Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Q1 of Fiscal Year 2017. 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. 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. With us today are Arch 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 any 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 reports and today's earnings press release. We will also refer to non GAAP financial measures. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the 8 ks, 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. 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 DeGeus.
Good afternoon, and thank you for joining us. Q1 was an excellent start to the year as we delivered solid double digit growth in both revenue and earnings. Revenue was €653,000,000 notably above our target range. Non GAAP earnings per share came in at 0 $0.94 We're raising annual revenue, earnings per share and operating cash flow guidance reflecting our confidence in our outlook. In addition, we continue to return capital to shareholders with $100,000,000 share repurchase.
Hak will discuss the financials in more detail. The market that we serve through our 3 customer segments of semiconductors, systems and software developers remains mostly unchanged since last quarter. In semiconductors, analyst predictions are more positive than in past quarters, reflecting the investments going into the early products in the Internet of Things, machine learning, automotive, augmented and virtual reality, networking infrastructure and the continually growing need for more compute power in the cloud. Fundamentally though, the dynamics have not materially changed. As companies continue to prioritize aggressive adoption of advanced silicon and state of the art design, while being mindful of their needs to control costs.
The consolidation drive to combine forces in order to better attack certain markets or more effectively utilize resources is likely to continue. Many of these consolidations have worked their way through the system, and while they are a headwind, Synopsys has fared well. The technology leadership and completeness of our solutions combined with unwavering support has made us highly valued partner. In fact, the strength of our design, verification and IP platforms positions us well with customers readying themselves for their next wave of growth. Moving to systems companies, which represent about 40% of our revenue, the intersection of hardware and software is at the core of their needs and our ability to deliver value.
It's hard to overstate the promise and the challenges brought by the new applications that are emerging as the age of smart everything is taking shape. Helping our customers de risk as they bring all the pieces together has now become our joint challenge. This is precisely where Synopsys excels. Our broad portfolio, proficiency and problems holding experience reaching from silicon to software continues to increase in value as the challenges grow more and more multidimensional. Our 3rd customer segment, software developers across many industries is a growing differentiator for Synopsys.
The expansion of interconnected devices with immense software content and complexity brings with it the need to find security and quality vulnerabilities early in the development process. Fixing issues by sending out a stream of software patches is now untenable with systems that touch human life, society's infrastructure, all the way to high value industrial and financial systems. Our growing portfolio of software security and quality products and services is gaining attention in market segments that only a few years ago we would never have touched, ranging from embedded to enterprise. Now to some Q1 product highlights spanning from silicon to software. Through our most advanced design tools, we are well known for supporting adoption of 16, 14, 10 and 7 nanometer FinFET technology.
With our advanced lithography and TCAT platform, we're also well engaged in the development and research of 5, 3 and 2 nanometer nodes. For example, we teamed up with IIT Bombay to announce an important extension of our Centaurus TCAP for FinFET reliability modeling at 7 nanometer, 5 nanometer and below. Meanwhile, adoption of advanced design with our tools continues unabated. After 300 FinFET designs completed to date, Synopsys was relied on for more than 95% of those chips. Significantly, 55 of the 50, 60, about 10 nanometer and below were completed using Synopsys.
Overall, our digital design platform, which is centered around synthesis, place and route and sign off, continues to make great strides. First, our leading synthesis franchise around design compiler, which benefits from an extraordinarily strong and broad usage base, is seeing a rapid succession of technology advances and runtime improvements, including in its ability to deal with advanced test requirements. 2nd, our state of the art Place and Route offering around IC Compiler 2 is benefiting from very rapid adoption, including 19 of the 20 top semiconductor companies, better and better results and solidity by holding the product on more than 250 production designs covering now over 25 different foundry processes. And as a result, we are seeing notable successes in head to head benchmarks and customer engagements. And third, the strength of our gold standard sign off franchise.
In addition to continuing drumbeat of technical improvements, the strong correlation between the design and sign off tools is a massive risk reducer for our customers while impacting their time to market. During Q1, for example, we released primetime hyperscale, which reduces timing sign off runtime and compute costs by 5x to 10x. The adoption is swift as market leading companies such as Broadcom, Juniper Networks, MediaTek, Vanessa's Electronics and Samsung Electronics have already deployed hyperscale in their sign off and PayPal flows. The sharing of physical sign off algorithms from IC Validator natively inside IC Compiler 2 also greatly improves sign off time as it minimizes physical design violations during instead of after placement. In custom analog design, adoption of custom copiler is steadily progressing.
