Synopsys, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for fourth quarter and fiscal year 2020. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and you can place yourself into that queue by pressing 1 then 0 on your telephone keypad. If you should require assistance during the call, please press star followed by 0. 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, Rich. Good afternoon, everyone. Hosting the call today are Arch DeGias, Chairman and Co-CEO of Synopsys, and Trach 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. Finally, we are all again participating from different locations today, so please forgive any delays or technology glitches or awkward handoffs in the Q&A session.

that occur as a result and with that i will turn the call over to arts to gia good afternoon i'm pleased to report another outstanding year for synopsis despite unprecedented macro challenges we build considerable financial technology and customer momentum we substantially exceeded our original plan with business strengthening through the year We grew revenue nearly 10% to 3.685 billion, led by EDA software and IP, expanded non-GAAP operating margin by three percentage points, delivered more than 20% non-GAAP earnings growth, and record cash flow of 991 million. Contributing to these very positive results were the new EDA and IP products we've introduced over the past few years. We expect to further build on this momentum with several groundbreaking technologies that we launched this year. In addition, our re-energized software integrity business is on its way to scaling to the next level and re-accelerating growth. About two years ago, we communicated a three-year financial plan to drive double-digit, non-gap earnings growth through a combination of top-line growth and operating margin expansion to the high 20s by 2021. We achieved our initial ops margin target a year early and have consistently delivered high single-digit revenue growth. As we enter 2021, we expect to surpass $4 billion in revenue with non-GAAP operating margins of 29% to 30%, low to mid-teens non-GAAP EPS growth, and more than $1 billion in operating cash flow. Beyond 2021, We will raise our ambition to a rule of 45 as we drive revenue growth and further operating margin expansion. Trak will discuss the financials in more detail. Meanwhile, design activity remains strong across the board. Opportunities in key end markets such as AI and machine learning, high-performance computing and cloud, 5G and automotive are massive. as all drive increasing adoption of our advanced solutions at a time that Synopsys enjoys particularly strong differentiation. This includes ambitious companies such as AI startups and cloud hyperscalers, as they position themselves to leverage big data generated by the billions of cloud-connected IoT devices. They need a trusted partner who not only has the most advanced high-impact products today, but complete solutions capable of scaling well beyond the traditional demands of Moore's Law into the powerful intersection of hardware and software. Let me provide some highlights. In EDA, our unrelenting innovation push in digital design has strengthened our long-standing market leadership. More than 95% of advanced designs today rely on our fusion design platform, and over the past year, revenue growth has accelerated. In particular, we continue to see strong adoption momentum for our Fusion Compiler product, the industry's premier digital design solution. Fusion Compiler significantly exceeded its orders target, increasing 140% in 2020. The progression from technical benchmarks to competitive wins to growing orders and production proliferation is trending even better than we anticipated. We've seen widespread adoptions from customers ranging from the largest global communications processor and graphics firms to high-impact cloud hyperscalers to influential system houses and AI startups. For our customers, production deployment yielded excellent results, as evidenced by five times the number of tape-outs in FY20 compared to last year, and for us, a rapidly growing pipeline across many market segments. The Fusion Technology Foundation also dovetails exceptionally well with the challenges inherent in the next wave of chip and system design. Specifically, Synopsys is addressing new TAM opportunities in AI-driven design flows, in 3D multi-chip design, and in the new area of silicon lifecycle management. Let me start with our DSO.AI product, where DSO stands for Design Space Optimization. Our combination of fusion and AI learns and automatically adjusts and optimizes design exploration for both better results and faster time to market. With it, design teams can also tackle larger blocks and more projects, thus focusing on more value-added tasks. Even in this early stage, the power and potential of DSO.AI is being widely recognized as it received a 2020 World Electronics Achievement Award for Innovative Product of the Year. Next is our extremely timely 3D IC compiler solution with disruptive technology that enables the design and analysis of multiple dye together on a chip. At the very moment that system architects are augmenting traditional chip complexity by connecting multiple chips very tightly together, our 3D IC product provides far better performance and capacity than conventional disaggregated chip-in package approaches. Finally, we launched the industry's first silicon lifecycle management platform just last month. On-chip sensors and monitors feed into data analytics engines integrated with leading test and yield management. This provides visibility into critical performance, reliability, and security issues for the entirety of a chip's lifespan, from design to in-field operation. Early customer