As a reminder, today's call is being recorded. At this time, I would now like to turn the conference over to Lisa Yubank, Vice President of Investor Relations. Please go ahead.
Thanks very much. 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 and targets and will make other forward looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.
In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. The reconciliation of the non GAAP financial measures discussed 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 www.synopsis.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 a very good start to the year. We delivered revenue of $569,000,000 and non GAAP earnings per share of $0.68 We entered into a $200,000,000 accelerated share buyback program and are well on track to meeting our revenue, EPS and operating cash flow objectives for the year. Trac will discuss these in more detail shortly. As most of you know well, Synopsys serves the broad electronics industry all the way from silicon to software.
Over the past 5 years this market has seen and is seeing dramatic changes as continued advances bring daunting complexity challenges, but also a fabulous wave of impact and business opportunities. Most notably, demand is expanding for mobile and cloud infrastructure to support the enormous potential of big data which is accelerated by a wave of Internet of Things data generation. Internet of Things or IoT for short itself is rapidly morphing into the next generation of smart everything meaning digitally intelligent devices using functions such as vision, learning, and reasoning as we are already seeing in assisted and autonomous driving. The increase in complexity of these sophisticated hardware software systems challenges the entire value chain. Whereas the race is on again along the traditional metrics of performance, power and cost, it's also subject to growing concerns on how to deal effectively with systemic security issues.
Synopsys is uniquely focused on enabling our customers across 3 market segments, semiconductor companies who design chips and increasingly embed software in them systems companies who develop products that incorporate chips while adding their own differentiating software, and software developers across many industry segments who focus on handling the increasing complexity and security of their code. For Synopsys, complexity is in our DNA and we're well equipped to enable the next generation of opportunities. Many years of investments have made us the market and technology leader in EDA, the 2nd largest IP company in the world and the emerging front runner in addressing the critical new software quality and security space. We're consciously building our silicon to software market position with an objective to grow shareholder value through strong operating cash flow generation, solid revenue growth and expanding annual non GAAP operating margins through a balanced capital allocation strategy featuring stock buybacks to maintain or shrink share count and acquisitions to expand our SAM and TAM and through the most predictable recurring time based revenue model in the industry supported by a large multiyear backlog. Our objective thus remains to drive long term revenue and earnings growth, while continually evolving the position of Synopsys towards the sweet spot of today's and tomorrow's electronics.
Let me make a couple of comments on the present landscape. In semiconductors the environment is essentially unchanged since we spoke in December. While consolidations are a bit of a headwind for the EDA industry as customers rationalize their combined businesses over time, Synopsys is faring quite well in these situations. The mission critical nature and completeness of our solutions mitigate risks and our Q1 results are very encouraging. In systems, our strong position and focus on the intersection of hardware and software have been particularly positive and we're seeing growth for Synopsys.
For software developers, our rapidly evolving platform of quality and security solutions is getting attention and we see increased calls to action most notably from the security perspective. Now to some highlights from the quarter beginning with EDA. In Q1, we signed a significant agreement with GlobalFoundries for design, verification and manufacturing tools. Synopsys is supporting their recently acquired IBM ASIC business by providing access to a full Synopsys flow, including IC Compiler 2 place and route and IC Validator physical verification. In addition, the cornerstone memory supplier increased its business with us by more than 25% per year with particular strength in analog simulation and manufacturing.
Meanwhile, our next generation physical design system, IC Compiler 2 continues its rapid deployment as customers see excellent results. The solution is production proven with nearly 150 production designs supporting 19 different silicon process nodes. Demand is quite high as IC Compiler 2 continues the fastest ramp of the Synopsys product ever with opportunity for further growth. Some visible successes include November's qualification of IC Compiler 2 by Samsung Foundry for its 10 nanometer production work, A collaboration with GlobalFoundries on the industry's first 22 nanometer FDSOI process and reference flow that includes Synopsys Synthesis, IC Compiler II and SINOFF. As a clear leader in advanced design tools, we are witnessing increased adoption of 16, 14, 10 and even 7 nanometer FinFET technology.
