Synopsys, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsis Earnings Conference Call for the second quarter of fiscal year 2019. 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 today's call, please press star followed by zero. 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. At this time, 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.

Thanks, Anna. Good afternoon, everyone. Hosting the call today are Art DeGias, Chairman and Co-CEO of Synopsys, and Trak Pham, 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 this 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. Reconciliation to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, 8K, and financial supplement that we released earlier today. Also included in the financial supplement is detailed information around our long-term financial objectives, the transition to ASC 606 this year, and operating segment results. 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 Taggios.

Good afternoon. I'm happy to report excellent second quarter results. Revenue was a record $836 million, with strength across both operating segments. In semiconductor and system design, software revenue growth was particularly strong, moderated somewhat by a tough hardware comparison versus the record second quarter 2018. Software integrity revenue tracks right to plan with greater than 20% growth and is expected to be profitable for the year. Non-GAAP EPS was $1.16, and we repurchased $100 million of our stock, bringing the total so far this year to $129 million, While the U.S. export restrictions that were announced last week do have an impact, we are raising our non-GAAP earnings guidance in the top ends of our revenue range to reflect the strength of our business. TRAC will provide some additional color on this topic and discuss the financials in more detail. Whereas geopolitical tension has escalated, the overall customer environment for us is quite solid. The hunger for advanced technology, design tools, IP, and security solutions is strong, creating a robust market opportunity. The growing impact of AI, 5G, the Internet of Things, and big data is profound, and it's driving substantial investments in new compute and machine learning architectures. Virtually all vertical markets are engaging with AI, and the potential economic impact is forecast to be in the trillions of dollars. In addition to long-time semiconductor vendors, very large system companies and cloud providers are investing competitively, opening further opportunities for us. The push for AI solutions, along with the growing security issues associated with a highly interconnected world, benefits our entire silicon-to-software product portfolio. Synopsys is ideally positioned to solve these very complex challenges. Our EDA design and verification solutions are front and center in creating brand-new AI-optimized engines. Our IP is broadly used in the most advanced silicon technologies ever built. Our prototyping tools run and test software on new subsystems long before silicon is available, and our software security and quality solutions are essential to minimize vulnerability to threats. In that context, let me provide some highlights from the quarter, beginning with EDA. The underlying driver of EDA growth is design complexity along three vectors. One, advanced processes moving to smaller, denser technology nodes, such as 7, 5, and most recently, 3 nanometer. Two, optimizing designs in more established nodes for cost reduction, but also speed and low power. and three massive software content that is becoming integrated as part of chip design. And overall, the system challenge is to make sure the chip and the software work well together. In design, customers rely on Synopsys for virtually all of their 12-nanometer and below designs. The three reasons are state-of-the-art tools and also our unmatched collaboration and support. This quarter, we continued our longstanding foundry enablement with TSMC, who certified both our digital and custom design platforms for its 5-nanometer FinFET process. TSMC also certified our Fusion design platform for their innovative System on Integrated Chip, or SOIC, chip stacking technology, delivering design solutions for true 3D device integration. Samsung used our complete design solution to develop the very first test chip for its brand-new gate-all-around process. In digital design, a rapidly growing highlight is the success of our new Fusion Compiler product, which we launched in November. It's a revolutionary combination of the main pillars of design, all of which are cornerstones for Synopsys. Synthesis, place and route, and sign-off into a single solution on a single data model. Fusion Compiler is doing really well, from both technical and business perspectives. A rapidly growing set of customers is reporting excellent results, including significantly shorter design times, a higher level of predictability, and better timing, area, and power results. Adopted by 19 different logos across eight different processes nodes and used for about 250 active and by now completed designs, the trajectory is impressive. One such customer is Renesas, who deployed Fusion Compiler across its high-value automotive portfolio. Renessa cited consistently superior power, performance, and full-flow productivity on its production design. The versatility and potential of the Fusion design platform is living up to its promise, which includes continuously adding of new Fusion technology capabilities to broaden its impact. This quarter, for example, we launched a fully integrated test flow containing next-generation capabilities for automotive tests and functional safety. Stay tuned as