And gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Q1 of Fiscal Year 2015. 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. Five minutes prior to the end of the call, we will announce the amount 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, Greg, and good afternoon, everyone. Leading today's discussion are Art de Geus, Chairman and Co CEO of Synopsys and Trac Pham, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts 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 this call, important factors that may affect our future results are described in our most recent quarter annual report on Form 10 ks 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, the 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.synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call. With that, I'll turn the call over to Art Sejias.
Good afternoon, and thank you for joining us. Q1 was an excellent start to the year. We delivered revenue of $542,000,000 and non GAAP earnings per share of $0.80 We entered into $180,000,000 accelerated share buyback program to repurchase stock. We're on track to meeting our operating cash flow goal of approximately $450,000,000 for the year. We are raising our revenue target to 2.195 to 2.235000000000 and our non GAAP EPS objective to a range of $2.75 to 2.80 dollars the midpoint of which represents double digit growth.
Trac will discuss these in more detail shortly. Looking at the economic landscape around us, I would characterize both the macro and semiconductor environments as solid. The overall economic outlook remains stable with levels of caution that vary by geography. For semiconductors, which had a strong 2014 with about 10% growth, the outlook for 2015 is positive, albeit with the usual early year trepidations driven by a very competitive market. The impact of semiconductors continues to grow, not only in the traditional computation and mobile communication areas, but increasingly in every aspect of our daily life, including health, automotive and financial segments.
With this unstoppable evolution of the electronics market, the relentless drive for smaller and lower power transistors continues unabated. Its corollary, much more complex chips that integrate complete systems, including rapidly mounting embedded software content, continues to drive our and our customers' business. The number of designs using power efficient FinFET transistors at sizes as small as 16, 14 and 10 nanometer is growing at a fast pace. At the same time, the cost and time to market pressures can make or break a product cycle. For our customers, this puts great emphasis on partnering with vendors who cannot only provide the best tools, but who also collaborate intensely to ensure product success.
Expanded its relationship with us in Q1. As they develop their next generation of products and plan their requirements for the next several years, they'll count on close collaboration and the leverage of a larger portfolio of Synopsys tools across digital and analog mixed signal design and verification. In 2014, we launched a multiyear silicon to software market strategy predicated on 3 pillars. 1st, build on our leadership in EDA with the clear objective to provide the state of the art tool sets required to design the next generations of chips. 2nd, grow our IP offering as one of the highest impact productivity mechanisms available to design highly complex chips under unrelenting time to market constraints.
And third, invest in and grow our software quality and security solutions as embedded software expands massively into next generation electronic systems and the vulnerabilities of application software create more and more challenges in our day to day lives. We entered Q2 with confidence in our business due to our position and expertise ranging from deep silicon to sophisticated software our comprehensive product portfolio utilized today by the most influential semi and systems companies a global technical support team widely recognized as the best in the world and a predictable business model that enables us to invest consistently to advance technology, while simultaneously driving long term shareholder value. Let me now provide some highlights for the past quarter, starting with EDA. As the acknowledged technology leader at Advanced Nodes, Synopsys is deeply engaged in our customers' efforts, ranging from early process development to chip design to system verification. The number of active FinFET designs and tape outs to date grew nearly 15% in just the last quarter to almost 200.
The breadth of our FinFET proven tools and IP gives us a notable competitive advantage, as evidenced by Synopsys being relied on for approximately 95% of these designs. At the very leading edge, we're engaged in numerous 10 nanometer partnerships with early adopters, and we are the go to partner for 10 nanometer process development. Through our TCAT technology, we're already collaborating with silicon providers and research consortiums such as Imeq on 5 and 7 nanometer. As a result of these early stage collaborations, we have access to key models much earlier in the process than our competitors, giving us a sustainable advantage. Our relentless innovation in verification, both digital and analog signal is evident as well.