Of the 286 active FinFET designs currently being tracked, Synopsys is relied on for 95% of those chips. 100% of the 10 nanometer and 7 nanometer tape outs completed thus far utilized Synopsys design tools. Notable also is Samsung already providing 10 nanometer qualified Synopsys physical verification runsets. IC Validator, which works particularly well with IT Compiler 2 and on FinFET technologies is seeing an increase in customer utilizing its full sign off status. We also experienced strong growth and business alignment this quarter with multiple silicon manufacturing partners in both lithography and TCAD at very advanced nodes.
Now to verification, an area where we've seen excellent growth as vision is now being rationalized. A number of years ago, we recognized that existing verification approaches were woefully inadequate to deal with the upcoming complexity growth in hardware and the systemic challenges of hardware and software. We had a vision anchored around our market and technology leading VCS simulation to deliver a complete platform of interacting verification techniques which we called the verification continuum. This vision and its subsequent execution were right on and today we're seeing excellent technical results as well as business and market share growth. A great example in Q1 was a major enterprise level partnership and expanded commitment to Synopsys by one of the top mobile semiconductor companies to drive state of the art technology collaboration and broadened adoption of our solution.
Both the hardware and software elements of our verification continuum did well this quarter. Our emulation system, Zebu, excellent growth and continues to demonstrate performance and cost advantages. In prototyping, we shipped a large number of our HAPS FPGA based systems. On the software side, our virtual prototyping solution is having solid success particularly in the auto industry. As evidenced by a large Q1 agreement with a leading U.
S. OEM, our automotive strategy is bearing fruit as the industry is massively increasing its investment towards opportunities such as advanced driver assistance systems. We expect the verification business to do well this year. Now to our IP products, where a solid results quarter accompanied continued expansion of our already broad portfolio. Our distinct leadership in Interface IP continues.
This quarter we were first to market with the new USB Type C which supports the connector that functions with either side up or down. In Q1 we also announced our Data Fusion subsystem for IoT devices. The many sensors on cell phones, tablets and the like need to take data in and process it effectively. This first of its kind integrated subsystem bringing together the processors, peripherals, memories, libraries and drivers necessary makes it easier, quicker and lower risk for customers to build this functionality into their chips. We also continue to innovate in our security IP portfolio.
This quarter we announced an enhanced security package featuring data encryption, address scrambling and data integrity checks aimed at providing protection from system attacks and IP theft. The theme of security naturally brings me to our Software Integrity Business Group. This new TAM higher growth area is our most recent investment and holds great promise as testing for defects and security vulnerabilities is now a necessity in virtually every market segment ranging from automotive to health to energy to financial markets. Our objective is to provide both developers and users of software with tools to automatically check for quality and security issues as the software is being developed or used in larger systems. The size of this tools market is approximately $2,400,000,000 highly fragmented and growing about 20% per year.
Driven by universe of 20,000,000 plus software developers and a cost of failure that has gone up dramatically particularly when human safety is at stake, this market is evolving rapidly. Last week you may have seen the President's budget proposal in which he asked for a 35% $5,000,000,000 increase in the U. S. Cybersecurity budget. Another good example is automotive.
We're following some widely published hacking incidents focus on software security and safety has become intense. As we attract some world class experts, integrate technologies from the 4 software security companies acquired in the last 8 months and closely collaborate with the automotive industry to help drive standardization efforts addressing cybersecurity, we're garnering attention and building a strong brand in the new emerging area of software sign off. I hope you see from my comments that our silicon to software push is both well anchored and visionary. Last quarter we delivered excellent progress in virtually every area of our business. In summary, Q1 was a very good start to the year and we're well on track towards meeting our annual financial targets.
Our core business is solid with areas of promising growth. We continue to invest towards broadening our TAM and our silicon to software vision aligns well with where the customer base is going and opens up brand new markets. Let me now turn the call over to Trac.
Thanks, Orit. Good afternoon, everyone. Q1 was an excellent start to the year. Building on the momentum from 2015, we continue to execute very well in a challenging environment. Q1 business levels were strong.
We met or exceeded all quarterly financial targets, and we returned $200,000,000 to shareholders through our stock buyback program. With our strong Q1 performance, we remain confident in our ability to achieve 2016 revenue, earnings and cash flow objectives. Now to the numbers. As I talk through Q1 results and 2016 targets, all comparisons will be year over year unless I specify otherwise. Total revenue was 569,000,000 dollars with growth across all product platforms.
