Synopsys, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Synopsis Earnings Conference Call for the first quarter of fiscal year 2020. 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. We ask that you limit yourself to one question and one follow-up so that we can accommodate. 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.

Thank you, Lori. Good afternoon. 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 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 DeGioia.

Good afternoon. Q1 was an excellent start to the year as we met or exceeded all of our guidance targets. Revenue was $834 million, with gap earnings per share of $0.67 and non-gap earnings above our target range at $1.01. In December, we communicated our Fiscal 20 guidance, high single-digit revenue growth, substantial ops margin expansion, mid-teens non-GAAP earnings per share growth, and more than $800 million in operating cash flow. We are reaffirming our guidance for the year. Drac will discuss the financials in more detail. Looking at the overall landscape, ongoing geopolitical tension and the recent coronavirus outbreak have generated heightened uncertainty around the world. Regarding the virus outbreak, our first priority has been the safety and health of our employees, customers and partners. We continue to monitor the situation and support our China teams as they continue to drive business execution. Undeterred by those challenges, electronic companies, ranging from traditional semiconductor and systems companies to new startups and hyperscalers, persist in designing ever more complex chips and devices, with a high degree of market urgency. Driven by AI and machine learning, automotive, 5G, IoT, and cloud expansion, the proliferation of smart everything is and will be the central driver for years to come. As a result, robust demand for our solutions has continued in 2020. Our innovation and technologies, spanning the spectrum from silicon to software, absolutely central to the ambitious product and systems being built. Let me share some product highlights from the quarter, starting with EDA. An important differentiator for Synopsys continues to be our leading position in enabling manufacturing process development. With highly sophisticated simulation of new technologies, new transistors, and the structures needed for the most advanced tabs in the world, we not only assist our manufacturing partners, but we also lay the groundwork for our design tools, to be tuned and ready well before these technologies go into production design. On top of that, over the last several years, Synopsys has pioneered a new approach called Fusion, that literally fuses algorithms from different tools, resulting in faster and lower power chips in far less time. A showcase example of this is our Fusion compiler product, introduced about a year ago. Within just a few months of its introduction, Fusion Compiler revealed itself as a revolutionary product. It is winning head-to-head benchmarks with consistently superior performance, power, and area results across a broad set of applications. Results thus far are ahead of our initial plan, with many customer engagements progressing very well, from exploring the tool to usage on a few live design blocks to production rollouts. In Q1, we built upon several breakthrough competitive wins, ranging from the largest global communications, processor, and graphics firms to high-impact cloud hyperscalers to multiple influential system houses. For example, AMD chose Fusion Compiler for its full-flow digital design implementation of its next-generation processors. Fusion Compiler is displacing the competition as a large hyperscaler for a next-generation ARM core-based graphics design at 5 nanometer and below. We achieved a significant win at a large multinational consumer electronics company on next-gen ARM CPU core. We're expanding displacement and deployment at a leading mobile company for critical 5G designs at 5 and 4 nanometer. A leading U.S. semiconductor company is deploying Fusion Compiler on all new graphics designs, taking advantage of better runtime and quality of results. We displaced the competition for ARM core designs at a leading automotive semiconductor company. And we expanded proliferation as a large U.S. semiconductor leader with a new win in wireless designs. While still relatively early in our multi-year product cycle, these important wins represent significant momentum and usage share gains which will flow into revenue over time. The fusion concept is very powerful and is getting great results across synopsis as our innovation continues at a rapid pace. Stay tuned for some exciting new product announcements as we approach our March Silicon Valley user group event. Let me now turn to custom design, a product area that underwent a multi-year innovation push and has seen excellent progress over the last 18 months. Not only are we now highly competitive for advanced nodes, we continue to see a growing number of displacements and full-flow engagements. Our expansion is driven by fresh innovations focused on maximizing designer productivity. Customers are experiencing this benefit, and we saw excellent growth in revenue from our custom compiler product again this quarter. For example, a high-impact global systems company expanded its full-flow usage of InQ1, proliferating after a significant competitive displacement. Additional custom compiler wins include a leading silicon photonics developer and a CMOS image sensor company. Let me now move to our verification continuum platform, where we maintain our number one market share position. In verification software, we gain share