In Q1, a market leading mobile fabless company deployed custom profiler on multiple 7 nanometer designs, while a large semiconductor IDM is replacing our competition for the design of a growing number of custom IP blocks. Now to verification, where our platform vision and technology execution have yielded excellent business and market share growth. Verification is a showcase of our broader Synopsys silicon to software vision. Our focus is squarely on the greatest enabler of the IoT smart everything age, the intersection of hardware and software verification. The center of our offering is our DCS simulator franchise.
The product is not only well doing well business wise, but also delivering great new technology advances. During the quarter, we announced the rollout of massive parallelism natively integrated in the press release of ECS. Advanced customer partners are already experiencing substantial performance boost as this technology further cements our commitment to best in class verification products. Our hardware based Zebu, emulation and HAPS prototyping had another strong quarter as well. The combination of increasing customer demands and our ability to deliver the fastest solution on the market today gives us the confidence that our verification business will do very well again this year.
Onto our IP products, where we continue to deliver strong results and gain customer recognition. Strength was across the board with notable wins in 7 nanometer and continued momentum in IoT. A major Chinese customer selected Synopsys for a wide range of IP for their 7 nanometer designs. TSMC certified our area optimized USB 2.0 solution for IoT for its 40 nanometer ultra low power process. The RXM security processor won the Lindley Group's best Processor IP award in 2016 based on power performance, efficiency as well as unique security features.
Our IP group is going well. This is the result of more than 15 years of investment and hard work, yielding an unmatched portfolio of high quality, trustworthy IT products. These characteristics are particularly important in the expanding automotive space, a key focus segment for Synopsys touching our IP, EDA and software security portfolios. Our customer base in automotive continues to widen, including new semiconductor companies as well as OEMs and Novit's Tier 1 suppliers. In Q1, a high profile automotive semiconductor company adopted our test solution for use in mixed signal automotive ICs to enable ISO 26,260 compliance.
Their ICs are for safety critical systems and therefore require in system and power on self tests to comply with the standard. Key elements of our EDA, IP and software integrity portfolio are now certified for the most stringent level of automotive safety measures defined by the ISO 26,262 standard, which naturally leads me to our Software Integrity Group. So simply stated, our focus is to provide products and services to both security and quality into the software development lifecycle and across the entire cyber supply chain. Clearly, security challenges are only increasing, but so is the recognition of finding and fixing security vulnerabilities must be addressed vigorously while developing the software. That means quality sorry, that means high quality code check-in long before the software gets deployed is a must.
For example, Online Trust Alliance, a well known industry organization states that 100% of recently reported IoT vulnerabilities could have been easily avoided if manufacturers and developers do security and privacy measures into account throughout the development process. Our strategy is to 1st, broaden and deploy our software sign off platform. 2nd, accelerate our penetration of key verticals in both embedded and enterprise spaces and third, drive demand creation with services, ecosystem partners and certification projects. While it's early, we are making great progress. 8 of the top 10 software companies in the world are now Synopsys customers.
So are 7 of the top 10 automotive OEMs. And illustrating the pan broadening potential for Synopsys, so are 16 of the top 20 commercial banks in the world. Having greatly tuned our channel in fiscal 16, we continue to invest in this promising business. In Q1, we launched a new version of our static analysis tool with enhanced security for mobile and web applications. It's designed to help provide enterprise level security analysis and broad programming language support necessary to address today's many evolving application security demands.
In Q1, we further broadened our language coverage by adding support for FORTRAN through a small acquisition. While arguably an older language, it's a very important legacy component in many oil and energy systems. And of course, in Q1, we closed the acquisition of Sigitel and Codoscope, a pivotal move to expand our market through a services arm that lets us reach and engage with higher level decision makers and a broad set of customers. We see Synopsys and Sigitl as an ideal combination. Synopsys leads with best in class products, Sygital with high expertise services.
Synopsys has a very strong presence in the embedded space, including automotive, medical devices and IoT. Sigittal is a leader in serving enterprise customers with particular strength in financial services. Synopsys is eminently engineering centric, while Sigital brings a demand creation element with customer touch points early in the security strategy development process. As far the integration is proceeding well and we had our first taste of the potential of the combination just this week at RSA, the world's largest security conference, where Synopsys highlighted the most comprehensive software security solution available today. In summary, we exceeded expectations in Q1 for an excellent start to fiscal 'seventeen, and we're raising our full year guidance.
