Categories Earnings Call Transcripts, Technology

Synopsys Inc (SNPS) Q2 2022 Earnings Call Transcript

SNPS Earnings Call - Final Transcript

Synopsys Inc (NASDAQ: SNPS) Q2 2022 earnings call dated May. 18, 2022

Corporate Participants:

Lisa Ewbank — Vice President, Investor Relations

Aart de Geus — Chairman and Chief Executive Officer

Trac Pham — Chief Financial Officer

Analysts:

Gary Mobley — Wells Fargo — Analyst

Jason Celino — KeyBanc Capital Markets — Analyst

Ruben Roy — WestPark Capital — Analyst

Charles Shi — Needham & Company — Analyst

Joe Vruwink — Robert W. Baird & Co. — Analyst

Jay Vleeschhouwer — Griffin Securities — Analyst

Vivek Arya — Bank of America Securities — Analyst

Pradeep Ramani — UBS — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys Earnings Conference Call for the Second Quarter of Fiscal Year 2022. [Operator Instructions]

At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Lisa Ewbank — Vice President, Investor Relations

Thank you, Caroline. Good afternoon, everyone. Here today are Aart de Geus, Chairman and CEO of Synopsys and Trac Pham, Chief Financial Officer. Before we begin, I’d like to remind everyone that during the course of the conference call, Synopsys will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today’s earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement and 8-K that we released earlier today. All of these items, plus the most recent investor presentation are available on our website at synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call.

With that, I’ll turn the call over to Aart de Geus.

Aart de Geus — Chairman and Chief Executive Officer

Good afternoon. We delivered an outstanding second quarter, exceeding all of our guidance targets and reaching record revenue, operating margin, earnings per share and cash flow. Revenue for the quarter was $1.28 billion, business was very strong across all product areas and geographies. Backlog grew to $7.3 billion. GAAP earnings per share were $1.89 with non-GAAP earnings of $2.50 and non-GAAP ops margin of 37%.

We generated $750 million of operating cash flow. With our significant first half strength and high confidence in our business, we are raising guidance substantially for the year. We expect to grow annual revenue approximately 20% to pass the $5 billion milestone, drive further ops margin expansion and grow earnings per share by more than 25%, while generating approximately $1.6 billion in operating cash flow. Trac will discuss the financials in more detail. Our financial momentum builds on three drivers, an unmatched product portfolio with groundbreaking new innovations, robust semiconductor and electronics market demand and excellent operational execution. The backdrop for our outlook sits at the intersection of massively growing amounts of data and the demand for Smart Everything empowered by machine learning and AI. This is synonymous to stating that in both consumer and business application, the need for electronics and chips is relentless. Chips for data capture and IoTs, for data transmission, for data storage and of course for faster high bandwidth and dedicated computation, plus a huge and intensifying need for more security and safety. All of this means escalating opportunities for Synopsys.

We’ve seen growing demand not only from our traditional semi and systems customers, but also from impactful new entrants such as hyperscalers amounting number of start-ups and non-traditional systems companies across vertical markets. Notwithstanding macroeconomic choppiness in an uncertain geopolitical environment, these companies are investing heavily in highly complex chips, systems of chips and chiplets and security initiatives.

Synopsys is a catalyst in enabling this new Smart Everything era, as many customers race forward to invent and deliver a highly creative and optimize chips and systems. Our innovations, particularly in AI driven design flows and at the intersection of hardware and software are crucial for our customers and have fueled our accelerating momentum. In addition, our IP focus particularly in high-speed connectivity and advanced interfaces supporting multi-chip design is second to none and yielding excellent business growth.

Let me begin this quarter’s highlights with AI as we continue to deliver groundbreaking results and as machine learning is revolutionizing chip design. Our DSO.ai solution which learns and automates a substantial portion of the design flow is seeing rapid adoption for production use. Many of the largest highest-profile semiconductor companies are reporting tremendous productivity benefits using DSO.ai in production today. At our users conference in March, MediaTek, Intel, Samsung and Sony shared with fellow engineers their impressive achievements using our DSO.ai. They reported results were truly remarkable, as much as 20x productivity improvement, 7% to 25% lower power and a dramatic reduction in turnaround time with a single engineer, completing four design blocks in half the time that it previously took four engineers.

