And gentlemen, thank you for standing by and welcome to the Synopsys Earnings Conference Call for the Q3 of Fiscal Year 20 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 conference 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, Paul. Good afternoon, everyone. With us today are Arch de Geos, 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, we'll 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 this call, important factors that may affect our future results are described in our most recent quarterly report on Form 10 Q and today's earnings press release. The reconciliation of the non GAAP financial measures discussed on this call 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 DeGeos.
Good afternoon. I'm happy to report that our Q3 results were very strong as we achieved revenue of 5 $56,000,000 non GAAP earnings per share of $0.63 $275,000,000 in cash flow from operations. In addition, we closed several key acquisitions as we continue to strengthen and evolve the company for long term growth. As a result, we are again raising our annual revenue guidance. Characterizing the customer environment around us, the semiconductor and systems industry results and outlook remain mixed.
Customer growth rates appear more challenged than 3 months ago as some customers thrive while others struggle. Consequently, consolidation continues, either through asset purchases or full company combinations. While consolidations overall are somewhat of a headwind for EDA, our customers continue to invest heavily in designing highly advanced chips. They seek long term relationships with trusted suppliers to meet the very demanding time to market expectations of their customers. In addition, our expansion into the software quality and security space has broadened our long term opportunity to grow well beyond traditional EDA.
Thus, Synopsys continues to be well positioned as partner of choice for electronic design and software development. Ranging from silicon to software, our multi year strategy has 3 pillars. 1st, continue to build on our EDA leadership by providing state of the art design and verification platforms with best in class support. 2nd, offer high impact productivity solutions such as outsourced IP and extremely fast hardware software prototyping, enabling customers to beat their relentless time to market constraints. And third, invest in and grow our software quality and security solutions.
Software complexity is escalating in both electronic systems and in the broader application space, and security vulnerabilities are visibly creating ever greater challenges. Let me provide some product and customer highlights that demonstrate our progress. Throughout our entire history, Synopsys has endeavored to be the technology leader in the highest impact areas of EDA. The investments we've made both internally and through acquisitions continue to bear fruit in terms of new game changing products, clear leadership in advanced node enablement, amazing customer design successes and the resulting customer wins. While I'm sure it's difficult for you to sort through the many claims of leadership in advanced designs, we are confident in our position and momentum.
Let me provide some color and data points. The number of FinFET designs continues to grow rapidly as leading edge companies are raised to take advantage of significant power efficiencies. The number of active FinFET designs and tape outs to date continues to grow quickly, now reaching almost 240. Synopsys is relied on for 95% of these. Technology differentiation matters and customers and partners count on us.
For example, in June, we announced Intel Custom Foundry Certification for Synopsys design tools for 14 nanometer FinFET production. During the quarter, we achieved certification from multiple standards organizations for our IP portfolio for TSMC 60 nanometer FinFET plus And in June, we announced an expanded collaboration with UMC on embedded memory and test solutions for their 40 nanometer FinFET process. In physical design, our game changing new product IC Compiler 2 continues to gain traction with rapidly growing adoption. Customers are seeing 10x improvement in throughputs and are using IC Compiler 2 in designs throughout the process spectrum. During Design Automation Conference in June, AMD, ARM, MediaTek, Socionext and Samsung spoke to a standing room only crowd about their successes and deployment plans for IC Compiler 2.
TSMC signed off on IC Compiler 2 certification for their latest 60 nanometer FinFET plus process. Demand is very strong and broad based, as evidenced by the fastest ramp up in bookings for any product in our support. We have transitioned a majority of our dedicated application engineers to IC Compiler 2, a further indication of its momentum. We're already serving 38 different customer logos with well over 100 production designs and tape outs, a significant increase over last quarter. Now to verification, where requirements have exploded as designs have become much, much more complex.
Here too, our verification continuum platform is truly a next generation solution with both breadth and depth of technology. Approximately 80% of advanced designs already use Synopsys as the primary simulator. And over the past year, we have steadily introduced many enhancements in a whole different level of integration throughout the platform. Propelled by multiyear collaborations with some of the hardest driving semiconductor companies in the world, our verification continuum now integrates all the critical software and hardware verification tools onto a common infrastructure. As a result, Q3 was not a strong quarter for verification, particularly in emulation, where growing demand is benefiting the entire EDA industry.
At the Design Automation Conference, Alterra, ARM, Cavium, AMD and FreeScale spoke at a customer luncheon about their verification challenges and how Synopsys is helping them achieve success. On the analog mixed signal side, a technically challenging area, we introduced significant advances in our custom SIM product, which delivers a 2x speed up. Finally, earlier this month, we closed the acquisition of Atrenta, a recognized leader in static and formal verification. Its SpyGlass product is an anchor technology in the industry that effectively addresses verification and power challenges early in the design cycle. The EdCentral Technologies further enhance both our verification continuum platform and our implementation solution.
