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.

Thanks, Art. Good afternoon, everyone. Our record results are especially noteworthy in light of the considerable challenges faced by ourselves and our customers over the past few months. Given our history of strong execution, sometimes it's easy to forget how much hard work goes into delivering results like these. So I'd like to add my thanks to our employees for their dedication under these difficult circumstances. Complementing our excellent execution in the first half is our very solid business foundation. technology leadership, a diverse customer base, and nearly 90% recurring revenue. These elements position us well for periods of high demand as well as during times of greatest stress. This rare combination gives us the confidence to reaffirm our annual revenue and non-GAAP margin guidance and to increase our non-GAAP earnings and operating cash flow targets. Now to our second quarter results. All comparisons are year over year unless otherwise stated. Orders substantially exceeded our plan, driven in large part by EDA, particularly digital design. Ending backlog was $4.7 billion. We generated total revenue of $861.3 million above our target range, driven by broad strength and some revenue that moved in from Q3. Semiconductor and system design segment revenue was $773 million, with strong growth in EDA software, moderated by tough hardware comparison over a strong Q2 of last year. Excluding hardware, EDA software results remain within our long-term target range of mid to high single digits. A quick note on hardware. While COVID-19 has presented some minor HAPS-related supply chain challenges, due to shelter-in-place mandates, we're managing through them well. Our contract manufacturing partners are gradually increasing capacity, and because our products are considered essential, they are top priorities. Software integrity segment revenue was $88.3 million, 10% of total. Moving on to expenses, total gap costs and expenses were $735 million, which includes approximately $30 million in restructuring costs associated with our previously communicated program to optimize resource allocation for sustainable long-term growth. These are not COVID-related. Total non-GAAP costs and expenses were $640 million, resulting in a non-GAAP operating margin of 25.7%. We are on track to generate approximately two percentage points of non-GAAP operating margin expansion for the year. adjusted operating margin for the semiconductor and system design segment was 27.1%, and for the software integrity segment, 13.3%. Finally, GAAP earnings per share were 71 cents, and non-GAAP earnings per share were $1.22, well above our target range due to excellent operational execution. Turning to cash. we generated a record $380 million in operating cash flow. We initiated a $100 million ASR and have now completed $200 million in buybacks year to date. We've repurchased $2 billion of our stock since 2015, approximately 75% of our free cash flow. Our capital allocation strategy has not changed. We'll continue to evaluate the best use of cash each quarter and will remain prudent as the global macro environment evolves. Our balance sheet is very strong. We entered the quarter with a cash balance of $856 million and total debt of $236 million as we paid down $90 million of our revolver. Now to guidance, which continues to assume that the current entity list restrictions remain in place for the rest of the year. Consistent with our expectations, Revenue is skewed to later in the year due primarily to the scheduled timing of hardware and IP deliveries. For fiscal year 2020, our targets are revenue of 3.6 to 3.65 billion. Total gap costs and expenses between 2.99 and 3.03 billion. Total non-gap costs and expenses between 2.63 and 2.66 billion. resulting in a non-GAAP operating margin of approximately 27 percent, GAAP earnings of $3.74 to $3.90 per share, non-GAAP earnings of $5.21 to $5.28 per share, cash flow from operations of $815 to $840 million, and capital expenditures of approximately $170 million. Now to the targets for the third quarter. Revenue between $875 and $905 million. Total GAAP costs and expenses between $721 and $737 million. Total non-GAAP costs and expenses between $640 and $650 million. GAAP earnings of $1.12 to $1.22 per share and non-GAAP earnings of $1.33 to $1.38 per share. In conclusion, despite the unprecedented challenges faced by our employees and customers around the globe, our focused execution, portfolio strength, and resilient business model enabled us to deliver a very strong quarter, reiterate our full-year revenue and non-GAAP margin guidance, and raise our non-GAAP earnings and cash flow targets. Our strong balance sheet and thoughtful approach to capital allocation positioned us well to navigate the current environment. And with that, I'll turn it over to the operator for questions.

Thank you so much. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to two questions to allow us to accommodate all participants. If you have additional questions, please re-enter the queue and we'll take as many as time permits. Ladies and gentlemen, if you wish 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. And our first question comes from the line of Rich Valera with Needham & Company. Please go ahead. Your line is open.