Critical to the high impact of DSO.ai is our powerful digital design solution, resulting in significant cross-selling opportunities and competitive wins at cornerstone semiconductor and systems customers. Orders were well ahead of plan contributing to our backlog growth. In Q2, two major hyperscalers selected Synopsys highly differentiated Fusion Compiler product for multiple advanced designs. We also significantly expanded our share at a top US communication semiconductor company. In aggregates, the trailing 12-month revenue for Fusion Compiler more than doubled. At our user conference, I had the opportunity to highlight not only some of the exciting capabilities to come such as using AI and verification, but also how Synopsys overall is technically helping to transform EDA design more broadly.

Our custom design solutions for example are seeing strong market disruptions as well, including 19 full flow competitive displacements year-to-date. Over the past year, revenue grew double digit in this area with adoptions ranging from large semiconductor companies designing at advanced nodes to automotive, to memory vendors. With advanced chips, while advanced chips are the foundation of continued scale complexity, electronic systems now increasingly grow systemic complexity by tightly connecting many chips and the software to drive them.

Synopsys excels at this, an ideal example of system leadership and impact is our IP product line. Here too business momentum continued with another excellent quarter as demand remains very high especially in the AI high performance compute and automotive markets. In Q2, we enhanced our comprehensive AI IP portfolio with the introduction of the industry’s highest performance neural processor IP. Simultaneously, we extended our lead in the most advanced commercial processes. We can report significant traction with our interface and foundation IP achieving more than 33-nanometer design wins for high performance compute and networking, as well as notable wins in mobile applications.

In automotive, our decade plus investments, safety certifications and market engagements are not only generating continued momentum with leading semiconductor suppliers, but also as OEMs and Tier 1’s now developing their own chips. We count demand our customers the top 12 leading automotive semiconductor suppliers, 10 automotive OEMs and 12 Tier 1 companies worldwide. For IP, we have close to 600 automotive design wins in advanced nodes, demonstrating the strength of our portfolio.

At the hub of the system is the intersection of hardware and software. This is precisely where our verification solutions are targeted. Let me highlight three success drivers. First, there is high demand for our market-leading emulation and prototyping hardware products. Demand is high and we’re heading towards another record year. Fueling this our new powerful application specific Zebu emulation and HAPS-100 prototyping systems. While demand is broad based across customers and geographies, we continue to see significant growth in usage, expansion of many of the largest Hyperscalers in the world.

Second, multi-die sometimes called chiplet based system design is driving a strong need for innovation Synopsys is uniquely differentiated with our 3D IC Compiler solution and the industry’s leading portfolio of die-to-die interface IP, both of which are essential. Our focus and execution are driving adoption momentum with engagements across multiple market segments, including AI servers, automotive, telecom and aerospace. And third, cloud enabled design. One of the challenges for chip designers is access to sufficient yet flexible compute power. Of course, our EDA customers have been using cloud compute for years, but true flexibility hasn’t been available until now.

In Q2, we expanded our cloud offering with the industry’s first broad scale cloud SaaS solution. It offers unique flexibility in both access and business model. Synopsys now offers three cloud approaches usable for peak demand to full deployment. One, bring your own cloud with pay per use access on the customer’s choice of third party cloud provider. Two, a SaaS model with tools flows and Microsoft Azure based compute. Three, hardware-based verification with Zebu cloud.

Initial customer reception has been excellent ranging from very small start-ups to large companies seeking peak compute flexibility. Now to Software Integrity which is both enabling and benefiting from intensifying demand for security and safety across all market verticals. Bolstered by momentum of products and consulting, as well as broadening geography strength, we delivered another strong quarter with 20% year-over-year growth, exceeding our internal plan. Internationally, we had our best quarter ever reaching 10 new countries that we’ve never sold to before through our channel partners. We also continue to make good progress improving our renewal rates and new logo engagement metrics. From a product perspective, our broad portfolio is unique in the market as our three-pronged approach provides differentiated value for all stakeholders, the developers, the DevOps Group and the corporate security team.

Over the past year, we’ve launched significant new products in each of these areas and customer response has been excellent. Industry analysts continue to recognize Synopsys strength. For the fifth year in a row, we were named a leader in the Gartner Magic Quadrant for Application Security Testing and for the fourth straight year, we were rated the farthest up and to the right.