interest in all of these new solutions is very high. Turning to custom design, momentum for our custom compiler product accelerated with more than 30 new logos and 15-plus full-flow competitive displacements during the year. This resulted in over 50% revenue growth. Having seen the power of our innovations targeting advanced FinFET designs, a number of the highest impact semiconductor and systems companies are putting their trust in us. Let me now move to our verification continuum platform. which combines market-leading anchor products into a seamless, high-efficiency solution. With the complexity increase of intersecting chips, systems, and software, the need for verification continues to rise. Our number one market share position in both software and hardware puts us at the center of this wave. As we continue to innovate aggressively in state-of-the-art native integration of the fastest engines, Contributing to our solid growth on the software side are influential high-profile customers ranging from hyperscalers to AI to automotive and mobile. Our hardware-based verification products are totally focused on unmatched speed, highest capacity, lowest cost of ownership, and lowest power consumption for high complexity designs. Building on our record here in 2019, In 2020, we again expanded our customer base, adding more than 50 new customers and well over 100 repeat orders. This includes major expansions at some of the world's largest semiconductor and systems companies. Now to IP, where strong market demand for our rich portfolio drove another record year, growing approximately 20% to more than $900 million in revenue. Our strength is broad-based across all regions and key market segments, particularly high-performance compute, cloud and networking, AI, and automotive. In automotive, momentum continued in 2020 as we have achieved more than 400 wins on advanced processes across more than 30 major semiconductor companies. An area of particular automotive strength is our arc processor. This year, we extended our lead in automotive qualified titles by delivering the industry's first processor certified for full ISO 26262 automotive safety integrity level D compliance. We also broadened our portfolio, introducing DSPs, higher performance embedded vision, and a 64-bit processor family. As the undisputed leader in interface IP, we continue to see very strong adoption of generation upon generation of important titles, including PCI Express, memory interfaces, and MIPI, which had an exceptional year. In USB, we extended our leadership by introducing the industry's first USB4 IP. We also saw continued traction in very high speed 30s with multiple 56 and 112 gig wins. Building on our lead in foundation IP, we expanded our portfolio to include specialty memories used in AI and cloud compute and general purpose IOs, which had an excellent year. Finally, our track record of being first to market with IP and advanced process nodes continues and is highly valued by our customers. We announced a full portfolio of 5-nanometer IP with multiple silicon-proof points, including our industry-leading PCIe 5.0 and USB4 solutions. With already more than 50 5-nanometer design wins, we started development of next-generation 3-nanometer products, targeting high-end mobile and high-performance commutes. Now to software integrity, testing software code for security vulnerabilities and quality issues. This area contributed approximately 10% of our revenue. The market opportunity is vast, with the need to address critical security challenges steadily increasing in importance. As the industry leader with the broadest portfolio of products and services available today, we're well positioned to serve this growing space. Over the past several years, we have successfully expanded our customer base with enterprise companies now representing about 75% of revenue. In 2020, we saw an increasing number of customers adopting multiple products and services, leveraging our broad portfolio. An important example is the Fortune 100 technology industrial and aerospace conglomerates. The depth and breadth of our products and services allow them to consolidate from multiple vendors to Synopsys while significantly expanding their investment and user base. Having said that, software integrity is the one area that saw an impact from COVID as well as some near-term operational transitions. Our new general manager hit the ground running a little over three months ago and has already made significant enhancements in three areas. First, we evolved our go-to-market strategy and customer success organization to better address and serve new and existing customers. This includes timing our sales coverage and building an indirect sales channel. Second, we are bolstering our strategic consulting capabilities. And third, we are evolving our product roadmap to capitalize on security trends in DevOps and cloud adoption. The recent moves are encouraging. and we expect to see continuous progress towards ending the year with reaccelerated growth. We're very optimistic about the long-term opportunity as we work to scale past the half-billion-dollar mark next. In summary, we're entering 2021 with significant momentum. Market demand is strong, fueled by complex technologies and a multitude of high-profile verticals. Our innovation engine continues to deliver advanced capabilities as our product offering is increasing in differentiation while seeing strong adoption. Financially, we're executing very well and raising our long-term ambition. Thank you to our dedicated employees who quickly and effectively adapted to unprecedented challenges this year and to our customers and partners for their commitment and support. With that, I'll turn it over to Trak.

