Synopsys, Inc.

ladies and gentlemen thank you for standing by and welcome to the synopsis earnings conference call for the fourth quarter and fiscal year 2018 at this time all participants are in a listen only mode later we will conduct a question and answer session and instructions will be given at that time if you should require assistance during the call press star followed by 0 today's call will last one hour Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Eubank, Vice President of Investor Relations. Please go ahead. Thank you, Lori.

Good afternoon. Hosting the call today are Art DeGias, Chairman and Co-CEO of Synopsys, and Trak Fahm, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this 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 and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during 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 and financial supplement that we released earlier today, and the 8 , which we will file tomorrow morning due to the closure of financial markets today. Also included in the financial supplement is detailed information around our transition to ASC 606, which we will adopt in Q1, and our long-term financial objective. 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 the site at the conclusion of the call. With that, I'll turn the call over to Art DeGias.

Good afternoon. I'm pleased to report another excellent quarter, and with it, an outstanding year for Synopsys. In fiscal 2018, we crossed the $3 billion mark, with revenue of $3.12 billion, and delivered non-gap earnings per share of $3.91, both record results with strong double-digit growth. Our three-year backlog grew by approximately $300 million to $4 billion. Our business was comprehensively strong, with very good growth across all product groups and all geographies. We repurchased $400 million of our stock and simultaneously made targeted investments to drive long-term growth both organically and through the acquisition of Black Duck. Our diversification into software security and quality progressed very well as we passed the quarter billion dollar annual revenue mark. Notwithstanding some turbulence in the market, Synopsys is in a strong position and we're increasing our long-term financial objectives. Trak will discuss the financials in more detail. The actual fiscal 2018 results highlight a five-year unparalleled period of technology innovation, market share growth, TAM expansion, and strong financial execution for Synopsys. Early on, we envisioned a world of smart everything where complex connected chips and systems combined with enormous software content would launch the age of AI-powered electronics. Our strategy flowed from there as we shifted our center of gravity to the critical intersection of hardware and software. Our investments were targeted at not only advanced EDA tools and platforms, but at broadening our mission-critical IP portfolio and entering a new business aimed at solving high-impact software security challenges. Our vision turned out to be on point, and our execution puts us in an excellent position. As we look to our next phase of growth to $4 billion and beyond, our strategy is threefold. One, sustain and grow our EDA and IP technology and market leadership. Two, continue to scale software integrity, driving substantial growth from a diverse customer base while steadily moving to solid profitability. And three, further drive operational excellence towards multi-year operating margin expansion through continued revenue growth and prudent expense management. In that context, let me expand on each of these, beginning with EDA. Notwithstanding inevitable swings in the semiconductor market, EDA growth is driven by continued chip and system complexity. In 2018, we delivered a stream of innovations aimed squarely at enabling the most complex designs ever, and those products are in the very early stages of a multiyear upgrade cycle. Specifically, our digital design tools generated their highest revenue growth in several years, with strong performance across all elements of our new Fusion design platform. The word Fusion captures the advantages of a single or fused data model for synthesis, place and route, and sign-off, enabling us to now share optimization engines across product boundaries. This results in very measurable productivity improvements for our customers. While we introduced the Fusion concept in March, we formally launched the Fusion Design Platform and two significant new products last month. Most notably, Fusion Compiler, the only single product on the market that integrates synthesis, place and route, and the key elements of our gold standard sign-off technology. Built on a unified data model with shared code among the different functions, it eliminates the need to move between tools. Through a simultaneous multi-year development effort, we massively upgraded our synthesis capabilities with a brand-new engine built from the ground up, resulting in notably higher capacity and performance. The combination is quite powerful, with 2x faster time-to-results and significantly fewer design iterations, along with a 20% improvement in quality of results. These are impressive numbers. Customers such as Toshiba, Samsung, Social Next, and others have already reported excellent results. and we see great promise for demand going forward. For customers who use our franchise design compiler product separately, we also launched a significant upgrade design compiler NXT, which delivers 2x faster runtime and cloud-ready distributed synthesis that boosts performance even further. Stay tuned for more Fusion-related capabilities to be rolled out during 2019. Verification 2.0 had another outstanding year of growth and share gains. With the exploding requirements of today's leading technology trends, including automotive, IoT, AI, and