We're seeing very good momentum with our EDA platforms, continued strength in our IT portfolio and good growth in software integrity as we continue to invest and broaden our TAM in this very promising emerging market. Let me now turn the call over to Chuck.
Thanks, Eric. Good afternoon, everyone. I'm very pleased with our strong start to the year. In Q1, we continued to build on our momentum from 2016 as we achieved financial results that exceeded our expectations across all key metrics. We posted double digit revenue and earnings growth, expanded operating margins and generated considerable cash flow.
In addition, we returned $100,000,000
to shareholders in the form of buybacks.
Based on our excellent Q1 performance confidence in the rest of the year, we are raising our 2017 outlook for revenue, earnings and cash flow. 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 13% to $653,000,000 with strong results across the entire product portfolio. The upside relative to our target range was due mostly to the timing of hardware sales and IP consulting deliverables.
90% of revenue came from beginning of quarter backlog and one customer accounted for more than 10% of revenue. The weighted average license duration was approximately 2.8 years and we expect the 2017 average to be about 3 years. Total GAAP costs and expenses were $556,000,000 which includes a restructuring charge of 12,000,000 part of our plan to align resources to position the company for long term growth. Although non GAAP costs and expenses were $477,000,000 slightly below our target range. Q1 non GAAP operating margin was 27%, driven by strong top line growth and better than expected expenses.
For the year,
we expect
solid margin expansion over 2016 with a modest dilution from CIGITAL and Codoscope is excluded.
GAAP earnings per share were $0.56
non GAAP earnings per share were $0.94 above our target range due to strong operational execution and the timing of hardware and IP revenue. We generated 47,000,000 in operating cash flow, even with the outflows from our 2016 annual incentive compensation payments. Collections were very strong. We're selecting some large payments that came in earlier than expected. We are raising our 2017 target to a range of $500,000,000 to $520,000,000 We ended the quarter with cash, cash equivalents and short term investments of 966,000,000 dollars with 16 percent onshore and total debt of $320,000,000 In Q1, we returned $100,000,000 to shareholders through our stock buyback program.
In 2019, we intend to slightly reduce share count and we have 335,000,000 remaining on our current authorization. Now to the quarter fiscal 2017 guidance. For Q2, our targets are revenue between $665,000,000 $680,000,000 total GAAP costs and expenses between 560 $1,000,000 $579,000,000 solar non GAAP costs and expenses between $507,000,000 $517,000,000 dollars other income between negative $1,000,000 $1,000,000 our non GAAP normalized tax rate of 19 percent outstanding shares between $152,000,000 $155,000,000 GAAP earnings of $0.51 to $0.59 per share and non GAAP earnings of $0.85 to $0.88 per share. For 2017, revenue of $2,580,000,000 to $2,600,000 a growth rate of 6.5% to 8%. Other income between $2,000,000 $6,000,000 a non GAAP normalized tax rate of 19%, outstanding shares between $152,000,000 and $165,000,000 GAAP earnings
of
2.01 dollars to $2.12 per share. We're raising the midpoint of our non GAAP earnings target range by $0.04 to $3.21 to $3.26 per share, capital expenditures of about 100,000,000 dollars and cash flow from operations of $500,000,000 to $420,000,000 As we look to the remainder of 2017, we now expect total revenue to be skewed to the first half of the year due to the timing of hardware and other deliverables. As a result, non GAAP earnings per share will be higher in the first half. Investors should expect continued quarterly variability in revenue due to the growth
of our hardware business
and its upfront revenue recognition. In summary, in Q1, we delivered double digit
growth in
revenue and earnings and generated solid cash flow. Based on our excellent Q1 performance, strong Q2 outlook and confidence in the rest of the year, we are raising our 2017 outlook for revenue, earnings and cash flow. Lastly, we will continue to manage the business for the long term benefit of shareholders through an appropriate combination of investing in the business to drive sustainable earnings growth and returning capital to shareholders in the form of stock buybacks. With that, I'll turn it over to the operator for questions.
We'll go to Gary Mobley with Benchmark Company. Your line is open.
Hi, thanks for taking my question.