Thank you, and congrats to the team on delivering very solid results in a challenging environment. First, just on the order commentary, I think you said you saw stronger than expected orders primarily in core EDA. I was wondering if you could give any color on sort of what drove that strength and if you thought it was maybe timing related or if you think that was sort of a net increase in demand relative to your original plan.

Well, I think there are multiple things that played in all at the same time. Obviously, in a time like this, we all pay a lot of attention to execution, and so we'll give some credit to just working hard at it. But I think the other thing that happened is that a number of the new products that we introduced last year and some that we announced just recently are very attractive and benchmark extremely well. And so the hunger for more sophisticated products continues because during the same timeframe, what we're seeing is that a number of the advanced customers are moving now from 7 to 5 nanometer. And so that has both implications on the IP that they're using and on the strength of tools that they want. And so the demand, I think, was absolutely there, and it was for us to make sure that we find a way to get at it.

Got it. And just one more on the SIG business. One, could you say what the bookings were there? I know they were pretty good last quarter despite the relatively modest revenue growth. And two, any progress on getting a business unit, a new business unit head there? Thanks.

So we normally don't disclose the bookings for any subpart of the company. We did communicate that they were lower this quarter than expected, and therefore that has some ramifications going forward. It's not completely a surprise because a lot of the interactions early on in the COVID time were very impacted by people essentially hustling for shelter or from home. On the recruiting, we have started a search, and so we expect that in the next six months this will be fulfilled, and now we're looking at candidates.

Got it. Thanks very much, Art, and congrats again on a nice quarter.

Thank you very much, Rich. Next, we turn to the line of Tom Diffley with DA Davidson. Please go ahead.

Yeah, good afternoon. Maybe first a question on the hardware business. At this point, is that completely outsourced or do you still do or do you do a final assembly and test in-house?

And just curious if COVID was a bigger... As you would expect, when you have a global disruption of all the markets initially, You have to watch out where all the parts are coming from, who's doing the assembly, et cetera. And the issues that we looked at initially were HABs related. I'm quite impressed by how quickly our team was on top of that. And after that, the fact that this is essential equipment benefited us as the assembly people we work with gave us high priority. And so I think the problem is mostly resolved at this point in time.

Okay, that's great to hear. And then track, when I look at the midpoint of guidance for, I guess, the third and the implied for the fourth quarter, pretty strong revenue growth, not a lot of model leverage off that revenue growth, though. I'm curious, is that because it's more hardware-centric? Is it conservatism, or is there something else going on?

It is a little bit of the hardware mix. You've got COGS ramping up with expenses as well. And the profile is that it does have some additional expenses in terms of of hiring, but I do expect that you'll see an improvement in operating margins from Q3 to Q4. Okay.

Sounds good. Thank you. You're welcome.

Next, we turn to the line of Joe Vrumek with Baird. Please go ahead.

Great. Hello, everyone. Apologies if this came up. I joined a little bit late, but just a current events question. I'm wondering if the recent proposals around new export restrictions have either impacted Synopsys anyway or maybe since the April quarter close caused some of your customers maybe to reconsider certain spending decisions or just any impacts from, you know, the past couple weeks and some of the news that's been coming out.

Well, the bottom line of the answer is no. The recent announcements were one or two weeks old. And while fairly complicated, we're able to get a good sense of it. And our conclusion is it does not affect us beyond what is already prohibited in the entity. We have also not had any follow-on of customers that were worried in any form. So I think that interpretation has been fairly universal.

Okay, great. And then on software integrity, I guess the qualitative commentary, just in terms of some of the buy in to Polaris, and the fact that you're getting competitive displacements for Polaris at this point, that strikes me as pretty positive. So I guess my question is, did it surprise you to have platform traction in a more difficult environment created by COVID? And does that give you maybe some optimism and thinking about bookings for the back half of your year?

Well, you know, we live with optimism, and actually this is a good example of it, because the whole point of a platform is to get the benefit of multiple tools that work well together. And by the way, for the buyer, it has another benefit, especially for larger companies. They are trying to maintain an environment that is not overly complex with tools from many, many different vendors. And so being able to bring multiple capabilities together in a structured fashion that over time will gain more and more value because things work well together is actually precisely the direction that we are counting on. And the fact that a number of customers have actually bought Synopsys precisely for that reason is extremely encouraging.