Our flagship VCS functional verification product is the primary simulator for 80% of advanced designs. In 2014, we began rolling out game changing new products that are driving a multiyear upgrade cycle in both design and verification. The single most important EDA tool launch in the last decade was IC Compiler 2. Announced last March and which delivers, we claimed at that time, an astonishing 10x improvement in throughput. Now with more than 50 engagements, our productivity claims are being confirmed again and again.
And we're now systematically helping customers proliferate IC Compiler 2 into their production flows. During the quarter, Reneza stated in a press release that they view ICC2 as a key enabler of competitive differentiation and are in the process of extending its application to all key in flight programs across 40 nanometer to 28 nanometer and below. Another advanced customer commented that while the speed of itself is impressive, the impact when combined with its larger capacity is that it opens the door to fundamentally changing the very way in which design is done. That is why we refer to it as a game changer in the industry. At this point, IC Compiler 2 has already delivered a rapidly growing number of successful tape outs, and we see high demand across our customer base.
In verification, our objectives are just as ambitious. We're executing on a verification continuum vision that integrates best in class hardware and software engines aimed at radically impacting verification and debugging productivity. In 2014, we released the first set of capabilities in our verification compiler product, which combines all our software based verification tools. Demand and initial adoption have been excellent. We're now broadening our integration to encompass both software and hardware based verification engines.
As we're fortunate to have both the fastest engines and the number one position in a majority of the verification areas, tight integration will drive substantial productivity increases for our customers. This has enormous value to them as they struggle with chip and system complexities compounded by hardware software interactions. The early results are truly excellent and throughout 2015 we'll roll out key capabilities that position us well over the next several years. Our strong ecosystem partnerships with the leading foundries and key IP providers are also critical in supporting our mutual customers. For example, last month, ARM and Synopsys announced support for ARM's new Cortex A72 Processor for mobile SoC development.
The reference flow includes a range of Synopsys tools, including our powerful IC Compiler 2 product. Let me move to our second strategic priority of growing our IP and prototyping product lines. Demand for IP is strong as more and more companies outsource standard based yet complex IP blocks. Synopsys is the number one supplier of interface, analog, memory and physical semiconductor IP, bolstered by a reputation for highest quality, reliability and technical excellence. We're increasingly at the forefront of process viability as our IP is a vital enabler of the commercial introduction of new technology nodes, be it the most advanced FinFET processes or those targeting the Internet of Things.
We've taped up more than 30 FinFET chips and the silicon results look very good across the board. We secured a large strategic win for a broad set of 10 nanometer IP blocks and also delivered our first 10 nanometer embedded memory IP, all indicative of our momentum. In addition, we are the very first IP provider of a USB 3.1 controller. This new generation of USB has great promise. It's twice as fast as USB 3.0 and more power Imagine the impact of such improvements in your daily use of your mobile devices.
As you know, the software content on those mobile devices is huge and growing. The design challenges are significant and it's become necessary to adopt an approach that enables software development to occur at the same time as the chip design, thereby speeding time to market by 69 months. Our HAPS FPGA based prototyping solution does just that and has proven itself in the marketplace. Q1 was its highest revenue quarter ever. And with more than 5,000 HAPS systems installed at customers today, we have excellent momentum.
Turning now to strategic priority number 3, expand our presence in software quality and security by building on the excellent Coverity solutions we acquired last year. In this new market space that analysts expect to grow in the 20% range, we see our opportunity in 3 primary areas. 1, accelerate adoption in the directly adjacent embedded software market segment, which covers software embedded on a chip or electronic system 2, accelerate adoption in the likely untapped enterprise applications market segment that reaches industries from financial to health, energy, retail, social media, etcetera. And 3, enlarge the portfolio by investing in new languages and further expanding in the security space. The Coverity integration of infrastructure and sales has gone well and our initial financial expectations are on track.
We saw 32 new logos in the quarter and executed an important agreement with a large U. S. Energy company, which expanded its usage after good initial success. This customer values not only the excellent technology, but also the stability and resources of the larger Synopsys entity. In summary, we're confident and optimistic about our business.
