All right, let's get started. Good morning. Welcome to the 27th Annual Needham Growth Conference. Joining me, my name is Charles Shi. I'm the Semiconductor Design Software and IP Analyst here at Needham. Joining me here is Silvaco. I'm glad to have Mr. Babak Taheri, CEO, and Mr. Ryan Benton, CFO, here on the stage. Babak is going to give a presentation, and then we transition into Q&A a little bit later. Babak, stage is all yours.
Thank you very much, Charles. Good morning, everyone. And thank you for attending this conference with us. I'm Babak Taheri, CEO of Silvaco. Today, I will just give you an overview of what Silvaco does. And in a nutshell, I would say Silvaco provides software solutions that are AI-based, and we provide digital twin modeling and simulation in order to reduce cost and provide go-to-market, a better timing for our customers. Disclaimers. I'm not going to go through those slides. Those are disclaimers for your information to read and understand. In terms of looking at us at a glance, Silvaco has three product lines. Those product lines include what we call Technology CAD, which is TCAD for short. It represents more than 60% of our business. Our EDA software platform, that's about 20%-25% of our business, depending on the quarter or year you look at.
And semiconductor IP business, which is the rest of it. We have 800-plus customer base. As a matter of fact, one data point I should say is last quarter, we added 13, and we added over 46 new customers in 2024. So this customer base is increasing rapidly every year. Our positioning in terms of market segments and by revenue, we are number two in global TCAD revenue. The company was founded in 1984 and relaunched in 2019 when new management joined, including myself and the rest of the team. We are based in Silicon Valley and have been in Silicon Valley since the inception of the company. And what we have focused on and how we differentiate is we tend to focus on vertical markets that we are strong in.
The top three vertical markets that we are strong in and have lead positions include display technologies, any display that you can think of, from watches to laptops to tablets to TV screens. I would call it the power market, which includes silicon carbide, GaN, or even MOS technology, power devices that we are able to simulate and provide digital twin models for, and the third market that we're growing rapidly in the past few years has been the memory market. We made announcements with one of our key strategic partners in the area, which we call it Fab Technology Co-optimization, which is basically our digital twin modeling of software that is enabling companies like Micron to be able to get to the yielding and to the market faster with this technology.
With that, I wanted to go to the next slide to give you some milestones that we have achieved. In the last year, we have expanded our FTCO Platform adoption not only in May, but also in October of 2024. We have had press releases on those. Please have a look for more detail. We also announced recently a partnership with Micon, M-I-C-O-N, not Micron. There were quite a few, I would say, bot newses that had misspelled this. So it's M-I-C-O-N. It's a distribution company that helps us expand our footprint in Europe. We joined also SMART USA Institute under the CHIPS and Science Act. As a matter of fact, we have made some announcements with universities such as Stanford, Purdue, as well as ASU that were part of this process. We actually did receive a PO from the CHIPS Act last quarter. We've expanded our Victory TCAD.
As I said, Victory is our latest and greatest name for our TCAD platform. We have expanded it into what we call advanced CMOS FinFET technologies. Historically, we've not participated at all in those markets. So this is a new market segment that we have actually provided tools for as of last year. And we do have customers utilizing those tools for advanced CMOS. And that's the next market segment that we would like to take our FTCO platform into. Historically, we've done it with memory devices. The next step is for us to take FTCO into advanced technology nodes. And that's big news for us. In terms of quality of work, quality of software, we achieved the ISO 9001 for all of our product lines, TCAD, EDA, and IP back in October.
And as you know, there were a couple of legal matters that many of the investors were asking us. The first legal matter was basically a banking group in Europe had brought a lawsuit against several European companies, as well as the government of France. And the details are all public. Part of the issue was the fact that Silvaco had bought a portion of a company that was acquired by another company that this investor had invested in. And it came back to name us also on the lawsuit. At the end, after five or six times in France losing in the court system there, and then a couple of times in the U.S., the final claims against Silvaco and the rest of the names that were mentioned in the lawsuit were dropped. And that case is closed for us. The claims are dropped. So that's behind us.
We're very glad to hear that. And investors were concerned about it. But we did not see any merit in their judgment. Also, we wanted to give you an update on the second lawsuit that we had that was a judgment against us. They were also asking for prejudgment interest. And that prejudgment interest, actually, the judge ruled for us. And because of that, the $3.8 million that was actually accrued, we put that back into place in our P&L. So that was a big help for us. In terms of if you look at what we focus on, we focus on one of our strategies is to focus on large growing markets. There are seven large markets that we focus on. They're all expanding and growing. Our top three, as I mentioned, are power, display, and memory.
