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 2020. 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 then 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, Greg. Good afternoon, everyone. Hosting the call today are Arch DeGias, Chairman and Co-CEO of Synopsys, and Trak Fahm, 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. Finally, we are all participating from different locations today. Please forgive any delays, technology glitches, or awkward handoffs in the Q&A session. as we navigate this new virtual dynamic. With that, I'll turn the call over to Art DiGio.

Good afternoon. I'm happy to report outstanding second quarter results with record orders, revenue, non-GAAP earnings per share, and operating cash flow. We substantially exceeded all of our key guidance metrics. Revenue was $861 million, with gap earnings per share of 71 cents and non-gap earnings of $1.22. Orders were substantially greater than our internal plan, driven primarily by digital design software, and we continue to make good progress on our margin expansion goals. As a result of our first-half strength and the resilience of our business, we are reaffirming our revenue and non-gap margin guidance for the year, while raising our non-gap earnings and cash flow targets. Trak will discuss the financials in more detail. Before providing quarterly highlights, let me comment on the market landscape, which is, of course, dominated by the COVID-19 pandemic and its substantial recessionary pressure on the global economy. While in a matter of weeks, many companies around the world have adapted to widespread work from home, the semiconductor sector has stayed busy as electronic system and system design continues unabated. Driven by the sudden need for bandwidth and compute for home, be it for work, schooling, or entertainment, advanced chip design is not slowing down. We've seen this continuous design activity in previous downturns. Regardless of where a company or industry is in its business cycle, continuous investment in new technologies, be they AI and machine learning, 5G, IoT, automotive, or cloud-end markets, is the best way to be ready when the economy turns up again. Synopsys is at the core of this enablement. Combining that with our time-based business model, a high level of recurring revenue, and a non-cancellable backlog of $4.8 billion, Synopsys is well positioned to withstand the uncertainties of today's macro environment. With that context, let me provide some highlights from the quarter, beginning with EDA. Our unrelenting innovation push throughout our Fusion design platform is driving momentum in technical benchmark wins, increased competitive displacements, and new breakthrough products. In Q2, our hallmark Fusion compiler product drove a doubling of the number of tape-outs, as well as significant business commitments by customers ranging from the world's largest microprocessor and consumer companies to mobile, networking, and automotive system designers. Key competitive wins included a leading Asian 5G edge computing chip supplier for next generation 5 nanometer design, a prominent North American graphics company on an advanced gaming GPU, and expanding competitive displacement at some of the world's leading mobile semis on multiple designs ranging from 12 nanometer to 5 nanometer. The fusion concept A revolutionary invention with impact that goes far beyond even the breakthrough fusion compiler solution resonates very well with our customers and partners. This quarter, we expanded our collaboration with Broadcom, who is widely deploying our fusion design platform to accelerate delivery of its innovative 7 nanometer and 5 nanometer designs. And our innovation continues at a rapid pace. In March, we announced several exciting new products, including DSO.AI. The result of a multi-year initiative with leading industry partners, it includes learning engines that can automatically adjust and optimize throughout the design flow. The result is impressive productivity improvements in terms of project time, as well as further optimizations in chip performance, power, and area. Using state-of-the-art AI and machine learning, As well as a cloud-based burst computation, it enables design teams to tackle more projects, handle larger parts of a project, and lets designers focus exclusively on leverage high creativity and value-added tasks. Another seminal new product is 3DIC compiler. Advanced designs are now so massive and complex that they require a brand-new approach. 3D-IC compiler is a single environment that enables the combination of multiple die together on a chip. This provides far better performance and capacity than conventional chip and package approaches for customers such as Samsung Electronics, who refer to it as an industry disruptor. 3D-IC is also a great way to extend the power, performance, and density benefits of Moore's Law. as it supports the high speed, parallelism, and massive data needs of new AI architectures. This opens a new path to very powerful multi-die computational engines for years to come. Meanwhile, in custom design, our multi-year innovation push has resulted in a highly competitive product that is being used for the most advanced FinFET designs and driving ongoing full-flow competitive displacements. For example, AlphaWave replaced its legacy custom design tools with our custom design platform for development of high-speed connectivity IP. Here, too, productivity was the reward, as our solution helped them meet aggressive design targets in a notably shorter timeframe. A major foundry in Asia expanded its internal deployment and now has more than 10 custom compiler projects underway. We also secured new deployments for memory, silicon IP, and microprocessor designs. Let me now move to our verification continuum platform, where significant technology innovation continues to cement our market share leadership. In verification software, we're seeing notable expansions at influential hyperscaler companies, traditional semi and systems companies, and global startups. Across the platform, our technology is strong. On the hardware side of our