Thanks, Art. Good afternoon, everyone. 2020 was another excellent year. We've reported record results in all key metrics, including revenue, non-GAAP EPS, and operating cash flow. We finished the year well ahead of our initial expectations. Our ongoing financial success reflects our dynamic end markets, our portfolio of best-in-class solutions, our resilient business model with nearly 90% recurring revenue, and our return our determined execution. We're entering 2021 well positioned to exceed $4 billion in annual revenue and further expand non-GAAP operating margin. As a result, we are on track to deliver strong double-digit non-GAAP earnings growth and more than $1 billion in operating cash flow. I'll now review our full year 2020 results. We generated total revenue of $3.685 billion, up nearly 10% over the prior year, with strength across all geographies. Backlog grew approximately 500 million during the year to 4.9 billion. Total consolidated GAAP costs and expenses were 3.065 billion, and total non-GAAP costs and expenses were 2.654 billion, resulting in a non-GAAP operating margin of 28%. GAAP earnings per share were $4.27, and non-GAAP earnings per share were $5.55, up nearly 22% over the prior year. Semiconductor and system design segment revenue was $3.3 billion, with particular strength in EDA software and IP. Adjusted operating margin was 30%. Software integrity segment revenue was $385,358 million, with adjusted operating margin of 11%. While software integrity results were affected by COVID and our near-term operational transition, we are enthusiastic about the dynamic market and our leading industry position. Our long-term objective remains to grow software integrity in the 15 to 20% range, exceeding market growth as we and the industry evolve. We believe operating margin can reach or exceed our corporate average over time. For 2021, as our operational adjustments take hold, We expect business levels to ramp throughout the year and to achieve 15 to 20% orders growth for the full year. Revenue will feather in over time due to our time-based model. Our objective is to exit the year with double digit growth in Q4 with a full year in the high single digit range, then accelerate in 2022. We'll increase the level of internal investments in 2021 as we implement our adjustments. and we intend to resume margin expansion in 2022. Turning to cash, operating cash flow for the year was a record $991 million, reflecting our strong results as well as robust collections. We ended the year with a cash balance of $1.2 billion with total debt of $128 million. During the year, we completed buybacks of $242 million. At this time, we expect to increase our total buyback in 2021 versus 2020. Now to guidance, which assumes there are no changes to the current entity list restrictions. For fiscal 2021, revenue of 4.0 to 4.05 billion. Total gap costs and expenses between 3.226 and 3.271 billion. Total non-gap costs and expenses between 2.825 and 2.855 billion. A non-GAAP operating margin of 29 to 30%. Other income and expenses between minus 11 and minus 7 million. Non-GAAP normalized tax rate of 16%. GAAP earnings of $4.39 to $4.54 per share. Non-GAAP earnings of $6.23 to $6.30 per share, cash flow from operations of $1.2 to $1.3 billion, and capital expenditures of approximately $100 billion. Now to the targets for the first quarter, revenue between $935 and $965 million, total gap costs and expenses between $767 and $785 million. Total non-GAAP costs and expenses between $674 and $684 million. GAAP earnings of $1.05 to $1.16 per share and non-GAAP earnings of $1.44 to $1.49 per share. Longer term, we are raising our financial objectives. We intend to manage to a rule of 45 over the next several years. through a combination of solid revenue growth and continued operating margin expansion beyond 30%. In conclusion, we entered 2021 with excellent momentum, reflecting the strong markets we serve, the resiliency of our business model, and the outstanding execution of our team. And with that, I'll turn it over to the operator for questions.

Certainly. Thank you. Ladies and gentlemen, Ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your telephone keypad. Please note that this may be different than previous calls you are used to. You may withdraw your question at any time by repeating the 1-0 command. If you are 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. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one follow-up. 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. And we will start the Q&A with Rich Valera with Needham. Please go ahead.

Thank you. Congratulations on delivering some really solid results in challenging conditions this year. And with that, you finished off the year with another really strong quarter in Asia-Pac, second quarter in a row. And I'm guessing China was a factor in that. And one of the concerns that's raised is that maybe some of that business is being pulled forward for various reasons. But just wanted to get your thoughts on the strength out of Asia-Pac, in particular China, and if you guys have any concerns about maybe some of that business having been pulled forward and what that implies for next year.

Thank you, Rich. It was indeed a very good year, and China definitely contributed substantially. In general, Asia-Pac overall was very, very strong. We have no indication of a pull forward from China. Obviously, there's always questions around that, but nothing really out of the ordinary, except the fact that we had very strong business with also quite a number of additional new customers.

