And gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Q4 of Fiscal Year 2016. 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, David. Good afternoon, everyone. With us today are Art DeGeus, Chairman and Co CEO of Synopsys and Trac Pham, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets and other forward looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.
In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC 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.
Finally, please note that we issued a second press release this afternoon announcing the close of the acquisitions of Sigital and Codoscope. With that, I'll turn the call over to Art DeGeos.
Good afternoon, and thank you for joining us. We're happy to report a strong 4th quarter finish to an outstanding fiscal year for Synopsys as we entered 2017 with a very solid foundation. We again delivered excellent financial results while successfully balancing investments for the short and long term. We made very good progress in digital design and verification. Our IP business delivered strong results and we further scaled our software integrity solutions, including the acquisitions we announced earlier this month.
Summarizing our financial results for the year, we delivered revenue of $2,420,000,000 an 8% increase, reflecting strength across all product groups. We reported non GAAP earnings per share of $3.02 or 9% growth. Our 3 year backlog remained very strong at $3,540,000,000 We generated $587,000,000 in operating cash flow. We bought back $400,000,000 of our stock and reduced share count. Building on our strong year end position and including the impact of the just closed acquisitions, we're setting a 2017 revenue target of $2,570,000,000 to 2,600,000,000 dollars a non GAAP EPS objective of $3.16 to $3.23 reflecting high single digit organic growth with modest near term dilution from the acquisitions and an operating cash flow goal of approximately 500,000,000 dollars Tracul discuss the financials in more detail.
As we head into 2017, we see varying technical and business dynamics for the 3 customer segments we serve: semiconductors, systems and software developers across multiple industries. Semiconductor companies sell chips that they may or may not manufacture and where design, verification and in some cases, embedded software From a technology perspective, many push state of the art silicon design nonstop. This means optimizing for performance, power, area and yield using advanced manufacturing processes and pushing our tools to the limit. While the cost of Moore's Law is tightening the race, the quest for still more complex chips delivering still more performance continues. At the same time, whether to drive efficiency through size or to scale up into vertical segments, some companies are divesting parts of their businesses or combining with others to better position themselves for the next wave of growth.
While these consolidations initially are a headwind for the EDA industry, Synopsys has thus far successfully navigated some large M and A combinations in a number of cases, even expanding our customer relationships. Our multi year business model combined with our technology, platforms and market leadership provides an excellent backdrop to help our customers through these transitions. System houses, which contribute about 40% of our revenue, develop products that incorporate multiple chips, their own or someone else's, as well as their own or third party software. Their differentiation manifests itself in terms of product capabilities and time to market. This opportunity space is great with exciting new applications such as digital intelligence, machine learning, smart IoT, 5 gs mobile networks, virtual and assisted reality and massive cloud based computing to name just a few.
Many of these are already visible in newly energized verticals such as automotive, industrial and health. The challenges at the complex intersection of hardware and software are substantial, yet this is exactly where Synopsys excels. Finally, software developers in many industries grapple with acutely growing security vulnerabilities. These exposures can have a dramatic impact on security, safety and even health with potentially staggering financial implications. We're enthusiastic about the step by step scaling of our software integrity solutions, which is happening at just the right time to help these organizations take their security strategies to the next level.
For Synopsys, our unique position reaching literally from silicon to software enables us to help all of these customers and positions us well for high impact and growth in the years to come. In that context, let me provide you some highlights, starting with the roots of silicon. The push towards bringing smaller, faster, lower power chips to market sooner is unrelenting and FinFET technology continues to advance. Our FinFET proven flow begins with the earliest TCAD and lithography simulation models, key enablers of Moore's Law. During FY 'sixteen, we announced a new solution that brings TCAD into the upstream research phase to help manufacturers reduce process development time.
We're already involved in 3 nanometer and even initial 2 nanometer research. Our unique position in TCAD is a differentiator that grants us early understanding and access to key models, giving us a head start in terms of product readiness. As the clear leader in advanced FinFET design, we continue to see a rapid adoption of 16, 14, 10 nanometer and test chips at 7 nanometer nodes. The statistics are compelling. The cumulative number of completed FinFET designs is approaching 300, which Synopsys relied on for more than 95 percent of those chips.
Meanwhile, 48 out of 49 leading edge tape outs at 10 nanometer and below are using our design tools. During the year, we announced broad foundry certification, including from TSMC and Samsung for our digital and custom analog tools at the most advanced processes. In digital design, IC Compiler 2 continues to proliferate and progress technically to help customers with their most advanced designs. Leading adopters, including Intel, Samsung, TSMC, Broadcom, NVIDIA, Qualcomm, Toshiba, Socionext, Infineon and Huawei shared some of their most intriguing challenges in IC Compiler 2 successes during the year. It's the fastest ramping product in our history, including a record second half and has been used in approximately 250 production designs on over 25 different foundry processes.
