Synopsys Third Quarter Fiscal Year 2018 Earnings Conference Call Prepared Remarks Wednesday, August 22, 2018

Transcription

1 These prepared remarks contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of Any statements that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding Synopsys business, projected business results, business objectives, acquisitions, products, technologies, business model, new markets, customer demand for our technology, our planned stock repurchase activity, our operating margin targets, expected benefits and financial impact of the acquisition of Black Duck Software, and the expected revenue impact of new accounting pronouncements to be adopted by us. These statements involve known and unknown risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in our forward-looking statements. Accordingly, we caution stockholders and prospective investors not to place undue reliance on these statements. Such risks, uncertainties and factors include, but are not limited to: our ability to operate or integrate Black Duck Software s business and technologies with our own successfully; our ability to estimate and predict the treatment of contract-specific terms and our customer s usage patterns as we assess the impact of Accounting Standard Topic 606; uncertainty in the growth of the semiconductor and electronics industry; consolidation among our customers and our dependence on a relatively small number of large customers; uncertainty in the global economy; our ability to realize the potential financial or strategic benefits of acquisitions we complete; fluctuation of our operating results; our highly competitive industries and our ability to meet our customers' demand for innovative technology at lower costs; our ability to carry out our new product and technology initiatives; cybersecurity threats or other security breaches; risks and compliance obligations relating to the global nature of our operations; our ability to protect our proprietary technology; investments of more resources in research and development than anticipated; increased risks resulting from an increase in sales of our hardware products; changes in accounting principles or standards; changes in our effective tax rate; liquidity requirements in our U.S. operations; claims that our products infringe on third-party intellectual property rights; litigation; product errors or defects; the ability to obtain licenses to third-party software and intellectual property on reasonable terms or at all; the ability to timely recruit and retain senior management and key employees; evolving corporate governance and public disclosure regulations; the inherent limitations on the effectiveness of our controls and compliance programs; the impairment of our investment portfolio by the deterioration of capital markets; the accuracy of certain assumptions, judgments and estimates that affect amounts reported in our financial statements; and the impact of catastrophic events. More information on potential risks, uncertainties and other factors that could affect Synopsys' results is included in filings it makes with the Securities and Exchange Commission from time to time, including in the sections entitled "Risk Factors" in its Annual Report on Form 10-K for the fiscal year ended October 31, 2017 and in its latest Quarterly Report on Form 10-Q. The information provided herein is as of August 22, Although these are expected to remain available on Synopsys website through the date of the earnings results call for the fourth quarter of fiscal year 2018, their continued availability through such date does not mean that Synopsys is reaffirming or confirming its continued validity. Synopsys undertakes no duty, and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law. These prepared remarks also contain non-gaap financial measures as defined by the Securities and Exchange Commission in Regulation G. Reconciliations of the non-gaap financial measures to their comparable GAAP measures are included in the Third quarter fiscal year 2018 earnings release and financial supplement, each dated August 22, 2018, and available on Synopsys' website at Additional information about such reconciliations can be found in Synopsys Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, ****************************** P a g e 1