While we're in the early stages of integration, customer and employee reactions have been very positive. Let me now move to IP, where our optimized solutions for the automotive and Internet of Things market segments continue to strengthen. About 6 months ago, we launched a major initiative to robustly address the automotive space by augmenting our product portfolio to include automotive grade IP. In June, we rolled out a broad set of IP optimized for automotive chip development. The portfolio now meets key safety, reliability and quality requirements, while continually being enhanced to address new emerging standards.
We have also worked with industry leaders such as Freescale, Infineon and Renaissance to create automotive centers of excellence with our virtual prototyping products, enabling our mutual customers to accelerate software development. Clearly, semiconductor content in automotive systems will grow significantly over the next 5 to 6 years. With this offering, we are expanding our influence in this important vertical market segment. For the Internet of Things, the ability to connect multiple smart devices to the cloud and to each other is fueling great application innovation ranging from wearable devices to machine to machine markets. Synopsys provides a comprehensive portfolio of IoT ready IP ranging from interfaces to memory and logic to power efficient processors to pre validated subsystems.
During the quarter, we announced a collaboration with TSMC to develop an integrated IoT platform for TSMC's 40 nanometer ultra low power process. We also acquired Bluetooth Smart IP from Silicon Vision for key low power smart home, portable health and industrial applications that require on chip wireless integration. Lastly, and second only to connectivity, security of these devices is paramount. Through the acquisition of Elliptic Technologies, we added proven security IP solutions for identification, authentication, data encryption and content protection, which brings me naturally to our software quality and security products. While security in the cyber world has been an issue for years, the combination of increasing connectivity and highly publicized breaches, including recently in the automotive domain, are spurring an intense security focus on the entire electronics and software application space.
Our entry into software quality and security comes at just the right time, and Q3 was significant for our promising business unit. As a refresher, last year's Coverity acquisition expanded both our total available market and our customer base. It's a compelling combination of technical, customer and channel adjacency to our existing business as well as a significant TAM broadening into a new higher growth space that truly differentiates us as a company and investment. During the quarter, we bolstered our security presence significantly with 2 acquisitions that are already showing great promise. The first is cybersecurity company, Codenomicum, a leader in the area of dynamic security analysis and well known for independently discovering the infamous hardbleeds bug.
We also acquired key assets from Cotium, specifically the well regarded Seeker product, a leader in application security testing. While we're in the early stages of building and scaling our presence in this space, we're already making a notable impact. Evident earlier in the month at the Black Hat Security Conference, a conference renowned for its hacker and security company attendees. For example, at a standing room only synopsis event that features speakers from Underwriters Laboratories and the Department of Homeland Security, UL spoke about its developing cybersecurity assurance program and the collaboration with Synopsys to drive it forward. It's designed to help companies manage security risks via a certification process similar to what they have been doing for years for electrical hardware devices.
UL's program, which is still under development, is expected to provide a baseline for cybersecurity assurance. Initially focused on medical devices, industrial control systems and networking and telecom equipment, it would utilize technology from a number of key suppliers, including Synopsys. Finally, reflecting the growing brand recognition in this space, we were named by Gartner as a visionary in their application security testing's magic quadrant. This is a big deal. Out of hundreds of companies in the application security testing space, only 19 are identified in this market making group.
Stay tuned as we evolve our software quality and security strategy in the coming months and quarters. In summary, we delivered strong Q3 results and expect to exit the year with approximately 10% non GAAP earnings per share growth. Our new products are driving excellent customer design successes and adoption momentum. And lastly, we closed several key acquisitions, strengthening our technology and evolving Synopsys towards promising high growth market segments. Let me now turn the call over to Trac Sam.
Thanks, Art. Good afternoon, everyone. As you heard from Art, we're seeing good momentum in the business. Our internal investments and key acquisitions are paying off in terms of broadening our portfolio with new technology and expanding our TAM with new growth opportunities. Our results reflect a business that is not only strong today, but also well positioned for future opportunities.
Our excellent Q3 performance and Q4 outlook solidify another year of increased growth and profitability. In fact, we're raising our annual revenue outlook again, reflecting the strength of our business. We continue to execute very well and we are committed to maximizing long term shareholder value. Now to the numbers. As I talk through Q3 results and targets for the rest of the year, all comparisons will be year over year unless I specify otherwise.