Congratulations on a strong start to the year. I want to start with sort of the order or magnitude of your guidance for 2017. You beat in Q1 by almost $15,000,000 You're raising the midpoint of your guide by $10,000,000 for the full year. And your full year guidance implies that the first half of the I'm sorry, the second half of the year is nearly 5% lower than the first half to where typically it's normally the inverse of that. Is that sequence of the fiscal year quarters purely a function of upfront hardware revenue recognition?
Or are you just simply trying to be a little bit conservative as we start out the year?
Hi, Gary. This is Chuck. You're heading in the right direction. Certainly, when we entered the year, our plan was, from a revenue perspective, it certainly skewed more of a second half versus the first half of the year. And what we're seeing in Q1 and what we're seeing in our outlook for Q2 is that the profile of hardware and IP has skewed towards the front half.
So that's affecting the profile. Overall, we still feel in fact, feel better about our outlook for revenue this year despite that profile.
Okay. Art, we've seen some reacceleration in semiconductor sales after what has been basically 3 flat years in overall semiconductor sales. I think we're now comping year over year to the tune of close to 10%. And so outside
of any of the
impact from consolidation in the industry, are you seeing more of a more buoyant environment as it relates to IP and EDA licensing? Or is it still kind of status quo with EDA revenue expected to grow some in the neighborhood of 2% to 4%?
Well, in general, when customers feel that they have a good year, everybody is a little bit more pleasant to deal with, as you would expect. At the same time, I've said many, many times that the growth rate in the semiconductor industry aggregate over multi years is really about 4% to 4.5%. And the fact that from different years, there can be big swings is more a function of individual product lines and rhythms within the buying market than anything else. Nonetheless, though, I think if there is one positive I would take out of this is that the predictions that we've made now for a number of years that electronics would bring about a wave of new opportunities through this whole notion of smart everything. You can also call it machine learning or digital intelligence, is starting to become visible.
And I think that is very exciting because if you have something that's a little bit smart, the one thing you want to make it smarter and one way to make it smarter is to give it more compute power. And so, we can see that the pressure and the push for advanced nodes is very solidly driving this notion forward and it's becoming increasingly real. And all you have to look at is how immensely powerful automatic driving cars are and yet how immensely far they still have to go before you can completely trust them. That's all good news for us. And so it's in that context for that the combination of hardware is getting better leads to software that is much more performance, it leads to applications that really I think will wow us in the years to come.
And I think there's a little bit of that in this picture as well.
And we'll go to Rich Valera with Needham and Company. Please go ahead.
Thank you. I'd like to sort of revisit the question about the front half loading of
the year, in particular on the hardware side.
I think when you entered fiscal 'seventeen or
at least on the last call, you talked about taking sort of
a cautious stance with respect to hardware because of the difficulty in predicting the sort of the timing and magnitude of hardware in any given year. Now that it looks like you've got a pretty year pretty well set with a very strong first half, curious what your thoughts are on the second half. I mean, might that come in stronger? Or do you feel like you've kind of got the funnel pretty well set and you wouldn't really expect the second half hardware funnel to sort of build up further from here.
Well, in many ways, you answered your own question. You said at the beginning of the year, we were cautious because we felt it was fairly difficult to predict the part of the hardware waves. And you were right because we have not predicted such a strong Q1 and the fact that Q2 is a strong follow-up, it's certainly encouraging. But it's also true that we want to remain cautious that when you look at it in aggregate, raising a year is a big deal when you do it early in the year, many things can happen. And so there's no indication of bad news.
It's just that we're digesting the good news, I think, at a slightly slower clip than being too aggressive.
Thank you. That's helpful. And then, wanted to talk about the software integrity business. And 1, you've had, I guess, close to a quarter of having the acquisitions under your belt. So I wanted to kind of get your impressions of how they're fitting in and how they're integrating in.
And then just talk about where you are in your sort of longer term goal of creating this software sign off platform? And what are the pieces, if there really are any meaningful pieces that you think you need to get to that goal?
Sure. Well, yes, I think we have it was closed about halfway in the quarter. And so far, the integration is almost a lot of learning while making sure that we continue to execute well. And I can state that the execution appears to be on track based on the plans that they had. But the opportunity really is how does, in this case, 1 plus 1 really be more than 2 and that the services can help accelerate a broader adoption of the tools because the services tend to interact with higher levels in the strategic levels in the company?