Over 90% of revenue came from beginning of quarter backlog and one customer accounted for more than 10% of revenue. The duration of renewable customer license commitments averaged approximately 3.7 years, which reflects a couple of large longer term agreements. Duration will vary depending on customer requirements, and we expect the full year 2016 to average approximately 3 years. Total GAAP costs and expenses were 497,000,000. Total non GAAP costs and expenses were 440,000,000, slightly below our target range due largely to the timing of expenses, which included some delayed hiring.
Q1 non GAAP operating margin was 22.5 percent. And for the year, we expect margin to increase over 2015. We will continue to drive global operational efficiency in order to expand non GAAP operating margin to a solid mid-20s range. GAAP earnings per share were $0.39 and non GAAP earnings per share were $0.68 above our target range. Similar to prior years, Q1 had a net operating cash outflow.
The $35,000,000 outflow was due largely to the timing of 20 15 annual incentive compensation payments. We expect a strong operating cash flow for 2016 with a target of at least 500,000,000. We ended the quarter with cash, cash equivalents and short term investments of 706,000,000 with 16% onshore and total debt of 228,000,000. In 2016, we plan to increase buybacks to slightly reduce share count. In Q1, we initiated a RMB200 1,000,000 ASR, which will complete in Q2.
There's $300,000,000 remaining on our share repurchase authorization. In addition, we closed a couple of small acquisitions in the software security space, adding key technology to support our strategy and drive long term growth. DSO was 57 days, within our target range, but up from Q1 last year due to strong business levels. We ended Q1 with 10,290 employees with more than onethree in lower cost geographies. The increase in headcount was due to planned hiring and acquisitions.
Now to the Q2 and fiscal 2016 guidance, which excludes the impact of any future acquisitions. For Q2, the targets are revenue between 595 $610,000,000 As we communicated in December, we expect more variability in quarterly revenue due to the timing of our hardware and consulting business. Total GAAP costs and expenses between $503,000,000 $522,000,000 total non GAAP costs and expenses between 450,000,000 460,000,000 other income between 0,000,000 and 2,000,000 a non GAAP normalized tax rate of 19%, outstanding shares between 153,000,000 and 156,000,000 GAAP earnings of $0.38 to $0.47 per share and non GAAP earnings of $0.78 to $0.81 per share. For 2016, revenue of 2,350,000,000 to 2,390,000,000 other income between 4,000,000, a non GAAP normalized tax rate of 19 percent outstanding shares between 153,000,000 and 156,000,000, a reduction of 2,000,000 shares versus our prior guidance range GAAP earnings of $1.64 to $1.79 per share non GAAP earnings of $2.93 to $3 per share capital expenditures of approximately 80,000,000 and cash flow from operations of at least 500,000,000. Dollars In summary, our priorities remain centered on managing the business to maximize long term shareholder value.
Our predictable business model and strong cash profile provide a very solid financial foundation for this year and beyond. And with our strong Q1 performance, we remain confident in our ability to achieve 2016 revenue, earnings and cash flow objectives. With that, I'll turn it over to the operator for questions.
And first, we'll go to the line of Krish Sankar with Bank of America Merrill Lynch.
Hi, thanks for taking the question. I actually joined a little late. So first question was, are the GlobalFoundries customer you mentioned, is it a new win or is it an existing customer? What kind of margin profile do we expect for that business?
Krish, if you don't mind, we never comment about specifics about a customer, but GlobalFoundries, be it through the GlobalFoundries side or the IBM side, were customers before. And I can only say that we are very pleased with the results and the support from GlobalFoundries. It's worked very well.
Got you. No worries. The second question I had was, obviously, you guys spoke about it last earnings call. There's been a lot of chatter around impact about semi M and A on R and D. Kind of curious, have you actually started seeing any impact?
Or what are your customers telegraphing to you, either those that just finished the acquisition or those that are in the process of getting acquired?
So Krish, sorry you missed a little bit at the beginning. I tried to explain that we have really 3 customer categories, the semiconductor ones, the system houses and the software companies. When we are talking about consolidation in semiconductor industry, we are mostly talking about literally semiconductor companies, people that design chips maybe embedding a lot of software, but nonetheless are centered there. And of course a number of the consolidations that occurred or that got started in the last 18 months have meanwhile progressed and closed in some cases. And we are engaged with all of these companies.