We delivered strong results in Q1 and are raising revenue and non GAAP earnings guidance for the year. We see high demand for our compelling new technologies in core EDA, which will drive a multi year upgrade cycle. Our ever expanding portfolio of IP and momentum in FPGA prototyping are driving strong IP and systems growth. And finally, we're making good progress in our new high growth software quality and security space. Let me now turn the call over to TracFam.
Thanks, Art. Good afternoon, everyone. In building on a strong foundation in 2014, we're starting this year with great momentum. Our excellent Q1 financial results and improved 2015 outlook leaves us increasingly confident in our ability execute our strategy for growth and profitability. In Q1, we met or exceeded all quarterly financial targets we provided in December, posted double digit growth in both revenue and earnings and accelerated our stock buyback program.
Now to the numbers. As I talk through Q1 results and targets for the rest of the year, all comparisons will be year over year unless I specify otherwise. Total revenue increased 13% to $542,000,000 Greater than 90% of Q1 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 2.4 years, but we expect the full year duration to be approximately 3 years. Q1 total GAAP costs and expenses were 471,000,000 Total non GAAP costs and expenses were 403,000,000 below our target range due largely to shift in timing of expenses, including some delayed hiring as well as lower travel and professional services.
Q1 non GAAP operating margin was 25.7%. GAAP earnings per share were $0.41 Non GAAP earnings per share were 0 point timing of expenses. Non GAAP tax rate was 13.4 percent due mostly to the reinstatement of the federal R and D tax credit for 2014. The Q1 tax rate includes both the retroactive benefit for fiscal 2014 and a partial year impact to fiscal 2015. As a result, we think a non GAAP tax rate between 19% 20% is a reasonable estimate for 2015.
Turning to cash flow. As expected, Q1 had a net operating cash outflow. The $87,000,000 outflow was due mostly to the timing of 2014 incentive compensation payments along with onetime severance payments related to our voluntary retirement program and other restructuring. We continue to target operating cash flow of approximately 450,000,000. We ended the quarter with total debt of 303,000,000.
This includes 235 from our revolver drawn during the quarter to largely fund our Q1 share repurchases and 68,000,000 from our term loan. During the quarter, we entered into an accelerated share repurchase agreement or ASR for 180,000,000 This was part of our goal to keep share count roughly flat with 2014 levels. Under this ASR, we received 3,300,000 shares in Q1 and expect to receive the balance by Q3 when the ASR is completed. We have 200,000,000 remaining on our share repurchase authorization. We ended the quarter with cash, cash equivalents and short term investments of 917,000,000 with 13% onshore.
We'll continue to optimize the use of cash to generate maximum long term shareholder value. Each quarter, we will evaluate our M and A, buyback and debt reduction options to determine the best balance. DSO was 49 days and we ended Q1 with approximately 9,300 employees with more than onethree in lower cost geographies. Now to our Q2 fiscal 2015 guidance, which excludes the impact of any future acquisitions. For the Q2, our targets are revenue between $543,000,000 $553,000,000 total GAAP costs and expenses between $470,000,000 $489,000,000 total non GAAP costs and expenses between $418,000,000 $428,000,000 other income between 2,000,000 a non GAAP tax rate of 22% to 23%, outstanding shares between 155,000,000 and 159,000,000 GAAP earnings of $0.26 to $0.33 per share and non GAAP earnings of $0.62 to $0.64 per share.
For fiscal 2015, we are increasing our revenue target to 2,195,000,000 to 2,235,000,000, a growth rate of approximately 7% to 9%. We expect other income between 5,000,000 9,000,000 a non GAAP tax rate of 19% to 20%, outstanding shares between 155,000,000 and 159,000,000 GAAP earnings of $1.41 to $1.50 per share, which includes the impact of approximately $89,000,000 in stock based compensation. We are increasing our non GAAP earnings to a range of 2 $7.5 to $2.80 per share, which represents double digit growth at the midpoint. Capital expenditures of approximately 100,000,000 and cash flow from operations of approximately 450,000,000. Finally, to help in your modeling, second half revenue is expected to be slightly higher than first half revenue, with Q4 the largest revenue quarter.