Total revenue increased 6.5 percent to $556,000,000 greater than 90% of Q3 revenue came from beginning of quarter backlog and one customer accounted for more than 10%. The weighted average duration of our renewable customer license commitments was about 2.5 years and we expect duration for the full year to be 2.7 years. Total GAAP costs and expenses were $494,000,000 and total non GAAP costs and expenses were $432,000,000 at the lower end of our target range. Non GAAP operating margin was 22.4% for the quarter and 24.2% for the 1st 3 quarters of 2015. Because of the technical complexity inherent in our customers' design processes, it's critical that we prioritize leading edge product development.
Nonetheless, we continue to drive global operational efficiency in order to deliver solid non GAAP operating margin in the mid-20s range. GAAP earnings per share were $0.35 and non GAAP earnings per share were $0.63 Turning to cash flow, we generated 275,000,000 dollars of operating cash flow for the quarter. We are reiterating our full year target of approximately 450,000,000 dollars Cash flows to date have been strong and we are able to offset the net outflows related to acquisitions. We ended Q3 with cash, cash equivalents and short term investments of 1,100,000,000 dollars with 31% onshore and total debt of $213,000,000 We have since funded the Atrensa acquisition from that U. S.
Cash, so would expect it to be lower at the end of Q4. Over the years, we have utilized our balance sheet very effectively for both stock repurchases and M and A. Since 2010, we have repurchased more than $1,100,000,000 of SunOpta stock. We have simultaneously made a number of important acquisitions to enter new higher growth areas, most recently software quality and security and prioritize P and L investments to expand our technology leadership. We believe this ongoing strategy will create significant value for our shareholders.
We closed several acquisitions in Q3 as well as Atrenta earlier this month. In addition, we completed the $180,000,000 accelerated share repurchase plan initiated in Q1 in which we bought back a total of 4,000,000 shares. For the trailing 4 quarters, we spent $220,000,000 buying back more than 5,000,000 shares and have $200,000,000 remaining on our share repurchase authorization. Finally, DSO was 50 days and we ended Q3 with approximately 9,835 employees with more than 1 third in lower cost geographies. Now to the Q4 fiscal 2015 guidance, which excludes the impact of any future acquisitions.
For the Q4, our targets are revenue between $570,000,000 $585,000,000 a wider range than we have provided in the past to reflect increased variability due to lumpiness of hardware and consulting revenue. Total GAAP costs and expenses between $503,000,000 $521,000,000 total non GAAP costs and expenses between 450 $1,000,000 $460,000,000 other income between $200,000,000 a non GAAP tax rate of 19% to 20%, outstanding shares between 155,000,000 and 159,000,000 GAAP earnings of $0.31 to $0.38 per share and non GAAP earnings of $0.65 to $0.67 per share. For fiscal 2015, revenue of $2,225,000,000 to 2.240,000,000 a growth rate of approximately 8% to 9%. Other income between $10,000,000 and 12,000,000 dollars our non GAAP tax rate of 19 percent, 20 percent outstanding shares between 155,000,000 159,000,000 dollars GAAP earnings of $1.43 to $1.50 per share, which includes the impact of approximately $87,000,000 in stock based compensation expense. Non GAAP earnings of 2.76 dollars to $2.78 per share, which reflects the slight dilution from our recent acquisitions, largely offset by operational overachievement.
Capital expenditures of approximately $100,000,000 and cash flow from operations of approximately 450,000,000 dollars While we continue to expect the revenue model that is approximately 90% time based, Going forward, we will expand our quarterly guidance ranges to better reflect the variability inherent in hardware deals for which revenue is recognized upfront along with the timing of consulting projects. In summary, we're seeing good momentum in the business. Our internal investments and key acquisitions are paying off with game changing new technology and a brand new TAM. We continue to deliver strong results and are well positioned for future opportunities. And our excellent Q3 performance and Q4 outlook solidify another year of strong cash flow and increased growth and profitability.
With that, I'll turn it over to the operator for questions.
Our first question is from Rich Valera with Needham. Please go ahead.
Hi, this is Kristen Sciacca in for Needham I'm sorry, in for Rich Valera. So I'm looking at your fiscal 2015 guidance and I just want to know, is the increase in revenues only due to the inclusion of Atrenta? Or is there some other driving force there?
Well, in general, the most of it is not due to Atrenta. It is a continuation of the execution of the overall company engine, so to speak. Trenta, of course, adds a little bit to it by virtue of having joined us this quarter, but most of it is just continuation of the path that Synopsys has been on.
Great. And then how hardware this quarter?
We had a very good hardware quarter and you'll see that reflected in both the upfront revenue line as well as our COGS expenses.
Great. Thanks very much.
You're welcome. We have a question from Kirsh Shankar with Bank of America Merrill Lynch. Please go ahead.
Yes. Hi. I had a few questions actually. First one is, Art, when I look at your IT system software integrity revenue, it seems like it was down sequentially about 10%. What is going on there that Coverity should be growing at this point, right?