2 Good afternoon. I am happy to report that Synopsys delivered another outstanding quarter and passed the 3 billion dollar mark in trailing-twelve-month revenue! An exciting milestone as we enter our next phase of growth. And it s a good time to thank our Synopsys team, our customers, our partners, and all of you for your support. We entered fiscal 2018 with expectations for solid revenue, earnings, and cash flow. As a result of strong customer demand and excellent execution, we re on track to substantially exceed the targets we communicated last November, and expect to deliver double-digit revenue and non-gaap earnings per share growth for the year. For Q3, we posted revenue of $780 million, with strength across all product groups; non-gaap earnings per share were $0.95, and we generated $289 million in operating cash flow. We repurchased $165 million of our stock, bringing the total for the year to $400 million. Lastly, we re raising our revenue and non-gaap earnings guidance for the year. Trac will provide more detail in a moment. The customer environment is strong, as the age of AI, or digital intelligence, drives hefty investments by traditional and new semiconductor and systems companies, as well as software developers, across many industries. Investments are directed at supplying the increasing demand for compute power, cloud storage, and networking infrastructure, all in support of massive data and complex software. Add to that the huge and growing challenge of security, and one can readily see that the need for design solutions will continue to expand for years to come. Synopsys is uniquely positioned to address these technological challenges, sitting at the intersection of hardware and software. As a result, we ve grown and strengthened our leadership position in EDA, built a strong and broad IP business group, and branched out into the large, adjacent TAM of software security and quality. In this context, let me provide some highlights from the quarter, beginning with EDA. The primary driver of EDA growth is complexity. Whether due to more advanced process technologies, sophisticated designs at established nodes, or immense amounts of software embedded on a chip. In our entire history, leadership in electronic complexity has been the differentiator for the Synopsys solutions. Today, this means moving to 7, 5, and even 3nm process technologies. With our TCAD and lithography tools, we re a key partner in the initial stages of manufacturing process development. These early engagements benefit P a g e 2

3 all subsequent products, as demonstrated by some of the successes in the quarter. We announced broad certification for several Samsung Foundry advanced processes from digital and custom design to verification. And just last week, we announced a collaboration with IBM to enable their very advanced process development with our manufacturing, digital design and IP capabilities. Our design platform generated revenue greater than plan, reaching an all-time high, with accelerating growth over the past year. On the digital side, our recently introduced Fusion Technology which brings about a revolutionary new level of integration between synthesis, place & route, and signoff is really hitting the mark with customers. Not only does the Fusion Technology provide a fundamental infrastructure to design better chips, but we ve already embedded a number of AI techniques that further improve speed, area and power. Engagements with partners and customers have grown. Samsung Foundry has certified our Fusion Technology for its 7nm Low Power Plus process with EUV. Multimedia SoC provider Vatics standardized on this technology after realizing 40% runtime reduction. We are seeing plan-of-record adoption by several high-profile systems companies. And at the Design Automation Conference, industry leaders AMD, Broadcom, Qualcomm, Renesas and Samsung presented the benefits that the new technology brings to their implementation flows, highlighting solid early results. Now to verification, where we also delivered an excellent quarter. Demand is high for our Verification Continuum Platform, built upon the fastest engines in the industry and our #1 positions in all three key areas: emulation, FPGA-based prototyping, and verification software. Verification hardware had another very strong quarter, with broad-based adoptions and renewals. Highprofile companies Samsung, Intel and AMD presented to fellow engineers at DAC their real-life successes using ZeBu. In Q3, we announced general availability of ZeBu Server 4, the industry s fastest and largest-capacity emulation system. With 2X the performance over competing systems, ZeBu is ideal for the extremely demanding verification requirements in automotive, 5G, networking, machine learning, and datacenter SoCs. In analog simulation, Toshiba Memory and Synopsys collaborated to accelerate 3D flash memory verification. The resulting technologies address increasing design complexity and reduce multi-day simulation runs to less than a day. Let me now move to IP, where we expect another record year. Double-digit growth in IP is driven by several dynamics. One, continued outsourcing of semiconductor IP blocks. Two, an increasingly broad portfolio covering interfaces, embedded memories, security, and processor IP optimized for high-growth markets such as automotive, AI, and cloud computing. Three, coverage of leading-edge and established P a g e 3