verification solution, which caters uniquely to unrelenting design complexity growth, demand for our products is also high. Competitively, our emulators and prototyping systems are differentiated by raw speed, higher reliability, easier installation and maintenance, and overall lower cost of ownership. Just this quarter, 13 new customers purchased our hardware products, and we had more than 30 repeat orders. Here, too, we're seeing good momentum with customers ranging from very large semi and systems companies to hyperscalers and startups. While the timing of hardware deliveries creates a tough comparison with the first half of last year, we continue to gain momentum with both new and existing customers. Now to IP, where we are growing with solid momentum. As the number one provider of interface, embedded memory, logic libraries, and foundry-specific IP, we provide the broadest portfolio addressing the most complex requirements, accelerating time to market, and lowering design risk. With more than 330 wins for foundry-specific 7-nanometer IP, customers are clearly placing their trust in our leadership in high-performance cloud computing applications. Most recently, we achieved significant competitive wins. including a major internet services and AI company who adopted our production-proven IP subsystems and PCI Express 5.0, and a major Taiwanese phablet semiconductor company who licensed our silicon-proven HBM2E for multiple networking customers. Our unrelenting focus on enabling advanced process design continues. We announced availability of the broadest portfolio of IP for TSMC's 5-nanometer process for high-performance computing SOCs. A multinational technology giant in cloud services and AI selected our PCI Express 5.0, CXL, and Foundation IP. And the leading e-commerce company chose our die-to-die HBI IP because of our performance, power, and area differentiation. Our product momentum for ARC processors also continued with the introduction of our first 64-bit processor IP. This is our highest performance ARC processor to date, targeting high-end embedded applications such as storage, automotive control, and infotainment. Now to software integrity. This is one area of our business that felt more of an impact from COVID as companies delayed business decisions while working to adapt to shelter-in-place mandates. While revenue growth improved sequentially, we did see a slowdown in orders that will moderate our revenue growth this year to the low double-digit range before returning to higher growth longer term. The breadth and roadmap of our portfolio are uniquely well-suited to serve today's DevSecOps requirements. By providing high-value products, a great new platform and strategic consulting services, We are well positioned to help companies develop more secure, high-quality software for a very interconnected world. Industry recognition of our vision and product breadth has grown significantly over the past several years. Just a few weeks ago, Gartner updated its magic quadrant for application security testing. We are pleased to note that Synopsys is again at the farthest top right position in the leader quadrant. We made progress during this quarter in several areas. We achieved multiple competitive displacements as customers embraced the benefit of our broad portfolio and the integration onto the Polaris software integrity platform. We saw a notable broadening of agreements as customers expanded the number of products they adopt. One example is a very large global electronics company who replaced the incumbent and significantly expanded its adoption to a broader set of our solutions. This quarter, our customer base continued to grow with new logos ranging from very well-known consumer electronics leaders to hyperscalers to industrial and financial services companies. Our next objective is to scale this business to reach $500 million to $1 billion in revenue over time. Before I hand it over to Chuck, let me comment on our practical handling of the COVID-19 pandemic. I'll begin with a sincere thank you to the many selfless caregivers who keep us safe. I also want to thank our employees, who have shown incredible commitment and agility over the past several months to execute on the dual objectives of health and business. I believe that our execution during this period has been stellar. In addition to the rapid actions we took to implement global shelter-in-place orders, we continue to partner with our peers, local governments, and health agencies to ensure a safe work environment for those returning to the office. Our IT, HR, facilities, and operations teams have done an amazing job quickly adapting our infrastructure and systems to support work from home. Our R&D teams continue to execute very well and have effectively worked through some hardware supply chain and logical challenges. The large number of new products and excellent benchmark results give us strong confidence in our product pipeline. This also applies to our worldwide IP team, which had the foresight to rapidly enable remote development and delivery of high-demand advanced titles. We are able to ship our products and our customers with support from our police station engineering teams. Last, as witnessed by the strongest orders quarter on record, our sales team also demonstrated stellar execution. As we now see a gradual opening of businesses in many countries and states, Our leadership is planning a very gradual shift back to the office in coordination with local authorities and sensitive to our employees' well-being. In closing, Synopsys is executing well. We delivered outstanding second quarter results with record orders, revenue, non-gap earnings per share, and operating cash flow. Design activity remains strong and enduring. We continue to introduce innovative new products throughout our portfolio and are benchmarking strongly. Notwithstanding the extraordinary world circumstances, we continue to target high single-digit revenue growth, substantial ops margin expansion, mid-teens non-GAAP earnings per share growth, and strong operating cash flow. Jack will now highlight the financial perspective.