However, we do have presence in automotive, IoT devices, high-performance compute, and wireless 5G and 6G as well. One overarching market that we tend not to differentiate that overarches all of this, we call that foundry, semiconductor foundry business. And those are basically companies that do pure-play fab or they're fab- light, meaning they have their own fab, and they also use external fabs. And that's something that we actually added quite a few customers in the last year, including the last quarter. And then the other market that we are expanding into that we haven't mentioned in the past, but that we have had customers in, however, we do, it's photonics. And that's also the addition of several new customers last quarter in the photonics market for us.
The semiconductor industry, as you know, the requirements have several complexities in terms of the challenges that you face when you're trying to put a semiconductor out into market, into any of the gadgets or any of the applications you have, and I would summarize the complexity of the problem would be in three categories. One is, first of all, the increase in the functionality and requirements for each of these new chips has increased rapidly, smaller process geometry node, larger number of transistors to billions of transistors, and also that includes many, many microcontrollers or microprocessors on board one chip. On top of that, there are technologies that are required to go to the next generation of power displays, such as silicon carbide and GaN and quantum dots that go into QLED displays. These are new materials that are introduced in production.
Those are challenges in order to scale them as well as yield them. There have been many news about Silicon Carbide companies not being able to scale to 8-inch wafers. That's a big challenge. Then also go-to-market challenge in the sense that there is a rise of costs associated with masks, with wafers, as well as this complexity at time to market. Those challenges are what we thrive on. That's what Silvaco works on. Anything that becomes a big burden to our customers tends to be where we face those challenges and help them. I'm glad to say that in terms of TCAD, EDA, and IP, we actually address all these complexities and challenges. A lot of you have asked us to mention how have we grown so far and what are our growth strategies.
I would say I categorize our growth strategies into six different areas. I mentioned already that we focus on large and growing markets. There are seven of them. I mentioned also on top of those seven, I mentioned foundry as well as photonics. So those are big markets that are fast and growing. We are focusing on our top three or four on those markets. We actually expand our presence into the market into where we have not played in before. Historically, I mentioned advanced CMOS being one of them. We introduced TCAD in the advanced technology node. That's where we are expanding. We actually introduced FTCO, which in a green field, I would call it. It's a time expansion for us and for the rest of the industry. We've done historical strategic acquisitions.
This is one of the knobs we can turn for faster growth by doing acquisitions, and as we have said in the past, we have a good, healthy pipeline of companies that are primed to be acquired. And also the last three that I would say in terms of our strategic thinking for the market and for the company is that we address unique customer needs. So if there are things that need an extra, I would say, care, extra attention by our field engineers as well as our R&D, we do what's called agile R&D. We enable our customers by adding software modules to our platform in order to make it specific to their needs. So that has actually helped us expand our presence in the market. We also see there are very many underserved segments of the market. Some of them we've mentioned display, power.
Those are the areas that we tend to focus. It's not the focus area of many of our larger competitors. We grow our customer base that way. We have proven that in the last year, we've added 46 new customers in those market segments. Then last but not least, in order to be able to stay ahead of the game in order to do advanced R&D projects, I've mentioned this in the past that 95% of our revenue comes from advanced R&D projects of our customer. We tend to have a great relationship. It's in our DNA with academia and research labs. We not only maintain but support it not only for, I would say, technology, but also for talent. Our next pool of employees come from academia, R&D centers, as well as the research labs.
With that, I wanted to thank everyone for their time and give the floor back to Charles.
All right. Thanks, Babak, for the overview presentation. And maybe I'll start with the first question, the announcement you guys made yesterday. So maybe to put this a little bit into context and tell us what's the reason or what you see behind that pre-announcement in terms of your end market dynamics. And maybe let me add, maybe it's related, maybe it's not. I guess it's not. But what do you see in the most recent round of U.S. export controls that was announced in early December? What's the assessment so far? Do you see any impact to the business? Why don't we start from there?
Do you want me to go?
You can first.
So the pre-announcement was made because we were attending this great conference, right? We wanted to.
Awkwardly timed conference.
We wanted to make sure we were comfortable with the questions and would be able to answer questions. In terms of the announcement itself, as it indicates, one thing we wanted to get out there, and we always get it out there with the hope that the understanding comes with it, is we had a record booking for the year. We had a record booking for the quarter. And the year ended up at 13% plus growth year over year for booking. And for the quarter, it was amazing quarter over quarter because of the fact that there was a missing Q3 or push of the POs in Q3 to Q4. But generally, we've said the best indicator for our business and EDA is usually looking at bookings gives you the health of the business because those booking numbers are directly what POs are.