As I mentioned in the preamble, we are very encouraged by the results that we have gotten. We are faring quite well with this. And I think one of the reasons is that as companies look for becoming more efficient, they also often rethink which suppliers they want to work with and how they want to work with them. And given both our vision from hardware towards software and our ability to deliver a very broad I think well honed set of platforms, we are not only a leader in helping them differentiate themselves in technology but also far and away the lowest risk. And so we have fared well with this.
Got you. Thanks, Arjun. And just a final question either for you or Track. You guys have done a great job in execution and talking about a mid-20s operating margin profile. I'm kind of curious, is this a business that can be a 30% operating margin business driven by any kind of like levers you can pull on the OpEx side?
Or is this a business where Op margin expansion is just purely a function of drop through from the top line?
Well, Chris, I would emphasize that we're focused on driving high single digit EPS growth sustainably. I think reality is getting to a 30% up smart. You can do it for a short term, but not sustainably over time. The nature of our business is pretty technical. Long term though, to drive high single digit EPS growth sustainably, it's really going to come through a combination of driving top line growth and margin expansion.
And the benefit we have in terms of trying to grow margins, we will really be looking at how we balance the portfolio between core EDA, IP and software integrity. And also as we look across our functional groups, whether that's R and D, sales and marketing and G and A, I think typically you refer to the 30 folks who look at R and D spend. But from our side, we'll increase margins either from driving the top line or balancing our resources.
And next we'll go to the line of Tom Diffely with D. A. Davidson.
Yes. It's Andrew Masuda asking a question on behalf of Tom. First one for Art. Just on the IP business, could you maybe update us on the percentage of IP that is outsourced today? And where do you see it going over the next year or 2?
Well, first it's actually a difficult to answer because the definition of IP that's outsourcable has grown dramatically in the last few years. For those that have followed us for many years, you recall that at some point in time we were proud to provide an adder and simple things like that. Today we are absolutely driving the state of the art of building blocks in terms of both complexity and some of the advanced SerDes and USBs and other interfaces are not only very complex on their own, they're also extremely complex as you put them into brand new silicon technologies such as 10 nanometer FinFET. And so we ourselves think that at best 50% or so has been outsourced. I just want to give the honest caveat that it's a little bit hard to estimate.
But as a little side note, the evolution in the market that we see, both through some of the consolidations but also through this move towards providing much more differentiation through the combination of hardware and software makes a number of customers focus on the higher levels of abstraction, meaning more and more the software and therefore an increased tendency to delegate or to outsource the hardware IP and we are in certainly a very good position to benefit from that.
Great, thank you. And then next question is for Track. Could you maybe just talk about your expectations on the linearity for operating cash flow as we move throughout the year?
Operating cash flow, let me describe
the P and L and maybe that can help you. You probably expect that the second half revenues will be a little higher than the first half, same thing with expenses with EPS ramping up weighted towards the second half. And Lisa later on can probably give you more details in the after calls.
Great. Thank you. You're welcome.
And next we'll go to the line of Sterling Auty with JPMorgan.
Hi, it's Darren Zhu on for Sterling. Thanks for taking the question. Just wondering about those large deals that drove the contract duration higher. Was there any sort of unusual level of discounting that had to be extended to get those customers to sign the long term deals? Or was it sort of their desire to sign the longer term deals?
Well, the reason customers sign long term deals is maybe financial, but in most cases it's really because one is looking at a collaborative partnership that has the potential to create additional differentiating value for the customer. And over the years, from time to time we have done very engaging, built very engaging relationships that have demonstrated that working closely together cannot only impact the way our tools are used presently but also hone it for the specific situation that the customer has. And so although of course when you do a multiyear deal, you always make sure that it is balanced for both parties, you also make sure that that one creates something that is beyond what would be just a customer supplier relationship.
Darren, this is Chuck. I would stress that not only were the deals large, but they were quality deals. We did see run rate grow in Q1.
Okay.
And maybe just one other question for you, Track. At least based on our model, it looks like most of the upside in the quarter in terms of EPS actually came from the gross margin line. I was wondering if you could just talk about what drove that?
Yes, Der, the overachieve on EPS is really an expense story. We were light on expenses. Typically, we started the year behind in hiring and this year was probably more uncommon than that. We'll be catching we'll try to catch up on our hiring for the rest of the year. If you look at our headcount, it's pretty flattish versus the end of the year and that's where the upside came from.