We expect total non GAAP expenses to be skewed slightly toward the second half of the year, with non GAAP EPS increasing sequentially from Q2 to Q4. In summary, Q1 was a strong start to the year. We delivered excellent financial results highlighted by double digit top and bottom line growth and solid operating margin. We are also increasing revenue and EPS guidance for the year, reflecting the confidence and optimism we have for the business. With that, I'll turn it over to the operator for questions.
Thank
Your first question comes from the line of Rich Valera from Needham and Company.
Art, I was wondering if you'd be willing to comment on the competitive dynamics in the EDA industry, particularly, I guess, in digital. As you probably know, your largest competitor is talking about gaining share in digital and has increased their expenses pretty significantly this year to support those share gains. So I just wanted to get your sense of are you seeing any changes in the competitive landscape? Do you and do you think you need to change your level of investment to address these changes to the degree you're seeing them? Thanks.
Thank you. No, we don't see any big changes. Nothing that you're telling me is not age old EDA. This has always been a very competitive landscape. And we are in the fortunate situation that specifically in the digital side we have some really fabulous products that have been rolled out and that are now gradually being distributed to customers.
So that brings with it that there is quite a bit of support effort to help them move on to the new projects and so on. So we will be very, very busy from that perspective. This is an intense time, but it's an intense time with a very good outlook given the quality of the products
we have. I know you're low to comment on share gains specifically, but given the ICC2 ramp that you're expecting, would you be willing to even qualitatively talk about your thoughts on share as you move out over the next couple of years, I mean, your ability to at least maintain your share in digital with that ICC2 ramp in front of you?
Well, our objective is to clearly grow it. At the same time, you know me well enough to know that for many years I've said that EDA is the industry where all the children are always above average and all the share gains are above average. And so there are many claims always being made. At the end of the day, it is what are the results over a long period of time. The second thing is many of the contracts that we have of course are very complex and very large.
And so these things change gradually. But there's no question that with the strong technology, we have an excellent shot at moving forward step by step. And so far, it looks like that's working out fine.
Great. And just one product question, if I could, on verification compiler. You alluded to some enhancements you're expecting to incorporate into that in this year. Any color you're willing to give us in advance of those actually being announced?
Sure. Just to clarify, so Verification Compiler was a product we introduced last year and it was the integration of all the software verification tools And the benefit of having that integration was immediately higher productivity for the customer, but also the possibility for designers to quickly move from one type of product needed to another in that context. Our longer term and much broader ambition has been to establish a verification continuum that reaches much broader space, including the various forms of hardware verification tools and even some things beyond that. And so that has been the focus at least for our R and D team for the last year. The results that I've seen are truly outstanding.
And during the year, we will gradually announce those as we're ready to make them available to customers. Great. And I'm sorry, one more, because I just thought of that. You mentioned HAPS, I
think, had its strongest quarter in history, I believe, in history since you've had it at least. What do you attribute that to? Is there something secular going on there? Or is it what are your thoughts on the kind of prototyping market and how that looks going forward?
The answer is actually very simple. You remember, you would certainly know 10 years ago, there was this term that was new system on a chip. We're completely there. System on a chip means it's a hardware piece with a boatload of software. And the challenge with that is of course that the software guys would like to start modeling and trying out their software before the chips are ready.
And so be it individual chips or in some cases even broader systems off chips, those are being modeled on the HAPS boards and the benefit of the HAPS boards is that they are amazingly fast in run time and that is absolutely key if you want to drive some software where the speed is relevant in terms of testing it. And so that is the simple reason why we see that. And I think that will continue. That's great. Thanks, Art.
Appreciate it.
You're welcome, Rich. Your next question comes from the line of Sterling Auty from JPMorgan. Please go ahead.
