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.

Thanks, Art. Good afternoon, everyone. 2019 was a very strong year, in spite of what was at times a tough macro environment. We achieved record results in all key metrics and finished well ahead of our initial expectations. We delivered these results despite multiple unique hurdles, including the operational transition to ASC 606, the U.S. entity list, and general geopolitical uncertainty around the world. We delivered strong growth in revenue, non-GAAP earnings, and operating cash flow, while expanding non-GAAP operating margin by almost three percentage points. We're entering 2020 well-positioned to continue our momentum. Our product portfolio is as strong as it's ever been, which in combination with healthy design activity is driving robust demand. The result is reflected in our backlog, which ended the year at $4.4 billion, up from $4.1 billion at the end of 2018, despite the ASC 606 backlog reduction. Our results speak to our solid execution and the durability of the business we've built. With an approximately 90% recurring revenue model, a diversified customer base spanning multiple key verticals and geographies, and a product portfolio consisting of mission-critical tools, we are confident in our ability to deliver growth, even in the context of an uneven macroeconomic environment. I'll now review our full year 2019 results. We generated total revenue of $3.36 billion, 8% growth or 9% adjusting for the extra week in fiscal 2018. Semiconductor and system design revenue was $3.03 billion, an increase of 7% or 8% adjusting for the extra week with both product groups contributing to the strong results. IP reported its strongest year to date, and EDA software continues to grow well within our mid to high single-digit target range. Revenue had another record year, reflecting the broad-based strength of that business. We again earned the number one market segment position as growth in our diversified customer base more than offset a decline in emulation revenue from our largest hardware customer. Excluding hardware, revenue from that customer grew very well, The software integrity segment generated revenue of $335 million, 19% growth, or 20% adjusting for the extra week. As Art discussed, 2019 marked the key milestone as we drew the business to approximately 10% of total revenue and solid profitability. Returning to the consolidated level, total gap costs and expenses were $2.84 billion, which includes approximately $47 million in restructuring costs as we worked to optimize our resource allocation for sustainable long-term growth. Total non-GAAP costs and expenses were $2.52 billion, resulting in a non-GAAP operating margin of approximately 25%. For our segments, adjusted operating margins were 26.7% for semiconductor and system design and 9.6% for software integrity. Gap earnings per share were $3.45 and non-gap earnings per share were $4.56, 17% growth or 19% adjusting for the extra week. Turning to cash, operating cash flow for the year was $801 million. We completed buybacks of $329 million in the year and $1.8 billion over the past five years. returning approximately 75% of our free cash flow to investors over that period. We ended the quarter with a cash balance of $729 million and total debt of $138 million. Now to our targets, which assume no change in the U.S. government's entity list during the year. Based on our current assessment of the timing of hardware and IP deliveries, we expect a first half, second half split of roughly 45%, 55% for revenue and 35%, 65% for EPS due to more evenly distributed expenses. For fiscal 2020, revenue of 3.6 to 3.65 billion. Total gap costs and expenses between 2.934 and 2.983 billion. Total non-gap costs and expenses between 2.63 and 2.66 billion, resulting in a non-GAAP operating margin of approximately 27%. Other income and expenses between minus 16 and minus 12 million, a non-GAAP normalized tax rate of 16%, outstanding shares between 153 and 156 million, GAAP earnings of $3.72 to $3.90 per share, non-GAAP earnings of $5.18 to $5.25 per share, cash flow from operations of $800 to $825 million, and capital expenditures of approximately $180 million, as project timing costs some of the spending planned for 2019 to push into 2020. We expect expenditures to decline in 2021. Now to the targets for the first quarter. Revenue between $805 and $835 million. Total gap costs and expenses between $715 and $744 million. Total non-gap costs and expenses between $635 and $655 million. Other income and expenses between minus $5 and minus $3 million. A non-gap normalized tax rate of 16%. Outstanding shares between $153 and $156 million. GAAP earnings of 43 to 54 cents per share, and non-GAAP earnings of 89 to 94 cents per share. In summary, our results this year reflect our strong execution and the resiliency of our business model. Our strength came from across the portfolio as we exceeded our near-term commitments and made significant progress on our longer-term operating objectives. As we look to 2020 and beyond, our focus remains consistent. strong execution to deliver on our long-term targets of high single-digit revenue growth, sustained margin expansion to the high 20s in FY21 and 30% longer term, double-digit non-GAAP EPS growth, and strong cash flow. These metrics, combined with a capital allocation strategy built on balancing internal investments, M&A, and buybacks, Give us confidence in our ability to continue to drive sustainable, long-term shareholder value. With that, I'll turn it over to the operator for questions.

Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question... You may press 1, then 0 at this time. One moment, please, for the first question. And we first turn to the line of Rich Valera with Needham & Company. Please go ahead. Your line is open.

Thank you. Good afternoon. Based on your annual profile, our half-to-half profile, it looks like you must be expecting significantly stronger hardware, at least beyond the first quarter. Can you talk about if that's the case and what kind of visibility you have to that hardware ramp and if that includes a significant pickup from the large customer that was down last year on the hardware shipments?

Hi, Rich. That's part of it. It's a combination of both IP and hardware deliveries that is affecting the quarterly profile.

Got it. And can you just talk about your visibility to that? Is that something that's kind of in backlog or what sort of underpins the visibility, particularly the hardware, since that tends to be a little more volatile than the subscription revenue? Sure.

Yeah, you're touching a good point, which is that hardware and IP generally is more variable from quarter to quarter. And the way that we're rejecting revenues for this year is no different than how we have done in the past. It's a combination of what is in backlog as well as, you know, our assessment of our ability to close the deals that are in our pipeline and both in IP and hardware. So it really does reflect our best estimate of the profile at this point.

Great. Just quickly, it looks like SIG was a little bit light in the fourth quarter, and you've moderated, I think, your longer-term target that had been 20% is now 15% to 20%. Is there anything structural you're seeing in that business or sort of law of large numbers as you grow it? You know, how should we – what accounts for that sort of moderation of that growth target there? Thank you.

Yeah, Rich, that's a good point. I'll start with the second half of your question, which is, is there any fundamental change in the business? And we don't see it that way, certainly not. We're very optimistic about that business, and we do see a good outlook for it. We did see some challenges this year, which we were quick to address, and we feel good that we should be able to continue to grow at the market rates or higher. To us, it's the natural ebbs and flows of growing a business.

Great. Thank you. Congratulations. Have a good year.

Thanks, Rich. Thanks, Rich.

We have a question from the line of Mitch Steeves with RBC Capital Markets. Please go ahead. Mr. Steeves, your line is open. You might have your phone muted.

Sorry about that. Can you hear me? Hi, Mitch. Now we can. Hey, yeah. Sorry about that. So I have really two questions. Unfortunately, I have to pick on track a little bit here. So if I look at the numbers from the guide you guys are giving, it's kind of like 21%, 22% operating margin for Q1. But that implies that kind of the rest of the year, the Q2 to Q4, is going to be around 28.6. So wouldn't that mean that basically by 21, you're kind of going to be close to high 20s starting the year? Or am I doing the math incorrectly there?

Well, yeah. Certainly for the full year, we expect to be around 27% operating margin. As we've said in the past, the quarterly profile is really an outcome of the plan. Candidly, when I think about the budget for FY21, 99% of my time has really been focused on the full year plan and making sure that we've got an outlook for revenue growth that is sustaining where we are or accelerating some areas. and then making sure that we're investing in the appropriate places while simultaneously improving margins for this year. The outcome of the quarterly profile really is just the timing of these deals. So I wouldn't read too much into the quarterly profile. And I'll close it out by saying we remain committed to our long-term commitment of high 20s in FY21, and we'll comment on that further as the year progresses.

Okay, and the second one I had is you guys have done a few smaller acquisitions lately, and that includes employee headcount. And so all of that is encapsulated in the four-year guide that you guys are giving, correct, meaning that there's going to be no additional op-ex in that number?

Yes, that's correct.

Okay, perfect. Thank you so much.

All right.

We turn to the line of Tom Diffley with D.A. Davidson. Please go ahead. Dr. Diffley, you might have your line on mute.

Yeah, hello. Hello, can you hear me? Yes, you can. Yes, you can. All sorts of technical problems today. Yeah, so just a quick question. When you look at the outlook for 2020 and the nice margin profile, if you look at it on a year-over-year basis, how would you split the margin growth from product mix versus overhead absorption versus potentially fine-tuned cost structure?