In custom analog design, this year we introduced a brand new product, Custom Compiler. The result of several years of development, it features an innovative approach that accelerates key part of design from weeks to days, targeting specifically at FinFET. While still in the early stages, it has generated considerable interest now converting into adoption by customers including SD, GSI Technologies and 8 ks Micro Devices with support from leading FinFET foundries. Now to verification, an immense challenge that is only getting more difficult with highly complex systems featuring sophisticated silicon and increasing amounts of embedded software. Our verification continuum platform, born out of an early vision and collaboration with our customers, is making a big impact.
Built around the fastest simulation, emulation and prototyping engines, it delivered an outstanding year of growth. We made great progress on all elements of the platforms and integration, yielding significant competitive displacements in leading customers. One example is a major enterprise level partnership and expanded commitment to Synopsys by 1 of the world's top mobile semiconductor companies. This year, we also unveiled a breakthrough innovation enabling massive parallelism to speed up our franchise VCS simulation product. In addition, the SpyGlass technology from Atrenta has exceeded our expectations.
Our hardware verification product had a very strong year with record orders for our Zebu emulation and HAPS prototyping solutions. We're the fastest growing emulation vendor in the industry. An excellent example of our momentum is NXP, which selected Synopsys as its primary SoC verification and emulation solution for its next generation automotive, secure connectivity and smart connected products. In IP, we saw growing business momentum through the year and significantly expanded our portfolio and vertical market reach. We're seeing very good demand for our comprehensive interface IP portfolio.
Continuously at the forefront of new standards development, we offer customers high quality titles as soon as a new standard is released. TSMC recognized us as Interface IP Partner of the Year for the 6th year in a row, and we were named SMIC's Interface Vendor of the Year for the 3rd year straight. We were first to market with the new USB Type C and are the only IP company with USB 3.1 certification. We delivered the latest PCI Express 4.0 IP, targeting advanced data intensive cloud computing applications. We continue to drive the state of the art in the most advanced nodes, winning several important 10 and 7 nanometer projects.
Lastly, our embedded vision solution provides a leading edge and easy to use processor neural network combo that leverages machine learning, one of the hottest applications out there. Another key focus for us, not only in IP, but across our entire silicon to software product spectrum is automotive. We've expanded our automotive portfolio and in FY 'sixteen made accelerated progress. We delivered several advancements for next generation automated driving and infotainment, including our newest embedded vision processor. We drove key design wins at major automotive semiconductor companies, thanks to having grown the broadest portfolio of automotive certified IP in the industry.
Enabling software development 15 months prior to silicon, we delivered our virtual prototyping solution to a leading supplier of driver assistance systems. We also signed a large agreement with a leading U. S. Automotive OEM. Our digital and custom design tools added new design analysis capabilities focused on ensuring the extreme reliability required for automotive applications.
Key tools throughout our EDA, IP and Software Integrity portfolio are certified for the most stringent level of automotive safety measures defined by the ISO 26,262 safety standard. Our focus on automotive software security is becoming increasingly well known. In fact, we've teamed up with leading OEMs, Tier 1s and semiconductor companies to drive software cybersecurity standards for automotive through SAE, the Society of Automotive Engineers. Our reach continues to expand to include new entrants as well as traditional leaders such as Bosch, Delphi and Continental. Stay tuned for continued product advances and new technology milestones this year.
Next to our Software Integrity Group, which provides products and services to build quality and security into the software development lifecycle and across the cyber supply chain. Building on the acquisition of Coverity a couple of years ago, we've added key technologies both organically and via acquisition, while simultaneously unifying the sales organization. Our go forward strategy is threefold. First, continue to broaden and deploy our software sign off platform as the foundation of our offering. 2nd, accelerate our penetration of key verticals in both the embedded and enterprise spaces.
And third, drive demand creation with ecosystem partners, certification projects and services. To that end, we just today completed the acquisition of CIGITAL, which specializes in security consulting services and Codoscope, a spin off of CIGITAL with related developer tools. We're very excited about this combination as it will accelerate our ability to reach customers and expand our market in new segments. The companies are strategically aligned with the shared vision and bring complementary elements to the table. Synopsys leads with best in class products, digital attacks security problems from a service angle.
Synopsys has a very strong presence in the embedded space including automotive, medical devices and IoT. CIGITOL is a leader in serving enterprise customers with particular strength in financial services. And finally, Sigital brings a demand creation element with customer touch points earlier in the security strategy development process of our customers. SIGITAL and Synopsys are both named in Gartner's Magic Quadrant for application security testing. In this highly fragmented emerging market, the combination will enable us to provide the most comprehensive portfolio available in the market today.