Great. Thank you very much.

You're welcome, Joe. And next, we turn to the line of Mitch Steeves with RBC Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my question. So I wanted to focus a little bit on the... Hello? Can you hear me? Yeah, we can hear you. Yeah, sorry. Yeah, so I wanted to focus a bit on the operating margin here. So the implied number, it looks like you guys are going to get to kind of the high 20s in the year. So I really have two parts to my questions. The first one is just that Is that correct that you're going to kind of exit at 29%? And then secondly, does that imply that 21 should actually be better than your high 20s target? Because now you guys kind of get to work from home dynamic. You don't have to have as much T&E expense. It's something we've heard that a lot of companies, particularly software companies, are able to do. So is there any way you guys are going to be able to squeeze extra basis points out of the OpEx line going forward?

Let me work backwards on your question, Mitch. You're right. We would be exiting in the high 20s for the year, but keep in mind that it's largely a profile of the revenue ramp. We remain committed to our long-term goals of driving margin expansion, but at this point, it's too early to talk about FY21. We'll comment on that later in the year. As far as savings from COVID, certainly we're seeing some elements of that benefit flow through to the results. But, you know, the results are largely driven by us executing the plan that we set out to do for the year, which is continue to focus on our spending, be more diligent about where we're investing, and driving a plan that's going to deliver good margin growth this year and over time.

Got it. And just one small one, if I can, I know I asked multiple questions there. So just was there any revenue impact you guys could quantify in terms of what the hardware shipments would have been or if you had any push outs in terms of sales? Because I'm curious to why the four year guide didn't go out. I would think that you'd be able to get at least about towards the high end, I guess, of the revenue guide. So was there any sort of push out or anything related to COVID in the quarter?

No, not really. COVID had a really small effect on the results or immaterial effect on the financial results. As we mentioned, we had some initial challenges with the supply chain when the shelter-in-place mandates went into effect, but we were able to overcome that and execute on the numbers for the quarter. Good execution in Q2. The results were strong on its own, but we did see some revenues move in from Q3 to Q2. At this point, we're providing our best view of the outlook for hardware, and it really reflects a profile of it growing in Q4. And so far, we feel confident in our ability to execute to that. That's why we're reaffirming guidance.

Understood. Thank you.

Mm-hmm. You're welcome. And next we turn to the line of Jackson Ader with JP Morgan. Please go ahead.

Great. Thanks for taking my questions, guys. The first one, Art, is a follow-up actually on some of the trade restrictions. You addressed, I think, the entity list and Huawei's, I guess, tighter restrictions having already been factored in. But what about the military end user or military end use case, I guess, control actions that were put out at the end of April. Do you expect any impact from that?

No, we don't. So fundamentally, the guidance that we have given you encompasses all of our interpretation of all of the various actions that have been taken over the last year and a half. And I think we feel very solid in that interpretation at this point in time.

Okay. All right, great. Thank you. And then follow up on the track. Yeah, just quickly on cash flow. So are there any customers either in software integrity or in the semiconductor business that are looking for maybe –

some payment flexibility i saw that the provisions for doubtful accounts went up but i'm just curious where the where the strength and cash flow is is expected to come from yeah for the most part we haven't uh seen um any meaningful impact of of that or of customers coming back and renegotiating terms um and so far that's been very positive uh we're prepared to to you know um We're prepared for that kind of potential, but so far we haven't seen much of an impact. The strength in the cash flow outlook is really confidence in the P&L and what we're guiding to. It's pretty solid growth for the year as well as good margin improvement, and that's going to eventually translate to cash. And it's a reflection of both strong collections and, you know, more effective disbursements or lower disbursements.

Great. All right.

Thank you, sir.

You're welcome.

You're welcome.

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

Good afternoon, everybody. Let me extend my congratulations as well. The 7% sequential increase in backlog is commendable. And by reading between the lines, I see that your average license duration is spiked quite significantly. And so does that speak to, I guess, the concentration of the record orders with perhaps one customer renewal, or is there some more diverse, you know, overall bookings trends there?