It's really come across the board. The progress that we made this year in 2019 in terms of improving it by three percentage points really came across all areas of the business. We saw it across the different business groups from sales, from the G&A functions, and it's really a continued and broad-based effort. For 2020 and beyond that, we'll continue to do the same thing. It's really fine-tuning across all areas of the business.

Okay, great. And then when you look at items like IP and hardware that tend to be a little lumpier, are there any other trends in 2020 you should know about as far as, you know, it's going to be fourth quarter weighted, it's going to be even after the first quarter, any other kind of, you know, trends on a quarterly basis?

We could probably help you with the quarterly profile in detail, but Q4 will likely trend to be the highest quarter for us, given what our visibility is at this point for both IP and hardware.

Okay, and then final question. Is IP fairly seasonal at this point? It seems like it's always a little bit higher in the second half of the year.

We're not really seeing much seasonality in the business, and as we said, it really depends on on the timing of when the IP is delivered or when the IP is pulled down by our customers. And you're going to see that variability increase due to 606, so just keep that in mind. But overall, the demand drivers for IP continue to be really strong, and that's reflected in our outlook for 2020. Great.

Thanks for your time today. All right.

Thanks, Tom.

And next we turn to the line of Adam Gonzalez with Bank of America. Please go ahead.

Yeah, thanks for taking my question. Can you just help us understand, I don't know if you got it out this far, but the revenue growth you expect by product group for fiscal 20, is it kind of in line with the longer-term targets you set out, or is there any substantial deviation in any particular product group? Thank you.

No, our long-term model spells it out pretty well between EDA, IP, and software integrity targets. And typically we don't break that down quarterly or on an annual basis. Our view is we do manage this business over a multi-year horizon, and the beauty of it is that we've been pretty good about managing it within that range over time.

Got it. And the reason why I guess I ask that is because there's been some weaker data points on enterprise spending overall. I imagine you're a bit more insulated from that given the relative size of your SIG business, but – Are you seeing any kind of impact from that going into fiscal 20? Or, you know, again, are you insulated from that? Thank you.

Those sort of concerns are certainly factored into our guidance. I would reference you to how we perform historically. And that's the great part of having a business that is close to 90% recurring, is that there is a gapping effect when things go, you know, through different cycles.

The other thing I would add to that is certainly if you look at the software integrity business, it's a business where we're actually very young in an emerging situation. And so there are many, many customers that we haven't even touched yet. And so I think that is a fairly open space. Now, overall, obviously, we are subject to the fluctuations of the global markets. but from a technology utilization point of view right now, I think the demand for technology is quite high, and so the race continues to be quite fast.

Great. Thanks. I'll get back in the queue.

And next, we turn to the line of Gary Mobley with Wells Fargo Securities. Please go ahead.

Hey, everyone. Appreciate you taking my question. It looks like you're not going to file your 10-K until January 1, so I was hoping that on this call you can share with us your next 12-month backlog, which excludes non-cancellable FSA and future royalties.

We actually don't disclose that information. What? In the K. In the K, we'll describe that. Do you have that number? I'm sorry. I don't have that number off the top of my head. Okay.

Okay. The point of the question is that it looks like if you take your next 12-month backlog, as you've been disclosing in your different SEC filings, and you divide that by your next 12-month revenue expectations, which is a critical juncture now, it looks like you're generating more revenue or expect to generate more revenue from next 12-month backlog. I'm just hoping that maybe you can speak to, you know, why you guys are sort of modeling in lower-turns business as it relates to that.

Well, I'll give you some specific numbers around that. The backlog that we have scheduled for FY20 is roughly 65%. That's lower than it's traditionally been, mostly because of the transition to 606 and with a higher mix of hardware and IPs. From a modeling perspective, when we take into account what we have visibility to from hardware and IP, the range of how we're building the business between backlog and turns and what we have visibility to is pretty consistent with what we've been managing to over the last few years.

Okay. And could you give us an update on the degree of the impact from the entity list, not specific to maybe the one big customer, but maybe in the entirety?

