Synopsys, Inc.

call for the third 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 the 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. As a reminder, today's conference 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, Anna. Good afternoon, everyone. Hosting the call today are Art DeGias, Chairman and Co-CEO of Synopsys, and Trach 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 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 and 8 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 the site at the conclusion of the call. With that, I'll turn the call over to Art Tagia.

Good afternoon. I'm happy to report that Synopsys continues to execute very well and delivered excellent Q3 results. Revenue, non-gap earnings, and cash flow were all ahead of plans. As a result of Q3 overachievement and broad-based strength, we're raising guidance for the fiscal year. These achievements reflect our increased momentum, evident in visibly strong results and outlook, product differentiation and technical strength, and demand for advanced solutions throughout our business. We're progressing rapidly on our journey towards $4 billion and beyond, while increasing value with operating margin expansion already visible in our bottom-line results. Before I discuss the broader landscape, let me say a few words about the U.S.-China situation. The government entity's ban has affected our revenue somewhat. However, even assuming the ban remains in place for the rest of the fiscal year, we're raising our targets. Given the sensitivity for our customers, we'll refrain from making any further comments. We're confident in our outlook, despite the geopolitical and economic backdrop, as global design activity and customer engagements are thriving. AI, automotive, 5G, IoT, cloud, and the proliferation of smart everything are not only growing segments, but are also very competitive, thus requiring the advanced solutions that Synopsys has to offer. After five years of substantial investments, our product platforms are the strongest they've ever been, putting us in an ideal position to benefit from the dynamic market trends. Notably, our new EDA products are winning share with competitive displacements at leading systems and semiconductor companies. We also had a record quarter with our broad portfolio of IP building blocks. Our IP offering is highly differentiated in driving time-to-market advantages for customers ranging from the largest market-making companies to fast-growing AI startups. While investing heavily in both EDA and IP, We've also diversified our business and customer base into the high-growth software security TAM. Our products and services are increasingly mission critical for the massive amounts of software that permeates our everyday lives. Our software integrity business is now at 10% of overall Synopsys revenue, is profitable, and continues to scale well. We've accomplished all of this while beating our financial objectives and raising our near-term and long-term financial ambitions. Building on our track record and the stability of our recurring revenue model, we're delivering significant margin expansion and solid double-digit earnings growth. From the perspective of our product platforms, let me provide some highlights from the quarter, beginning with EDA. As a result of our intense multi-year innovation push in digital design, including new game-changing products and major updates, Our technology is winning benchmarks and driving increased competitive displacements, especially at advanced nodes. This is evident in our results as revenue growth for digital has accelerated. In particular, Fusion Compiler continues the strong momentum that began with its launch in November. It has won all head-to-head benchmarks completed to date with consistently better quality of results and runtime across multiple applications. be it mobile, 5G, high-performance computing, data servers, automotive, AI, networking, or graphics. We had several breakthrough competitive wins at noteworthy large semiconductor companies, including a significant competitive adoption at a leading U.S.-based mobile 5G company. We also won a decisive benchmark at a very large Taiwanese semiconductor company and achieved a win for 5 nanometer ARM-based hypercomputing designs at a new well-funded European customer. Also in Q3, the internal IP core group of an international mobile company standardized on Fusion Compiler for all CPU and GPU designs at current and upcoming advanced nodes. A US large-cap systems company has selected Fusion Compiler as its primary platform for digital implementation. Finally, a premier U.S. semiconductor company is aggressively expanding deployment of Fusion Compiler for its mission-critical programs representing more than 95% of its business. Turning to custom design, Synopsys is gaining share, bolstered by 30-plus percent revenue growth for Custom Compiler over the last four quarters. Our expansion is fueled by key wins in the 5G, AI, and server chip markets, including a Tier 1 North American server company. We've also begun multiple full-flow competitive displacements, including at traditional analog customers, and during the quarter, we won yet another major contract at the large U.S. high-speed communication chip maker. These wins are a result of powerful innovations that are driving 3 to 5X productivity benefits, especially for advanced node design. and a unique technical advantage by partnering with our world-class mixed signal IP team. Moving now to our verification continuum platform, where our early vision and technology strength have led to our number one market segment position. Verification software growth is strong, reflecting the impact of tight integration of the fastest simulation with static and debug engines on the market. Contributing substantially to this growth are large, influential cloud hyperscalers in North America, notable evidence of the power of our solution. Hardware verification is strong as well. For the third year in a row, we stand as the number one provider in hardware verification overall, as well as in the emulation and FPGA-based prototyping subcategories. By delivering the fastest, highest capacity, and lowest cost of ownership solutions, we're the preferred choice for complex hardware software design. Hardware-based systems have broad-based appeal, from large processor companies to market-leading systems houses to emerging companies optimizing their software on hardware that is still in development. In addition to high secular market demand, we are winning important design slots, and customer adoptions continue to grow substantially. In the first three quarters of this year alone, we added 32 new customers and had 74 repeat orders. This significant broad-based growth has offset a year-over-year decline in hardware revenue from our largest emulation customer, driven by the timing of product shipments. We expect that total hardware revenue this fiscal year will match or even exceed the banner results from last year. Now to IP. where strong market demand and our unmatched portfolio are driving double-digit growth. Q3 was a record quarter, including the largest single IP order in our history with a prominent U.S. semiconductor company. We expect to deliver a record year as well. We see especially strong momentum in interface IP, where we are four to five times larger than our nearest competitor, along with memory and logic IP, where we also lead the market. We're proud of our long, positive track record of providing early availability of high-quality IP at the key manufacturing processes. This commitment to vital technologies has driven our ongoing success from one IP generation to the next. As an example, our USB titles alone passed one billion in cumulative bookings this quarter. Cloud computing, particularly AI accelerators and hyperscale data centers, is driving substantial growth. Market makers in North America, Europe, and Asia Pacific are adopting IP across our portfolio at a rapid pace. Also strong are processors, particularly machine learning and AI engines for embedded vision, driven by top semi and systems companies. After significant investments to enhance our portfolio for automotive reliability and safety standards, we achieved another important milestone with ISO 9001 certification of our IP quality management system, setting the foundation for further growth. Finally, we saw continued strong momentum in mobile, with multi-million dollar agreements at multiple global leaders. Which brings me to software integrity, where the combination of rapidly growing market needs and our wide-ranging and evolving portfolio are driving approximately 20% growth this year. We not only offer the broadest portfolio of tools and services, we're moving to the next level of impact and ease of adoption with our new Polaris software integrity platform. Announced in Q2, it's a cloud-based platform with a compelling integration roadmap for continual rollouts over the next 18 months. Polaris is drawing positive and growing interest from a wide range of customers. Building on the first adoption by a Fortune 500 insurance company in May, we received several new orders in Q3 from customers ranging from financial services to networking to a highly recognized beverage company. The acquisitions and integration of Black Duck and Sigital have been essential in building the leadership position we have today, as recognized by Gartner and Forrester. Addressing fundamental code quality and security, Analyzing and flagging suspect open source code and engaging with enterprise customers, both technology up and management down, are enabling high-level strategic relationships. Renewable rates are up, and we continue to see longer-duration, multimillion-dollar agreements. Building off the current base of more than $300 million in revenue and increasing profitability, we're enthusiastic about the long-term potential of this business. In summary, strong execution delivered excellent Q3 results, and we're raising our annual revenue, non-GAAP earnings, and cash flow guidance. Design activity continues unabated. Our product platforms are the strongest they have ever been, and they are driving technology wins and competitive displacements. Finally, a sincere thank you to our employees for their continued commitment to our customers and to the long-term success of our company. With that, I'll turn it over to Chuck.