Finally, a few weeks ago, we announced a definitive agreement to acquire WhiteHat Security, a leading provider of SaaS-based dynamic application security testing or daft technology. This acquisition will further expand our portfolio and accelerate the build out of our SaaS solutions. We look forward to welcoming the WhiteHat team after the close, which we currently expect to be in our third fiscal quarter.

In summary, we delivered a high momentum quarter and are substantially raising our outlook for fiscal 2022, building on our wave of technology innovations, fueling growth, strong and resilient markets and excellent operational and financial execution. We’re poised to cross the $5 billion mark 5 billion mark revenue milestone this fiscal year. These results are not possible without the unwavering commitment and diligence of our employee teams. We thank you all.

With that, I’ll turn it over to Trac.

Trac Pham — Chief Financial Officer

Thanks, Art. Good afternoon, everyone. Thanks, Art. Good afternoon, everyone. In Q2, we delivered record revenue, operating margin, non-GAAP EPS and cash flow. We continue to execute exceptionally well despite uncertainties in the macro environment. This is a testament to our robust portfolio, healthy markets and financial discipline. Our strong execution is also enhanced by the stability and resiliency of our time based business model and 7.3 billion of non-cancelable backlog. Our results and growing confidence in our business lead us to again raise our full-year 2022 targets.

After surpassing $4 billion in revenue in 2021, we expect to grow 20% and cross $5 billion in 2022, as our growth accelerates for the third straight year. I will now review our second quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.28 billion, up 25% over the prior year, with strength across all product groups and geographies. Total GAAP costs and expenses were $916 million, total non-GAAP costs expenses were $809 million resulting in a non-GAAP operating margin of 36.8%. GAAP earnings per share were $1.89, non-GAAP earnings per share were $2.50, up 47% over the prior year.

Semiconductor assistant design segment revenue was $1.17 billion, up 25% with robust demand for EDA software and hardware and IP. Semiconductor and system design adjusted operating margin was 39.2%. Software Integrity segment revenue was $113 million, up 20% and adjusted operating margin was 11.5%.

Turning to cash, we generated a record $750 million in operating cash flow. We used $250 million of our cash for buybacks and have repurchased $890 million of stock in the trailing 12 months. Our balance sheet remains very strong. We ended the quarter with cash and short-term investments of $1.70 billion and debt of $24 million.

Before providing guidance, let me briefly comment on the WhiteHat acquisition, which is subject to regulatory review and customary closing conditions. We will pay approximately $330 million in cash when the transaction closes, which we expect to occur this quarter. Based on our preliminary review, we expect the acquisition to be roughly neutral to non-GAAP earnings this year.

Now to the guidance, which excludes any impact for the WhiteHat acquisitions. We are raising our full-year outlook for revenue, operating margins, earnings and cash flow. For fiscal year 2022, the full-year targets are revenue of $5 to $5.05 billion. This represents 19% to 20% growth and a $225 million increase versus our prior outlook. Total GAAP costs and expenses between USD3.928 billion and USD3.975 billion. Total non-GAAP costs and expenses between $3.35 billion and $3.38 billion, resulting in a non-GAAP operating margin improvement of approximately 250 basis points. Non-GAAP tax rate of 18%, GAAP earnings of $6.22 to $6.40 per share.

Non-GAAP earnings of $8.63 to $8.70 per share, representing 26% to 27% growth. Cash flow from operations of $1.55 billion to $1.6 billion. Capital expenditures of approximately $145 million, up from our prior guidance, as we consolidate our campus at headquarters to create a more efficient and economical footprint.

Now to the targets for the third quarter, revenue between USD1.21 billion and USD1.24 billion. Total GAAP costs and expenses between USD981 billion and USD1 billion. Total non-GAAP costs and expenses between USD830 million and USD840 million, GAAP earnings of $1.32 to $1.44 per share. And non-GAAP earnings of USD2.01 to USD $2.06 per share.

In conclusion, we continue to execute exceptionally well and based on our strong momentum, we expect to deliver 20% revenue growth, 250 basis points of non-GAAP operating margin improvement, more than 25% non-GAAP earnings growth and $1.6 billion of operating cash flow in fiscal 2022.

With that, I’ll turn it over to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open. Please go ahead.