Well, those businesses combined have actually a very high degree of fluctuation from 1 quarter to another because they're quite lumpy in how we recognize the revenue. And this is largely due because many of the large IP deals have a variety of milestones attached to them or even some services. And so that is why these numbers have continued to be up and down. On a trailing 12 month basis, the numbers are actually very good. Got
Got it. And then in the past, you guys mentioned how you should be breakeven in Coverity this year and accretive next year, but it looks like you're doing some investments. So at what point will Coverity become accretive to the broader company?
Well, in general, we look at being slightly accretive in 2016. The addition of acquisitions may change that as they always do. But fundamentally, read that as we continue to invest in a business that we see a very good future for.
But so at some point next year, you're saying Coverity would be accretive?
Yes. This would be as the Coverity that we acquired, by now we've already added, I think, 4 different acquisitions. And so this is a very rapidly evolving business unit for us. And so from a philosophy point of view, the way to think about it is that as we add acquisitions, we aim to within, I would say, 12 to 18 months make them accretive or if they are technology acquisitions, they get integrated very, very fast into the existing product. And the objective obviously is to build a profitable business, but the other objective is to also create a strong footprint in an area that we expect to grow in the future.
Hey, Krish, this is Trac. You had previous I think you're referencing what we had originally guided when we bought Coverity in general. As we look at 'sixteen, we are looking at that business to be more than $100,000,000 and accretive, 'sixteen.
Got it.
Got it. And as you think about the acquisitions that we made in the recent quarter, we expect as you saw in the earnings guidance, we have tweaked our earnings guidance to reflect the slight dilution from those deals, and we do expect them to be slightly diluted in 2016 as well.
Got it. And then if I could ask a big picture question. If you look at the ED industry, E and M says it could grow at like 5%, 6% top line growth. And but it looks like next year, 10 nanometer have been pushed out from 2016 to 2017. So my question is that with that backdrop, do you still think EDA industry can grow 6% or so?
And what does it mean specifically to Synopsys given 10 nanometer from some of your biggest customers are getting pushed out?
Well, let me take it sort of in reverse order. Yes, of course, we understand that some deliveries on technology have been slowed down or just feathered in, but that doesn't mean at all that the work for us has diminished around 10 nanometers because a lot of people are essentially looking at when do they ship products. And that is really the more relevant data from a macro perspective for the semiconductor industry. But for EDA, the work starts long, long before that. And as a matter of fact, we have a significant amount of work right now already on 7 nanometer to make the technologies, the tools, the IP ready.
So if you look at it as a macro picture, I did guide a bit in my preamble to the fact that the overall semiconductor industry is quite turbulent right now. And if you look at the expectations for this year and for next year in terms of growth rate of the industry, they have gone down somewhat. But it is also true that within these ups and downs of the semiconductor industry historically, EBA has fared quite well because not only do we attach the more stable R and D efforts, we also are very much the investments that lets people come back out of the troughs within a year or 2. And so therefore, a high degree of stability. Last but not least, within that, I think Synopsys has done particularly well because we are, I hope, viewed as a trusted partner and a company that you can count on.
And we continue to invest quite aggressively in technology to make sure that we're there tomorrow as well. Got it. And Arnaud, if I
can just squeeze one last question. In the last several quarters or for like few years, your R and D as a percentage of sales has been somewhere in the 30% to low 30% range. Is there any chance for that even if Moose Law does slow down and I understand you slanted a lot of design work, is there an opportunity for that R and D as a percent of your sales to come down or you think 30 the bogey?
I honestly think that that is about the bogey and for the simple reason that we are seeing nothing that says that technology is getting simpler. In many ways, it's the opposite. And the reason people go there is because the value is extremely high if you could deliver chips that had even less power utilization with even more computational speed because in the coming years, it will open up a whole new domain of smart devices that literally applies to everything. Now that complexity comes from, at a minimum, 2 sources. 1 is the advanced silicon technologies that just demand much more sophisticated modeling and we are well on top of that.
And secondly is that the very sophisticated silicon is what's enabling a lot of the super sophisticated software and the intersection of those 2, we're also well on top of that. And so I think that we are in the right place while we see an industry that is morphing and changing around us. And this happens continually in this industry and has been one of the reasons for its tremendous impact. We have a question from Sterling Auty with JPMorgan. Please go ahead.
Yes, thanks. I want to go back to the Atrenta question for a minute. I thought the 2014, they were doing something in kind of $55,000,000 range. What did you guys lose for acquisition accounting? It would seem like you should get some material revenue for the back half even for the 1 quarter and then moving into 2016?