others, verification is the biggest bottleneck for customers. We developed our verification continuum platform, which integrates the fastest market-leading hardware and software tools available to not only drive state-of-the-art chip verification, but to enable the simulation of these highly complex systems. Across the board, we've generated a large number of competitive wins and have built significant new customer relationships. Particularly impactful has been our hardware-based Zibu emulation system, which saw another record year, making us the market leader. In 2018, we launched Zibu Server 4, the fastest, largest capacity emulator available today. It hits the sweet spot of not only accelerating chip verification, but importantly, early software bring-up and system validation. Customer success has been quite broad-based, from very large, big-volume, semi and systems companies, all the way to small, aggressive AI startups. Emulation is an area that lends itself to delivery on the cloud, which is helpful to some customers as they seek sufficient compute capacity during periods of peak utilization. While we have offered cloud hosting for EDA tools for many years, we officially launched a broader cloud solution in the summer, partnering with public cloud providers, including Amazon, Microsoft Azure, Google, and Alibaba Cloud. We expect that continued growth in complexity will sustain strong demand for our solutions. Turning to semiconductor IP, We had another excellent year of double digit growth, reaching record levels at slightly more than 20% of total Synopsys revenue. Over the past 15 plus years, we've built the broadest and highest quality portfolio of logic libraries, embedded memories, interfaces, processors, and security IP. Our offering has evolved from being initially cost effective building blocks to now state-of-the-art, sophisticated subsystems serving high-impact markets and leading-edge customers. Nowhere is this more visible than in cutting-edge verticals like cloud, AI, 5G, and autonomous driving. Our arc processors, for example, generated very good growth in 2018, notably with our innovative embedded vision processor, targeted at AI applications, including drones, surveillance, and digital imaging products. Today's automotive chips must meet stringent functional safety and reliability standards. Over the past several years, we've developed the broadest portfolio of ISO 26262 certified IP for ADAS, infotainment, embedded microcontrollers, and more. Our unmatched portfolio of IP interfaces ranges from USB to PCI Express to DDR, HDMI, MIPI, high-speed certies, and more. We are by far the broadest one-stop shop for high-quality blocks in all key manufacturing processes down to 7 nanometer and below. As customers trust our IP for their most demanding new designs, we expect continued strength going forward. While Tumos is fortunate to lead in a number of areas, we continually evolve our strategy to stay ahead of emerging opportunities. Our entry into software integrity almost five years ago is a prime example of this. In this new market, we offer solutions to identify and address security vulnerabilities and quality defects early in the software development cycle, that is, while code is being written. Through both organic investments and key acquisitions, we have built a new market position, one that is nicely adjacent to EDA, but also constitutes a major new tent. For Synopsys, that means a high-growth industry and diversification of our customer base, reaching software developers in key verticals such as financial services, automotive, and medical devices. The most recent acquisitions, Cigital and Black Duck, have been very successful in enabling higher-level strategic engagements with customers, demand creation, cross-selling, and significantly increased brand recognition. In 2019, We plan to deliver a comprehensive software integrity platform, which is designed to provide a streamlined, more robust solution in what has been highly fragmented market, delivering high value for our customers. Software integrity is poised to reach roughly 10% of our total revenue in fiscal 19, while progressing towards profitability. We are evaluating the best way to manage the business and report its results, and we'll make a decision in Q1. Rounding things out, a few comments about the economic landscape. Following two years of very strong revenue growth in the semiconductor industry, analysts are forecasting continued growth, albeit at a more modest pace. Design activity, however, continues unabated. Learning from experience, customers prioritize electronic design through all parts of the business cycle. In addition, exciting new verticals, many new AI entrants, and continued complexity growth are bolstering the demand for our solutions. With a portfolio of products and services aimed directly at the most critical electronic challenges in the world, we're confident in our position and feel a great deal of vitality in our outlook. Furthermore, our solid financial foundation, recurring revenue business model, and diversified customer base augment that confidence and sense of momentum. As a result, we're raising our financial ambitions with the intent to drive double-digit non-GAAP EPS growth over the next several years. In closing, fiscal 2018 was an excellent year for Synopsys. We delivered double-digit revenue and non-GAAP earnings growth with strength across all product groups and all geographies. We're poised for the next phase of growth, leveraging a number of game-changing new products in EDA, delivering on a strong pipeline of advanced IP cores, and continuing to scale revenue and profitability in software security. I want to thank our employees, customers, partners, and investors for their hard work, support, and confidence. Let me now turn the call over to Trak.