Got it. Thanks. Just a follow up on the SI business. Are there any sort of green shoots you can point to at this point? I know you've made a lot of nice sort of organizational and structural changes. Are you seeing anything on kind of the bookings pipeline or funnel that might show some of those are actually starting to have an impact?

No, we cannot say that yet because Jason Schmidt, the new GM, has been there for just about 100 days. He has made already a lot of very good changes, specifically on the whole go-to-market side, where we have been able, I think, to optimize much better. As indicated, our expectation is that through this year we'll gradually see the growth rate accelerate again because the business is fundamentally actually the right thing at the right time. And so I think as our execution improves, we will see the results probably fairly quickly.

Got it. Thank you.

You're welcome.

We'll now go to the line of Tom Diffley with DA Davidson. Please go ahead.

Yes, good afternoon and thanks for taking my call. So our first question for you is based on the news we got out of Intel this summer, a little hiccup in a node transition. So just a bigger, broader question, what is the impact to you and the EDA industry when a large customer stalls out a bit in node transition? I know that they'll redesign at the current node for a while, but just in general, how does that impact EDA?

Well, Tom, as you know, I never comment about individual customers, but one of the things that we know well for many decades is if anybody at any point in time stumbles a bit or gets ahead, The race is on among everybody. And at this point in time, I think all the companies that aspire to be at the leading end in technology are investing and moving very fast to move the ball forward. Now, this is not just because they want to be first in line with their technology. The demand of the market is very high. So it's not only do you have the latest node, it's also can you deliver in volume with the right level of yield because the production rates are pretty high. So to us, this is all good news. It is good news because we see a strong wave of new designs. The new designs are very much aimed at the latest technology, so people are taking advantage of that. And in parallel to this de facto continuation of, let me call it Moore's law classic, we also see more and more customers now very actively looking at multi chip or multi chiplets in a design. And so I think the hunger for more capability is an infatiable.

Great. This is track. I just want to add that you're going to see this in the 10 K in a couple of weeks, but I'll highlight that we continue to do very well at Intel.

and our business there is is grow has grown in 2020. okay so just to reiterate arts points yeah that makes sense and then track um you know i guess in the comments or the transcript you talked a bit about um you know the software integrity and putting in a an indirect sales channel is that a different uh sales line or a sales approach than before and is that going to have any impact on the margin of profitability

You know, if I may chime in, I think I may have misspoken about the indirect sales channel. It's really a parallel utilization of a channel that typically goes to large companies that actually help install things at our customers. And so it's really sort of working more closely with the existing ecosystem and not really a different sales channel.

OK, great. Thanks for the clarification.

Yeah, sorry, I got in the middle of an almost cough and started to misspeak. My apologies.

We'll now go to the line of Joe Vruink with Baird. Please go ahead.

Great. Hi, everyone. I wanted to start with the cash flow outlook for next year. It's quite strong and a pretty nice step up. Can you maybe provide a bit of a bridge other than just the improvement in net income and the reduction in CapEx that factors into the improvement in cash conversion next year?

Hi, Joe. Those two things that you highlight are really the biggest contributor, the fact that we are growing up income and reducing our CapEx spend. The other thing I'll highlight is over the last couple years, as I've mentioned, We've had some unusual one-time events that have hit us, and we've always described that heading into 2021, things will start to normalize a bit with regards to one-time adjustments, whether it's tax-related or legal settlement-related or build-out of our facilities. But going back to the point, it's the biggest part is the fact that we are driving margin expansion up in 2021. That's contributing to the strong cash flows.

Okay, great. And then it's a really strong improvement in backlog here at year end. Nice to see the acceleration. I'm wondering if you could maybe help decompose some of the bigger contributors. I'm sure there's quite a bit contributing, but if I kind of step back and think, it probably helps that the broader environment seems to be improving now in terms of R&D activity accelerating into next year. So I'm sure that helps across the portfolio. But in terms of any of the individual product contributors, is it really just increased momentum behind some of the things you called out in your prepared remarks? So things like fusion and verification continuum, anything else you would maybe point to as being, I'll say, extra good here at year end?