Gary Mobley — Wells Fargo — Analyst

Hello, everybody. Let me extend my congratulations on good execution, to say the least.

Aart de Geus — Chairman and Chief Executive Officer

Thank you.

Gary Mobley — Wells Fargo — Analyst

I want to ask about a multi-part question on the backlog, I believe roughly 50% year-over-year and mid-single digit percent or high-single digit percent sequentially. So, to what extent is that backlog number growing as a result of longer duration, average longer longer average duration, excuse me, maybe we can start there?

Aart de Geus — Chairman and Chief Executive Officer

Gary, the backlog is up due to overall run rate growth, duration remains within the model we communicated in the past, which is 2.5 to three years.

Gary Mobley — Wells Fargo — Analyst

Okay. And here we sit today with the potential for your company to grow 20% this year and that’s obviously much, well I guess it’s tactically within your long-term view of double-digit percent growth. But that can mean a lot of different things to different people. So I’m wondering if we can get an updated view on your — on your long-term revenue growth target?

Trac Pham — Chief Financial Officer

Well, right now we’re not changing any targets for the long-term, but it’s clearly we’re at the right end of the double-digit answer. And in general, I would say that we feel that we’re in a strong position that has a potential to continue for quite a while by virtue of not only building up the backlog, but more importantly. So by the conjunction of the demand in the market and what we have to offer being particularly well aligned. So I think the company is very strong right now and you saw that we changed the objective for the year considerably from where we started the year.

Gary Mobley — Wells Fargo — Analyst

Got it. Thank you, guys.

Trac Pham — Chief Financial Officer

You’re welcome.

Operator

Our next question comes from the line of Jason Celino with KeyBanc. Your line is open. Please go ahead.

Jason Celino — KeyBanc Capital Markets — Analyst

Great, thanks for taking my questions. Really impressive guidance raise here and think as we kind of second across into the second half, maybe if we take a step back six months coming into the year versus now what exactly in your visibility or confidence level has improved so much or I guess what has surprised you to this point?

Aart de Geus — Chairman and Chief Executive Officer

Well, I wouldn’t say it’s a surprise, it’s been hard work that has worked really well. I think we’re executing extremely well at this point in time and having the products that are needed at the right time, including some that have truly breakpoints in innovation that are very valuable for the future serves us well. Obviously the markets around us have a lot of noise up and down and sideways, but we cater to a part of the market that is highly competitive where there is a renewed understanding of how important chips are for differentiation in literally every field you can think off.

And so that is an area where the customers want to move faster with better tools, with faster solutions and I think we are all positioned in that.

Trac Pham — Chief Financial Officer

Jason, we — keep in mind when we entered the year, we are feeling very bullish about the business, right, because in December, we’re coming off of several years of very strong growth and margin improvement and based on that we had raised our long-term outlook for the business. What’s different now six months in is that we’ve booked six month support the business and we continue to see the momentum be very strong and consistent with what we have communicated. So right now we’re feeling — we’re feeling like we’re executing well against the opportunity ahead of us and the outlook is really positive.

Jason Celino — KeyBanc Capital Markets — Analyst

Okay. And then maybe just a quick one on margins, if we kind of back into the 4Q kind of implied framework, and I know Q4 is typically kind of one of the lower points on margins, but this year it seems a little bit HMH lower than on a sequential basis. Maybe can you maybe speak to maybe some of your hiring plans or timing of investments which may impact that?

Aart de Geus — Chairman and Chief Executive Officer

Well, I’ll start with the fact that we are raising the overall margins for the year by 250 basis points versus 2021, so it’s really, really strong improvement. With regards to the Q4 profile, we continue to invest in the business in the second half good hiring. Frankly, the other part that’s contributing to it is the fact that the outlook is so strong that we are increasing our variable comp, compensation accrual in the back half year.

Operator

And our next question comes from the line of Ruben Roy from WestPark Capital, your line is open. Please go ahead.

Ruben Roy — WestPark Capital — Analyst

Hi, Yeah, thank you for letting me ask a question and like to extend my congratulations here on solid execution. First question, just kind of around something you mentioned last quarter and just thinking about iterations haven’t changed but backlog orders well ahead of plan, etc, you had talked about being able to extract more value in negotiations. And I’m just wondering if you could comment a little bit about kind of the pricing environment as you’re seeing expansion of tools across large customers etc. Has the pricing dynamics across the business or product areas changed much between last year and this year?

