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 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. 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 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, ma'am.

Thank you, Greg. Good afternoon, everyone. Hosting the call today are Art DeGias, Chairman and Co-CEO of Synopsys, and TrackFam 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 financial supplement, and 8K 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 Taggias.

Good afternoon. I'm pleased to report another excellent quarter, and with it, an outstanding year for Synopsys. In fiscal 2019, a year in which we successfully navigated several external challenges, we once again exceeded our plan. We generated $3.36 billion in revenue and are well on track to our next milestone of $4 billion. Our backlog grew to $4.4 billion. We expanded operating margin significantly and delivered 17% non-GAAP earnings growth to $4.56 for the year while returning $329 million to shareholders through buybacks. Business was strong across our semiconductor and system design segments and strengthened as the year progressed. Software integrity achieved profitability and grew 19% to $335 million. Tackle discussed the financials in more detail. Against the challenging global market backdrop, with geopolitical stress and unevenness in the semiconductor industry, design activity remains strong. Growth in machine learning, automotive, 5G, IoT, cloud, and the proliferation of smart everything is considerable. New entrants, including AI startups and cloud hyperscalers, are pushing the boundaries of technology and time to market. Synopsys is at the center of this wave of innovation and growth, and we are uniquely positioned to enable electronics design from the intricacies and complexity of silicon to the power and pervasiveness of software. A year ago, I communicated our strategy for our next phase of growth. First, sustain and grow our technology and market leadership in EDA and IP. Second, continue to scale and grow software integrity in a diverse customer base and new TAM, while steadily moving to solid profitability. And third, further drive operational excellence towards multi-year operating margin expansion. During fiscal 19, we made very good progress on all three. Let me provide some highlights, beginning with EDN IP, where we substantially expanded relationships with our customers and ecosystem partners. TSNC, for example, recognized Synopsys with Partner of the Year awards for the ninth straight year. Awards this year were for interface IP, joint development of 6 nanometer design infrastructure, joint delivery of innovative 3D chip stocking, and cloud-based productivity solutions. In addition, some of the world's largest and most influential companies expanded their reliance on us. One key example is a U.S. mobile systems leader who significantly expanded its business with us across both EDA and IP. In EDA, our platforms increasingly stand out as the strongest they've ever been. This year, we began proliferating several game-changing new products, that already have significant momentum. Notably, our unrelenting innovation push in digital design is driving benchmark wins and increased competitive displacements. Our Fusion platform, including our new Fusion Compiler product launched last November, is achieving widespread wins and growing deployment, exceeding our initial business targets. Fusion Compiler is winning head-to-head benchmarks with consistently better results and runtime across many applications. Breakthrough competitive wins have ranged from the largest global communications, processor, and graphics firms to high-impact cloud hyperscalers to multiple influential system houses, such as a large global consumer electronics company for image sensor design, a leading automotive semiconductor company for autonomous driving SOC design, an expanded competitive displacement at a leading mobile company for 5-nanometer and sub-5-nanometer design. Benchmark wins at a U.S.-based graphics company with superior quality of results in turnaround time, a large-cap U.S. systems company selecting Fusion Compiler as its primary solution for digital implementation, and a U.S. semiconductor leader who is aggressively expanding deployment of Fusion Compiler for its mission-critical programs, representing more than 95% of its business. While still early in our multi-year product cycle, these important wins represent significant momentum and usage share gains, setting the stage for revenue share gains going forward. Turning to custom design, custom compiler revenue nearly doubled this year, fueled by multiple full-flow competitive displacements. Our expansion is driven by key wins in the 5G, AI, and server chip markets, including a Tier 1 North American server company, a large U.S. high-speed communications chip maker, and complete full-flow competitive displacement at a large IDM in Japan and a major DRM company. We also announced a full-flow custom compiler platform deployment at Samsung for its 5LPE process and are seeing good momentum with startups who are not locked into legacy flows and demand modern technologies. Let me now move to our verification continuum platform, where we hold the number one market share position in both software and hardware. Benefiting from native integration of the fastest engines on the market, our verification software products continue to drive competitive wins and proliferation. Contributing substantially to growth, our broad set of system houses and chip makers, ranging from cloud hyperscalers in North America to AI, automotive, mobile, and memory leaders around the world. Hardware-based verification was strong as well. Despite our largest hardware customer delaying delivery of a substantial number of emulators