Yes, thanks. Hi, guys. Wanted to start with the upfront revenue. When you guided for the quarter, had you contemplated this level of upfront revenue as part of the mix and what was the driver?
Yes, this is Trac. The revenue came in as expected in total as well as the various line items. Certainly the upfront revenues were strong and that was due to a strong hardware quarter, primarily the HAP side.
Okay. And how should we think about the mix of upfront? Because on a percentage basis, this is the highest it's been in recent memory.
Yeah, upfronts will fluctuate quarter to quarter. I think upfronts will fluctuate quarter to quarter. Our model for upfronts remains at 10% or less.
Okay. And then turning to sales and marketing, you mentioned the shift in spending and hiring. Can you give a sense of how many heads that you are anticipating hiring in the quarter that may have shifted to the Q2?
You can see that the headcount did decrease from Q4 to Q1. A large portion of that was due to the voluntary retirement program and the small layoff we had, but also the delayed hiring.
Okay. How would you characterize because one of the things, Lee, is duration down to 2.4, sales and marketing down seasonally more than expected and you're giving us some transparency. I want to make sure that we get a good handle. Not going to give us the bookings number, but these are the things that we kind of used to triangulate to whether it was a good bookings quarter or a challenging one. And these items are kind of pointing to challenging in terms of duration and expenses.
Anything else you can give us in terms of transparency to talk to how much of it were these items and versus the health of the bookings in the quarter?
I would say that Q1 came in as we expected across our business segments, all of our business metrics. Run rate was up. The duration was light at 2.4 for the quarter, but we expect it to trend back to 3 years for the full year. I didn't see anything unusual in the business.
Your next question comes from the line of Tom Diffely from D. A. Davidson. So maybe first track, when you look at the $0.18 upside in the quarter, it looks like back to the envelope calculations here that your $0.10 $0.12 came from the lower costs and $0.06 $0.08 from lower taxes.
Does that sound about right?
I would say it's more about half of that was taxes, about $0.08
Okay. And so the increase in the full year guide is largely due then to the tax?
Yes. So when you look at
I'm sorry, when you look at Q1, there's really three things happening. Revenues came in as expected. The upside was really on lower tax rate 2, higher than expected other income and then 3, the shifting of expenses.
And as I said, dollars 0.08 of
that is roughly the tax rate.
Okay. And what is your current view of the FX impact during the quarter and what you project might be a headwind or tailwind going forward?
Yes, I mean that's a really good question considering the variability in FX this year. Let me just step back and say that we do have a hedging program in place to protect our financials, both the P and L and the balance sheet from that volatility. From a P and L perspective, our goal is to protect the annual EPS from any FX movements. On the revenue line, our revenues are invoiced in dollars except for Japan, which last year was roughly 12%. We do hedge that revenue.
On expenses, we've got about 3rd in local currency, and that's hedged as well. So what you see on a net basis is that FX had an immaterial impact on our bottom line year over year.
And then Art, when you look at the IP market, how do you view the market when we move from the planar world to maybe 14 nanometer FinFET and then ultimately 10 nanometer FinFET? Does the IP market itself increase dramatically from those
steps? For us, it will. And the reason is that what that means is that building the IP is actually substantially more difficult. So much so that a number of people that are introducing a new technology can only do that if simultaneously to a number of other things, a substantial amount of IP is ready to go, otherwise people can design chips. And given that we are now extremely well versed in literally the smallest sizes of FinFET technology, especially in our IP team, I think we're well positioned to become more and more of a backbone provider to the industry.
It's also one of the reasons why we collaborate very closely with the foundries and other technology providers, because if we work with them ahead of time, we can sort of see where the technology is going, what the problems are going to be. And invariably, even when a technology is introduced, it goes through quite a number of iterations and little refinements and improvements for yield. And our team is all over that.
Okay. That's nice. And then finally, when you look at the 50 plus engagements with IC Compiler 2, at this point, can you tell what impact this new product that's 10 times faster has on the market size? Is it shrinking the market because it's so much faster? Or is it actually potentially growing the market because it can do a lot more or enable a lot more?
