Synopsys, Inc.

ladies and gentlemen thank you for standing by and welcome to the synopsis earnings conference call for the first quarter fiscal year 2019 at this time all participants are in a listen only mode and then 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 please 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, everyone. 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 today's earnings press release, financial supplement, and 8K. Also included in the financial supplement is detailed information around our long-term financial objectives, our transition to ASC 606, and newly disclosed results by segment. All of these items, plus the most recent investor presentation, are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted at the site at the conclusion of the call. With that, I'll turn it over to Art Tagia.

Good afternoon. Q1 was an excellent start to the year. Revenue was a record $820 million, and non-GAAP earnings per share were $1.08, both above our target ranges. Strength was across all product groups, including some large expanded renewals with Cornerstone semiconductor companies. We are confident in our outlook for the year and are reaffirming our guidance. Please note that this is the first quarter we are reporting two segments, semiconductor and system design and software integrity. In semiconductor and system design, results exceeded planned with strength across the board, augmented by timing of customer shipments. In software integrity, revenue was right on plan and operating margin continued to move towards sustainable profitability as we built for the long term in this high growth space. Trak will discuss the financials in more detail. Looking at the overall landscape, solid demand for our solutions has continued into 2019, notwithstanding the somewhat increased uncertainty in the market. While the global narrative focuses on geopolitical realities, electronics companies continue to design ever more complex chips and devices at an unabated speed. One notable driver, of course, is artificial intelligence. The development and proliferation of AI-dedicated chips brings great potential for us as the number of customers and designs is growing quickly. Competition among AI-specific companies is fierce and indeed for anyone incorporating AI into their chips with an intense race to market and a broad set of competing architectures. In addition, we're seeing an escalation of the security challenges in highly interconnected systems loaded with software. This is in part driven by the proliferation of data-intensive IoT devices and the emerging 5G connectivity standard, among other applications. The power of AI and the risks of security breaches require attention for all the products we use every day, from cars to mobile phones to smart homes to medical devices. Synopsys provides key technology in the midst of this evolving picture. Our results and outlook are not in spite of these challenges, but rather because of them. Our innovation and technologies become even more valuable to our customers when the stakes are so high. This is evident throughout our business. Our penetration in new and growing AI chip companies has been excellent, and this growth has been visible across our product groups. In EDA, our fusion technology and platform rollout is progressing well, and reports show increasingly strong results. IP also continued on a positive path, helped by a particularly strong competitive win rate as we deliver sophisticated building blocks in more and more difficult advanced nodes and challenging verticals. On top of this, our software integrity business continues to broaden its customer base and software security is increasingly recognized as a must-have in this era of product development. With that, let me share some product highlights starting with EDA. At the leaning edge of technology, we continue to see a steady push towards smaller geometries, as Synopsys continues to be the pioneer and the relied-upon supplier for well over 90% of 12-nanometer and below designs, all the way down to 5-, 3-, and 2-nanometer research and development. A particularly noteworthy accomplishment was the tape-out of the industry's first chip using next-generation gate-all-around transistors. This highly... is the result of an extensive collaboration with Samsung using a full fusion design platform flow from synthesis to place and route to sign off. Even at the earliest stages of process development, our unique position at the roots of silicon helps advance the most difficult research. The latest example of this is the recently announced collaboration with LTAP and IMTAP important industry innovators to drive modeling standards to 2 nanometer and beyond. Meanwhile, our breakthrough Fusion design platform continued to make great strides and generated strong results in Q1. You may recall that in November, we introduced not only our next generation synthesizer, Design Compiler NXT, but also a game-changing new product called Fusion Compiler. Fusion Compiler, which is architected on a unified data model, is the only system on the market that integrates synthesis and place and route and all the key elements of our gold standard sign-off technology. We accomplish this through a novel way of sharing code among the different functions, thus eliminating the need to move between tools. The value to the customer is better chip results such as size, speed, and power, in shorter and more predictable design time. For just one quarter on the market, we're seeing high initial demand and have rapidly grown the number of active customers, including many of the top 