From an overall company financial perspective, our primary long term objective remains to drive high single digit non GAAP earnings per share growth on a multiyear basis through a mix of the following: 1, grow traditional EDA revenue generally in the low to mid single digit range 2, grow revenue in IP systems and software integrity generally in the low double digits 3, actively explore TAM expanding R and D and M and A opportunities. 4, focus on global operational efficiency to deliver solid non GAAP operating margin in the mid-20s range and 5, optimize the use of our strong cash flow through a balance of stock buybacks, M and A and debt repayments. While the results in any given period may vary based on acquisitions or other near term priorities, our long term driving principles remain consistent. To summarize, Synopsys delivered another excellent year even in the context of a challenging semiconductor landscape. In terms of both total and EDA related revenue growth, we outpaced the competition in 2016.
We continue to invest in the short and long term organically and via acquisitions, operationally and with share buybacks, all to drive long term shareholder value. Lastly, we're making good progress in building our software security platform and market segment position. Let me now turn the call over to Trac.
Thanks, Art. Good afternoon, everyone. As I reflect on this past year, I'm pleased with our results. We again delivered on our near term financial goals, while investing for sustainable long term growth. This strategy is paying off.
Our EDA and IP solutions are doing well, offering a combination of healthy growth and profitability. We're also building out a new higher growth software security platform, which is gaining critical mass. This diverse product and customer portfolio positions us very well and supports our near and long term objective of driving high single digit non GAAP EPS growth. In 2016, we achieved substantially better financial results than we originally anticipated. The entire Synopsys team executed very well and Q4 was a strong finish to an outstanding year.
We delivered high single digit revenue and non GAAP earnings growth and generated significant operating cash flow. We bought back 400,000,000 stock to reduce the share count. And earlier this month, we announced 2 acquisitions to further scale our software security platform. We enter 2017 with a solid foundation and are confident in our ability to achieve our financial objectives. Now to the numbers.
As I talk through the results and targets, all comparisons will be year over year unless I specify otherwise. We delivered total revenue of $634,000,000 in Q4 and $2,420,000,000 for the year, an annual growth rate of 8%. There was strength across all product groups, including record hardware sales. Over 90% of Q4 revenue came from beginning of quarter backlog and one customer accounted for more than 10% of Q4 2016 revenue. The weighted average license duration was approximately 2.7 years for the quarter and 3 years for 2016.
We expect the 2017 average to be about 3 years. Our 3 year backlog remains strong at $3,540,000,000 and reflects strong good business growth and the timing of large contract renewals. Importantly, approximately 80% of our 2017 revenue target is already in hand, which provides stability and predictability. Total GAAP costs and expenses were $551,000,000 for the quarter $2,100,000,000 for the year. Total non GAAP costs and expenses were $488,000,000 for the quarter $1,850,000,000 for the year.
2016 expenses increased due largely to higher costs associated with employee compensation, acquisitions and cost of goods sold for hardware sales. We delivered solid non GAAP operating margins, 22.9% for the quarter and 23.5% for the year. GAAP earnings per share were $0.47 in Q4 and $1.73 for the year. Non GAAP earnings were $0.77 in Q4 and $3.02 for the year, an annual growth rate of 9%. We generated $148,000,000 of operating cash flow for the quarter at $587,000,000 for the year.
We exceeded our original 2016 target due to strong collections and business levels throughout the year. We ended the quarter with cash, cash equivalents and short term investments of $1,100,000,000 with 15% onshore at total debt of $205,000,000 Earlier this week, we renewed and expanded our credit facility to $650,000,000 dollars and took out a $150,000,000 term loan, providing excellent flexibility to support our strategic goals. In 2016, used about 80% of our free cash flow for buybacks. As a result, we reduced share count by 3,300,000 shares and intend to slightly reduce it again in 2017. We have $435,000,000 remaining on our current authorization.
Operating cash flow is expected to be strong in 2017 with a target of approximately 500,000,000 dollars even with an outflow associated with the recent acquisitions. We expect the quarterly profile to be similar to prior years with a net outflow during Q1, driven largely by 2016 annual incentive compensation payments. Before moving on to 2017 guidance, let me briefly comment on some of the details of the CIGITOL and CODASCO acquisitions, which were funded using a combination of U. S. Cash and debt.