They're actually POs that are committed, and they turn into revenue at some point in time. Revenue recognition, you find out that depending on the mix of the product, FX effects, foreign exchange rate, these things impact revenue the way you recognize it. And you'll see that we may be off by a few hundred thousand dollars. That's the impact of FX effects and as well as what mix of products we could recognize how much of. So again, going back to bookings, we hit those. We are profitable. We actually, our profitability went up. Our gross margin went up by a few percentage points. We're getting closer to 89%-90% gross margins, which is unheard of usually in the semiconductor industry in general.
So it basically shows that our company is growing, our company is healthy, and we are delivering to the promise of what we have been doing, including not only new products like FTCO for memory market, but also we've been able to grow and acquire new customers in photonics, which is a big deal for us in foundries, which helps us get access to foundries for advanced CMOS technology. And that's how I would summarize it. And that's the first part of your question. And the second part of the question, the impact of governmental announcements on business. As you know, this is not new to our industry. It's been going on for a while. And the impact of what we heard and what we've observed, we have not changed anything.
And we don't see that impact basically with Asia or with China in that specifically would change the percentage of revenue we have from China. We have a double-digit China percentage of our revenue, and we expect that to maintain and support the same way. In Q3, we said there were some delays of POs to Q4. And 90% of those POs have already closed in Q4. And the first couple that are remaining will close this quarter, so.
Okay. Great. Great. That was a nice update on some of the delayed POs that you actually pre-announced in October. Glad to hear it's going to be fully closed this quarter.
Yes.
Thank you. So moving on a little bit away from the near-term topics, I want to maybe go back to some of the basics to try to facilitate the folks who may not be familiar with the story, but to get up to speed. I think EDA, IP, Cadence, Synopsys, pretty well-known stories right now. Silvaco, you guys came to the public market only May in last year. But there's one piece of your business that seems like it's not fully understood, which is technology CAD.
TCAD.
TCAD. So can you explain a little bit more what exactly TCAD is? What's the difference between TCAD and EDA? Who buys TCAD? And you're number two, right, from your deck. Who are your main competitors?
Yeah, that's a great question. Technology CAD is probably one of the most sophisticated pieces of software that you could have out there because it's a software that basically combines mathematics, physics, chemistry, electromagnetics, if you will, all the physics aspects of a semiconductor or photonics device or process steps that you need to model. TCAD, actually, our whole company started from the TCAD that was licensed from Stanford University back 40 years ago. And the reason that TCAD was needed at that time because, as you know, the old chip technologies in bipolar devices and CMOS, what have you, people had very few understanding of how do these things behave. So they needed a simulation software to really understand the physics and chemistry aspect of it. So that's why it was relevant at that time.
Actually, it peaked for a decade, and then it came back down because then the main process that everybody used was a workhorse was bulk CMOS, they call it, right? Everybody used the same practically. With fine-tuning that process, everybody was using the same thing. So there was a need at that time. That's why the TCAD business for the whole industry went down. There was no need to really simulate or understand because 99% of the problems were understood at that time. But as we go down the Moore's Law curve, and you see geometries get shrunk, you find in some of these geometries that are two nanometers angstrom level. And even at FinFET level, there are physical limitations that cannot be understood. Hence, you need to have a physics understanding of what it does. So these simulations become a must-have going forward for those processes.
If you add a new material that changes the characteristics of your device or your process steps, you need to understand it before you manufacture it. That's why TCAD becomes more important. As you add other material like quantum dot, I mentioned any new material, you need to understand its property and how it works with the rest of the system. TCAD is where fundamental physics and understanding of devices and processes come into picture. As the complexities increase, the need for TCAD increases. You find that part of the TCAD is not only simulate and provide digital twin models of process steps. Like in a memory device, you could have 1,000 process steps, right?
1,000 is if you think of how much material you stack up compared to the wafer surface, you find out that it's about 10,000 times higher and deeper than if you think of the tallest New York building to the lowest oceanic cave that you could find. It's about 10,000 times much larger aspect ratio. So it's very complicated, and that's why you need TCAD to understand those. And that's the summary of it, so.
Customers and competitors. Sorry.
Thank you. Thank you for bringing it up again. So customers for TCAD fall under, I would say, four categories. One is any company that deals with developing new processes, new transistors like silicon carbide, GaN, advanced CMOS technology that is using it and it's in the market to provide solutions for that will use TCAD. Any customer that's their customer in order to understand what they are manufacturing for them requires to have TCAD. Any new companies that come up with a new process and new technology that requires understanding of physics and electronics aspect of it or photonics aspect of it needs TCAD. And the fourth part is advanced R&D that would have products coming out of those results within 5 to 10 years require you to do TCAD. So it's growing. The need for it is growing. The market TAM expansion is there.