Sure. Well, if I were to find a common denominator among all of those things, it is the adoption of advanced technologies. And the reason for that is that the race is so much on in everything that has to do with big data, be it from transport to storage and, of course, especially to computation, i.e., various forms of machine learning, et cetera, that people want to adopt the most advanced technologies. In order to do that, They really need to have the most advanced tools, and Fusion Compiler is really doing terrifically well. We can see the benefits, our customers see that, and it's in broad deployment. But the other thing is the building blocks, and the building blocks are IP blocks. And those IP blocks with the advanced nodes are becoming more and more difficult to do for many of our customers, or just economically not all that viable if they do it themselves. And we are absolutely ready for the most advanced nodes as they come out. And so those are the areas that stand out. The last one I would just highlight is that with all these systems that use more and more and more transistors, these transistors have one mission in life, which is have software run on it. And so the intersection between hardware and software, which we often refer to as prototyping, overall is also very healthy.

Joe, I would also add that it's great to have $4.9 billion of backlog and have that certainty and the visibility to the future. And it does reflect the broad-based strength that Art's described. More importantly, I think a more critical measure for us is run rate, and that was up pretty substantially for the quarter and the year as well, which is the one thing that we are more encouraged by when we look at the key metrics for our business.

Okay, that is helpful. Thank you both.

You're welcome, Joe. We'll now go to the line of Mitch Sties with RBC Capital Markets. Please go ahead.

Hey, Greg Korder, guys. Just wanted to double-click a little bit on the operating margin implied guidance here. When I look at the EPS growth, it looks like you're implying somewhere around 12%, 12%, 13%. That would be kind of the lowest you guys have put up over the last four years, five years or so. just looking over the past performance. I'm just curious as to why the incremental margin driving for 21 would be lower relative to the last three years or so.

Yeah, the margin story, I think, is very constructive. We're driving margins up between one and two points. And remember, Mitch, this is coming off what I consider a pretty extraordinary year, both in terms of strong revenue growth and margin improvement. At this point, this is the best visibility that we have in the business, and I think it's a pretty constructive outlook for growth, profitability, as well as margin, as well as cash flows. So a pretty strong outlook for the year, and we feel pretty good about it at this point.

Okay, fair enough. And then just on the software integrity business, is there any sort of update you guys can give us on, like, the long-term trajectory there? I know you guys moved over a lot of the salespeople and kind of the strategy there, so maybe – You can put up a big picture as to what that should look like over the next few years or so.

Sure. So aside of the go-to-market improvements and accelerations in some areas, there are two other things that we look at. One is to increase our consulting capabilities because there's demand for that, and they have a big impact on sales. how well the rest of the business does. And secondly, on the product side, sort of a double focus, a focus on one hand of making sure that each one of our individual products increase more and more their differentiation because they do battle with a lot of small companies, and simultaneously that the overall platform really becomes more and more integrated because there's a lot of demand from the larger companies to be able to look at their overall risk management picture as it applies to software. And the more we can provide multiple tools that are integrated and that can jointly report on the status, that is very helpful to the CSOs or heads of IT that are typically in charge of that.

Understood. Okay, thank you so much.

You're welcome. We'll now go to the line of Jackson Ader with J.P. Morgan. Please go ahead. One moment, please. Go ahead, Mr. Ader, your line is open now.

Okay, great. Thanks for taking my questions. Yeah, just on the growth infusion, I think you mentioned it was like 140% growth in orders. Does that order count? And is that also, I mean, are ASPs

Basically coming in line with what you expected so total contract value is also Exceeding your expectations with fusion compiler Yeah, fusion is doing very well in every Dimension and as you know this was a long road to get it's not only a product, but it's a whole platform To get it to really to the point that's only across the bridge where it became markedly differentiated versus any competition and And we see that not only with Fusion Compiler as the core product, which for those of you not familiar, does both synthesis and place and route, but also has embedded in it timing and power and test and a number of other things. In other words, it's the intersection of many things that you look for on a design. It is also the linchpin for brand new products such as 3D IC and also connected very well to the silicon lifecycle management capabilities. And so in many ways, we feel that we have literally entered now the next decade of being able to build on that backbone that we have invested in for quite a number of years. And so both the technical stats, the booking stats, and the revenue stats are all looking very encouraging.

Okay, great. And then a financial follow-up question. Time-based licenses actually came down sequentially. That's a pretty rare phenomenon. It's not like it never happens, but in a fourth quarter, I think it's even rarer than another quarter. So anything that we should be aware of just in the mix between time-based and services?

No, Jackson. There's really nothing unusual there. Over time, the time base is pretty steady. But from quarter to quarter, you'll see it be a little more volatile given the timing of contracts and what gets added or falls off. So it's really nothing unusual in the business. Okay.