They are expected to be modestly dilutive to 2017 non GAAP EPS and reach breakeven on a non GAAP basis by the second half of twenty eighteen. Now to the Q1 and fiscal 2017 guidance, which includes the impact of CIGITAL and Codoscope. For Q1, the targets are revenue between $630,000,000 $645,000,000 total GAAP costs and expenses between $540,000,000 $558,000,000 total non GAAP costs and expenses between $485,000,000 495,000,000 dollars other income between $2,000,000 a non GAAP normalized tax rate of 19%, outstanding shares between $152,000,000 $155,000,000 GAAP earnings of $0.43 to $0.50 per share and non GAAP earnings of $0.77 to $0.80 per share. For 2017, revenue of 2.57 to 2.6000000000, a growth rate of 6% to 7%. Keep in mind as you model 2017, the hardware sales add variability to revenue, driven by the timing of customer requirements and shipments.
Other income between $4,000,000 a non GAAP normalized tax rate of 19%, outstanding shares between $152,000,000 and $155,000,000 GAAP earnings of $1.92 to $2.06 per share non GAAP earnings of $3.16 to $3.23 per share high single digit growth when a modest dilution from Sigital and Codoscope is excluded. Capital expenditures of about 100,000,000 dollars and cash flow from operations of approximately $500,000,000 To help in your modeling, we expect second half to be slightly higher than the first half with Q4 the largest revenue quarter. Total non GAAP expenses to skew slightly toward the second half of the year and second half non GAAP EPS to be slightly higher than the first half, with Q2 the lowest EPS quarter. In summary, we continue to evolve our company to maximize long term shareholder value. Our active diversification and investment strategies are working.
We delivered very solid growth in revenue and profitability and significant cash flow in 2016. We returned $400,000,000 to shareholders in the form of buybacks, and we made the appropriate investments to drive sustainable high single digit non GAAP EPS growth. With that, I'll turn it over to the operator for questions.
All right. Are we ready for questions?
We are.
All right.
Our first question comes from the line of Krish Sankar. Please go ahead, sir.
Yes. Hi. Thanks for taking my question. I had a few of them. Number 1, I look at the annual backlog, it is down almost 2% year over year, even though the duration went up.
Can you just help us reconcile that? And then I had a few other questions.
Sure. Backlog is completely dependent on the timing of the very large deals. And given that we have a number of large customers that do multiyear deals, typically backlog will tend to go down until it goes back up. And so from our perspective, actually, this turned out to be a very strong backlog year. And so we are very well on track with this.
Got it.
All right. And then the next one is, in terms of your SEGITAL and Curtiss Corp acquisition, should we assume the revenue generated from that is roughly like $100,000,000 for FY 2017? And along the same path, is this going to be similar to the Coverity from a few years ago where it's probably $0.10 dilutive to the 1st year and then turns accretive like 1.5 years down the road?
Hey, Krish. This is Trac. Yes, Coverity did do about $100,000,000 for this year as we had expected. As far as Sigital and Codoscope, I would model that roughly at half that business. And although it's modestly dilutive to 2017, we do expect it to be accretive by second half of twenty eighteen.
Got it. And then the final question from my end is, can you give us an update on how your digital landscape is shaping up? Because one of your biggest competitors seems to have some pretty good wins or penetrations on the digital side, which has kind of been your strongest forte for several years. So I want to find out what you guys are doing on that segment trying to protect your market share? Thank you.
Well, in general, the digital space is strong for us because the complexity that comes with chips with many more transistors and simultaneously fairly difficult to achieve performance and power objectives demands the utilization of sophisticated tools. And this ranges, by the way, from the synthesis to the place and routes to all the tools that are around that, including, of course, all the verification tools as well. So in that space, we have seen very good results. It is very competitive at any point in time, but we've also seen that our technology this year has really strengthened substantially. So this has been a very strong year, especially second half.
And as we enter into 'seventeen, we feel that we're in a good position.
Our next question comes from the line of Rich Valera with Needham and Company. Please go ahead.
Thank you. I just wanted
to follow-up on the backlog question. You said it was actually quite a strong year from a backlog perspective or presumably a bookings perspective. Were you referring to sort of bookings run rate? Just wondered what you meant by that statement. Well, our run rate is up, period.
But when we look at bookings, there's some years that have more, some years that have fewer large transactions. And most of those are somewhat predictable in terms of their timing because, of course, they have on average, about a 3 year cycle. And so if in any given year, let's say, for argument's sake, you have 1 or 2 larger transactions that were to happen at the same time, in that year, you would see the backlog spike up substantially. And then consequently, in the next 2 years after that, by natural utilization of the backlog, if I can call it that, you would see a decline. And so against that complete understanding of where these things are, our statement is we had a very good year and we are in a very solid position in terms of the backlog that we have in hand for predictability for 'seventeen, for example.
Got it. So sounds like for the deals you did book this year that were scheduled to book, you were pleased with the run rates of those deals, but there's some large multiyear deals out there that obviously didn't happen this year. Got it.