Well, in general, as you know, we don't disclose the specific customers, nor do we disclose a subset of customers. Obviously, it has a negative impact, but at the same time, the guidance that you gave, which I think is rather strong, has fully encompassed the fact that we are assuming zero return or zero revenue from the entity list customers. So if things change for the better, we will let you know, of course, immediately. But for right now, the wisest path is to not comment much more about the situation.

Okay. Didn't you comment in the past that it could be 100 basis point impact at the top line?

No, we have not provided specific numbers around that. Okay. All right. That's it for me. Thanks, guys. You're welcome.

Next, we turn to the line of Jackson Ader with JP Morgan. Please go ahead.

Great. Thanks. Good evening, guys. First question is on the delay in the emulation in the hardware. Is this something that's just absolutely single-customer specific, or is it possible that it could be some symptom of a broader trend?

It was single-customer specific.

Okay, okay. And just to follow up on that, any additional color on that? I mean, why the delay? Do you expect it in, I think Rich asked earlier, what you expected in the first half or when the actual delivery will be? But any additional color you can give there?

No, we really don't want to give color because, as you know, we're always very cautious to not comment about specific customers. Maybe I can give a little color in a different dimension, which is, we were quite diligent in finding opportunities to grow in a broader set of markets. And actually, if you look at our verification area and specifically the hardware, we did really, really well. And so we have no doubt that the capabilities we offer, the very need for a lot of customers to run their software on prototypes where they don't have the real hardware yet, continues to be a great opportunity for us. And we continue to both invest there and are bullish about the broader customer set that we have.

Okay. Thank you. That is absolutely helpful, Collar. Then switching gears to the integrity business, the refining of the sales channel and looking to scale this thing to $500 million and beyond. So what's What do you think in the sales channel or sales processes needed to be refined relative to what you were doing in 2019? Any additional specifics you can give there?

Well, let me just take a first step back, given that we've had the unique experience of growing Synopsys literally through these phases as well. And, you know, I'm always thrilled by the fact that enterprises do go through different phases. And so, you know, the $50 million company is very different than the $100, and that in turn is very different than the quarter billion, and $500 again is different. And the difference is essentially the complexity of how you manage not only your internal product development and management, but also the external relationship with the customers. And this is certainly also true in the case of the software integrity group, because there, too, there's also a bifurcation between large enterprise customers that typically are cautious and slow in adopting, but when they adopt, they keep adopting and keep adopting, and so they become, over time, the bigger spenders, versus many of the smaller agile companies that very quickly buy a few copies, and then it's more ad hoc how they expand. On top of that, you have the gradual broadening of geography. Any of the startups that we acquired originally had certain geographies that they were focused on. We, of course, are a global company and therefore open up broader domains. And then the third one, which is maybe more marked here than it was in the semiconductor domain that we originally were in, is that they deal with individual verticals. And so dealing with automotive is different than dealing with the financial sector or the health sector and so on. And so you have sort of these multiple variables, and now the question is, how do you deploy and manage your salespeople and support people, I should say, against that backdrop of multiple dimensions? And that's just another way of saying one continually learns and evolves. And as we're looking now to phase two, which is the crossing of the half billion and beyond, that is essentially what we're talking about when we are saying we have the opportunity to optimize our go-to market again. And no doubt in a year and a half, we will say it again.

Okay. All right. Thank you.

You're welcome.

And next, we turn to the line of Jay Vlieschauer with Griffin Securities. Please go ahead.

Thank you. I'll ask both questions at the same time, first for you, Art, and then for Track. Art, following up on a conversation we had when you were here in New York a couple of months ago, regarding the next big thing in EDA, you answered that prototyping, broadly speaking, and new requirements and abstraction would be the next growth driver for EDA. And by that you meant, of course, not just hardware prototyping. And so my question is, is this already showing itself in new business and how are you investing towards that since it's likely to be a multi-year process? And then secondly, for track, you spoke of your largest customer in two separate ways, but could we combine that and could you talk about the total business from the largest customer? In fiscal 18, according to last year's K, it was 15.4% of your business, which worked out to just over $480 million, and that was flat with 17, which have been up very strongly since. So netting out everything you just said about that customer, did your business, in fact, grow either proportionately or in absolute terms? Thanks.