All right. Great. Thank you.

Thank you. We'll now go to the line of Gal Munda with Berenberg Capital Markets. Please go ahead.

Hey, good evening. Thanks for taking my questions. The first one for the team is just around China. If I did my creation right, based on your disclosure, it grew about 30% this year, even more than that. I guess I'm trying to look a few years out, and it now represents low teens in your revenue. as a proportion of total revenue. We've seen that it can reach, if it continues to grow that rate, it could be up to kind of high teens. Is that something that you would expect to happen in the long term, especially considering your comment earlier that you have been really seeing pull forward that this is a structural growth the way you're seeing it?

Well, as you know, the Chinese economy has rebounded post-COVID. but in general is in a phase of growth where technology is important to where that country is going. And we see many new companies entering the fray for chip design and other areas that we can provide them with tools with. And, of course, we see many of the companies that have now a number of years under their belt designing much more sophisticated chips. So I expect that to continue for a long, long, long time. And when you say a decade, it doesn't faze me at all. On the contrary, I think that's absolutely what's going to happen. And so our job will be to service that market as well as we can because it's a great opportunity. Now, I would add to that that the countries around China are doing quite well also. And so the whole Asia environment is absolutely moving forward on technology, and we're thankful that we have very good connection in all these countries, be it ranging from Korea, Taiwan, but also Japan that is rebounding somewhat with the China phenomenon.

Got you. Thank you. And then the second one, I just wanted to follow up a little bit on the margin itself. If I look at the incremental margins you guys have achieved this year, it's been quite remarkable, around 60%. Your higher end of the guidance kind of implies 45% for next year. Is that really a reflection of the fact that, you know, perhaps COVID situation made it a little bit of a more inexpensive year this year. And some of the investments might come back just generally in terms of the hiring and stuff. And, you know, it's 45% something that you feel comfortable kind of then achieving on an ongoing basis as we move past FY21. Careful. To go on.

Yeah, so I would say that you're right with regards to COVID. We did get some benefit of COVID in 2020. So that was for most of the year. And as we look at 2021, we do expect things to sort of stay that way for the first half. But, you know, we do expect some resumption of, you know, normal activities. So that's a bit of a drag on margins. But overall, as you said, we're expecting to drag margins up this year. With regards to the question regarding incremental margins, we'll have more to say throughout the year because we're in the process of further refining our next multi-year financial plan. But if you think about the objective of Rule 45 and the idea of driving really strong growth while expanding margins towards Rule 45, you're going to see pretty healthy incremental margin improvements year over year. So we'll have, like I said, more specific details to provide as we progress in the year. Thank you both.

I appreciate your answers. You're welcome. You're welcome.

We'll now go to the line of Jay Fleschauer with Griffin Securities. Please go ahead.

Thank you. Good evening. Art, let me start with you on the silicon lifecycle management strategy and platform. When we look at the stack of that platform, as you depicted at your design symposium a couple of months ago, it looks like there would seem to be some logical connections that you could make between that and core EDA and or perhaps even SIG. uh so perhaps talk about what your plans might be what the roadmap might be for connecting slm to one or both of the uh remainder of the uh of the businesses and then for for track to clarify on your comment earlier about business with your largest customer i assume you meant in uh dollars not necessarily as a percentage of revenue But given the extent of the decline of that business in 2019 versus 2018 in dollars, could you say whether you got back to the 2018 level or not in 2020?

Okay, Jay, you opened a very big box with Silicon Lifecycle Management because there are multiple entry points to that. One of the entry points that's sort of obvious and actually has been asked for for many years is for chips that are in the midst of a situation that could be life-threatening, i.e., in charge of a car or the brake system of a car. So you really would like to know, is the chip still working? And if the answer is no, you really want to know what to do with that answer or how do you stop the car or whatever you have to do. And so that is already a first example where, for a number of years, people have started to put different mechanisms inside of a chip via test connections to know is something broken, is the software still running correctly, or are there heat situations and so on. And so from there to go to the notion of, well, why don't we start to add some additional sensors? And by the way, sensors are very little things. So you can easily find a corner somewhere to put them in. That brings very quickly the next question, well, why don't we then take some data inside of the chip and can we make the decision if the chip still works inside of it? With other words, can you have some machine learning that gets interpreted inside of the chip? In contrast to say, oh, we can now read out a lot of this data from the chip that comes from these sensors and use external learning or external interpretation of the data so that we can make better chips going forward. And so I'm trying to just give you a little bit of a visceral sense that the minute you put observation points in anything, but certainly on the inside of a chip, and you have a way to either bring the data out or use it on site, so to speak, all kinds of new doors open up. And that is why this is exciting, because on one hand, you could say, well, nothing new here. On the other hand, you'd say, there's a lot new here and a lot new opportunity in specifically the AI that can be applied with it. So hopefully that gives you a little bit of a sense that the opportunity space is very big. The good news is, you know, we are in a leading position with our test capabilities, so we have good connectors there. We have very strong machine learning capabilities. We can use that. And by the way, our own IP has already used a number of these type of mechanisms for a number of years. So technically we know what to do.