Yes. And we're not intended to happen in 2016, right?
Correct. Right. Yes. No, that makes sense. And then with respect to hardware, you had a pretty high level of upfront hardware or upfront, sorry, revenue again this quarter relative to historical, presumably driven by hardware.
Still thinking about the model the same way, though, sort of 10 percent or less is still the sort of target model going forward?
Yes. That's roughly the target model we are moving forward with. And 2016 was very strong in terms of hardware. And so you never quite know exactly when the hardware comes in because it tends to be lumpy. But there's no question that from a technology point of view, we're in a very solid situation.
And there's also no question that fundamentally, all kinds of acceleration techniques in hardware are necessary for many of the very complex hardware software products that are coming to market. So I think it's going to continue to be a good area for all of DDA vendors and specifically for us also.
Hey, Richard, this is Trac. For modeling purposes, you should feel comfortable that we'll maintain the 9010 model.
Got it. That makes sense. And then for emulation, I think a quarter ago, you had mentioned I guess with hardware in general, a quarter ago, you'd mentioned not to get maybe too excited about extrapolating the growth you were seeing in hardware this year into next year. I'm wondering what in the end you decided to sort of bake into the fiscal 2017 guidance with respect to hardware. Can you give us any sense of how you're thinking about that business on a year over year basis as we move into 2017?
Yes. I think that the word not too excited at the beginning of the year applies to Synopsys pretty much every year. We are, by nature, cautious as we look forward. But at the same time, we do not see any decreasing demand for the technology. And so it may be spiky from 1 year to another, but fundamentally, it's a good business that we expect to continue to see good results in.
Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Thank you. Good evening. Art, let me start with you with regard to the semiconductor consolidation effect and how that all played out over the last year or so. So thinking back to a year, year and a half ago, you and your peers were quite apprehensive when that first wave of mergers were announced and you were quite concerned about what the adverse effects might be on EDA. And now as it turns out, it perhaps wasn't so adverse after all, at least not as much as you might have thought some time back.
So what didn't happen is the question in terms of what you had originally been apprehensive about that turned out not to be the case. And to the extent there is further semi consolidation that we're not quite done with that, do you think that that in future such consolidations it might be the same, not so terrible after all kind of outcome?
Well, I would almost like to start with what did happen. And I think this is a statement that's probably true for the entire EDA industry. We worked really hard in light of seeing this happen. On the side of what did not happen is there was certainly no slowdown from a technology point of view. And so as much as these consolidations to some degree are set up to try to reduce the overall cost equation for these companies.
More often than not, rather than getting the cost reductions, what they do is spend the money immediately on just doing more demanding products and taking advanced technologies because they still want to differentiate themselves. And so we are fortunate enough at Synopsys to be positioned very close to the leading edge. Those are people that with or without consolidation, they want to be differentiated. And that's how we balance things. Now in my preamble, and I'm sure I must have used the same words a number of times in earnings releases in the past, I always say, well, a consolidation is momentarily a headwind.
But in the long term, these companies are morphing or are merging because they want to attack a new market. And there's no question that if you look at the overall high-tech horizon, that electronics plus software combined in the next decade will have profound impact. How it manifests itself for these companies, well, that is precisely what they are racing towards. And so I think we are part of this race one way or another, even if during a merger, the mandates from the top ten to be save money. The mandates then pretty quickly shift to become more differentiated, and that's where we play.
Would you be willing to speculate on what the possible competitive effects might be of Siemens' potential or pending rather acquisition of Mentor? I mean, is it simply a matter of a new much larger owner pouring money into R and D and or sales that might incrementally make a competitive difference? Or how do you think about what the effects might ultimately be?
Yes. The word speculation is not really part of our vocabulary, I think, in this context. I think the only the positive is that this acquisition shows the value of EDA, and I think hopefully it reflects well on all of us.
Just wrapping up for me on the technology side. It became increasingly apparent earlier this year that Synopsys was incrementally investing in design compiler. Of course, you've always invested in it, but
it looks like you were doing it
incrementally. And to the extent that the synthesis market has been by and large sideways for the last number of years, What is it that you are aiming for with respect to the incremental investments in DC? Do you think that there could be some new wave of growth at least for you, in that part of the market?
I think if I look back at our the entire history of Synopsys, which by the way, in 3 weeks will be 30 years, believe it or not, if there's one thing that we could take some pride in is that for the vast majority, 80%, 90% of our products, we have in all these years always been at the state of the art. Now to stay at the state of the art when you have that rate of change underneath implies a continual rotation of investments from one product to the other. And from time to time, there are bigger steps. In many situations, it's just constant delivery of new capabilities. And so this is true for our entire portfolio.