It is the second. It's not a single customer at all. It is multiple customers. I think in general, you know, there are often variations in length of contracts. At this point in time, it is encouraging that the contracts have not become shorter, as in times of economic stress, people could be worried about it. That appears to not be the case at all. And as I said, from a use and approach to design, we see no difference. If nothing else, there are a number of companies that are really accelerating as they hope to have good opportunities next year with new products. So the technology advances are on track, and the business, I think, reflects that directly.

Gary, I would also add that it's nice to have that large backlog in an environment like this, in general, but particularly in an environment like this. But the Q2 bookings was not only a record in absolute numbers, but we also saw a very good run rate growth in the quarter. So I'm pleased with that combination.

Okay, and as my follow-up question, you know, with the shelter in place, you know, I guess largely still intact there in the Bay Area and perhaps affecting access to your facilities and access to labs and whatnot, is that a hindrance to completion of some IP deliverables? Is that perhaps an explanation why the fourth quarter, you know, may be so back and loaded?

While initially there were a number of questions of how to best get access to labs, how to manage that, can we manage it, I think there, too, we were able to find practical solutions pretty quickly. And I'm actually very positively surprised at how well the IP group is executing. as we continue to send chips to manufacturing, as we continue to deliver new cores. And so I think the distribution of revenue is more a function of the uptake from the customer than anything else.

Okay. I appreciate that. Thanks, everyone.

You're welcome.

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

Hi. Thanks for taking my question. First, on the software integrity business, Just wondering if you could elaborate on some of the delay in business decisions that you alluded to on the prepared remarks. And then, you know, what gives you the confidence in the low double-digit growth target that you implied the business would grow this year? And then secondly, how have your sales efforts been impacted by the shelter-in-place orders in SIG? And have your spending plans changed at all versus what they were last quarter? Thanks.

Yeah, let me go backward on that. You know, as the work at home started to become acted on with many of our customers, it did slow the interaction somewhat. We also saw some slowdown in our ability to hire people as quickly as we had planned. And those are the type of things that then tend to impact the orders rates that one gets in. And so one can certainly always point out things that we could do better under those circumstances. But all in all, the reception to the type of capabilities that we have and the need have not diminished at all. As a matter of fact, you can see how a wave of concern has gone through many of our customers as they established work from home. And immediately the security of many of those installations was somewhat in question. Now, we ourselves barely touched that. So that is not the field that we're in. But the secondary ramification of that is that people will look again harder at what to do in the software to protect from future security breaches. So from that perspective, I think the business opportunity is just as healthy as it was before. The circumstances will evolve, and I think our execution can improve, and that's what we're focusing on.

Great. And in my follow-up, just generally speaking, do you see any read-across to the EVA industry more broadly from the duplication of semis and tech supply chain that we seem to be progressing toward? Just asking, you know, following up on TSMC's decision to build a fab in Arizona.

You know, I'm sorry, I couldn't hear the first, you said something across, but I'm not sure what the something was.

Do you see any read across to the EDA industry broadly from the duplication of, you know, supply chain efforts, you know, with US and China? Thanks.

That is an interesting question, because whenever supply chains start to duplicate efforts, they actually become less efficient, which is actually not a bad thing for the people supplying to them in turn. And so I don't think that we see an enormous amount of effort in that yet, but clearly there are sort of fairly big macro discussions on different countries wanting to have a high degree of independence of other countries, all the way to manufacturing of semiconductors, as you saw per the recent announcements of TSMC. And so I think that we're going to see a fairly dynamic evolution over the next year. And given that, you know, we're connected to all of those people very well, I certainly intend for us to participate in whatever they're going to build and whatever they need to construct in a fashion that is good for our business.

Great. Thanks. And congrats on the result. Thank you. Thank you.

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

Thank you. Good evening. Art, needless to say, the comments about record orders was quite important and the same about record backlog. If I'm not mistaken, the last quarterly record for bookings was seven years ago. Well, the question is, yes, the question is, how will this momentum in in EDA influence or your direction or allocation of internal resources. Normally when we see that kind of strength in EDA, again, driven by demand and new product adoption, we would see, for instance, significant ramping up of AE capacity. as a coincidental or leading indicator for that kind of strength in EDA. So perhaps you could talk about that kind of internal investment you're thinking of incrementally for EDA, and conversely what you might be doing differently in terms of SIG investments as you go through this slower period of growth and maybe track and comment a little bit more elaborately on the restructuring intent. And then my second question is back on EDA. You, in the last year and a couple of conversations we've had, spoke about two big trends driving the EDA industry. One was moving from the general to the specific or specialty chips, as you call them, and that the next big thing in EDA was, as you described it, prototyping, broadly speaking, at different levels of abstraction. I'm sure you remember those comments. Is there any way to parse how either or both of those is directly having a business impact incrementally versus, let's say, older forms of design or older methods?

