
Well, we haven't disclosed the exact numbers. We've given you pretty good hints as we acquired different companies over the years. All of this area is growing above 20% per year organically, and of course, the acquisitions have accelerated that. We don't disclose the specifics. I would say that our sense is that this business has definitely reached critical mass, meaning that the ingredients that we have, the technical position, but also our ability to leverage the acquisitions well in the field, support the customers well on a global basis, has definitely strengthened substantially. This quarter for us was a very clear sign that the group is well managed, and that we see upside going forward.
Okay. I'm assuming your guidance included the consideration for the additional weeks. Considering that, it looks like you reported roughly 2% of revenue upside and organic revenue growth of 11%. Can you point out one or two factors that are driving the revenue acceleration and/or the revenue upside for the quarter?
Gary, you're right. The guidance did include the extra week in your calculations in the ballpark. I would say that across the board, it was a very good quarter. We had good growth across all the business lines. We did see a little bit more strength in the Software Integrity business and, to a lesser extent, hardware as well.
Okay, I'll hop in the queue. Thank you to everyone.
Thank you.
All right. Thank you. The next question comes from the line of Rich Valera. Your line is open. Please go ahead.
Thank you. Just following up on that same line of questioning. Core EDA was particularly strong in the quarter on a year-over-year basis. Can you highlight what were some of the drivers of the strength in the core EDA business?
Well, I think it's useful to start with the big picture, which is fundamentally, we're still in a very strong high-tech market and specifically a semiconductor-related market for really no surprising reasons. The acceleration towards the world changing towards a smart everything investment set that will literally impact every vertical is continuing. Now, I think we will, over the years, see some up and down for semiconductors, which is normal, but in aggregate, it's sort of a strong phase of the industry. Within that, every aspect of our business is putting to task to actually help with this.
It starts with the fact that there's a whole bunch of new chips being designed specifically in AI on the premise that while general computing has brought us reasonably far and graphics chips have moved it even further, if one could create chips now that were still much faster, one could still do much more AI. I think that will continue. That's where we see new entrants. We see investments in sophisticated chips and across the board, both in the design side, in the IP and the verification, all of this is pretty much all in state-of-the-art FinFET group. That drives pretty much the whole front.
Got it. Trac, was any of the $40 million that you raised the guidance by from the couple of small acquisitions you made, I think Kilopass and Phoenix?
No, it was not. I'm sorry. To a modest extent, but for the most part, it was organic growth.
Sort of similarly, it looks like if you lower the tax rate by the 6% roughly there, that you'd get around, I think, $0.26 of benefit. You're raising your EPS guide by a bit less than that. Are you kind of electing to reinvest a little bit of that upside from the tax rate into the business? Or is there maybe a little dilution from those acquisitions?
I wouldn't attribute it to the dilution. For the most part, we're off to a good start for the year with the results in Q1. We're giving the best outlook we have at this point based on our visibility. I think it's pretty early in the year, so we've got several quarters left to deliver on.
Fair enough. Thanks. Congratulations on the nice quarter.
Thank you.
Thank you.
Thank you. I apologize, Mr. Valera was from Needham & Company. The next question comes from the line of Tom Diffely from D.A. Davidson. Your line is open. Please go ahead.
Hi. Good afternoon. This is actually Franco in for Tom. Thanks for taking my questions. First on your IP business, how much of it is currently ratable versus upfront?
I'm sorry, we missed that question.
On your IP business, how much of that business is currently ratable versus upfront?
I would say more than two-thirds of that is time-based, and I'm being specific about time-based rather than ratable because there's a good portion of consulting business that is recognized on a percentage of completion basis.
Okay. Thank you. Asia Pacific was actually your only region that was consequential during the quarter. Can you give us any color into how China is doing in particular on the software integrity business side? Are there any emerging trends that are perhaps different from the rest of your geographies?