Okay, Jay, the next big thing. And, of course, next is always a function of short-term, long-term, medium-term, you name it. But I have to say I sort of agree with my answer that I gave you a number of months ago. which is that the more systems become complex, the more it's necessary to essentially build mock-ups, we call those prototypes of them, to see how well they work, because the working is often illustrated on how well the software runs, and the challenges may very well be inside of the hardware. With other words, you always have a very complex modeling proposition of how do you create a prototype of the hardware a level of abstraction of the hardware, to use that word, and then run software on it to see how fast is it, how much power does it consume, are there weird stops, what happens if something breaks, can you restart it if it's in the middle of some lockup or things like that. And these things become dramatically more important if these systems also impact life-danger situations, such as driving a car or operating some machinery. And it is very clear that a lot of the world is going exactly in that direction. So how well have we done with that? Well, initially we went after a market that was considered to be extremely slow-moving and stodgy, and that was the automotive market. And that quite radically changed a few years ago when two things happened. One is a car got hacked, a Jeep, and was literally driven off the street by somebody using a cell phone. And secondly, people suddenly saw the coming about of autonomous driving with all the potential and the challenges for security and safety. And it's been quite remarkable to see how the OEMs, so these are the end car companies, have in turn pushed on their tier one, which is their supply chain, which in turn pushes on the semiconductor guys, which is their supply chain, to now start putting all of these capabilities in models so that they can assemble it long before the car is actually ready as a prototype. And so we've been central to that, and it's been quite rewarding to see how quickly this has advanced on an industry that fundamentally, for good reason, has to be slow because it has to be safe. Now, the concept I just described, actually happens in all of the more sophisticated electronic systems. And this is only true also for a cellular phone that has a very short time to market, where one can run the software on an emulator, for example, and actually discover surprises before one actually ships the product. So that is one of the many directions that we're going into. And it literally takes advantage of our entire stack of relationships in the supply chain and stack of relationships in the technology levels.

Hi, Jay. This is Shrek. So to your second question, you will see in our 10K filing in a couple weeks that the revenue for our largest customer will be down in 2019. And that is strictly a function of the hardware declines. The rest of the business, EDA and IP, grew very well in 2019.

Got it. Thank you. If I could squeeze in one more, perhaps, regarding your headcount. Your number of AE openings has increased significantly, and particularly in the Americas, where they've nearly tripled over the last year and up by about 60% over the last year in Asia, flattened EMEA. So maybe comment on what's driving that growth in AERECs, and is it a coincidental indicator, a leading indicator? How are you thinking about filling what is your second largest function by openings after R&D?

You know, Jay, you always give me the best summary of our hiring practices. But, yeah, the increase of AEs invariably has to do with either products that are in deployment and need support as we harvest the opportunity, and that's certainly the case in areas such as Fusion Compiler, Custom, and many other places of verification. Or it is a gradual rebalancing of the geography makeup as different parts of the world grow at different rates or have different needs at various times. It is rarely the need to increase specific skills because our teams are actually quite strong and very broad. But every so often, bringing in some specialists, let's say, for example, in the prototyping or in the intersection of hardware and software can be quite beneficial as well. So the fact that we are hiring, I think you can take as a positive in general. and adding much more probably enters the competitive knowledge space. So I'll refrain from that. Thank you.

Thank you. As a reminder, if you'd like to ask a question, please press 1 and 0. Next, we turn to the line of Jason Salino with KeyBank Capital Markets. Please go ahead.

Thanks for taking my question. One, kind of tying back to Art's comments about The SIG margins, you know, 27% operating margin guidance for full year, you're on track to do the high 20s in fiscal 21. But how should we think about the design margins versus SIG margins? Because I think, Art, you said that margins wouldn't be as expansive in 2020, but then ramp again in 2021.

Yeah, that's correct. I think we said that we'd hold SIG probably roughly flat. And, of course, that means if the rest of the option margin for the company drops, growth, then everybody has to chip in. And, you know, we have obviously multiple parts in the company. Everybody is sensitized to the operating margin that we want to achieve for the company. And so all of the VUs and subgroups are all focusing on how do we get there while at the same time not making any compromises for future growth. And so you are probably aware that somewhat loosely we use the Rule of 40 as a guideline for And so there's room for people to make improvements to get there. But on a strongly positive note, I think Synopsys throughout its management is not only sensitized to this desire, but very committed and has budget and plans to get there. So from year to year, I think different BUs will get a little bit more or less of a reprieve as a function of the investment needed or corrections or whatever else we need to do. But in aggregate, we all know that we want to deliver on the numbers that we are guiding you towards.