4 process nodes. And four, the demand for IP subsystems that make it easier and more efficient for customers to outsource their designs to us. We are seeing strong demand for our processor IP solutions, notably the ARC Embedded Vision Processor that features the industry s first ASIL-D-Ready embedded vision IP for autonomous driving applications. Our acquisitions in non-volatile memory are also bearing fruit, with significant orders in the quarter across many different market segments. Now to software integrity, where Synopsys provides testing for security vulnerabilities and quality defects in software code during the development phase. While software developers in our traditional customer base are a prime growth opportunity for us, the number of companies who develop and rely on software as a critical component of their business is much broader than EDA and IP. This mounting need in verticals such as medical devices, financial services, automotive, aerospace and industrials represents a large TAM that we are just beginning to tap. Our mission is to enable companies to more easily test both open source and proprietary code, through a combination of a unified tool platform and consulting services. With general availability planned for next year, we re making steady progress towards our Software Integrity Platform, with early testing happening now. An important part of the platform is the set of Black Duck testing tools which address the growing need to diagnose security risks in open source software. A recent analysis of more than 1100 commercial code bases found that 96% of applications scanned had open source components. 78% contained at least one open source vulnerability with an average of 64 vulnerabilities per codebase! The integration of Black Duck is going well. For us, this is visible through both early cross-selling opportunities and enhanced brand recognition. Our services organization is another important aspect of our holistic approach to assisting the customer journey towards a more mature security development process. The progress made over the past four years has been recognized by industry leaders such as Gartner and others, stimulating further strong interest by new customers. For example, at the recent BlackHat security conference, we received around 7,000 inquiries from current and potential customers, nearly doubling last year s tally. From a financial perspective, we re also executing well. We ve reached critical mass, passing a quarter billion dollars in trailing twelve months revenue, and are quite enthusiastic about the future potential. Reaching up into emerging vertical market segments, automotive is a key focus for Synopsys not only in software security, but across our entire portfolio. Our unique virtual prototyping is gaining traction across the automotive supply chain. By providing models of critical chips and subsystems, Tier 1s and P a g e 4

5 OEMs can start software development earlier to better meet strict time-to-market objectives. We ve collaborated with the leading automotive semiconductor companies to create the most comprehensive ISO qualified tool flow, with differentiated technologies for functional safety and reliability. At DAC, we hosted an automotive panel with leaders from NVIDIA, Panasonic, TSMC and NSI-TEXE a division of leading automotive Tier 1 Danso who shared their successes with Synopsys. We also have the most comprehensive portfolio of automotive-certified IP, ranging from our ASIL-D embedded vision processor to key interfaces and memories. To summarize our strategy over the past several years, our actions have been deliberate. First, maintain and grow our leadership in EDA. As the market leader, we re rolling out new leading-edge technology, and have gained share. Second, continue to broaden our IP portfolio and customer adoption. As the #2 global IP vendor, we ve built the most comprehensive portfolio of high-value titles and continue to see double-digit revenue growth. And third, enter and scale the brand-new, high-growth TAM and diversified customer base in Software Integrity. We believe that we ve reached critical mass by passing the quarterbillion-dollar mark, having built a recognizable brand, and are poised for ongoing 20% organic growth. During the past years, we made significant investments, both organically and through M&A. We did these while also delivering on our guidance for high-single-digit EPS growth. In fact, in the last two years, Synopsys overachieved, delivering double-digit revenue and earnings growth, and crossing the $3B mark earlier than our own internal projections of a few years ago. This backdrop provides a solid foundation for continued growth and increased operating leverage in the business. We will be in a position to provide an update to our long-term operating model objectives and assumptions when we report next quarter. For now, I will say that we currently intend to drive non-gaap operating margin to approximately 26% over the next three years, with a longer-term ambition of high-20s. As we are presently in the middle of our budgeting process, we are not yet ready to provide 2019 guidance, but even with the change in revenue accounting next year, we expect non-gaap operating margin to increase in FY19. To conclude, we delivered another excellent quarter and are raising revenue and non-gaap earnings guidance for the year. Our strategic investments over the past several years are paying off. Near-term, our strong products and customer relationships in EDA and IP are leading to very good revenue and EPS growth. Longer-term, our expansion into the new software security and quality TAM is making excellent progress. Let me now turn the call over to Trac. P a g e 5