Sterling, this is Trac. The acquisitions have a very small impact on our results for this year. If you think about just the size of the deals in general, the timing of when they're closed and then you factor in the deferred haircut, The guidance that we gave is there's very little impact from revenues. We did tweak the earnings guidance at the midpoint by about $0.01 to reflect the dilution. But overall, most of it is in the most of it is organic business.
We when we think about the deferred haircut, it can range anywhere from 50% to 80% depending on a particular deal. Right. So can you give us some guidelines in terms of where you're at the upper end of that range on these acquisitions in terms of what the write down was? And perhaps you can remind people what the business model at Atrenta was in terms of what would have been in deferred revenue that perhaps would have lost? Well, we don't disclose the specifics of each individual deal.
But where we are operationally, we're still working through the contracts
to do the valuation analysis on that and to determine the deferred haircut. But fundamentally, their business model is a ratable model just like ours. And so in many ways, they had a very similar philosophy, both financially and technically. And I think the 5th is actually going to be remarkably
good. And then looking at the sales force in the quarter, it seems to come in light relative to the street models and our model as well. Any insight into why the sales and marketing expenses were what looks to be as much as $4,000,000, $4,000,000 light? Sterling, the difference between where we came in versus the model is really just a function of how you model it. As far as internally, that the sales and marketing line can vary from quarter to quarter depending on commissions there's no issues there.
It's not a reflection of the underlying health of the business. That's what you're trying to get at. The run rates for the quarter and year to date were actually very healthy and up. Okay. And then one last high level question.
Art, you kind of talked about the headwinds near term to the health of semiconductors and just the M and A environment. I'm particularly interested in terms of some of the consolidations that have happened. Is there a sense over what time frame you might feel some of the impacts of those consolidations? And I do agree that I think ultimately, you'll end up with healthier customers. So maybe it's even better for you long term.
But are we going to go into a 6 month, 12 month, 18 month period where perhaps as you go through contract renewals, you have a little bit
of a headwind. Anything you can
do to quantify or give qualitative commentary would be helpful.
Sure. Well, in general, the reason one looks at consolidation as a bit of handwritten for an industry is because none of the consolidators ever says, well, now that I've consolidated, let me spend more money with you. They do regroup, however, and often reassess what is the wisest way to spend their money. And in a number of cases, this has been actually very positive for us because we're not only a safe haven in times of turbulence, but also by virtue of driving technology very hard. If this is an advanced user of this, there's opportunity sometimes to align them better with us making them successful.
So the time line that you are highlighting around consolidation is correct. It takes typically a number of months for the companies to figure out what they want to do. Many of the EDA companies have multiyear contracts. They can shift based on mutual agreements, but there's some stability in all of this. So I don't want to overdramatize any of this.
I think this is part of an industry that is evolving and where visibly so there are non industry related pressure points by virtue of what we see in the overall markets, in the stock market, in some of the currency a company as a company synopsis, we've been through this many times in our history and I think we know what to do. But it is also true that the better we execute here, the better we'll do.
All right. If I may, I just want to squeeze one more in. We've watched the technology leapfrog one another between yourself and Cadence for many, many years in terms of the industry. I think Cadence has been very upfront in terms of their belief that they've been gaining share on the software. Art, you and I have had that conversation in terms of the percentage of wallet.
But what I'm particularly interested in is IC Compiler 2, have you hit that inflection point? And do you think we're about to go through a leapfrog back the other way?
Well, for starters, let me respectfully disagree with your notion that we've seen leapfrogging between our companies. I think that I would humbly submit that for a majority of the products for our entire history, Synopsys has been the state of the art. And that is not to denigrate anybody else's products because all of these products are hyper sophisticated and at times can get very good results for specific customer situations. Having said that, it's the very nature of both companies or all the EDA companies being actually very strong that has propelled technology forward and is one of the key drivers behind the success of Moore's Law. And so I expect that race to continue.
Specifically, in IC Compiler 2, we are getting now very systematically very strong results. And the challenge that we face is a great opportunity is not the challenge proving that we have strong technology. It is to now help migrate our customers to the next generation. And we've sort of reported to you a number of the chips being done, but underneath this is actually much more activity and the number of chip blocks that are being migrated with Synopsys is actually quite substantial. And so while there's a lot of hard work that's left to be done, I highlighted the fact that most of our support engineers now are already on IC Compiler 2.
And we consider that situations where the customer has sort of voted for the long term.
Great. Thank you, guys. I appreciate it.
We have a question from Tom Diffely with D. A. Davidson. Please go ahead. Yes.
Good afternoon. So one more question on the consolidation front. Historically, have you seen the biggest impact to EDA based on the number of engineers or seats that have gone away or is it just the customers get better pricing because of volume and discounting? It's an excellent question. I think as far as I can tell engineers don't go away.