And how can the tools be a wonderful add on to a service business that is already quite performance in some of the market segments, most notably the financial services market segment. Now having said that, I don't want to minimize at all the challenge of that learning because Synopsys fundamentally has been a product company more than a service company. We have, of course, had a very large support force. But service requires a certain set of behaviors. And we are step by step broadening the digital capability now on a worldwide basis, which is a great opportunity, and at the same time, making sure that both teams are well educated on the offerings that we have.
So I think we're well on track to create something that is stronger again. And that belief is mostly somewhat by the fact that the non digital part of Synaptis of SIG did well again. And I think we had alluded to that the last few conference calls that the predictability of that business, the number of large deals was on a very good track. And so that gives us a degree of solidity that gave us additional courage to make this move.
Got it. That's helpful. Thank you, Art.
You're welcome.
And we have a question from Tom Diffely with D. A. Davidson. Please go ahead.
Yes. Good afternoon. I wanted
to do one more question on linearity of the year. What is the current what are the current lead times for some of the hardware systems that you have? And how long ahead of time do you typically get those orders?
Well, the lead times really at this point in time are only a marginal issue because typically we can execute on within a quarter or so. Now of course, if an order comes in late in the quarter, then typically it wouldn't have much impact revenue wise in that quarter. Regarding the linearity, of course, I understand that many of you are trying to handicap how good the rest of the year looks. I think what we are fundamentally communicating is that our guidance at the beginning of the year turned out to be more conservative than the Q1 delivered, and therefore, we made some changes. But we are maybe a conservative company or fundamentally, we try to execute to what we say we will do.
And that's why after Q1, we don't change guidance too much. Having said that, run rate grew again. I think we have many customers that are actually quite interested in the emulation part of the business, in the prototyping part of the business, because they're going more and more into the hardware software part of the space that determines their time to market. And so it's well possible that the second half of the year turns out to be strong. It's just that we don't have visibility to that today.
Okay. That sounds good. And then you've had some comments earlier about new simulator coming online here pretty soon. Does that close the gap at all with the simulator? Or is it still a very distinct market for each of those?
These are quite distinct markets because they have different characteristics both in speed, but also in the ability to debug and look at things. At the same time, one of the very strengths that our verification platform has is that it can be used very much as a continuum, meaning that one can do parts of the design in the VCS software simulator, one can do part of it in emulation or in the prototyping boards. And we will continue on that track because if we can execute well on that, while each one of these products from version to version will be faster again and higher capacity, the fact that they work all together is actually an asset for Synopsys. Okay, great. And then when
I look at a few years, in my mind, the big drivers, the individual drivers are kind of the IT and the China IoT market, automotive and software integrity. I'm curious if you think those are the 3 biggest drivers that you have and what are the relative strengths
do you think reach? Well, as you were listing them, I kept thinking about all the other products that are positively impacted too because while things like IoT, machine learning, automotive are growing very rapidly, they sort of pool with them an unbelievable need for more capacity and everything that connects to the cloud, to massive amounts of computing and therefore the bandwidth and the storage that goes with that. And I think that is why as much as a lot of people call this the age of Internet of Things, the Internet of Things is almost more a catalyst to growth in all of these other dimensions than anything else. Now if you look at our products, there's no question that some of the products that went particularly well happen to touch the areas that you mentioned. And so IP is particularly relevant to people that want to very quickly do complex systems where they don't want to build all the blocks themselves.
And our IP blocks have literally been home over many, many years and are constantly pushing the state of the art. I mentioned already the verification as this intersection between hardware and software. And for us, the promise of the software space, we originally got into that by realizing that software complexity was starting to rival hardware complexity and that the penalty for errors was rapidly moving up. The penalty for errors in hardware has always been high. Software has said you could get away with patches.
But that's not the case when the software drives things of very high value all the way to cars and human lives and phone. And so you amend that with the very fact that there is a world of hacking that really was nothing good in mind, you can see that the need for higher degrees of discipline in the software space is a necessity even if it will take some time before development flows get there. And so that is the mission that we're on. And while this is a new market, it's particularly rewarding now as we start to see that we're interacting with companies that literally 5 years ago, we would never have dreamed of talking to insurance companies, health companies, banking consortia and so on. And these are all people that use software and use it in the context of very high value propositions.
They need to be safe and they need to be efficient.
Okay, great. And then, Trac, if you look at some of these drivers, key drivers for the company, does that fundamentally change the model over the next few years as they become a bigger percentage of the overall mix?
The emulation, Tom? This is like software integrity. Certainly.