Hi, Jay, this is Chuck. So on your question, you're right. Thanks for clarifying that the the dollar revenues at our largest customer is up this year. I know that you like reading our case. So I don't want to give away too much that's going to come out in a couple weeks. And you can see the details of that relative to the prior years. Okay. Okay. Just a quick follow-up, if I may. I don't think you used the word record to talk about either hardware or IP revenues for the quarter, but certainly for hardware, it looks like it had a record quarter, and possibly for IP as well, if you could clarify those. Yeah, we had a really good year for good quarter and good year for hardware, and it was down slightly versus a record year in 2019, but nonetheless a really strong quarter. revenue year for us. And same with IP. IP, I want to say actually is a record year for us overall. Okay, good. Thank you.

You're welcome. Thank you. We'll now go to the line of Jason Salino with KeyBank Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my questions. You know, the first one going into the introduction of the Rule of 45 a little bit, How much of achieving this goal is based on the SIG business being higher margins than the corporate average?

I think for the most part, Jason, and we'll provide more details throughout the year, as I said, because we are in the midst of developing that multi-year view. But for us to continue to drive margins north of 30, A lot of it's going to come from the rest of the business, the 90% of the business that is driving the growth and profitability. Now, longer term, as we've said pretty consistently, there's nothing structural about software integrity that would prevent it from converging towards the corporate margins. But that's a bit, you know, that's some time out. In the next few years, as we think about it, you know, a lot of it's going to come across. Some of it's going to be contributed, I'd say, but a large portion will continue to be driven by the semi-business.

Okay.

In general, I would add that throughout the company, everybody understands presently our objective of the rule of 40. And so it really applies to all of the businesses to do their best to move in that direction. But SIG is only about 10% of Synopsys. Now, it's a high potential 10%. And so your conjecture that it will need to both grow and improve its margin is absolutely true. But for the numbers that we or the direction we're indicating to you, we think that we have a number of engines that are doing quite well.

Okay, great. Thank you. And then one more quick one. You know, 20% growth in the IP business, I think that's what you mentioned in the prepared remarks, but I widely understood the tailwinds, the design starts and outsourcing, but what are you seeing on the competitive side? Any competitive changes on the IP side?

No, not really. There are a number of other companies that provide either very specialized capabilities, and I could mention ARM as a actually very good partner to Synopsys. And then we have some direct competitors that compete on some of the blocks that we do. And in general, if a market is competitive, that's actually a good sign that there is opportunity for growth and doing more. I think we will all be very busy because I do think that there's a lot of market demand, and I think it will increase. I think Synopsys is particularly well-placed because increasingly IP is very much a trust business. These things are very complex. And somewhat tongue-in-cheek, I've often said that it's a little bit like organ transplants. you want to make really sure that you're getting some very good quality solutions into your chip because otherwise it causes all kinds of other issues. And so it is very much a trust business, and I think Synopsys is doing very well in that regard.

Great. Thank you both.

You're welcome. You're welcome.

Next we'll go to the line of Vivek Arya with Bank of America Securities. Please go ahead.

Thank you for taking my question. I think, you know, you have given us a nice sales growth number for next year, about just over 9%. I was hoping if you could give us some relative indication of growth in the different segments. And I think, Art, in your prepared remarks, I thought you said growth acceleration from 2022. And I'm not sure whether you meant just in the SIG business or whether you were talking about the overall company growth rate.