We've actually added to the TAM by introducing FTCO. And I believe we've quoted $500 million of TAM expansion by adding that. We're taking TCAD not only for people who design, process, and device to people who actually want to yield and manufacture. And that's where the TAM expansion comes from. So it's a very rapidly growing area that had lost focus, but it's a must-have, so.
Competitors.
Competitors in this market, thank you for segmenting those questions. Competitors in this market, we are number two. Number one historically has been Synopsys because they've focused on the area, the market segment we didn't in the past, but we are now called advanced CMOS technology nodes. And we are the top two companies that provide the full solution. And what I mean by full solution, the platform consists of three components: device, process, and modeling. If you have those three combinations for these technologies, then you have a solution. We are the only two that have the full solution, but there are much smaller companies that are in Europe that have the address part of the process, part of the device, or part of the modeling that fall in that category as well.
Like point tools?
Like point tools. That's a good way to say it, yes.
Okay. Moving on a little bit about your EDA and IP portfolio because when people think about EDA, it's highly consolidated to three plus one, I would say, players.
Sure.
Right? And probably if the Synopsys-Ansys merger goes through, that goes down to three largest ones.
Three.
IP, yes, maybe a little bit more fragmented. But for Silvaco, help us understand what's the differentiation of your EDA and IP portfolio? Maybe also give us a little bit of details about what exactly the kind of solutions you provide.
No, absolutely. We have actually been in the market for a long time. We're growing. And the strategies that I mentioned, we work on fast-growing market segments that we can lead on. For example, I mentioned earlier that we are very strong in the display market. We're in the display market not only with our TCAD solution to be able to do process and device and modeling, but also we are actually in a lead position with our EDA software as well. So companies, if you look at the top 10 display companies, we are in eight of them at least. And they tend to not only have our TCAD, but also our EDA software. So you find out that our EDA software has not focused on what I call big D, little a, D being the digital, right? Digital world, microprocessors, and so forth, a being analog.
We have been focusing on the analog aspects of the design, unlike the big three competitors that we have that focus on big digital chips. We focus on analog. We're diving into other markets such as power, IP design with analog circuits. As a matter of fact, there are many, many startups that started their company with use of Silvaco's EDA tools because they were cost-effective, and they did at the time that they were involved in what they needed in order to get the chip out, so by focusing on display market, by focusing on the power market, by focusing on analog-ish solutions, plus our EDA software we use internally for developing IP reduces our IP cost, so with that, we are going to expand our EDA market.
In terms of our IP business unit, you find out that we also have very interesting verticals that we focused on. Our IP business unit is the youngest business unit or product line for us as of seven years ago, six years ago. It was formed by several acquisitions that we had stitched together. These acquisitions brought in some of the relationship we have. We've announced our relationship with NXP that we're one of the only companies that can actually resell their IP. That was for a specific reason because we were focusing on automotive interconnect market. That's where we provide that. We have IP that addresses the majority of what they call Foundation IP for any SoC, any chip you want to design. That includes memory, includes standard cells, includes I/Os, and includes analog design. That's where we're focusing on right now.
Those market segments are still growing and good for us to maintain in order to have the growth rates that we've quoted before, so. In terms of our competitors, as you know, the top three EDA companies are Cadence, Synopsys, Siemens, which acquired Mentor, and as you said, Ansys, if this goes through, that would have been. Their focus has been on digital design. In terms of IP, the largest IP provider, if you don't count Arm or Qualcomm of the world, but semiconductor IP, the way we look at it, of course, Synopsys is number one. And then there's Cadence. Then there's another 50 smaller companies, and other companies that are around that have their own verticals that they address and focus on, which is different than what we do. And that's how we differentiate, and that's how we grow our business that way.
Maybe a next question to Ryan, a little bit on the margin. So first off, I think I did hear you that the fourth quarter, the gross margin, you guys made good progress. But from our perspective, I think we look at a little bit more on the operating margin. Of course, good gross margin, that helps, right, on the operating margin line. It's just our observation that within EDA, IP, this space, the higher the operating margin, the stock tends to get a better valuation, probably because higher operating margin kind of implies better economics of the business. So can you recap what your operating margin target is, where you are at, and how do you plan to expand margins there? Any thoughts?