Trac Pham — Chief Financial Officer

I’d say the pricing environment is pretty healthy for us right now. And you know it starts with the fact that we are — our products are incredibly competitive. And as you heard in Aart’s comment or prepared remarks, they are creating a lot of value for our customers and the ability — when you’re coming to an engagement of the customer with really good products that’s solving their problems in a much more efficient, effective and scalable way. It’s a much more constructive conversation and pricing.

Aart de Geus — Chairman and Chief Executive Officer

Yeah, in general I would add, there is just a lot of demand. People are designing much more complex, not just chips but systems of chips, the intersection between those chips and the software is more important, meaning that they want to optimize the chips for certain software and optimize certain software for the chips and vice versa. And so these are all relatively difficult problems that require a lot of our tools and a lot of our IP.

And I think the semiconductor market overall is heading towards continued growth by the sheer need of all these parts.

Ruben Roy — WestPark Capital — Analyst

All right. Helpful. Thanks, Aart. I guess just a quick follow-up on that Aart around the IP itself. As IP continues to grow for you and your competitor and a lot of companies are obviously talking about IP or using IP going forward as system complexity has continued to move up into the right. How are you — how do you should we I guess think about IP is sort of a driver for your tool sales. Is it or is it kind of the other way around?

Aart de Geus — Chairman and Chief Executive Officer

You’re right with both, meaning that’s in decades ago clearly was EDA driving things and then you would sell from IP and some of the regions that have come online. Let’s say in the last 10 years, IP has often been the first decision making point and then the EDA followed. And in the system world, it’s a little bit of both. But very often when people decide about what architecture they’re going to build, they make big decisions on the building blocks. And then the immediate look in the catalog from Synopsys, okay, which building blocks can I have ready to go or which ones can I get with some modifications and that is of course a dramatic shortcut in design and effort.

So I think they’re sort of twofold in my perspective, two sides of the same coin, you need both and both need to be working very well.

Operator

Our next question comes from the line of Charles Shi from Needham Company. Your line is open. Please go ahead.

Charles Shi — Needham & Company — Analyst

Hi, good afternoon. Congratulations on the strong results. I want to start with another question on IP. Thanks, Aart, for your answer on the synergy between EDA and IP, when I look at your numbers, it looks like that your IP growth so far in this fiscal year has been far above your long-term target like mid-teens. I really just wonder, do you still holding the view that IP is mid-teens kind of growth long-term or do you think it may grow faster than that given how strong the results are so far in the year?

Aart de Geus — Chairman and Chief Executive Officer

Well, as you know, so far we want to hold on to the general directive that we’ve given for the long-term. At the same time there is no doubt whatsoever that IP was particularly strong this quarter and actually has been strong for quite a while. And so IP tends to be a little lumpy, because you often sell IP over a period of time and then the customers pick it up as they need it or some of the things are subject to milestones if they want to have IP that’s modified for their purpose.

So it’s not always as easy to predict as some of the other things that are more time based, but overall they reflect very well. The new designs, the new chips, but also the new types of chips and we’re particularly strong already in those interconnectivity blocks that will be used when you put chips in very, very tight proximity sometimes also referred to as chiplets. And so that’s a whole new wave of opportunity for us.

Charles Shi — Needham & Company — Analyst

Thank you, Aart. Maybe a second question, I know, during the quarter, there was a press article about the subpoena administrative subpoena you received probably like last year by the end of last year. Can you give us an update as this was kind of overhang, I mean in terms of what investors think about Synopsys and any update, do you — is it closed or when do you expect it to close? Thank you.

Trac Pham — Chief Financial Officer

Well, there is not really an update, we received this if I’m not mistaken in November 2021 and so typically you get a number of questions and then there are some follow-up on those questions. And by the way a lot of these are being given out to a number of companies. And so we have diligence — diligently followed up. It’s not to us for us to know actually when these things finish. So it’s wait and see, but we’re following up and no issues from our perspective so far.

Operator

And our next question comes from the line of Joe Vruwink from Baird. Your line is open. Please go ahead.