6 Thanks, Aart. Good afternoon everyone. Synopsys Third Quarter Fiscal Year 2018 Earnings Conference Call Reaching $3 billion in revenue is a great accomplishment that not only reflects our financial execution, but also demonstrates that our strategy and investments for the long-term are paying off. This is evident in our strong performance this quarter and improved outlook for Q4. As a result, we re raising our 2018 revenue and non-gaap EPS guidance. Now to the numbers. As I talk through the results and targets, all comparisons will be year-over-year unless I specify otherwise. Total revenue increased 12 percent to $780 million, reflecting strength across our product portfolio and in all geographies. Total GAAP costs and expenses were $716 million, which includes a $26 million charge for the Mentor Graphics patent litigation settlement. Total non-gaap costs and expenses were $612 million, resulting in a non-gaap operating margin of 21.5 percent. GAAP earnings per share were 52 cents. Non-GAAP earnings per share were 95 cents, exceeding our target range due to strong revenue growth and operational execution. Operating cash flow for the quarter was $289 million, reflecting very strong collections and offset by a one-time payment of $65 million related to the Mentor legal settlement. Cash and cash equivalents at quarter-end were $741 million 18 percent of which is onshore with total debt at $622 million. We launched a $165 million dollar accelerated share repurchase in May, bringing our total buybacks yearto-date to $400 million. As a result, we ve been able to reduce our share count versus last year. We currently have $325 million remaining on our share repurchase authorization. We re progressing very well with our integration of Black Duck, and remain on track to achieve our 2018 target of $55-60 million in revenue. This estimate reflects a purchase accounting deferred revenue haircut of about $20 million. In addition, we continue to expect Black Duck to be approximately 12 cents dilutive to 2018 non-gaap EPS, and to reach break-even in the second half of Before moving on to guidance, let me provide some brief commentary about the new ASC 606 revenue accounting rules, which will go into effect for us in fiscal 2019, beginning in November. As we ve P a g e 6

7 previously discussed, we do expect a one-time loss of backlog at the time of transition. While revenue recognized under the new rules will be slightly lower than under the current rules, we do not expect a material impact based on our current forecast, and there is no impact on cash flows or the economics of the business. As we look to 2019, please note that we re still working through our normal budgeting process, and are assessing the business outlook, coming off another record hardware and IP year in Therefore, we would suggest that it s premature to change your 2019 estimates until we provide detailed guidance next quarter. We will also provide a full view of our long-term operating model objectives and assumptions at that time. In the meantime, let me reiterate what Aart said: we intend to increase operating margin in 2019 and beyond, with the goal of reaching 26% in the next three years and the high 20s longer-term. Now to fourth quarter and fiscal 2018 guidance, which reflects overachievement in Q3 and incremental upside in Q4. For Q4, the targets are: Revenue between $774 and $804 million; Total GAAP costs and expenses between $722 and $738 million; Total non-gaap costs and expenses between $655 and $665 million; Other income and expenses between minus $3 million and minus $1 million; A non-gaap normalized tax rate of 13 percent; Outstanding shares between 153 and 156 million; GAAP earnings of 39 to 47 cents per share; and Non-GAAP earnings of 76 to 80 cents per share. The revised targets for fiscal 2018 are therefore: Revenue of $3.1 to $3.13 billion. Other income and expenses between minus $5 million and minus $3 million; A non-gaap normalized tax rate of 13 percent; Outstanding shares between 153 and 156 million; GAAP earnings of $1.55 to $1.63 per share; P a g e 7

8 Non-GAAP earnings of $3.89 to $3.93 per share; Capital expenditures of about $110 million; Synopsys Third Quarter Fiscal Year 2018 Earnings Conference Call And cash flow from operations of $460 to $500 million, reflecting the one-time Mentor legal settlement. In conclusion, we delivered strong Q3 results and are raising full-year guidance for both revenue and non- GAAP earnings reflecting another year of double-digit growth. We reached $3 billion in revenue by investing to carry out our growth strategy, while also delivering on our earnings commitments and returning cash to shareholders through a consistent stock repurchase program. We re confident in our balanced approach to maximizing long-term shareholder value, making the most of compelling revenue growth opportunities while also driving operating leverage. Let me now turn it over to the operator for questions. P a g e 8