due to near-term spending priorities, we finished the year with record hardware revenue. We maintained the number one market segment position for the third year in a row. Our hardware products are particularly well-suited to today's complex designs with unmatched speed, highest capacity, lowest cost of ownership, and lowest power consumption. As a result, we significantly expanded our customer base, adding nearly 40 new customers and more than 80 repeat orders in 2019. We saw major expansions and share gains at influential customers, ranging from prominent global systems companies to growing hyperscalers and leading semis. AMD, for example, standardized on Zibu, expanding their emulation capacity to accelerate time-to-market for processor, graphics, and gaming chips. Now to IP, where strong market demand and our rich portfolio are driving double-digit growth. We had a record year, reaching more than $750 million in revenue, with prominent engagements across all major markets, including AI, automotive, cloud, and 5G. As the number one provider of interface, embedded memory, and foundry-specific IP, we provide the industry's broadest portfolio to address today's most complex design requirements, accelerate time to market, and lower risk for customers. We have particular strength in USB, memory interfaces, and PCI Express 5.0. This year, we achieved the significant milestone of $1 billion in cumulative USB IP bookings. bolstering our position as the number one USB provider by far. And our new 56 and 112 gig Serides IP is gaining good market traction. During 2019, momentum accelerated in automotive, where we've achieved nearly 230 automotive socket wins and advanced FinFET processes across approximately 30 major semiconductor companies. We announced our collaboration with Infineon, to incorporate the Arc Embedded Vision Processor into their next-generation Aurex controller to accelerate AI in automotive applications. From the Embedded Vision Alliance, we were awarded the Best Process Award for 2019. Finally, our track record of delivering IP in advanced process nodes continues and is highly valued by our customers. We achieved more than 250 IP wins on TSMC's 7-nanometer FinFET process and announced the collaboration with TSMC for development of IP on their most advanced 5-nanometer process, where we signed yet another significant multi-year agreement with a very large global customer. We're also seeing great momentum with Samsung foundry process down to 4 LPE and global foundries across a range of processes. Now to software integrity, the tools that test software code for security vulnerabilities and quality issues. We entered this new TAM in 2014. By the end of 2018, we had completed a number of significant acquisitions, integrated them into Synopsys, and enhanced our products with new features and broader language coverage. In 2019, we completed phase one of our software integrity strategy by delivering 10% of Synopsys revenue and achieving approximately 10% operating margin. Although orders were a bit softer than planned, we outpaced the market with 19% growth. This was achieved through progress in driving multi-year, multi-million dollar agreements, a steady increase in the number of customers adopting multiple solutions, and growth in all of our key verticals. In 2020, we're now moving to phase two, scaling the business to half a billion dollars and beyond. The opportunity is vast, as companies must embed security testing into their software development process without compromising time to market. Synopsys is well positioned to enable this evolution with a great combination of high-value products and consulting services. Our scaling efforts for 2020 span three areas. One, expanding Polaris, our cloud-based software integrity platform. We announced Polaris in Q2, including a compelling roadmap of product integrations and new capabilities over the subsequent 12 to 18 months. We've had a growing number of adoptions thus far, including a Fortune 500 insurance company and customers ranging from financial services to networking to medical and industrial digitization. Stay tuned as we expand the Polaris capabilities and enhance support of large deployments. Two, scaling consulting engagements. This is where we help our customers with high-level benchmarking, program development advice, as well as large product deployments. It's a key synopsis differentiator in the software DevOps market. And three, refining our channel. We've realigned our sales organization to better serve large enterprise customers key market verticals, and new regional business. In FY20, we intend to further increase both our sales and support capacity. We believe we are on track to exceed market growth in this business, delivering approximately 15% to 20% growth over the next couple of years as the market evolves. For 2020, we plan to hold non-GAAP operating margin roughly steady, then resume expansion in 2021 and beyond. For Synopsys as a whole, in FY20, we expect solid revenue growth, even as we exclude from our forecast any revenue from companies currently on the US government's entity list. Furthermore, we plan substantial non-GAAP operating margin expansion, mid-teens earnings per share growth, and strong operating cash flow. In summary, we executed very well in 2019, delivering financial results substantially above beginnings of year targets. Market demand is strong, and we are well positioned. Our product platforms are driving benchmark wins and competitive displacements, and we are driving continued financial execution and growth. As we move into the holiday season, I want to thank our employees for their innovative and hard work, and our partners and customers for their continued commitment to our products and trusted synopsis. With that, I'll turn it over to Chuck.