Yeah, lots of parts of that question. Let me try to address all this. So look, I think it's about the model of the company. So we're a software company. For the fourth quarter, our preliminary results on a non-GAAP basis, 88%-90% is where we see the range of outcome, which aligns very closely to our long-term target that we've previously published of 90% gross margins. And again, that's really just an artifact of the fact that as a software company, principally, the cost of revenues that we have are largely fixed in nature in terms of supporting our customers. And so it's really just about as we get a little bit of scale, then those margins kind of get to that critical point. I do take your point on operating margin. Operating margin, again, super important. What stands between that, of course, is R&D.
We're going to continue to invest in R&D. R&D will scale with revenue, sales and marketing. We get some leverage. G&A, of course, we've added a ton of fixed cost in order to become a public company. Nature of the beast. But we'll get leverage from G&A. Again, I think it's an issue of scale. If you look at Q4, what's implied in the numbers that we published, pretty good operating margin number. I think you can calculate there in terms of call it between 15%-20%. So I think it's a good number, which again, also is reasonably close within shouting distance of what our long-term target model of 25% non-GAAP operating margin. So as the company just gets a little bit of scale, a little bit of continued growth, then you're able to get there.
For us, there's ways that FTCO, of course, is a fabulous technology that the company has developed. It's big game hunting with important customers. So as the company has success and demonstrates a second and third customer, which we're hopeful to do, then you can see the company can gap up. And then separately, as you know, Charles, we raise funds in the public markets partly because we see a displacement in the marketplace. Cadence and Synopsys are such wonderful companies. They're so successful. They've gone so far upscale in terms of what they like to do in terms of M&A, in my opinion. And we think there's an opportunity for someone to be the acquirer of a choice of these smaller companies that save, call it, $5 million-$20 million in revenue.
So, M&A is another way of doing smartly, done right, and done appropriately that I think it's another way that you can gap up towards your operating margin goals. And ultimately, post-acquisitions, our hope is those acquisitions are accretive to that target model. So again, but we know M&A is something that, like I said, has to fit strategic technology, people goals. That has got to get through my filters on a financial side, just like the business of making investments. Any deal could be a good deal or bad deal based on price.
Great. Thanks. You actually almost covered the other question I have on the M&A. For the interest of time, I think I do want to open it up and see if any questions from the audience. We may have time to take one, maybe two max. Yes?
Sure. I'll throw one out. How about so when I think of digital twin, I usually think of buildings and things like that. But it sounds like you're using, and you skipped a few slides in your presentation, it sounds like you're using digital twin in the context of TCAD as opposed to something else that might not be core to your business.
Yeah. So you're absolutely right. And what I want to add to that is digital twin as the most general definition. If you look at it, you can have a digital twin of a chandelier. If there was an earthquake, if there was temperature increase or decrease, how it behaves. And you find out that there are companies that actually operate in the physical world, depending on the dimension, what portion of the physical world do they simulate and provide digital twins for. If you look at companies that are large that provide CAD software, they do digital twin of buildings. If you look at companies like Dassault, which is a giant, they provide digital twins of jet engines, digital twins of airplanes. The scale they work on is very large. If you look at us, I would say we live between the atoms and 12 inches.
Atoms being anything that's atomic level simulation all the way to 12 inches of a wafer, right? So anything in between, that's the physical world we live in. We are able to have exact, when we say digital twin, in other words, we have physics-based modeling, which you can actually, if there's a physical wafer out there or a physical transistor out there, a physical photonics device out there, you can have a digital twin of it, model it, its behavior, its thermal characteristics, and so forth in a computer and simulate it. So that's where we specialize in.
You're using AI to understand simulation issues?
No, it's more than that. So AI, it certainly has been done for designers to design chips, help them design chips. The way we are using AI here is if you run a TCAD simulation on a wafer, it would take you hundreds of years to get the results you want. What we are doing with AI in case of FTCO is how can we learn from a set of data that we have, petabytes of data we have in manufacturing, and have a near real-time simulation result such that when you tweak a knob, it gives you the answer to the point that the human cannot see that microseconds of delay, but it sees the answer right there and then. It wouldn't take 100 years to simulate.
It's a dream come true for me because we've been working on it for more than four years, being able to get something that would take 100 years to simulate but have almost simultaneous answer to using AI and being able to train it so that it just improves and gets better over time is what we are using AI for.
Very good.
Thank you. Yeah, absolutely.
All right. I think we probably don't really have time for one more question, but thanks, Babak. Thanks, Ryan, for joining us.
Thank you.
I'll really outline a story, the Silvaco story, and get a chance to meet with the investors and know about the company. Thank you again. Thanks, everybody. Enjoy the rest of the conference.
Thank you.
Thank you.