And what happens is that in consolidations, the company that buys another company, the minute it closes by nature has to push on efficiency for starters to try to repay or recoup the premium that they paid. And so it's really an efficiency mechanism in an industry. Now that efficiency can also manifest itself on the technology side, where companies say, well, we now have more critical mass in an area or we vertically integrate and we can have more technical differentiation. And so as an earlier question highlighted, the opportunity space tends to grow after some period of time because the resulting companies are actually in most cases truly healthier and are aimed at the next decade of success. And so for us that is be responsive to the customers as they are often in a financial time of need situation, but at the same time, keep an eye on making sure that we're in the game for the long term and most importantly that we deliver something to the customers that truly increases their value and their differentiation going forward.
Do you also view
that as inflection points where there's some share shifting that goes on as well? I'm sorry, I didn't understand the question. When you look at consolidations, do you look at that as an opportunity for maybe some share shifting going on? Yes, absolutely. Sorry.
Yes, of course. There's always share readjustments in various ways. And historically, we have been blessed with having been chosen more often than not in a number of categories to become the lead provider. We hope that, that will be the case again, but that is the discretion of the customer and our job is to make ourselves as attractive as possible to them. Okay.
And then when you look at the kind of the midpoint of your 4th quarter guidance, the margins are a little below where previous expectations had them. I'm wondering if the biggest impact there is just the increased cost structure from the acquisitions or is it the larger percentage of hardware in the business in the 4th quarter?
It's a combination this is Trac. Tom, it's a combination of few things. One is just the continued hiring in our business to the headcount from the acquisitions. And also, traditionally, Q4 is our historically the highest expense quarter.
Okay. All right. And then finally, you mentioned emulation in your prepared remarks. It sounds like you're doing well there. We are hearing that there is some pricing pressure in emulation these days.
And I'm just kind of curious what your view of the industry is right now and what your longer term industry growth view is for emulation? Sure. Well, I think emulation is an interesting field because it has a natural growth just by virtue of the complexity of the circuits having grown immensely, but also because the intersection of hardware and software demands just very fast simulation or various forms of verification. And so in that context, I think that we've seen a good growth in all of the EDA companies that provide these technologies. Now when you use the word pricing pressure, you could have used it for the last 30 years on any product in our field.
The race is always on. And so the pricing pressure is mostly mitigated by saying, well, therefore, we have to develop better products that are more differentiated and that sort of manages the economic equation. So frankly, nothing new under the sun and it applies to any field be it hardware or software. Okay. You're not seeing any degradation of that market based on your litigation with Printographics?
No, none whatsoever. Okay. Thank you. Question from Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Yes. Thanks. Good afternoon. Art, I'd like to ask first about the business impact of the 2 new markets that you highlighted as opportunities for you, namely automotive and IoT. And the question is twofold.
1st, what do you think the relative benefit to your tools, IT and Software Integrity businesses might be from either or both of automotive and IoT? Do you think it will be mostly a tools play for you, an IT play or a software integrity play? And similarly, how do you think 1 or both of these markets as they develop for you might change the services intensity or services profile of the company? When you look at your counterparts in engineering software, for example, that serve the automotive market, those engagements are often very services intensive. We know that Meta's won some nice deals in automotive that are largely services oriented thus far.
So if you or as you develop in automotive yourself and in IoT, do you think there's going to be a significant ratcheting up of the kind of services you're going to have to provide and invest in?
Okay. Let me try to answer part A, B, C and D of your question here. Maybe going backwards, which is for starters, overall, initially these areas, the tool focus is bigger than either services or the software integrity just by virtue of these are markets that we have already interacted with quite a bit, only not necessarily in a vertical fashion. And so if we take automotive as an example, automotive has the characteristic that relatively speaking, they are not a super big EDA market, but they are sophisticated EDA market, not because they drive the state of the art of FinFET, for example, but because they have a stringent requirement, 1st and foremost for safety and then for reliability. When you think that many of these parts have to be in tip top shape for 30 years, you can imagine that that's not a trivial path.
And so increasingly with the growth of smarts in the car, if I can call it that, and therefore the increase of electronic content, one can see that therefore the attention on these type of conditions has to be higher. And so what we're doing in our tools and you heard in the preamble in the IP, we're essentially making it conformance with the automotive standards that apply to the type of areas we touch, which are is chip design and other companies may have other aspects. I cannot say that we see a lot of services there at the present time, but it's good you mentioned it, we'll think about it a bit more. On the IoT side of things, IoT unfortunately is a little bit of catch all for the entire industry. And Internet of Things, whatever the things are, can lead many different ways.