Joe Vruwink — Robert W. Baird & Co. — Analyst

Great. Hi, everyone. I’m wondering if it is possible to maybe compare the new product cycle we seem to be in at the moment and thinking of DSO.ai, fusion, verification hardware 3DIC. How does kind of this cycle compare to I think 2019 was a big one, I think 2015 with IC Compiler was a big one. I mean, do you get the sense that there is greater traction or that this era of product is different and better than some of the prior recent experience?

Trac Pham — Chief Financial Officer

That’s actually a fun question because you seem to know some of our better birthdays here. Yes, in 2015 and 2019 we had absolutely great products that hit the markets that substantially advanced the existing state of the art. I think when you talk about things like DSO or some of the hardware, software interaction, you’re essentially talking about a new state-of-the-art. And having had the privilege to be here for long time, I strongly feel that the early days of synthesis felt very similar to what we’re doing right now with AI applied to our own design flows because it is so revolutionary from a computer science point of view as AI has essentially brought a whole new way to look at problems through the lens of can you recognize patterns versus can you do deductive calculations.

And we have already demonstrated literally month-after-month new results that are getting better and better and also broadening the applicability beyond just design, but also in verification. And so I think there is a long runway with that, but it is also literally fun to watch how exciting our own — how excited our own teams are every time they get some better results.

Joe Vruwink — Robert W. Baird & Co. — Analyst

Okay, that’s great. And then you went through a period of time thinking about fiscal 2019, 2020 and actually a lot of 2021 where your backlog, it was solid, but kind of sequentially stable and now we’ve had one big step up and actually this quarter is another big sequential step up. How much of that would be renewal driven and the scope of a renewal getting up, take behind some of these more advanced solutions versus what might be new logo growth?

Aart de Geus — Chairman and Chief Executive Officer

It’s a little bit of all of that and we have always wanted to say that backlog goes up and down, because if you do, let’s say a large transaction over multiple years you get your backlog to go up and then it gradually decreases as the revenue is recognized and then it gets renewed. Now of course, we have many renewals. So it’s not that spiky in aggregate, but that’s the one flag I want to raise for backlog. On the other hand, there is no question that our business is strong and that we have many growing renewals and are broadening the portfolio of what we offer as a company. And so we are very purposefully building the company for growth at this point in time. And so we’re watching to make sure that the backlog is in sync with the guidance that we gave you going forward.

Trac Pham — Chief Financial Officer

Now I’ll add to Aart’s comments about the backlog that is noisy and it it will vary from quarter to quarter. It’s great to have some $0.3 billion of backlog, it’s even better that the backlog is increasing because of run rate growth as Aart described. I’d say that momentum in terms of run rate growth in the first half is really what’s driving the confidence in the outlook for the full year.

Operator

And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Please go ahead.

Jay Vleeschhouwer — Griffin Securities — Analyst

Yeah, thank you, good evening. Aart, I’m excited we all know that there is much that is new in EDA in terms of certainly accelerated growth, new customers, new customer requirements through products and the like, but over time EDA history has a way of repeating itself. And so when we think about, for example, the thing that you started in your comments with AI and by the way, there is a very interesting Synopsys presentation this morning at the Answers Conference on AI. The question I have there is about historical precedence for earlier new tools. So for instance, in the early days synthesis and implementations eventually there were issues with respect to capacity for example in terms of synthesis blocks for example methodology. I’m sure you remember the great debate about flat and hierarchical and extensibility of the tools to new device types or applications. So the question with respect to AI is how confident are you that the platform that you have is viable for five to 10 years in terms of capacity performance and meeting the needs of a wider and wider set of device type. So that the kind of well perhaps some of your earlier tools eventually went into AI doesn’t necessarily run into, that’s question number one. For you, Trac, you raised the midpoint of your non-GAAP expense expectation for the year by $95 million. Could you talk about that in terms of headcount driven growth behind that the raise in guidance for OpEx? And if for example you were to fill every one of the more than 2000 physicians you now have open, would you still be able to meet your margin objectives for the year?

Aart de Geus — Chairman and Chief Executive Officer

Well, let me start with your first part one, two, three and five of the question, all the things that you mentioned, I hope we have exactly those problems because we lick them in our history. The fact is that we have the good fortune of starting with synthesis, it revolutionized the digital design made it possible in all fairness together with simulation later place and route and those automations kept growing with every success the customer wanted to do more.