I think looking at the quarter-by-quarter in our business, while maybe giving you some insight, is actually not the best way to look at Synopsys. Everything we ourselves always look at is at a minimum of trailing 12 months basis, if you did that for Asia Pacific, you would find that it's far and away the highest growing region, China in general is one of the hard drivers, positive drivers for that. I would not read anything into a specific quarter at all. Fundamentally, we're doing extremely well in those areas.
Okay, great. Thank you. One last question regarding M&A. Over the past year and a half, given opportunistically acquiring a few companies, IP and software, how are those fitting under your current portfolio? How are those being integrated at this time?
The integration is something that we already look at during the process of doing the acquisition because fundamentally we try to follow what we call the rule of adjacency, which is try to find businesses that are different from what we have, but close enough to minimize risks and leverage what we have. The adjacency falls into either technical adjacency, channel adjacency, or customer adjacency. From that perspective, the minute a new team joins us, we try to integrate quickly all the infrastructure functions on the business functions when it makes sense and when it goes to the same customers, typically the same salespeople deal with it, and this is a process of making sure that it's sort of like two trains in movement merging at the same time and doing that without losing any of the speed. I guess there's some Olympic analogy here somewhere.
I think we've done quite well with these acquisitions and to take the largest one that is ongoing, Black Duck right now, while it is not all that long ago that we closed, we can already say that it has had very positive impacts on our relationship with customers because Black Duck has an outstanding market position, but also an outstanding brand, and it fits very well and is extremely complementary to what we already had. That's a good example of what we try to do in the different areas, and you were correct to highlight that we did a number of those in the Software Integrity Group as well as in the IP Group, and it's essentially the same story there.
All right, great. Thank you. One last one quick follow-up, if I could. I guess with the amount of cash that you have right now in hand, what other pieces of technology are you looking to acquire within the next several months?
This is one of those questions where we always mumble our way through it, as we don't really want to indicate what our next steps are. Let me just generalize it. As you know, over the years, we have never been shy to acquire, but we're also not shy to invest ourselves. We try to do a balance between R&D investments and acquisitions to keep us on the leading edge, and also to allow us to sometimes enter domains that would take too long to do on our own. This is only possible if one continually looks at the opportunities around. The vast majority of the things that one may be interested in actually never materialize. It's a relatively small percentage that ultimately gets acquired, but that percentage is harvested over a long period of time.
We're on the lookout, but we won't necessarily give you the next names yet.
All right. Thanks a lot.
You're welcome.
All right, thank you. The next question comes from the line of Farhan Ahmad with Credit Suisse. Your line is open. Please go ahead.
Thanks for taking my question and congrats on the results. My first question is regarding the tax reform. We had the tax reform passed recently. As part of that, now you have access to all your ongoing free cash flow generation without worrying about what's onshore versus offshore. How are you thinking about the capital structure of the company? Is there any change in how you view the business given the tax reform, and the onshore versus offshore cash generation?
Hi, Farhan, this is Trac. You're right, the tax reform does provide more flexibility to us. However, if you look at our history over the years, we've done a pretty good job of balancing between investing in the business while doing buybacks and acquisitions. That's been fairly successful to date. I would expect that we continue on that path.
Got it. One question just on the linearity of the year. When I look at the guidance, the implied guidance for the full year, the second half fiscal seems like you're pretty much flat year-on-year for revenue growth. How much of it is conservatism versus just something really going on with the hardware business? Because it seems like the growth has been more than 10% for about six quarters, and now suddenly you're going from 14% implied in your April quarter year-on-year growth to basically 0% in the second half of the year.
I would at first point you to the guidance for the full year, where we've raised our revenue range for the year from 7%-8% growth. I think that's very healthy growth. What you're seeing in the second half is just a shift of the timing of hardware. I wouldn't characterize it as being conservative or just anything wrong with the software business. As I said in our initial remarks, we're seeing very good execution across all of our businesses, whether you're talking by products or by region. It's just a function of profiling of the quarter.
Got it. Just one quick last question. Have you given any thought to starting to report your software security business? It's obviously becoming almost 10% of your revenues, and it's not yet profitable, I would argue that we are not getting any credit for it in terms of how investors are looking at the business. Have you given any thought to just splitting the business, or at least in the sense from a segment reporting point of view?