I sometimes like to call it immensely optimistic thinking. And that is because right now many of the actual IoT parts are very low cost sensors connected to some data processing quickly connecting into the web where the money is made on the application. On the other hand, I do want to take my little optimistic thinking also in a positive direction, which is, I think over time, this is really the root of where smarts will come about. Because if all of these IoT devices can have a bit more computational capabilities at low power, over time, one will see that they will head towards some degree of artificial intelligence sounds like a big word, but adding smart so many devices, Which brings me to the software integrity side, because the other way to think about IoT and by the way, in many ways, cars as well, this is the intersection of hardware and software. And when you know that there are in advanced car there are about 100,000,000 lines of code.
At a minimum, some shivers need to go down your spine because as you probably read recently, that code too has been hacked by now. And so aside of the traditional safety and reliability constraints for automotive, now security will be on par. And that is where, of course, our software integrity group will have impact. And the same is true for IoT. IoT are really hardware software intersections where they touch the real world and then they create, in many cases, a lot of data and maybe some reasoning around it.
And all of that has software quality and software security issues. So that is how this all ties together for us. It's early from a business size point of view, but it's certainly very promising.
Okay. Secondly, your use of language to describe the guidance was subtly different. You talked about in future having a wider range of revenues having to do with the variability of IP and hardware. Now those have been variable all along anyway as we've seen and your hardware business to date has sometimes had a good quarter, but it's not on the whole been a particularly large business for you. Has something changed however in terms of either market conditions or your competitiveness or both suggesting that over time your emulation business particularly could be materially larger than it's been to date and hence the wider range of revenue outcomes?
So the reason why we increased the revenue guidance range is in fact driven by both hardware and IP. On the hardware side, as you've seen year to date, we've been doing very well progressively with hardware, and that includes both rapid prototyping and emulation. So as that business continues to grow and becomes a more material part of our business, we would expect it to be more variable from quarter to quarter.
All right. Lastly, as everyone knows for the last 6 quarters or so, you focused on ICC2, of course, and that's going to continue to be a major product event for you. The question is, now that that's underway and will stipulate it will continue to be adopted, of course, What's next on the tool side do you think as a next major driver to the business? If you set aside IP and the new software business, what else in, let's say, core EDA might also become the next incremental wave for you, not necessarily as large as implementation, but really it might be simulation or something else in verification? What do you think is next in terms of a incremental driver besides ICC2?
Well, we actually do think that the other big investment that is now turning to seeing growth and return is actually the verification continuum. And the verification continuum is called that because on one hand, it's many different tools that do get sold individually, but really the value that we're providing is increasingly an ability to use these tools with each other in a fashion that let themselves let them be adopted adapted, sorry, adapted much better to the problem that people like to solve. And so in order to get there, took quite a bit of effort, multiple years of extremely sophisticated programming. And in technical terms that means a common compilation platform, meaning the description is understood in the same fashion. It also means a common debugging platform, meaning that you can see and interpret and analyze your results in a user friendly fashion.
Those were very big investments. And they're now starting to bear fruit at the very moment that another angle has started to increase in importance, which is this intersection between hardware and software. Are you verifying the hardware in the context of the software? Or are you verifying the software in the context of the hardware? Or are you really verifying both simultaneously in order to get to market as fast as possible?
And whichever is the long pole in the 10s, you try to eliminate that one. And so that means that the spread of what one verifies is quite broad. Another area that we will see we expect some good growth in the future is actually the custom area. And this is an area that we have invested in for quite a while. We have a number of very new capabilities that we will be talking more about in the coming quarters.
But these are all investments that invariably take many years. And then when they roll out, the rollout itself is a major enterprise and that's what we're doing in verification right now. We have a question from Monika Garg with Pacific Crest Securities. Please go ahead.
Hi. Thanks for taking my question. So Art, when you acquired Coverity, you were talking about like a 20% growth rate for that segment. Are you still seeing similar growth rates in that?
Yes. We have not changed our perspective on the opportunity space. Of course, since then, the good news is, I think we've learned a lot, including the fact that it's a space that is extremely fragmented with many loud voices and some that actually have impact on customers. And the fact that we have been able to close we think are some very, very good acquisitions that have strengthened and broadened our position is a sign that we are, I think, gaining confidence. Now, no market is simple or easy, but I think it's readily visible to most people that software has reached a stage where it needs the next level of, I'll use the word discipline and therefore the tools to enforce that.
And by the time you throw the word security in it, now you really have to start paying very systematic attention. And our objective is to provide the tool set that allows people to do that.
Thanks. Then a question on Entrenta. Maybe you can help us understand how to think about the impact on growth and margins from Atrenta's acquisition next year?