Now it is like race car drivers you give them a faster car, they drive fast and say can you give me something that’s faster. And the good news is Synopsys for its entire history has always stayed at the state-of-the-art. So in that sense, this is normal evolution. Secondly, I think the AI capabilities that we have right now and that we’re building are actually quite, quite broad in terms of the applicability. And if you add the very fact that on the slide here we have just announced that we also have a SaaS model for cloud that’s theoretically saying, oh this infinite compute waiting for you if you want to pay the price and I don’t want to be light-hearted about this, but the fact is that compute is not a limitation for us right now.

I think what will be the challenging part is that all the problems that we’re addressing are highly systemically complex, meaning there are so many different things that play together and you have to nail every single one of them, otherwise the system doesn’t work and that plays absolutely to Synopsys strength, because we are deep in every area that we touch and we’ve put a high degree of emphasis now for a number of years for Synopsys to migrate its thinking from scale complexity to systemic complexity.

And so I actually have no fear in this direction, trepidation on the execution is always there, but I think we’re on a roll here.

Trac Pham — Chief Financial Officer

Jay to you — with regards to your question on OpEx, there is two parts to the expense decrease. One is the investments in the business, we’ll continue to invest in the business primarily to sustained really strong growth over the next few years. And the second part of investment is making sure that we can scale this business in a way that we can drive margin improvement over time commensurate with that growth.

The second part of what’s driving expenses is what I highlighted earlier, which is an increase in with a strong increase in the outlook for the year, it’s also allowing us to accrue more for the variable compensation to reflect the over achievement. On the hiring front, our outlook for the year of 250 basis points improvement in ops margin contemplates our ability to hire and our ability to continue to invest in the business. So it’s all closed loop and factored into the numbers.

Jay Vleeschhouwer — Griffin Securities — Analyst

Thank you, both.

Trac Pham — Chief Financial Officer

You’re welcome.

Aart de Geus — Chairman and Chief Executive Officer

Thank you, Jay.

Operator

Our next question comes from the line of Vivek Arya from Bank of America Securities. Your line is open. Please go ahead.

Vivek Arya — Bank of America Securities — Analyst

Thank you for taking my question. I actually had two kind of more conceptual questions. So for the first one, I’m curious why is there such a large gap between the growth rates of your EDA and IP business, conceptually they should be levered to the same underlying trends or why is one outgrowing the other so much. And when I look at your EDA growth right, 9% kind of full year more like 11% last year was 10%. So I don’t see the same acceleration that you’re describing. And when I compare it to your peer who is growing in the mid-teens, there also appears to be a difference in growth. So I just want to make sure I’m looking at things apples-to-apples. So that’s the first question that I have.

Aart de Geus — Chairman and Chief Executive Officer

Well, in all areas we’re outgrowing our competition and that includes EDA and IP and the other areas that we’re in. At the same time, all of those have historical precedents of how the business is set up and if you recall, it’s not that many quarters ago that we were referring to IP as in the mid single-digit growth rate. And today we’re clearly in the double-digit. So that has moved up, the IP has moved up very fast and part of the explanation I tried to give a little bit earlier is that in a number of situations IP is leading as IP is in many ways the shortcut of EDA right which is you have design that’s already done.

And so the combination of IP and EDA actually works really well together, I want to take them in aggregates and then aggregate the company is essentially predicting for this year what is a 19% to 20% growth. And so you can split the numbers anyway you want.

Vivek Arya — Bank of America Securities — Analyst

I see. So you don’t agree with the market share gains or shifts that your competitor was describing in their last call?

Aart de Geus — Chairman and Chief Executive Officer

You know I cannot fully — I cannot critique what other say about their business. We are doing well. I think the semiconductor industry is growing rapidly. There is no question that most advanced nations in the world have all understood that chips are at the heart of all the software that’s needed to be competitive. And so that is a very fundamental change and we are I think playing very well in this, with the technologies we have.

And some of the areas that we’ve highlighted such as DSO.ai, but I could have also highlighted SLM or a few other areas that are relatively new. We’re doing very well.

Vivek Arya — Bank of America Securities — Analyst

All right. And just a quick follow-up. The math suggest Q4 earnings could actually be down year-on-year. I imagine it’s more to do with just the pace of hiring because you still have pretty strong sales growth, but it will still suggest Q4 earnings based on your implied guidance would be down year-on-year, did I get that math right, is it just conservatism, is it just kind of the timing of our opex and hiring is flowing. Is that the right way to understand [Speech Overlap].