Next we'll go to the line of Jay Bleeschhouwer with Griffin Securities.
Couple of questions, Art, about how your business is evolving and the end market and start with the most popular question, of course, having to do with consolidation. So it sounds as though so far it hasn't had an adverse effect on you in terms of post merger budgeting versus pre merger budgeting. The longer term question is for you, do you think that the concentration of your customer base, the top 10 or 20, will be up, down or sideways over time? At least in the core business, do you think the top 10 to 20 will continue to account for half or more of your revenues, even taking into account some post merger cutting among some of your larger customers?
And a couple of other questions.
Well, by definition when you have consolidation that means that some customers are becoming larger assuming that continue the business relationship, which we have. And so I think that is not a new phenomenon and that will continue. At the same time, I've always been a believer that in times of consolidation, you can look at it as a maturation of a market or you can look at it as the beginning of a next phase. And the reason we're emphasizing and we're investing along the lines of working with both semiconductor systems and software developers is precisely because we see an evolution in the markets that we'll continue to emphasize this increased role of the intersection between software and hardware. And so we are well positioned for that.
Obviously on the hardware side we go as deep as anybody down into the silicon. On the software side we have put down new gambit in the software sign off or software integrity space. And then in the middle we have a large business that deals with the intersection of those 2, be it in verification or even some in the IP side. So I think we're well balanced and I try to express that by saying we're trying to sort of follow the sweet spot of the industry. And in that context, of course, the players do change over time.
But I think we're well we have solid roots down and I think good opportunities looking up.
With respect to the IT business, you said yourself that in the early days, the technology was that you offered was fairly primitive compared to what you do now. But it's always been the case that IT has been a fairly fragmented business. In other words, lots of different categories, which historically had made it hard to scale as far as margins were concerned. You've done better over the years now with margins, but my question is, particularly now in having to meet the needs of the new IoT market, your new automotive strategy, etcetera, could you foresee that the portfolio for IP becomes even more fragmented again? And if so, how might that affect your cost structure or the margin profile going forward in IT?
Well, I think it's a question. Although I must say, we never use the word fragmented about our own position because we see it as broad, meaning that having more products available, more IP titles is actually a good thing given that it is relatively costly to build up the channel that is capable of both selling and supporting this. Secondly, given that it's important to build good relationship with the customers and if they trust the IP one delivers they are more likely to come back for other things. And so in that context I hope that we will continue to broaden the portfolio. But I also would say that we are deepening the portfolio because maybe to be more to the point, the difference between a USB 1, a USB 2, a USB 3 and now a 3.1 and a USB C are quite remarkable just in terms of the capabilities that go into that part.
And then on top of that you layer the evolution on the silicon side from I forget when we started this probably by 65 nanometer or so and then down to 40, 28, 16, 14, 10 and now 7. That is a substantial evolution in terms of the complexity of what we deliver. And so all the more is a trust relationship and execution relationship with customers essential. And so if we can broaden even more that is good. But we also partner very well with some other key providers.
And our objective is to make sure that our customers are successful with this way of doing design. And so far I think it's proven to be true.
One more for you, if I may, Art, on strategy and then wrap up with track on Q1. So you've become quite enthused now about the automotive opportunity. And the question there is how you see yourselves positioned for that? In other words, do you think that your play is largely at the IP and software integrity level? Or do you think you can ensure the move up the supply chain into the automotive system suppliers themselves and even up into the OEM level of car companies themselves as Mentor has done, for example, in some cases?
And then lastly, for Track, for Q1, would it be fair to say that the substantial sequential increase in your IP business was correlated to the unusually large sequential increase in the Asia Pac business? And then on the other hand, was your decline from Q4 in North America largely correlated to a sequential decline in emulation?
So let me start with your automotive question. The first reason why of course automotive is in so many discussions is because somewhat surprisingly so almost overnight it has turned into the poster child of what digital intelligence can do. And this I say surprisingly so because automotive in the past has been a relatively slow adopter of silicon technology for many good reasons because safety was absolutely paramount and so it demanded a lot of very specific long term design. I think this is changing radically, meaning that solely automotive is now on the clock tick of Silicon Valley, so to speak, of software combined with most advanced silicon. And therefore many of the capabilities and tools and IP that we provide is front and center.