Okay, I will try to answer that in less than half an hour. Let me start with, you know, the very good results from the order perspective. And, frankly, I didn't know that it was seven years ago at that time we were more colored by, you know, single large customers making an impact. This was much broader. Nonetheless, when we entered the global pandemic crisis, it became instantaneously clear that there were more questions than answers of what this would do to the market, to the behavior of the customers, and so on. And it was also instantaneously clear to Synopsys that it was all hands on deck to make sure that we maintain strong relationships with the customers. first from a support point of view to make sure that they do well, and secondly from the perspective of continuing to bring in the business in order for us to be able to fund however long the downturn may be. We executed on that clearly well. And as mentioned, I think one of the very early questions today, I think partially it is because we focused extremely well, but also because we are at a good time with new products, and new necessities from a design point of view, such as the new nodes, the advanced technologies, the increase of IP reuse, et cetera. And so we will continue to manage the way we've always done, which is we committed to you to obviously optimize the growth rate, but also to work towards the ops margin improvement, and this helps in the right direction. But this also ties to your next question, which is what are the key trends behind this from a technology point of view? And what I must have called many years ago specialty chips, now we would call AI and machine learning chips because that is really the whole generation that has completely readdressed architectures. And it's important to understand just a little bit why that is relevant to us. Because no matter what, when you do computing engines, such as for AI, you want speed, speed, speed, except these computing engines are extremely large machines of parallel small processors that with very big data rates and often a big bandwidth. And so every company that is invested in that is doing their own thing and trying to be differentiated, and so they are truly specialty chips. And what is particularly interesting is a number of these are now splitting into multiple chips, and that is why CDIC compiler is such an interesting product because after many, many years of worrying about Moore's Law maybe slowing down a little bit, and it has slowed down somewhat, although it's much more alive than people think. This is a great answer if one can go to multiple chips that are extremely well connected. And so the specialty chips, as you call them, are the architectures that are precisely driving the notion of bringing more chips together. Now, in that context, the prototyping is just as relevant because the other half of a product is the software that runs in it. And the more complex these specialty chips are, the more complex the software is, and the more there is risk that the software doesn't work when the chip comes out or that the chip wasn't quite responsive to the software it was intended to be on. That is where prototyping sits in the middle. It allows people to check and run their software before they actually have the hardware. And so I expect that we will see continued attention and growth to this, and certainly we are investing strongly in these areas. So bottom line is nobody will ever argue that strong orders is not a good thing. Obviously, we have to execute now in the next few quarters. We'll see what the global economy does. I think that semiconductors is actually in a good spot, relatively speaking, to most other markets, and we have not seen a slowdown.

AJ, in addition to that, to your question regarding the restructuring, we're committed and we remain on path to driving margins up over time. In addition to that, we'll continue to invest in the business because all of the segments that we're in, we're seeing good growth opportunities. The restructuring is really a reflection of fine-tuning the investments and making sure that we're placing heavier bets in the areas where we think we can get the best best combination of growth and profitability. Thank you very much. Thank you, Jerry.

And next we turn to the line of Jason Salino with KeyBank. Please go ahead.

Hey, guys. Thanks for taking my questions. Nice to hear from everyone. First question, you know, maybe track, can you maybe go into the comments around the pull forward of some revenues from Q3? You know, is this more on the EDA side or the hardware side?

Mostly on the EDA side, what we saw in EDA, particularly in Q2, was just a few shorter contracts. Typically, they're FSAs, and so we saw that benefit, and that's why you might see a little bit higher on the time base relative to the upfronts. But overall, the profile for the year, there's really good growth and strength across the board.

Great. And then my follow-up, you know, the SIG margins did, you know, increase 300 basis points, probably the highest SIG margins that you've reported since breaking that segment out. How much of this was from the restructuring, maybe the slower hiring, and then would you look to prioritize managing profitability for this segment while the growth profile is a little more challenged?