we deliver further enhancements over the next 12 months. Now turning to verification, where we continue to see outstanding results and a strong outlook for the year. Thanks to many years of great technology advances and excellent customer support, we are the market leader. Verification is a huge bottleneck for chip and system design. Customers tell us that they can't get enough verification as design complexity is getting more difficult and more time-consuming by the day. Synopsys is fortunate to have the fastest software and hardware solutions and demand is high for our verification continuum platform. Q2's strength in verification software was driven in part by accelerating demand from influential systems companies who are reinventing how to design and verify their next-generation products. Our decade-long leadership is an important indicator of our impact. Twelve of the top 15 semiconductor companies in the world use our franchise VCS simulator as their primary verification solution. Demand for our hardware-based verification is also high and increasingly broad-based. The ability to validate chips together with the software and the need for early software developments are paramount. Our new ZBoot4 emulator, launched late last year, is doing very well, with early demand exceeding expectations and outpacing that of previous solutions. Adoption of our HAPS FPGA-based prototyping solution, which targets early software development, was again robust in the quarter. As a result of our differentiation, we are the market leader in both emulation and prototyping. Now to IP. which had another very strong quarter and is poised for an excellent year of double-digit growth. As the number two vendor in the world and the market leader in interface, analog, embedded, memory, and foundry-specific IP, we provide the industry's broadest set of building blocks to address today's most complex design requirements for AI, automotive, Internet of Things, cloud computing, and more. The quarter featured a number of important milestones at advanced nodes, We announced that we have achieved more than 250 IP wins on TSMC's 7nm FinFET process across a broad range of applications. In addition, we signed a multi-year agreement with a marquee global customer for 5nm IP. Meanwhile, our portfolio continues to expand. Further building on our strength in automotive, we announced a collaboration with GlobalFoundries to develop the industry's first automotive-grade IP for their 22-nanometer FDX process. We announced a complete solution for one of the hottest markets around, narrowband IoT, enabling the next wave of connected devices. And we taped out two key IP titles for cloud computing and AI applications, including 112G30s, an ultra-high-speed connection for hyperscale data centers. With the rising complexity and time-to-market challenges inherent In delivering today's electronic systems, Synopsys fills a critical and growing need for sophisticated low-risk IP. Which brings me to our software integrity group, which has now reached the 10% of Synopsys' revenue milestone, and it's scaling nicely. As software security issues continue to increase in both number and severity, testing during the development process becomes a necessity. This is true not only for electronics, but for anyone who develops software in financial services, medical, automotive, industrial, and beyond. The progress our team has made in building this business over the past five years is striking. While we acquired compelling technologies and added substantial organic investments, we also focused our deep knowledge towards building a compelling software security and quality platform. In March, we announced our new Polaris software integrity platform. It brings products and services together into an integrated, user-friendly, cloud-based solution that makes deployment and scalability easier. While we will continue to deliver enhancements to the platform over the next 12 to 18 months, the initial release is already showing great promise. We are engaged with customers across all regions, and early reaction has been very positive. This included a Fortune 500 insurance company who placed a multi-year, multi-million dollar order for Coverty delivered on Polaris. The power of our portfolio, the broadest in the industry, is evident in the growing number of high-value contracts and companies adopting multiple products. Industry recognition of our solution also continues to grow. Last month, for the first year in a row, Synopsys was named a leader in Gartner's magic quadrant for application security testing, In fact, we were placed at the highest level. We're also again recognized as a leader in the Forrester Wave for software composition analysis for open source software. Importance rankings such as these substantiate our leadership for customers who are investing significantly and choosing their preferred partners. To summarize, we delivered another very strong quarter and are raising the top end of revenue and non-gap EPS guidance for the year. We're making step-by-step progress in expanding our ops margin. Our new EDA products in the early stages of a multi-year adoption cycle are experiencing rapid and substantial adoption. Demand for our IP portfolio is high, and we expect to deliver another year of low double-digit growth. And our software security and quality business is scaling well, reaching about 10% of total revenues and expected to reach profitability for the full year. Finally, I want to say thank you to the Global Synopsys team for its continued hard work and commitment to helping our customers meet their important and always urgent objectives. Let me now turn the call over to Trak.