Now to your specific question of our position in automotive, we have a remarkably complete set of capabilities that is well vested in a number of automotive specific techniques such as making sure that chips are designed with provable safety and verifiability in mind. And so in that context, we I think are very well positioned and very engaged at by the way all the levels that you mentioned. So semiconductor companies, Tier 1s and even some automotive companies specifically. I don't want to go overboard with the enthusiasm here either. It's an industry that doesn't ship as many cars as their cell phones.
So the numbers are somewhat moderated by that. But it is an industry that certainly has caught the bug of how do they differentiate themselves in this new space and I think the race is very much on.
So Jane, this is Jack. Your question regarding the geographic growth and the product growth, I wouldn't read into any correlation between other geographic growth and product growth. We see both emulation and IP as growth areas for us long term. And that's pretty broad based. We're not expecting that necessarily comes from any one geography.
It would be broad based growth.
Right. But I was asking specifically if that was the case, however, in Q4 to Q1?
Q4 to Q1, in emulation, that would be partly the case. But it's quarter on quarter, yes.
Okay. Thanks very much.
You're welcome.
And next we'll go to the line of Monika Garg with Pacific Crest.
Hi, thanks for taking my question. First I have a follow-up on the question he asked earlier. If you look at your closest period cadence, they posted north of 26 points operating margin last year. And we could see them going to at least 27 points over 1 or 2 years. Since you are still talking about mid-twenty
5 percent margins, my question is, yes,
we understand it's not 30% off margin this Well
Monica, we have said for a while that where we're heading is towards the mid-20s and so these numbers are all in that space. At the same time, one of the things that we decided to do a couple of years ago is to invest specifically in a new emerging area. And we did that with the belief and understanding that a lot of functionality would move into software, that the software was quickly going to reach the issue of complexity and then security issues that would become enormous. And we continue to invest in that. Of course, such an area initially is not particularly profitable, but it has potential.
Secondly, we have seen that the investments that we've made recently through some of the acquisitions initially bring about a small haircut and those are the small differences that would make up or explain what you were mentioning. Be it as it may, our objective is very clear. Our objective has always been how do we deliver shareholder value over the long term with a fairly consistent pattern. So the intent is not to surprise anybody, but at the same time to also not to be hesitant to put our chips down if we see some opportunity. And that is exactly what we are continuing to do.
You have noticed that in the last couple of
years we have not been hesitant to also
utilize our balance sheet towards appropriate and have done so again this quarter. So the balance of those things is how we are managing the company.
Got it. Thanks, Al. And then as a follow-up, how big you think emulation market can become and how you are thinking about growth of your emulation business this year?
Well, you know the emulation business is difficult to characterize because there are multiple players with multiple sort of cycles of products and there's some degree of I wouldn't say seasonality is just things go up and down from 1 quarter to another because it's somewhat lumpy. Lumpy was the word I was looking for. Having said that, the reason that we are bullish around emulation is actually a broader one, which is that we are strong advocates and we think we strongly deliver around a vision of a verification continuum that allows to use emulation in the context of many other tools as appropriate for the task at hand. And without going too technically deep here, the reason this is important is because we are dealing with a space that goes all the way from verifying strictly some hardware to verifying some chips that was embedded software all the way to people wanting to bring up entire operating systems and some application software on hardware that has not yet been built. And so in that context, the collection of technologies assembled in a platform that we have is truly quite amazing compared to where we were just 5 or 6 years ago.
And we have seen that the take up in system companies that are now hitting this intersection has been particularly positive and that was visible in some of the Q1 growth.
Got it. The last one for TReK. TReK, at the midpoint you beat Q1 by almost $0.06 EPS, then why not raise yearly EPS guidance?
As I mentioned, the overachievement was mostly on light expenses and most of that's timing still in the year early in the year. We are definitely focused on the full year EPS targets. And at this point, we feel pretty good about the guidance.
And next we'll go to the line of Gary Mobley with Benchmark.
Hi, guys. Thanks for taking my question. Most of my questions have been asked and answered, but I did just have one question about the M and A environment. Given the equity capital markets turbulence and as well maybe some economic softness more broad, Has it become a buyer's market for cash rich companies like you in what has been sort of a consolidation strategy? And in other words, are you seeing more companies being shocked to you that are perhaps a good strategic bid?