It's always amazing, even a 10 times faster tool will not shrink the market for a very simple reason, which is the first thing that customers do is, well, I can do bigger things now and I can do them sooner and I can be more competitive. And so it's a little bit like introducing the next race car on the market. Immediately the races become even more intense and that is what IC Compiler does right now. Secondly, one should not underestimate how much chip complexity has grown in just the last 4, 5 years. And you may recall that a number of years ago, I was very bullish on the impact of going forward at a time where it was not quite clear that the technology would make it.
It is very clear that it's making it now and it's also very clear that the combination of lower power, smaller devices will have impact on many chips. Initially, it's all on the more complex chips. Gradually, it will become necessary even for the things that will end up in Internet of Things type products. So a lot of opportunity there.
Okay,
great. Thank you. Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities.
Art, question for you first on IC Compiler 2. To the extent that it sees good uptake, which you say you are in vaccine, could there be as well a pull through effect on other Synopsys tools whether or not they've been as architecturally overhauled as the implementation product has been? I'm thinking, for instance, specifically of design compiler, prime time, perhaps some others. So we've seen sometimes other areas of technology that one product does well, it starts to pull other products in the company's portfolio along as well. So are you seeing something like that at all?
Well, we're in the fortunate situation that in many of these situations, our customers do already have the products that you mentioned. And there is no doubt that after many years of work, we have architected our tools in such a fashion that if you use them in combination, you will get better results than if you sort of use a smorgasbord of independent tools. And so from that perspective alone, that's been a positive. Secondly, there's no question that some tools tend to be more anchor point products. And so when renewal of contracts happen, it tends to bring up the question, well, what else should be negotiated at that time?
Can we grow the contracts or can we become a broader provider? And the answer is more often than not, yes. So all in all, this is a good position to be in. Having said that, there's competition and we have to battle for every opportunity and that is what customers need in order to get the vessels.
On the call a quarter ago, you announced, of course, the management change involving Trac himself and Brian. Could you remind us of the internal changes you've made to align yourselves towards the changes in the customer base, the systems companies and how that mix is evolving for you, new vertical markets you're addressing. This is not a Coverity specific question per se, but clearly, you've had to do things differently, relying things differently inside the company. So could you just remind us what you've done organizationally to prepare for an evolving end market?
Well, the end market that has gradually become a bit more systems dominated is not a new phenomenon. I think about 40% of our revenue comes from systems companies, the rest from chip companies. And so we've been there for a long time. Your question is interesting nonetheless because more and more we are seeing that the software content that plays into many of the chips or the systems becomes actually the differentiator for our customers. And sometimes it's also the negative differentiator meaning when it doesn't work or when it's not ready.
And so from that perspective, verification tools around the whole hardware software. And obviously the acquisition of Coverity was to then open up a new horizon towards the software period. And there, there's still a lot of open space.
One more product question for you and then a last financial question for Trac. Rich and Sterling asked earlier about the HAPS business. My question there is, is there an analogy here at all in terms of the evolution of the market as we saw with emulation? So as you know, of course, that market was around for a long time, but wasn't very large, didn't really do very much until just the last few years. And now we've seen it grow to fairly substantial size.
And on the whole, it's had pretty good growth, though not every vendor of the year necessarily. Is there any reason to believe that the much smaller prototyping business could now be seen perhaps some similar kind of inflection for similar reasons over the next number
of years?
I think in general, your thinking is correct. I find it relatively difficult to predict what the speed of that will be. And the reason I'm saying that is the difference between HAPS boards and emulators is that the HAPS boards, now they do look a little bit like a science project, meaning you have to plug in a lot of wires and there is a lot of mechanisms to actually get the software into the chips just the right way. And now of course the people that do this are hyper sophisticated at doing it. And I think the utilization will increase.
How quickly it will go, a little hard to tell, but there's no question that the problem that it's addressing is absolutely growing.