And that certainly includes the synthesis, it includes the timing, it includes the power optimizations, the place and out, etcetera. And so it should not be a surprise that we invest in these tools that are absolutely central to a modern digital design. I mean, these are the type of tools that has made Moore's Law possible from a design perspective. And with our 3rd decade finishing or not, the 4th decade is absolutely aimed at technology leadership and driving the state of the art and making it possible again. So we will continue to invest at a strong clip in R and D because that is how we've been successful as a company.
Thanks, Arie.
You're welcome.
Our next question comes from the line of Sterling Auty with JPMorgan. Please go ahead.
Yes, thanks. Hi, guys. Let me approach the question this way. With the upfront becoming bigger each quarter through the year, positive comments around what hardware did for you this year, positive comments about IC Compiler 2. It would seem like it leaves the rest of the core EDA software portfolio as the area that softened in terms of growth year over year.
Is that the case? And what areas do you think have the potential to turn
in fiscal 'seventeen?
Well, for starters, 'sixteen, of course, was very strong from a hardware point of view. So that may balance how one looks at the different products a little bit differently. And then individual products themselves go through waves of being more central to the renewal of agreements or not. In general, though, I would say that we have a really well balanced product portfolio because with a very strong position in the core EDA that is central to really the continuation of advanced chip design and system design. Around that, the verification is reaching into physics of silicon.
And the software itself is now an area that is seeing good investments. And so we very much look at the core EDA as one of the key things that is enabling yet another business, which is the IP business. And so when you look at it more as a portfolio, at any point in time, the balance shifts a little bit because one technology sort of enables the other. Finally, looking back at 2016, this was a year where we can literally say and this is as much an aim that the internal teams here as any is that every one of our businesses did very well. And any given year that some do better than others, this year we had across the board very good success.
Okay. And then on the acquisitions, if I heard the answer to the first question correctly, it sounds like we should assume roughly $50,000,000 in contribution for fiscal 2017 versus the $100,000,000 that they did kind of finishing up the year. Can you walk us through the accounting impacts in terms of the write offs? And should that bounce back immediately to the $100,000,000 level when we get to fiscal 2018?
Well, I don't think
they were operating at that level to begin with. But yes, first of all, you're right. It should be in that range of half the Coverity business. The impact of that is a combination of the deferred haircut and the integration of the business over the next 10 months.
And how should that is that something that we should see a gradual ramp through the year or upfront loaded or a hockey stick? What's as we're layering this in the context of the guidance?
I would model it more of a gradual ramp throughout the year.
Okay. Thank you.
You're welcome.
Our next question comes from the line of Farhan Ahmad with Credit Suisse. Please go ahead, sir.
Thanks for taking the question. First question is on the operating margins. In past, you have talked about operating margin improvement to 25% range over time. And just along the same line, if I think about your operating margin and include stock based comp in it, you are operating at about a 20% operating margin. If I look at semiconductor industry and your customers in general, they're about 25% to 45% operating margin.
I guess like EDA is a pretty consolidated space. So why aren't the operating margins higher and why aren't you aspiring for higher operating margins in general?
No, we are aspiring for higher operating margins and we remain committed to driving margins to the mid-20s. If you're looking at this 2017 guidance and you separate out this digital and CodeScope impact, we would have grown margins very healthily from 2016 to 2017. Now the factoring in the dilution impact of that, we're going to see it roughly flat year over year, but the underlying health of the business is good and we are growing margins there.
Got it. Thank you. And did you characterize like how much is the total net impact to the EPS from the Pfizerteal and Cordiscope acquisitions?
A modest impact to EPS.
Is it like $0.10, $0.05 Any color around the level of impact?
Modest impact to EPS. Okay.
I would
say that something to keep in mind is that
net of that impact, we would
have been growing EPS in the high single digits.
Got it. Then I had a question on custom compiler. You talked about some of the some strong momentum in that area. How do you see that product going? And is that a growth driver for you over time and how it can become?
Yes, it is a growth driver over time, but it starts from a very small base. And the company right now round numbers is sort of at the $2,500,000,000 And so an individual small product does not have the impact to change where the overall revenue line really is markedly impacted. Nonetheless, it is an area that we're gaining strength in that before we didn't have. And this is especially true in the conjunction with an outstanding analog mixed signal and custom verification set of tools and specifically in the area of FinFET. And so we have good hopes actually for some really good results in 'seventeen.
Got it. Thank you. That's all I had.
You're welcome. Thank you.
Our next question comes from the line of Tom Diffely with D. A. Davidson. Please go ahead.
Yes, good afternoon. Quick question on the software security side of the business. So following the 2 acquisitions, do you feel as though you're critical mass today? Or are there pieces or scale that you still need?