Are companies potential acquisition targets more amenable to price terms? And considering the answer to that, do you feel the best use of cash might be for to accelerate M and A pace or sort of stay on the same cash return strategy related to dividends and share buybacks?
Okay. Well, Gary, you probably know that. We never respond to specific M and A questions. But in general terms, if you watch Synopsys, we have found a balance between using repurchase mechanisms and M and A as the two ways to leverage our balance sheet. And when we look at M and A, invariably it's driven by 2 things, either a mechanism to increase the strength of our SAM, meaning purchase companies that have either technology or market position that we think we can do better with or that strengthens our position.
Or just as important, maybe even more important is opportunities to create new TAM for us. And so in that sense, the last 18 months have been interesting because we've done a number of acquisitions starting with a company in the software quality space. And the reason that one was important is because that is the fundamental platform to analyze software. And then just in security companies that can all pretty swiftly be integrated into the overall software analysis platform. And so these are all good examples of how we utilize our cash on an ongoing basis.
Now are there waves of these? Yes, they are. Sometimes they are driven by the state of the market. But in general, I would tell you that many of these things are often on the radar scope for many years and the moment has to just be right to be able to acquire something both from a seller point of view and a buyer point of view. And there is quite a bit of dating that goes around before marriage.
So in that sense we are always busy.
Understood. Appreciate the response. Thank you.
And next we'll go to the line of Srini Sundar with Summit Research.
Hi, guys. Thanks for taking the call. First question is on the mid-twenty percent range operating margin, which others have also explored. My question is, what do you propose will be the timing and how exactly will you achieve it? I mean, will it come from the gross margin line or R and D or SG and A?
So if you could
Sure. Well, in general as Trac alluded to, at the end of the day revenue growth is the single best recipe to grow margins. And in that sense, we are heading there. And as mentioned, based on some of the past acquisitions and recent investments, we see that the haircuts will gradually fade away and our continued growth and diligent expense management will get us there. So to me the issue is not can we get there or not.
Yes we will and we have been committed to that for quite a while.
Okay. My next question is as you go down in the dimensions of the nodes, the number of products that the foundries will design will be reduced. So for the industry as a whole, right now, semiconductors form the bulk of the revenues. So maybe by 2020, what kind of revenue percentage will come from the adjustments you think?
Well, in general, I would observe 2 things. The most advanced nodes by definition are always the ones that get adopted by the people that have both the skills to use them, but most importantly have the business opportunity to leverage differentiation of faster, much more dense lower power chips. Initially that is invariably a small number as the foundries themselves hone these processes to gradually grow the yields meaning bring down the cost per chip. The most advanced design companies spend most money because they have an economic return on that differentiation. If you look back at only 3 or 4 years, the belief was that FinFET would be the realm for only 3 or 4 companies.
Well that is most definitely not the case. We are seeing actually a rapid increase now as the proof points of solid FinFET technology are there by a broader set of companies. And interestingly enough, a set of companies that one would never have thought about in the past, the automotive companies are certainly interested here as well as they want to introduce digital intelligence in their products. So I think the push will continue, which was not to say that it gets easier or much cheaper, but the value of differentiation is quite high and we will continue to work with those most advanced customers. But as said, we also work equally much with system houses that integrate these chips and need to have an understanding of the insides of the chip and the software that runs on it.
So it's actually a fairly broad field of companies that we touch that are deeply involved with FinFET.
Just one last question. Your service revenues for Q1 seem to be the lowest among the last 9 quarters. Any particular reason for that?
The services line, it's
right in the
range though, Srini. So when you look at the services line, it's relatively flat at 61 versus the last quarter. And the nature of that business, that's where a lot of our IP consulting business does flow through. So it can move around quarter to quarter depending on the revenue signature and the project schedules.
Okay, thank you very much for taking the questions. Thanks.
You're welcome.
And there is no one left in queue to ask a question. I'd like to turn it back to the speakers for any closing remarks.
Well again thank you very much for attending our earnings release. I think the Q1 was particularly positive as a start to the year and I think many of the issues that were alluded to last year actually quite mitigated and so we have a strong outlook going forward. Thank you again for your time and we'll be available after the call for the analyst.
And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation in using AT and T Executive Teleconference. You may now disconnect.