As we and let's talk
into the overall mix. We talked about that segment growing in the 20% to 25% range and we're cognizant of how that grows as an overall mix. And so when we talk about the long term growth rates and earnings growth rate, that's factored in.
Okay. And then finally, when you look at some of the impressive numbers you have, maybe 10 to 20 top semiconductor guys for placing route. How much of those positions are sold positions versus shared positions with other players?
For many, many decades, most positions have always been shared in various ways.
There are a
few that are sole positions or there are a few that where one or the other company is massively dominant. But we're in a field where constant advances are constantly being explored, And we have been very fortunate to do very well in this. But our investment continues to be at high speed and to race forward. So customers will look at anything that helps them, but they're also increasingly benefiting from the collaboration that comes out of fairly deep and long term relationships.
We'll go to Krish Sankar with BofA Merrill Lynch. Please go ahead.
Yes. Hi. Thanks for taking my question. I had a couple of them. Number 1, how to track.
If I look at
your last quarter, did your DDA software revenue come down year over year? I'm just trying to figure out because Ketan has been talking quite a bit about digital share gains and I'm trying to see if that is actually impacting the numbers quite yet. Can you just talk a little bit about the competitive situation and if the EDA software revenue is down? And then I had a follow-up.
Chris, revenue is actually up. When you look at the
year over year comparison and the trailing 12 month basis, it's actually up very helpful, 8.5% year over year and then 6% on a trailing 12 month basis.
Okay. All right. And then can you talk a little bit about the competitive situation you're having?
Well, in general, we compete intensely for this market that continues to push hard and in some cases accelerate the need for technical advances. And so, as you know, there are not that many players in our field. And so, it's a healthy and good thing that we're both pushing hard. Synopsys has had the benefit of having a portfolio that is both all anchored and quite complete and increasingly very well integrated in platforms that are helpful for the customers' time to market and risk reduction. And so all of these are probably statements that some of our competitors would make about themselves as well.
And we never underestimate them, but we're both providing tools that are sort of similar to race cars. The faster they go, the better for the customer.
Got it. And then can you give us an update on like all this like fast data that's coming up that's being implemented next year? It looks like some software companies are moving away from ratable model, but the EDA companies and a few other security companies seems to be believing that the ratable change will not impact them. Can you tell us where you stand in that spectrum and what if you come forward the ratable model will continue? Thank you.
Hi, Krish. You're referring to 606 revenue recognition rules. We've been working
on this for a number
of years and working closely with our auditors as well as the regulators. And first of all, let me remind you that this won't take effect for us until FY 'nineteen. So there's a lot of time for us to implement it. But right now, based on the work that we've done, we feel very confident that most of
our ratable model should stay in place.
We'll go to Jay Vleeschhouwer with Griffin Securities. Mr. Blishower, we've got your line open. Please go ahead.
Okay. Thank you. Art, I'd like to ask you about future growth potential within specific parts of core EDA, excluding hardware, and where you might possibly see some positive inflections. There are times when there are certain growth categories within EDA that foreseeably might grow or grow in Canada. If you go back to a few years, 4 or 5 years, it was fairly foreseeable that the PCB category would see a reinvestment or retooling cycle, which went on to do for a number of years.
You're not in that, but just making a point about some predictability in this space. Implementation has seen some renewal obviously with ICC and Cadence's business there. So when
you think about your references
to DC and ECS and sign off, those are for the industry altogether about $1,000,000,000 of total EDA revenue. And so I'm wondering if after
a fair number of years of somewhat flat results
in those categories, there might now be in any role of those some new inflection over the next number of years?
Well, I think at a macro level, if you look at all of these products taken together, they are fundamentally anchored linked to a large portion, not entirely in the semiconductor industry. And for an earlier question, notwithstanding the year over year differences, the semiconductor industry has
had a
fairly steady growth rate and with steady R and D expenditures and therefore fairly steady EDA growth all in all. Now within individual product groups and especially when you connect them together in coherent products in a matter of 2 to 3 years as one moves to the next generation. And these changes invariably are around finding a way to dramatically improve one of 3 characteristics, either the characteristics of the quality of results, meaning the power of the chips or the performance of the chips or the time to results, meaning make the product run much faster or the cost of results, which is reduced the area of chips. And these evolutions are not linear because often you work for 2, 3 years on a set of profound algorithms and then suddenly it makes a difference. If you look at a little bit higher level, and this is where it sort of intersects with the strategy for our company, The big inflection points from my perspective have been the addition of the IT business to EDA.