It does feel like we are heading towards some degree of critical mass. And we are driving the business now towards profitability after the dilution issues that will be passing. And the reason I think we're starting to have critical mass is because we are seeing the deals that we're making grow in magnitude and the number of large deals is growing from quarter to quarter. But just as important from an operational point of view is, I think our sales team is now delivering significantly on their own projections. And that sounds like a trivial thing, but it's actually not.
It is that we are, I think, increasingly on top of a market segment where we know what we're doing and where there is demand that is growing. Now having said that, and you all know this, the word security occurs in so many different dimensions. And of course, this is a world market with a much larger number of potential users than what we would have seen in EDA, initially, of course, at much smaller transaction sizes but in a set of verticals that we've never touched in the past. And so just to highlight one aspect of Sigital is they are particularly strong in the financial market. And that is a market that while we had a number of successes in the past, they were sort of I don't want to say accidental, but they were not systematic, to say the least.
This changes that immediately. And moreover, because of the service nature and because of their ability to help do diagnosis at a high level in a company of the general readiness for security, I think it gives us an entry point with the CIOs and CTOs of companies that we didn't have before. And so all of these pieces combined, as we integrate them, I think we'll start to feel like increasingly a critical mass. And it's a word set that I like myself quite well.
Okay. And when you
look into going to verticals like the automotive world, what does the long term business model look like there? Is it consulting? Is it licenses? Is it royalty based?
Are you talking for security or in general?
Yes, for security.
Well, I think it will be in many cases, the entry point tends to be a bit random because companies are random in terms of how they suddenly are dealing with security. Although if you look at automotive, ever since about 15, 18 months ago, you may recall that Jeep was hacked. That sent sort of a shiver through the automotive industry that had for literally decades done an extremely good job at driving their engineering to be on top of safety. Well, overnight, the software part became the Achilles heel of safety and therefore very much top down from those companies all the way from their boards got the mandate of we have to deal with this. And this is precisely why the service business is helpful because if you get a mandate top down in a company, let's say, from a Board of Directors, they'll deal with it.
First thing you need to do is to have sort of an assessment of where are you. And this is where Sigital has another key asset, which is over many years, they developed a mechanism to assess in a number of dimensions the degree of security preparedness of companies. And so that is a perfect entry point. And that so called BCIM maturity model can be used to then drive the dialogue to what should be the action taken. And hopefully, in those actions, rightfully so, there would be a number of interactions with us on our products or additional services.
So that is why I think all these pieces gradually fall into place. But it's a new market, and so there's a lot of learning and but there's also a lot of enthusiasm about what we closed today.
Okay, great. And then quickly on the consolidation of the customer base. So if you look back to 2016 as a whole, do you think there was an impact at all from consolidation on your results?
Well, it's hard to say it didn't have impact, and it's hard to point exactly at what the impact is because as I said earlier, whenever 2 companies consolidate within 3 minutes later, it is, well, we have to save money to pay for the premium that we just gave out. And consolidation is fundamentally either a move towards efficiency, strict economic efficiency,
or it is
a move towards and that's why I like these words, critical mass horizontally be bigger in a market and therefore another way to be efficient Or it is a move towards vertical critical mass, meaning heading towards verticals that before a company couldn't reach or where the value proposition is moving up the stack. And so as companies navigate through the just hard practical integration and money saving phase, very quickly, they end at what is it that they want to accomplish. And not that, that means immediately money spending, but it certainly means immediately helping with differentiation. And that's why as much as these transitions initially are a headwind, we've navigated reasonably well through them, I would say.
Our next question comes from the line of Monika Garg with Pacific Crest Securities. Please go ahead.
Hi. Thanks for taking my question. Track first is on the CFO. Last year, cash flow from operations was $587,000,000 You are guiding $500,000,000 this year. Shouldn't cash flow from operations grow in line with operating income?
Yes. Over time, you should model you should assume that cash from operations should track EBITDA less cash taxes. But as we've said in the past, it will vary from year to year. Dollars 500,000,000 we think is still a very healthy level of cash flow for the year. Keep in mind, when we entered 2016, we guided to about $500,000,000 and we overachieved that by over $80,000,000 So the comparison is a little bit tough year over year.
The second thing to keep in mind is that we think there's roughly a $30,000,000 headwind in cash flows this year as a result of the dilution and the cash outflows related to the acquisitions and then timing of some early payments that shifted from 1 quarter to the next or year to next.
All right. Then how excluding these 2 acquisitions you just announced, how big is software security segment for you? And excluding these 2, is it profitable now?
Coverity was did end up close to where we end up where we expected to end up at €100,000,000 It was modestly dilutive as a result of some of the acquisitions that we made earlier this year, but it's trending very well in terms of growth and profitability. The Sigital, I think you asked about the size, Sigital and the Codoscope is about half of that business.