I would say that this year we are very much focused on integrating Black Duck and executing against that plan. We're excited about the fact that we are hitting critical mass in that space. Throughout this year, as we evaluate how best to manage that business, the reporting, I think, will fall out of that. We'll have more to describe later in the year as we have more clarity on that.
Got it. Thank you. That's all I had.
Thank you.
Thank you. The next question comes from the line of Sterling Auty with JPMorgan. Your line is open. Please go ahead.
Yeah, thanks. Hi, guys. Just want to start with the upfront revenue. Just want to make sure, you talked about strength in ZeBu. Was the hardware the main component of the upside in the upfront revenue in the quarter, or was there strength in other parts as well?
As I said previously, there were strength across the board. If you're looking at the upfront portion specifically, that's where hardware would show up.
Okay, relative to your expectations, how would you characterize the strength in that revenue line? How much do you feel for each do you think was hardware versus other items?
Marginally. I think most of the upside was very good strength across all of the businesses.
Okay. Given the transition tax and other, can you just talk about the cash flow in the quarter, what items may have kind of weighed on the cash flow in the quarter? Obviously, you had good deferred revenue contribution, but what were the things that maybe took away from some of the cash flow strength?
Yeah. For Q1 specifically, keep in mind, that's when we pay out our variable comp from last year. That really weighs mostly on the Q1 results. Sterling, is that what you're referring to?
Yeah, even looking at it on a seasonally adjusted basis, it was lower than I would have expected. I didn't know if there was actually cash tax payment timing with repatriation or other items that maybe would have weighed on cash flow specifically for the first quarter.
The biggest part is that we typically do see a negative outflow in Q1 related to variable comp. There are some other puts and takes, but that would be the largest component of that.
Okay. Last question, again, just around cash flow. You're raising the full-year revenue by $40 million, but you're leaving the cash from operations range unchanged. Is there anything to be read into that?
It's really, frankly, early in the year, and cash flow typically is the hardest metric for us to project. Keep in mind that when you're looking at the full year, there's a few unusual items. Last year, we had a one-time benefit from a $30 million for ATopTech. This year, we've got a couple of unusual items that we've highlighted before. At this point, we're off to a good start, but it is pretty early to make a call on cash flow.
Okay. Thank you.
You're welcome.
Thank you. The next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Please go ahead.
Thanks. Good evening. Aart, let me come back to the question regarding core EDA software momentum. Rich asked about that earlier. The question is this: historically, if you go back over the last two or more decades in EDA, when there's been a good product category, the momentum has lasted, rough average, two to three years, and then things begin to cool for a particular category. At least that's the history. We've now seen, for the last one to two years or longer, some good momentum and implementation for synthesis, which specifically helps you, and a couple of other categories. So the question is: is there something different now that might suggest that certain categories that have already had one or two good years of momentum might just keep going, contrary to perhaps historical trends with regard to specific categories?
Well, in many ways, we have long moved beyond the individual products determining what quarters look like or even years, as companies such as ourselves are de facto providing much more complete solutions and intersect with our customers on the basis of multi-year agreements. Both of those comments both lead to the same thing, which is it fundamentally smoothes curves and makes them more stable. That is also supported by the fact that for certainly all the very large customers, stability of relationship in both directions is very important because one tends to not see under the numbers the fact that there's also very big human interaction by virtue of support and being on the most advanced projects, almost on equal terms with the employees of the customer.
While certainly certain technology drives are related to new needs, I don't think that the renewal of certain products are necessarily driving big waves. If I can highlight an example of a new need, though, in verification, we have seen a substantial high growth rate now for multiple years in the whole area of trying to prototype systems in a combination of software and hardware or more and more hardware. That relates to truly a problem that is growing, and that is the problem of can you get the software to run on the hardware before you have the hardware? Because once you have the hardware, you don't want to wait for the software to be debugged or fully optimized.