Aart de Geus — Chairman and Chief Executive Officer

Yeah, we just look at the profile, you’ve got two years that have very different profiles. And as a result the comparisons are — if you’re comparing any particular quarter this year relative to last year, it’s going to stand out a scene unusual, but I would — if you zoom out and look at the full year, we’re delivering north of 25% EPS growth and that’s really on the heels of strong revenue growth and margin improvement.

Vivek Arya — Bank of America Securities — Analyst

Understood. Thanks very much.

Trac Pham — Chief Financial Officer

You’re welcome.

Operator

Our next question comes from the line of Pradeep Ramani from UBS. Your line is open. Please go ahead.

Pradeep Ramani — UBS — Analyst

Hi, thanks for taking my question and congratulation. I just had a question on just the sustainability of this 20% revenue growth, it feels like everything you’re saying on the call is that there are structural drivers that are accelerating the growth of your business and yet you’re not taking up the financial model. So how I really sort of interpret this, are we sort of to enterprise this at 2022 is going to be a 20% type growth and then you reset back to lower levels or do you or should we take the other side, which is sort of EDA growth is sort of when I say EDA and IP growth is structurally higher than it’s been before?

Aart de Geus — Chairman and Chief Executive Officer

Let me try to put it in this context, Pradeep, we are executing incredibly well and we’re showing 20% growth off of a record year last year. The momentum in the business is really strong. We are feeling very confident about the business, not only for this year but over a multiyear period where the questions are coming from with regards to changing our multiyear model we literally just are six months into this and we updated you all on a raise in a model back in December. It’s premature to be talking about change our model mid year while we still have six months left in the business to go, but I would just say that we are feeling very bullish and confident in the business over a multi-year period.

So I would not read anything in terms of the results and concerned about our ability to sustain very strong results for the long-term.

Pradeep Ramani — UBS — Analyst

Great. And as a follow-up, maybe I mean this is sort of been asked, but let me ask in a different way. Is your growth, especially in the back half of the year, is it being driven by maybe one big customer who is pursuing foundry plan or is it broad based both in terms of customer mix and maybe even in terms of just product mix with respect to hardware or EDA or IP and so on?

Aart de Geus — Chairman and Chief Executive Officer

Well, you can see in our disclosures that we are seeing very strong growth in all geographies and across all the product lines, so just gives you a sense of the breadth that we have with regards to where the growth is coming from. We don’t disclose obviously, the customer detail, but the growth in all these areas are driven by really strong growth across the broad customer base. So I — we’re not attributing the change of the model or the older for the year to any one area that’s just not a sustainable way to run the business.

Pradeep Ramani — UBS — Analyst

Got it. Thank you.

Aart de Geus — Chairman and Chief Executive Officer

You’re welcome.

Operator

Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open. Please go ahead. I’m sorry, we did lose Mr. Mobley, one moment. [Operator Instructions] We have no lines in the queue at this time.

Aart de Geus — Chairman and Chief Executive Officer

Okay. Well, I guess we can finish it on a timely fashion. Thank you very much for your interest. We had not only a very [Technical Issues] at this time. Okay. Well, I guess we can finish on a timely fashion. Thank you very much for your interest. We had not only a very strong quarter, but more importantly saw momentum in our entire business that will go forward for as Trac said a number of quarters. And so on that basis we appreciate your support and we’ll be talking to you shortly in one-on-ones.

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Salesforce stock hit by weak guidance, co-CEO’s exit. What next?

For technology stocks, 2022 has been a challenging year, with companies losing significant market value amid prolonged stock selloff. In that respect, Salesforce, Inc. (NYSE: CRM) is among the worst-affected

Macy’s (M): Here’s a look at the retailer’s expectations for the near term

Shares of Macy’s Inc. (NYSE: M) were down on Thursday. The stock has gained 36% over the past three months and 18% over the past one month. The company’s sales

KR Earnings: Kroger Q3 sales, profit increase and top expectations

Department store chain The Kroger Co. (NYSE: KR) on Thursday said its third-quarter sales and adjusted earnings increased year-over-year. The latest numbers also exceeded the market's expectations. Net earnings attributable to

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top