It's a little bit of all those things that you described. You're right. The margins did come up to around 30%. We mentioned at the beginning of the year that we were going to try to invest further in that business to invest for growth. I think we're still committed to that plan and the profile for margins will vary from quarter to quarter depending on the ramp up in its expenses. I would extrapolate that up to the full year or as a new plan. We'll continue to balance investing the business while making sure it fits into the overall company's goal.

Great. Thank you.

You're welcome.

And next, we turn to the line of Chris Sankar with Cohen & Company. Please go ahead. And, Mr. Sankar, you may have your phone on mute. Maybe we can go to the next and come back to the gentleman. Thank you. And next we turn to the line of John Pitzer with Credit Suisse. Please go ahead.

Yeah, good afternoon, guys. Thanks for letting me ask the question. Art, quick question just going back to China. Appreciate all the color you gave on the recent Huawei licensing news from last week and the military use. So I'm just kind of curious, just given how critical EDA is to the setting up your ecosystem, and China's desire to kind of build that system out, you guys become a really important sort of pawn on the geopolitical sort of chessboard. And so I'm kind of curious, you break out Asia Pacific revenue, but you don't break out China revenue specifically. Can you help us kind of just ballpark that? And I guess as you look inside of China, what percent of the customers are you supporting in China today that if for some reason you couldn't, that demand would probably get soaked up somewhere else, i.e., Huawei can't ship into phones, but maybe MediaTek and Qualcomm can. And to what percent of the Chinese customers do you think, or maybe a lot of startups, that if you're not shipping to them, that demand probably doesn't go elsewhere?

Well, this is a very difficult hypothetical question because there's so many geopolitical forces de facto in play at the same time. I can tell you that so far a number of companies have picked up very quickly where others could not develop themselves. And I expect that to continue because, after all, globally speaking, it's a very open market and people jump in when there's an opportunity one way or another. And so really since the entity list came about, which was May last year, We obviously have learned how to live with that and really have not felt much change. Growth continues well in China. Actually, growth continues well overall in the world, but China particularly. And there are many, many companies that are jumping in both there as well as in other parts of the globe.

That's helpful. And then maybe for a follow-up, just back to SIG, I'm just kind of making sure I understand this. Is the growth sort of slowdown here – of your inability to actually bring on new headcount and drive channel growth there? Or is it actual customer activity? And I guess I'm asking the question, I'm just trying to get a better sense of why the confidence that once we get through this COVID phenomenon, growth will re-accelerate there? What metrics are you looking at to support that view?

Sure. Well, I think the most objective answer has to be that it's a combination of the two. Meaning that, yes, we did see a slowdown as a number of customers just have been sidetracked into their own survival challenges in different ways. And that tends to slow down this type of investment at the same time. And you saw a little bit of that in our commenting that our hiring was slower than planned. That is our own execution that is in question. So bottom line is we will need to put, continue to put effort in bringing this part of synopsis into a very good profile and we're doing exactly that. Now what gives confidence? What gives confidence is that, you know, the problem is not shrinking at all and the solution that we have is getting better and better. Now you say, well, that in itself, you know, doesn't give you money. But, yeah, you're right. We have to work for that. But the problem will continue to grow. And it will continue to grow because so many electronic systems are much more intertwined than they were before. And that will continue to happen in the present pathway that electronics is on. Therefore, there will be needed more assurances that the sub-pieces have built in security in a variety of ways. That certainly is massively the case on software, but as a side note, will also increasingly be the case on the hardware side. So there's nothing that has changed in our opinion of this being a good market, a technically challenging, therefore particularly good market for us, and the combination of the overall situation and perhaps our own execution led us to this point. But let's not underestimate, this is actually a very good business for Synopsys. It is now growing a bit slower than we wanted this year, but it is well on track to have a good future. Thanks.

You're welcome. And speakers, we have no further questions in queue.

Well, in that case, let me first thank you to attend. My assumption is that if not all of you, most of you attend from home. So we hope that your home situations, family situations are also safe and sound. And all the more do we appreciate hearing your voice and having your support on a quarterly basis through these earnings releases. Please take care of yourself and be well. Bye-bye.

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