This, of course, now already closed a number of years ago, but now it is a significant portion of our business. I've alluded the last couple of years to the inflection that is coming with the addition of the software side of hardware software. And it's not a surprise that so many of the verification expenditures are increasingly focusing on that. And then we have predicted that the software side itself would go through this by virtue of the complexity growth. And so that is how we are looking at our opportunity space.
And to the earlier question of how does our financial profile evolves, be it in growth or profitability, while we're managing Synopsys as a portfolio of a number of specialty areas that are very related, but somewhat independent in their growth spurts. And in large arrangements with customers, the allocation of the individual revenue streams can be somewhat fuzzy just by virtue of accommodating how the customer
wants to look at it. So I'm
not sure I completely answered your question sharply, but I did give you
I think what I think are the big things
actually bode well for us for a number of years to come.
Second question with respect to software integrity. At the investor lunch in New York back in October, you made 2 interesting points about that business. Number 1, that you were seeing or would expect to see more large deals in that business. And so the question is if you are in fact beginning to see that. And secondly, that business would necessarily have a services component to support customers pre and post sale and so forth.
You addressed that with the Sigital acquisition, but the question is, do you think that that makes you sufficiently capacious in services or do you think you need to do more building organically or otherwise in services to support the SI business?
Well, now listening to my prediction through your mouth, they almost feel clairvoyant because indeed the deals did get larger. And that's not surprising because this is the same history as EDA many years ago or many other fields where automation and verification gradually takes hold. I guess it takes hold faster with people that look forward and so on. But really it happens very often when people have a catastrophe or an issue to deal with. On the services side, you're right, we mentioned that then.
And to be honest, I don't recall if we were completely engaged with Cititall at that point in time already. But we have felt for a while that the issues around security are so large that when you get the opportunity to talk to, let's say, the CIO or CSO or CTO of a large company and they tell about all these security issues, if the next answer is, well, we have this one product, why don't you just buy some, feels pretty shallow. And in that context, the digital acquisition was great because these are people that are customed and knowledgeable about reflecting the broader picture than advocating what is sort of a good approach for the company to deal with it, while not necessarily pushing for individual products, but of course now highlighting what we have. And so in that sense, I think that we will first learn how to run the business well. And assuming that goes well, my guess is this will broaden more and more on a worldwide basis.
Thank you. Our next question from the line of Farhan Ahmad with Credit Suisse. Please go ahead. Thanks for taking the question.
My first question is related to your recent lawsuit against EBITDA. And secondly, if you can talk about how big of issue is piracy Software for you?
Well, if you don't mind, we don't want to talk about individual legal situations. So let me more generalize. From time to time, we obviously see glaring cases of misuse of software. And we try to respond forcefully but gracefully to it. And it is always better if we can guide customers towards a healthy long term solution, if I can call it that.
Every so often, that's more difficult,
and there may be legal situations resulting from that. We have had a few of those in the past. They have been resolved, I think, professionally and positively. Let's hope this yields the same.
Got it. My second question is in regards to just the overall China market. Are you seeing like increased growth in coming from China design companies? And just in relation to that, like why isn't your Asia Pacific revenues as a percentage of Smart Growth?
Well, if you looked at our distribution of revenue over many, many years, you would see that Asia Pac for decades has been growing substantially faster than other parts of the world. Now Asia Pacific itself has multiple components and Taiwan and Korea have been big parts of that for many years. In the last number of years, China has grown immensely, and of course, has the potential to continue to do so. Simultaneously, we know by virtue of having been in China since really the early '90s, how the competence of the engineering teams and the companies that have grown and some have merged and grown again has progressed quite superbly. And so in that sense, a number of companies have a state of the art design in China just like anywhere else in the world.
And we have been very fortunate to be, I believe, the largest contributor to that from an EDA space point of view.
Got it. And then my last question is on the competitive dynamics. Krish talked about it earlier. But just can you give us a sense of like where are we in terms of adoption of IC Compiler 2? And do you think that, that can be a driver of share growth for you?
And also, if you can touch on the IC Compiler on the system side?