Well, normally, we don't break out individual acquisitions of that size in terms of the impact. Obviously, it will add revenue. And as the haircuts, as you know, gradually goes away, it becomes rapidly less and less dilutive. It will be slightly dilutive in 2016. But the reason I'm always hesitant, frankly, to speak about that in those terms is the first thing we do is to try to integrate tools into something bigger and better.
And so by the end of next year, I don't think that the trend as we knew it quite exists. We have something better and that's actually mostly in the verification continuum. And so we think it's actually a fabulous technical acquisition and the customer loyalty and utilization has been very good. And so this will also help us with a number of key customers as we look at the overall solution.
I'd add that even though we stated earlier that collectively the acquisitions will be diluted for next year, Our goal is still to drive EPS growth in the high single digits.
Got it. Then last one for me. We have seen massive share buyback by one of your peers. You guys have a strong net cash position, generates a lot of cash, then why not accelerate the buyback?
Monica, we think that the combination of buybacks and acquisitions definitely create a lot of value. We this particular quarter, we happen to emphasize M and A, but overall, early this year, we did complete the we did announce the $180,000,000 of ASR. And when you look back since 2010 till now, we've bought back more than $1,100,000,000 of stock. So we are very committed to that.
Got it. Thank you so much.
You are welcome, Monica.
At this time, we have time for one more question. It will come from the line of Manish Sanjanaria with RBC Capital Markets.
If you can talk a little bit about your strategy on the software security and quality market. You have been pretty active on that in terms of acquisitions. Are we going to see your growth strategy more focused on organic growth? Or you're going to be more aggressive on the acquisition side for this market?
Well, it's an easy answer, yes. Meaning that the good news is we have a very, very good R and D team here. And it's quite remarkable how from a technology depth point of view and for many of the concepts around compilation, understanding of languages, interpreting things, they are just as deep as the deepest people here at Synopsys, and there are a lot of similarities. At the same time, it is also very clear that if we invest in certain areas to broaden the impact they have, for example, with adding some more languages, which we are doing, it immediately broadens the potential TAM of the solutions that we have. Having said that, the reason we invested in the security domain is because that too is a domain of specialists.
And specialists at times can be a 2 edged sword because they are sometimes specialists that are very narrow problems where it's very important to solve them, but it's very difficult to actually make a business off. And therefore, you wouldn't be surprised if I said that there are many essentially service companies in that space that do, if not a great job, at least an adequate job based on what is understood today. Our aim is slightly different. Our aim is to acquire or invest in areas where the problem is systematically growing and where we can offer much more of a platform solution rather than either a service solution or some very low cost tools and thus build a business not dissimilar to what EDA was in the early days for chip design, but now or for IP as a matter of fact, but now do the same in this domain that is emerging is still very much emerging. And so the acquisitions happen to be cornerstone pieces with very, very talented and experienced people, but that we're relatively small versus the opportunity space and having the synopsis machine and in some ways also the brands behind this gives an opportunity for these technologies to be leveraged much more.
So I guess I sort of answered your question by not answering it because we're doing really both.
Okay. That's very helpful. One more follow-up on the question Krish asked about the Intel talking about extending the development or the product. And you answered, but I just want to simplify that a little bit and see if I understand that clearly. Is it fair to say that even if the technology rollout changes from 2 years to 3 years, it's that the complexity has increased so much that the rate of consumption of EDA doesn't change.
Is that the right way to look at it?
That is exactly the right way to look at it, because the way to look at it is EDA and that includes all EDA companies. We're running as fast as we can at this point in time. And by the way, I think the semiconductor manufacturing guys on technology, they're running as fast as they can and the users are adopting as fast as they can and as fast as is economically reasonable. And so the reason I make a distinction with the users is because economically reasonable is determined by one more variable, which is ultimately the production yield. And so of course, the manufacturers are trying to drive the yield up like crazy.
We're trying to make the designs as yield friendly as possible and the ultimate volume adoption is a function of that. But there is no question that there is no change whatsoever in the speed of drive of the semiconductor industry. It's at max. It has always been at max, and I think that will continue. At this time, I'll turn the call back for closing comments.
Well, I guess that brings us to the turn of the hour. Thank you very much for a very interesting set of questions. And I hope that you have an impression of Synopsys that captures both the momentum and the opportunity space going forward. And we will be available for further questions in 1 on ones as usual. Thank you so much.
Ladies and gentlemen, that does conclude our conference for today. Today's conference will be available for digitized replay after 4 pm Pacific Time through midnight on August 26. You may access the AT and T Executive Replay Service at any time by dialing 1-eight hundred-four seventy five-six thousand seven hundred and one entering access code 366,153. International participants dial 320-365-3844. That number again is 1-eight hundred-four 70five-six 701 320-365-3844, access code 366,153.
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