I think that is an area that will continue to grow and is of super high interest also when you look at all the AI processors that have one objective: run software faster than before. That would be essentially the gradual coming about of a new category. Even there, it sort of grew out of software simulation before it became hardware. Overall, we've seen a continual growth of our run rate across the board, and I think it's just we are in good technology times right now.
I'll ask my two remaining questions together, so both for you. Number one of the things that we've seen from a geo perspective that's really interesting over the last one to two years is the recovery in Japan. Your numbers are looking better sequentially and year-over-year on a trailing 12 basis in Japan, and it's broadly true for the industry. Certainly that's the opposite of what had been a very long drought for EDA in that market. The question is: what's changed there, and do you think that keeps going? Lastly, just over a year ago, you bought Cigital as a necessary step to provide services for SIG. How are you thinking about the long-term services intensity of that business?
You got the nucleus of services just over a year ago with that acquisition, do you think over time or for at least the time being, SIG becomes more services intense or perhaps might become less services intense over time?
Well, two very different questions. Starting with Japan, you're absolutely correct that it used to be called the lost decade, and I think they added an S and it became the lost decades in which Japan went through really tough high-tech times and a renewal of workforce, a recombination of, or consolidation of many companies that had many cuts. It felt a little bit like the beatings will stop when the morale improves. I think the good news is I think the morale has improved. They are in a number of companies sort of fresh, more modern, more Western organized management that is looking at growing their businesses. So it feels better in Japan. Still, if I look at our numbers, it's still the slowest growing region in the world over at least a trailing 12-month area.
I think that there's more rebound possible in Japan, but it took literally a redo of the high-tech industry, I would say. Regarding Cigital, the service group is very much focused on managed services, which is the ability to not necessarily be physically at a customer, but deliver it over the cloud. Secondly, I think the services will continue for quite a while because the problem statement of what does security mean and how do you do it is one that is not only evolving rapidly by constant new vulnerabilities, but also demands a degree of sophistication that many companies don't have. Therefore, the quality educations of the '70s and '80s are now replaced by the security educations of the 2010s.
With that, I think we can not only align better with customers, but ourselves learn what it's like to have to modify companies from within, with our tools, and I think it's very well-aligned with the rest of our business.
The next question comes from the line of Monika Garg from KeyBanc Capital Markets. Your line is open. Please go ahead.
Hi, thanks for taking my question. First, Trac, on the operating margin side, you raised your revenue guidance, 7.5%, the midpoint somewhere 7.5%-8%. If we model as what you've guided, your operating margins would be down almost 130-140 basis points year-over-year. Why are we not seeing more leverage in the model?
Monika, I think we can go through the model with you in more specific details, but right now the way we're managing is to keep margins relatively flat with last year. Excluding the impact of Black Duck, as we've commented previously, organic margins would have gone up to absorb that dilution.
Okay. If I look at all the software security acquisitions you have done, Black Duck, Cigital, all the previous ones. If I add all of them together, when do you think this complete, this whole business together could be breakeven and profitable?
Well, we are essentially executing on the same business algorithm with each acquisition, which is, these acquisitions typically come in either not being profitable or needing substantial investments, because there's great growth opportunity. We follow the same recipe, which is, A, we have to deal with the accounting haircut, and B, with the integration cost and the potential desire to invest, but always the same objective. Turn each of these acquisitions positive from a profitability point of view within the first 18 to 24 months. I would say we're on track with all of those. At the same time, this is a business that clearly has great long-term opportunity and, having been able to assemble in about four years, a really strong position, I think bodes really well for the long-term return of value to the company.
Right. The last one here. Aart, you had talked about some use cases in autonomous driving. Could you talk in detail how Synopsys is looking to deploy and develop AI machine learning solutions? You talked about IP for vision processing. Talk about if you have customers who are looking to develop solutions with the same, any design wins you can share. Thank you.
Sure. Well, let me take the general topic of AI. We are both a participant and user ourself, and of course, a supporter in many ways of the development and the advancement of AI. As a user, we have a number of projects that we apply to our own tools with an objective to see which one of the AI algorithms can actually make the tools run faster or better or diagnose things more astutely. There's a host of projects that I won't go into here, but look promising. At the same time, I think there's also a learning curve to see which one of these projects has the highest return on investment. As a supporter, we touch many aspects.