Well, IC Compiler 2 has seen actually an enormously rapid adoption rate, which continues and which is solidified more and more by the fact that we're also getting increasingly excellent results, especially when used in conjunction with some of our other tools. And so from that perspective, while I certainly don't want to be negative on any other competitive products, we have a high degree of competence and confidence, I should say, in this product line, and we expect it to continue to grow. Your second question was on custom compiler. There too, this is a smaller product, less visibility and typically a slower adoption rate by virtue of the longer history that people have in the custom space. And our focus has been primarily in the more advanced nodes, so the FinFET technologies and we're seeing some very good adoption, especially in the last few quarters.
So we'll continue to watch this space.
Thank you. That's all I have.
You're welcome. We have
a question from Monica Garg with Pacific Crest Securities. Please go ahead.
Hi, this is Jason on for Monica. Thanks for taking my questions. My first question relates to maintenance and service revenue. So I'm showing that it's up 20% quarter over quarter. Is there any reclassification of revenue in this?
No, Jason. The maintenance and service line should be strengthened IP. And then in this quarter, when we completed the Cigna acquisition, that business should flow through that line as well.
Got it. Thank you.
That's helpful. And then my next question looks for the stock buyback. How are you guys thinking about doing the rest of the $325,000,000 for the rest of the year?
Well, as you said, we'll look
at what's necessary to bring the share count down to the guidance range. And we continue to evaluate whether or not it makes sense to do an ASR or an open market, but that remains to be determined. Okay.
And then my last question, with Siemens buying Metroraphics, have you seen any change in competitive dynamics in the market? Do you see competition increasing, decreasing because of the acquisition?
Well, for starters, we certainly don't
underestimate what
the change can do for Mentor. I certainly cannot say that we've seen an increase in competitiveness.
But let's see what
the future brings. It's a very capable company with very capable products. Maybe if I can choose our own horn, I think that we are we have very achievable products too and increasingly a lot of our top customers reflect on the strength of our platforms and that will certainly be a continued angle for competitiveness in this regard.
Great. Thank you.
You're welcome.
We'll go to Mitch Steves with RBC Capital Markets. Please go ahead.
Hey, guys. Thanks for taking my question. I guess I'm going to look at the linearity, not from a top line perspective but for operating margins here. So typically, the back half, you guys get a lot of operating margin expansion. So I'm wondering if you're essentially saying that the operating margins will be down on a year over year basis in the back half?
Hey, Mitch, this is Tragun. It will vary quarter to quarter. We typically don't see it necessarily increasing through the year, right? And it will vary depending on the profile of revenues and that could flow depending on hardware or IP services. And then throughout the year, what we'll see is the change in variable comp as it ramps
up or as it
particularly on the commission side as it ramps up depending on shipments.
So I would not interpret
that as something longer term trend.
Got it. And then just one quick follow-up. On the IT business and their software investments, they should be growing materially higher than the rest of the company. So I'm curious if this means for the next couple of years here that you'll see revenue reaccelerate if it can come down with that, Jeff?
I'm not sure if we understood the question. You're saying that we will see the software business and the IP continue to grow well. And what was the question attached to that?
All right. So essentially, the back half comes down to call it low single digits by the implied guide. So you then reaccelerate because you have much higher mix of essentially software assets and IT?
Well, if you refer to the profitability part, obviously, these businesses, as we grow them, we also have in place a discipline to make them gradually more profitable. And the question is always when you have something that grows very fast, is it better from a both competitive position, growing the value of the company over time to push on growth or on profitability, and that decision gets made sort of on a continual base. But fundamentally, we're following a belief system that says once a business starts to grow, it also has to increase its profitability. And so while the high growth businesses are less profitable than the lower growth businesses, in aggregate, I think we're actually in a very good balanced portfolio situation.
Mitch, let me just add to Art's comments.
I think I would not take the
second half of the year and annualize it in
any way or extrapolate off
of that. We are very comfortable with the overall business and the growth rates that we've identified for core EDA, IP and software integrity. And those trends, I think, remains intact. The shift from the back half to the first half of the year is really the timing of the hardware and hardware and IP. But overall, if you look at the business of a multiyear trend, those growth rates that we've previously communicated for each of the segments remain intact.
Does that help?
Yes, that's very helpful. Thank you. You're welcome.
And I'll turn it back to our speakers. Thank you.
Well, I guess we have reached the end of the hour. Again, thank you very much for attending the earnings call. We had a very strong quarter. We look forward to Q2 with a fairly high degree of confidence and a strong year as well. And as usual, we'll be available for the after call phone calls.
Thank you very much.
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