10 SOC design houses. Fusion Compiler was also recognized with a World Electronics Achievement Award for Product of the Year. When we pioneered the Fusion concept, our aspiration was to build a platform upon which we could roll out new differentiating capabilities for years to come. Stay tuned as we deliver even more exciting advances over the next 12 months. Now to verification, where our platform vision and technology execution have yielded excellent business and market share growth. Increasing chip and system complexity means huge verification challenges in terms of both speed and time to market. In addition, the growing desire to run software on top of systems that are still in construction is taxing the state of the art of simulation, emulation, and prototyping. Synopsys is at the forefront of enabling this to happen across software, simulation, emulation, FPGA-based, and virtual prototyping. Our verification continuum platform continues to drive excellent demand and competitive wins. This quarter we saw particularly strong growth in software-based verification at both traditional semiconductor companies and emerging system companies focused on their own in-house design. In emulation, revenue growth has been significant over the past two years, driven by a steadily expanding number of customers and average run rate. While hardware revenue is quite variable from period to period, driven by the timing and magnitude of specific orders, it's clear that strong industry demand continues. Our newly launched Zibu Server 4 product, the fastest, largest capacity emulator in the market, is generating broad-based adoption by customers, designing storage, networking, and AI chips, as well as a large global systems powerhouse. Orders for our HAPS FPGA-based prototyping solution were strong, particularly in 5G and automotive verticals. We're also seeing very promising progress with virtual prototyping in the automotive vertical benefiting semiconductor, tier one, and OEM customers. Verification is an example of a capability that works well on the cloud. While we've hosted tools on our own cloud for years, including our Xebu emulation system, we're continuing to make good progress tuning our solutions for cloud optimization. Interest is high. We have many customers who use their own or public clouds, some who are already working directly with us, and many others in proof of concept stages to see what structures may best work for them. Now moving to our IP products. We continue to deliver double-digit revenue growth with strength across the board, particularly in AI and automotive. Our AI-related differentiation was readily apparent in Q1, with wins from several very notable AI startups. As an example, Israel's Havana Labs achieved first-class silicon success on its high-performance AI processor SoC using our PCI Express 4.0 IP. In automotive, we had a number of major global wins, including AI automotive startup Fabu, which selected a broad portfolio of Synopsys automotive certified IP. Over the past 12 months, We license IP to more than 25 leading automotive semiconductor suppliers, covering a range of applications such as autonomous driving, infotainment, and connectivity gateways. Now to our software integrity group, which provides products and services to address code quality and security vulnerabilities early in the software development lifecycle. Over the last five years, we've systematically scaled this business and expected to reach 10% of total Synopsys revenue for fiscal 2019. Our investments in this high-growth market also substantially diversify our customer base into verticals such as financial services and medical, expand our reach in automotive, and increase our business with our well-established electronics customers. While the need for enhanced security measures has clearly increased, companies still struggle to develop effective strategies on how to get there, given the immense scope of the challenge. One example is automotive, arguably one of the most vulnerable industries due to the heavy toll that breaches can cause. A recent survey of global automotive manufacturers and suppliers found that 84% of automotive professionals have concerns that their organization's cybersecurity practices are not keeping pace with evolving technologies. and that most of them test less than half of the technology they develop for security vulnerabilities. Bolstered by the acquisition of Black Duck, which was fully integrated in Q1, we offer by far the most comprehensive portfolio of products and services in the market today to help companies solve these challenges, and we're not standing still. We're on track this year to deliver our integrated software integrity platform which will enable both software developers and management to build essential security and quality checks into their software development lifecycle. Stay tuned for an announcement soon. In closing, Q1 was a strong start to the year. We delivered excellent financial results and are reaffirming our outlook for fiscal 2019. Even with some caution around global markets, electronics companies continue to invest in critical chip and system designs, as well as immense amounts of sophisticated software. We are confident in both our near-term execution and our long-term prospects, given our position in the market. We are committed and well on track towards our mid- and long-term growth and margin expansion targets. With that, let me thank our customers for their business and our employees for their dedication and hard work in delivering yet another strong quarter. Track will now highlight the financial perspective.