Okay. And then lastly for Trac, could you elaborate on why you would not have raised the cash flow guidance for the year on the higher GAAP net income outlook for the year? And more broadly, when you look at over the next number of years at operating cash flow, free cash flow, Besides net income and deferred revenue, what other principal levers do you foresee in terms of being able to meaningfully inflect or grow your working capital and overall cash flow?
Okay. So let me start with the first one, which is our cash flow guidance. Jay, I understood that. So we are confirming our cash flow guidance of $450,000,000 If I understand your question, we raised revenue and EPS and why does cash flow stay the same? Yes.
So it's early in the year. Cash flow tends to be one of the more difficult parts of our business to predict. Keep in mind, last year, if you recall, we ended up overachieving on our guidance by $100,000,000 just to highlight how variable that can be. Long term though, we are definitely very comfortable with we're comfortable with our guidance of $450,000,000 for the year, and we're certainly comfortable with our long term trend on cash flows. I think if you ask what's going to drive that over the long term, It does track EBITDA less cash taxes over time.
So if you continue to drive top line growth and drive operating margins to the mid-20s, you'll see cash flows trend with that.
Your next question comes from the line of Krish Sankar from Bank of America Merrill Lynch. Please go ahead.
Hi, thanks for taking the question. I actually joined a little late, so I apologize if it
has been asked. I'm kind
of curious your status on the digital side now that Cadence seems to be stepping up on the gas, putting some customer investments. Can you just frame the situation in digital and what you're doing to counteract that? I also had a follow-up after that.
Yeah, we commented earlier about that. The digital area is very interesting for us because we have, as you know, introduced some very powerful products, specifically SC Compiler 2. And so we are massively engaged with a large number of customers already in proving that the technology is as good as we said it would be and so far every piece of feedback has been absolutely in tune with what we predicted originally And then helping them gradually design it in as they have many chips that are in flight as we would say and one is always very careful with introducing new products and it takes some hand holding. So that is what we're focusing on and we see that as an opportunity to grow our share and to really work with customers on a very close partnership basis for the coming years.
That's very helpful, Art. And then as a follow-up, I was trying to figure out the status of the emulation product with EVE. And in the past, you said that one of the applications people have been using your product was more for software repping rather than like the true emulation potential. Kind of curious, when you look forward, do you feel that the product cycle lifetime for emulation needs to come down from the typical 4 5 year cadence? Or do you think your strategy right now you have is the right ones too?
In our field, anything, anything that can bring down the product cycle is a good thing. It's always amazing to me that after literally 50 years this year of Moore's Law, this continuous exponential increase in complexity is being met with new tools, new products and this is with new tools, new products and this is in verification, it is in implementation and so on. And of course, emulation or HAPS boards or some of the virtual prototyping are very central to this. The one new twist to all of this is that now on top of the well understood Moore's Law, you get all this embedded software. And that brings a degree of complexity that is going to be very increase in complexity for many, many years.
Increase in complexity for many, many years. So be it emulation, be it rapid prototyping, be it virtual prototyping or other techniques, all of these are always welcome yesterday. And our team is nonstop racing forward to improve them.
Your next question comes from the line of Monika Garg from Pacific Crest Securities.
Just first, while you've not raised your yearly guidance by as much as you beat your Q1 EPS estimates. Any just kind of walk us through that?
Yeah. Q1 was a good quarter and we did increase our annual EPS guidance to a range of $2.75 to $2.80 If I can remind you, the majority of the overachievement was due to expense timing and non operational items, so that's a tax rate and higher other income. We're trying to strike the right balance between the overachievement and investments in the business, investments per our plan. We see a lot of opportunities in IP, software quality and security and even in our new EDA solution. So we want to make sure that we're balanced for it.
And I think one thing to also keep in mind, as you look at the guidance that we just provided at the midpoint, we'll continue to increase operating margins by about 100 basis points year over year.
Okay. Then Art, you talked about semi industry grew like 10% year, grew high single digit year before that. But the core EDA growth rate, which you have talked about, is still 3%, 4%. Do you think EDA growth at least starts becoming closer to semi industry growth?