Okay, great. And then maybe a little more clarification, if you can, on some of the fiscal responsibility you'd see on your EDA side, because guidance would suggest most of that improvement would have to come from that business.

Well, realize, of course, that if SIG is roughly 10% of Synopsys, then by definition the rest is 90%. and we have multiple very different efforts in EDA, and we have a relatively large but still less than a quarter of the company IP business. And so, obviously, between those different groupings, they all have to contribute. And if I'm not mistaken, all but one of the businesses are heading towards improving ops margin. One of them is heading a little bit more towards... growing the revenue, but in aggregate, and it's sometimes difficult to measure because they intertwine in the deals and so on, but in aggregate, it's all heading in the same direction, which is put a dent in the rule of 40. Great. Thank you. Appreciate the call. You're welcome.

Next, we turn to the line of Krish Sankar with Cohen & Company. Please go ahead.

Hi, thanks for taking my question. I told them, Art, I think in your prepared comments you said the SIG group could be half a billion in revenues next year. If that is the case, it looks like the semi and systems division is going to grow only like 3%, which seems lower than historical. Is it a function of the entity list, or is there anything else going on there? And then I have a follow-up.

Sorry if I was not clear enough, but my statement was that the next milestone is is to pass half a billion. I did not say that it would pass a billion next year. And so we gave you a sense of the growth rate for SIG at 15% to 20%, which you think is a bit above the market that it is in right now. And so fundamentally, there's no real change in the path that Synopsys is on and all its components from what we did this year and the past year. We're fortunate to have a set of businesses that are all doing well. Some are very profitable also. And so it's an aggregate improvement that manifests itself in the financial results, largely because of many years of big investments and a number of, I think, really good acquisitions that got integrated well. So we're continuing the pathway. And, you know... if you want to get a different sense of synopsis, then just graph our results for the last 10 years, and then you'll see a very different level of stability of how we manage the company.

Got it. That's very helpful. And then just as a follow-up, a much more longer-term industry question. You know, given you guys have a good push in FPGA apps, hardware, and also you come to the back of the DEMI group recently, I'm kind of curious, from your vantage point, when you look like five years or more than five years out, Where do you stand on the durability of FPGAs for AI applications? You know, where do you stand on the FPGA versus ASIC debate?

Well, you know, the AI field itself is a field that has its own specialty and many, many companies that are all making different bets. And, you know, it's useful to take a small step backwards, which is fundamentally AI has one need, which is much, much, much, much, much faster computation. Well, no matter how hard we push on Moore's Law and so on, That's hard to achieve. And so the answer, by definition, has to be, therefore, architectures will become optimized for different applications. Now, architectures can mean chips. It can be groups of chips. It can be FPGAs. It can be a combination of things. And actually, a number of the very large suppliers, you know, provide combinations of processors together with graphics processors together with FPGA pieces, all with one objective, optimize for applications an architecture that's appropriate for a specific situation. And so in many ways, we ourselves have been a user of these capabilities because, of course, we use a lot of computation for our software tools, but the hardware tools that we provide is our own way to say for certain tasks, such as for simulation, we can do much better on an emulator or FPGA board. So I expect all of these technologies to continue to evolve, to continue to be available in various combinations, and the race will continually be on of how do you build machines that can do really well. My last comment is we ourselves are the provider of tools to a vast, vast group of emerging AI companies. And this is encouraging because I think those people will not give up for quite a while in trying to new architectures, and some will ultimately go into very large volume. And so in many ways, we see a number of those companies as harsh technology drivers for Synopsys, and business-wise, we're doing very well with them.

Thanks, Saj.

You're welcome.

And speakers, we have no further questions in queue.

Well, given that, as you heard, we had a very strong 19. We have a great outlook for 20. The market around us, which was a bit soft last year, looks up a slight bit. There are a lot of uncertainties, as we all know. But meanwhile, I think we're executing well, and this is also a good time to say thank you to you for your support. You're often provocative and stimulating questions, and we'll be back with some of you in the next half hour or so. Thank you. Thank you.

That does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.