Got it. Then if you look at IP and Systems segment, grew 17% year over year. Could you maybe split the growth between IP and systems in
it? No. No, we won't split that out. But roughly, the growth of those businesses are in line with the models that we've previously communicated.
Yes. And in general, I would add that both areas are doing very well. And the IP business, in particular, saw very, very good growth this year, largely because complexity demands alternatives to design. And one of the key alternatives is to buy those blocks that you can get on the market and that are cost efficient, while at the same time being super high performance and low power. And that is exactly the collection of IP that we have.
Got it. And last one on the emulation. You said it was the fastest growth in the industry. Cadence also had a very strong year. Could you maybe talk about what was the growth for your business in emulation?
How big is that now?
No, we are well aware that the overall industry, I think, is doing very well in emulation. And the reason for that are in some ways straightforward, which is the complexity of the chips for those people that provide emulation more on the silicon verification side or the sheer amount and complexity of the software for those people that are maybe more focused on the software side or those that are working in between the hardware and software in all three cases is up substantially. And I don't have to tell you that the value of or the cost of not getting to market on time because the hardware and the software don't quite work together is extremely detrimental. Therefore, I expect that the investments in this area will continue and it's a very competitive market. But speaking now for Synopsys, I think we're well positioned.
Ladies and gentlemen, we have now reached the 5 minute mark to the top of the hour. I'd now like to turn the next question over to Gary Mobley with Benchmark. Please go ahead.
Hi, everyone. Thanks for taking my question. Most of the questions have been asked and answered, but I did have a question about the value of M and A during 2016. I know in the past you disclosed that. I'm not sure if it was in the 10 ks filing or if it's in your supplemental materials published today.
But could you share with us what the total dollar amount paid for M and A was in 2016?
Well, normally, we don't disclose it unless it is material to the overall results. Relatively speaking, it was not a super high year of M and A. And maybe the best is if we get back to you later because we don't have the numbers in front of us actually.
Fair enough. Fair enough. I don't know if this is the right venue to delve into the topic deeply, but could you maybe give a quick overview on your opinion and your assessment of our likelihood of some of the proposed accounting changes and the revenue recognition issues as it impacts some of those?
Hi, Gary. So we've been actively working on that over the last few years. And right now, we are fairly confident that we should be able to maintain the ratable model for our business. There's obviously a lot of some details remaining to work that out and actually the implementation of that is going to be very complex. But for the most part, we are confident that we should sustain the model.
Okay. Last question for me. The upfront licensing costs I'm sorry, upfront licensing revenue that showed up as well in the IP systems and software integrity group and as well showed up in the accounts receivable with a spike there. And so I was wondering if there was any if there
were any other factors that drove
up the spike in upfront besides emulation? That you see maybe perhaps a spike in IT licensing or maybe a large software integrity license deal?
Yes. The upfronts the strong upfronts in Q4 were a function of both hardware and IP that was recognized on a perpetual basis for upfronts.
All right. That is it for me. I appreciate you taking the question. Thanks, everyone.
Gary, just to follow-up
to your earlier question, the cash outflow for M and A was about $60,000,000 for 2016. 60,000. Yes.
Our next question comes from the line of Mitch Steves.
Hey, just had a quick one. Thanks for letting me get on here. So for the revenue guidance, you guys are talking about kind of 2, 585 kind of as the midpoint that kind of implies 4.5% growth, if I take out the 50,000,000 dollars So if you all maybe just mirror that with your comments on mid single digit growth in core EDA and then double digits on the IP and systems piece because I think that it would be north of around that 4.5% mark organically.
Yes. Obviously, there's always variability from year to year. Remember that in 2016, we had a very strong hardware year and that is quite lumpy. And so for an earlier question, we want to be a bit conservative given that these things are just very hard to predict. But fundamentally, I think we feel ourselves that we're coming into 2017 in a stronger position than we entered 2016.
And so now, of course, the proof is in the pudding, and there's a lot of work to be done, but that's sort of the way it feels to us right now.
Okay. Got it. Thank you.
You're welcome. Well, I think we've reached the turn of the hour. So I would like to thank all of you for not only attending this earnings release, but for closing yet another year. We are thankful that we had a strong year. We're thankful to our employees, our customers, our partners, but also to you for following us and reporting on our endeavors.
We're heading into 2016 2017, sorry, 2017 with good confidence and a lot of exciting things to do. And so we hope to have you on our next earnings call sometime next year. Thank you very much.
Ladies and gentlemen, that does conclude our conference for today. Thank you again for using the AT and T Executive Teleconference Service. You may now