Well, just to be clear, semiconductor semiconductor industry goes up and down rather wildly. And if I look at my numbers, I would say that the average semiconductor growth rate probably around 4.2% to 4.5% right now if you look at it from a multiyear perspective. So in that sense, EDA actually is pretty close to the customers and not all that different. Overall EDA over many years has out executed semiconductors. But when the semiconductors have a great year, they worry about the bad year.
And when they have a bad year, they worry. And so it's an industry that is always racing forward.
Okay. I have a question on Coverity. Previously, you talked about Coverity expected to be accretive second half this year. If that is still the target and COVID-nineteen was growing kind of 20% -plus, which you talked before. Is that is it still the growth rate you're expecting and seeing for that business?
Yes. So we are still on target for breakeven in the second half. And the other thing we said is that we would be over $100,000,000 in 'sixteen. And so far, things look good.
Thanks. That's all for me.
Thank you.
Your next question comes from the line of Mahesh Sanjanaria from RBC Capital Markets.
Okay. So one quick question on your products revenues. You talked about system revenue at record. And do you report that in the IP and system? Is that the reason that number is so high?
You mean why are we reporting IP and systems together?
No, I'm just confirming that, that is the case that you're prototyping revenues in IP and systems.
Yes, it is correct. We are reporting those together. The trailing 12 month growth was actually quite high. But you may also remember from last year that IP goes up and down quite a bit and we have said that the IP is double digit growth on a multi year basis. And the reason for that is the nature of that business, the fact that there are often milestones attached to deliverables.
And we said last year that this would be a good year and so far it looks like it is.
Okay. So one question on the 20 nanometer and 16 nanometer from the foundries and from the semi companies, we're hearing lot of change in the timing and pushing out, pushing in. Are you seeing a different kind of behavior on migration to 20 16, 14 nanometer, consider that we have different set of players on the foundry side and also on the product side. If you can compare it to the previous design transitions, that will be helpful.
Sure. Let me distinguish something which is let me take the whole grouping of 28 nanometer and higher and then 20 nanometer as an individual node and then the FinFET category, some are actually at 22, 16, 14 and 10 nanometer. The 20 nanometer node is really a little bit of an odd duck and TSMC have been successful with that. But we have predicted already a long time ago that it would probably be a node that would not see a lot of utilization, because once the vision to FinFET is established and that the yields look good enough, people will rapidly move there. That appears to be the case.
At the same time, for all the people that don't want to cross the bridge to FinFET, 28 nanometer will be a node that will be utilized massively for quite a long time. And so that's sort of the way we look at it a little bit, which is 28 nanometer is sort of the one side of the bridge with planar transistors, 16 is really the other side of the bridge with FinFETs and then from there you go on to smaller dimensions.
Okay. And one more question related to that, but really further looking. We know that the FinFET enabled the Moore's Law beyond 20 nanometer, and there is already talk about FinFET probably be sufficient for maybe a couple of generation and then there will be another transistor structure change or material change. Do you have a view on that, that do we have to change the material structure very soon or this can take you for a few generations?
Well, our sense is that this can go for a few generations right now. At the same time, we're in a field where relentless ingenuity is a necessity to overcome the intricacies of very, very small physics. So at some point in time, the very nature of the transistor will change again. It's always fascinating to me to remember that not that many years ago, I'm talking 6 or 7 years ago, many people said FinFET will never work and here we are. And so by the way, the term Moore's Law of course is by now more of a concept than an actual exact law because the economics with these type of chips are changing a bit.
But there's no question that the opportunity fabulous products as we move to smaller transistors is still very, very appealing.
Okay. That's very helpful, Art. Thank you very much.
You're welcome. And at this time, there are no further questions.
In that case, thank you very much for attending our Q1's earnings release. We had good results. We feel confident about the year, and we have a lot of work to do to finish the year. Thank you very much. Have a good rest of the day.
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