For starters, I mentioned it earlier, we have now seen a rapid progression of some successful AI algorithms on general processors to then graphics processors to now specialized processors. I was talking just two weeks ago to one of the CTOs of a company that's developing one of the most advanced AI processor cores in the world, for sure. He was saying, well, it's unbelievably promising because here they can do computations that are probably going to be 100 to 1,000 times faster than what was possible before. Except they really want another billion times faster. That certainly mirrors how I feel about it, which is that we have opened the door to a category of computation that in the long, long term, aims to rival what fundamentally the human brain can do.
In order to do that, you need a degree of computation that is not anywhere close to what we have today. Therefore, I think the investments are going to continue at a very, very rapid pace for a long period of time. So in that context, these people all very quickly navigate to the most advanced silicon, to the largest possible chips they can design. Oh, and by the way, they want it on market yesterday, therefore, they're in a hurry. Those are perfect customers for our tools, for our IP, and for our support. In addition to that, in order to check this thing out, they want to run software on mock-ups or prototypes. By the way, the software has to be secure, too.
It's sort of everything we touch is somehow in this soup, and we're trying to stir it as fast as we can. It's certainly very interesting to see how rapid the evolution of learning is in this field.
Thank you so much.
Thank you.
All right. Ladies and gentlemen, as a reminder, if you wish to ask a question today, please press star then one on your phone. The next question comes from the line of Mitch Steves with RBC Capital Markets. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my question. I had two, kind of first on the Software Integrity side. Now that you guys have a lot of assets in there, you're getting close to kind of a $0.25 billion of revenue, is there any sort of seasonality to be aware of in terms of the combined entity, just so we get a bit of clarity on kind of the seasonality expense for the full year?
Hey, Mitch. The Software Integrity business won't really affect seasonality at all. It's mostly time-based, and so you won't see variations driven by that business on the margin. Yeah.
Yeah. Does that include the deferred write-off and all that as well?
I'm sorry. Yes.
Okay. The second one is kind of just in terms of the overall market. Based on what Aart is saying, it sounds like the entire industry's kind of hit its critical mass. What would be the rough market share you guys think you have? What is the total addressable market of the entire software integrity portfolio at this time?
I was just looking at that a few minutes ago, I concluded for myself over and over again, even determining what the TAM really is virtually impossible. We can put a number right now on it of about $2 billion or so. To be honest, I am not sure how many of the software companies in the world this encompasses that all sooner or later are going to run into the necessity to have their software checked out for vulnerabilities. This is where it ties actually indirectly to electronics. Electronics is simultaneously connecting pretty much everything in the world to everything else. Therefore, everything is a potential entry point for vulnerabilities, and no matter how innocuous, say, some software is in some coffee maker or God knows what, once it is connected to a network somewhere, it can be an entry point.
Therefore, I think that the notion of software quality and security will continue to just broaden itself. Now, having said that, of course, the market does not grow infinitely fast. I think we are in a good position because we have found this combination of organic growth, some M&A growth, but most importantly, to try to build a position that is strong for the long term and is trusted for the long term. That implies being able to execute well
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I don't know if anybody can hear me right now, but I apologize. I don't know what this sound is from. Hello?
Are you still connected?
No, I am not.
Call back maybe. That's Mitch.
Hi, this is-
Hello.
This is Susan, the operator. I apologize. I got disconnected. It is at the five-minute mark, so I'd like to turn the conference back over to your host.
Okay. Well, let me apologize for what happened. We have no idea what it was. You probably heard the same beeping and at the same time, I guess it's the beeping of the end of this event. Let me thank you for participating. You heard hopefully that we executed well this quarter and feel good about Q2 and the year's outlook. As usual, I will be available for the individual comments and questions in the aftermath. Apologize again for the abrupt ending. We appreciate your participation.
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