in Q1 at a large global hyperscaler, driven by their growing needs for verification capacity across our platform. Meanwhile, demand for hardware-based verification is high across the board, driven by continued complexity growth in new designs. The speed and capacity of our solutions are particularly well suited whenever software bring-up is involved. While a strong Q1 last year makes for a tough year-over-year hardware comparison, we continue to gain momentum with both new and existing customers. In Q1, we gained nine new logos and 34 repeat orders, including very high-profile systems and semiconductor companies. NEC, for example, chose our Zibu emulation system over the incumbents for their high-performance compute solutions due to our superior performance, very fast bring-up time, and unique debug visibility. In Q1, we also announced the acquisition of the Dini Group, which further expands our HAPS FPGA-based prototyping portfolio. Now to IP, which continues to deliver strong results. As the number one provider of interface, embedded memory, analog, and foundry-specific IP, we provide the industry's broadest portfolio, covering all key markets, AI, automotive, cloud, IoT, and 5G mobile. Our demonstrated strength in high-performance cloud computing applications is evident in several areas. We've already achieved more than 60 design wins in PCI Express 5.0. Our new die-to-die 56 and 112G30s continues to gain market traction. We also had a significant IP portfolio win with a major China e-commerce company for microserver applications. Our leadership position in USB led to multiple Tier 1 processor semiconductor companies adopting our newest generation USB 4.0 IP in a leading 5 nanometer process. We're also seeing unmatched leadership and momentum in automotive, where our automotive-grade IP is being used by 10 of the top 11 semiconductor suppliers to that industry. One notable example is Qualcomm, which selected our automotive IP portfolio including interface, R processors, and embedded test and repair solutions for their new Snapdragon ride platform for autonomous driving. Finally, we continue to expand our IP portfolio with the acquisition of technologies from eSilicon and Invecos, the latter closing just last week. Along with valuable technology, these acquisitions also enable us to further scale our IP development to meet high customer demand across growing markets. Now to software integrity, the tools that test software code for security, vulnerabilities, and quality issues. We delivered a solid beginning to the year, with business levels up more than 30% over the same period last year. We saw continued progress in driving multi-year, multi-million dollar agreements, booking several across multiple verticals. As I mentioned in December, we've entered phase two of our strategy, scaling into the 500 million to 1 billion revenue space. To accomplish this, we're focused on four areas. One, expanding our cloud-based Polaris software integrity platform through additional product integrations. Two, scaling consulting engagements to fully leverage a key differentiator in the software and DevOps markets. Three, refining our channel to better serve large enterprise customers, key market verticals, and new regional business. And four, evolving our management team for the complexity and size of a larger business. We're moving fast on all of these. Just last week, we announced the expansion of the Polaris platform, bringing static testing and software composition analysis directly to the developer's desktop. This first-of-its-kind solution enables developers to seamlessly find and fix security weaknesses in proprietary code and known vulnerabilities in open source code, all within their desktop development environment. We also added the team and products from Tinfoil Security, broadening our product offerings for dynamic application security testing, or DAST, and adding API scanning capabilities. Our scaling efforts in the field are also progressing well as we've ramped up hiring activity and are excited about the sales energy in the organization. A good example of the power of the combination of products and consulting is one of the largest pharmaceutical companies in the world. A relationship that began with a small initial service engagement to help them respond to a security breach has grown to include both product purchases and now additional services to help them proliferate our solutions. We're also moving fast to scale our leadership and management team to the next level. We have launched an external search for a new general manager to lead your organization into the 500 million to 1 billion level. While these efforts will flow into revenue over time, we're encouraged by the positive start. There's a tremendous opportunity in this space and we're well positioned to enable companies to improve the security and quality of their software with a combination of high-value products, a great new platform, and enabling consulting services. In closing, Q1 was a very good start to the year. We delivered strong financial results and are reaffirming our outlook for fiscal 2020. 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. Our innovation engine is prolific, and this quarter we will be introducing a number of exciting new products and differentiating capabilities. We are committed and on track towards our mid- and long-term growth and margin expansion targets. Finally, let me thank our customers for their business and our employees for their dedication and hard work in delivering continued strong results. Track will now highlight the financial perspectives. Thanks, Art. Good afternoon, everyone.