Well, let me start with that part. What I meant at that point, I was talking about SIG, because obviously SIG is lower than our intent and our expectations. And so the changes that we've made, I think, are all in the direction to vitalize specifically the go-to-market function and really align better the product consulting and go-to-market three steps for bigger business. So I was talking about that part of synopsis accelerating back to where it should be. For the rest of the company, I think we're doing very well. I must say that it's very difficult to predict what 2021 will look like in general. High hopes that, as you heard in second half of the year, not only the Far East will do better from an economic point of view, but also Europe and the U.S. with the coming about of vaccines. But it's not a simple situation. Having said that, I think the semiconductor segment and the technologies around that are almost immune to that part of the economy because the needs are so high and many of the very things that got started under COVID, such as the work from home, such as the massive communication, the massive amounts of data being used, are just going to continue to be accelerated themselves.

Correct. And for my follow-up, you know, we are starting to see Arm expand into new markets, you know, Max and, you know, other high-performance markets in the data center, even supercomputing. Is that a net positive for you, or does it just cannibalize your presence in the x86 market?

No, no. Well, we ourselves are not in the x86 market. We provide all the building blocks around these key processes, right? And so if that part of the market wants to go accelerate themselves through a massive food fight, by all means go at it because acceleration in general tends to use more technology and newer technologies. And so I don't want to handicap any of the players. These are all very, very, very competent and great companies. But I think that the applicability of various forms of cloud computing is broadening. And what we're going to see is that there will be more and more specialty areas not only in general processing, but various applications, of course, of graphics processors. But let's not forget, we're serving 200 or so companies all doing the best ever AI chip. And these are all specialized computation machines that will, many of those will be very valuable for certain specific applications. So there's no slowdown by any means here. Thank you.

You're welcome. Next, we'll go to the line of Pradeep Rahmani with UBS. Please go ahead.

Hi, thanks for taking my question. First, I guess, for TRAC, can you sort of help us shape the year in terms of how the revenues are going to be weighted, first half versus second half? And on the margin fund, it almost feels, if my math is correct, most of the upside in margins is going to come from your semiconductor business basically. Is that correct or am I sort of missing something there?

You're right, Pradeep. I'll start with the second part of it, where the margin expansion is coming from. For 21 specifically, given that we will make some additional investments in software integrity to get it to reaccelerate growth, you'll see more of that margin improvement being driven by the semi-business. With regards to the quarterly profile, it's certainly going to be a better profile this year than what we saw in 2020. It's closer to fairly even, but still a strong second half.

Okay. And for my follow-up, actually, you know, when I look at ARM from a different angle, do you feel that customers are sort of indicating greater interest in ARC simply because of the uncertainty around ARM's situation? And is that a

positive for you guys and maybe does ARK actually grow is it growing faster than your other IP business well I don't really want to comment too much about ARM as they are a strong partner I would say that there are many different applications for different types of processors and We have never really competed with ARM in its main area, which has been very much the strong processors for mobility that are driven at a low power level in order to work well in a portable phone. And so we do an enormous number of, well, we do, our customers do an enormous number of the ARM cores with our tools, I should say. And, you know, we drive them as hard as we possibly can. ARC has done particularly well in super low power situations or in a number of specialty areas where the processors just suited the build particularly well. And automotive is one of those areas because there's all kinds of other requirements around automotive that have to be followed very strictly. And as we put major effort in quality overall and in quality specifically for automotive, we paid attention for that, for ARC specifically, and that's where it's doing well. Thank you. You're welcome.

Next we'll go to the line of Krish Sankar with Cohen and Company. Please go ahead.

Hi, thanks for taking my question. I just wanted a first question on IP business. You kind of mentioned on the IP side, like building IP blocks is getting more difficult with advanced nodes for your customers. Is there a way to quantify what the percentage of outsourced IP blocks to the EDA companies was, let's say at 28 or 20 nanometers? And what is it today at like five nanometers? Is there a way to quantify the percentage? Then there's a follow-up.

Well, you know, to be honest, there's probably a very good way to quantify it, but I cannot do that live for you here because I don't have the credibility. I would have to talk to the people in the IP group. Generically, though, I can absolutely say that 28 nanometer feels like a long, long, long, long time ago. And at that point in time, we are probably in the 20 or 30 percent of outsourcing. Now we're much higher. But what has really changed is that the complexity of the blocks since that time, there are certain blocks, especially all these big controller and communication interfaces, they have become particularly tough to do. And they are exactly the area where maybe some customers could do it themselves. Why would they? Because they're often standards. And, you know, being better than a standard is the same as being worse than a standard. You're not the standard. And so I think that has benefited our taking on more and more of the area on CHIPS. If you add to that the fact that there's a large, large number of embedded memories, that covers a large swath of a chip as well. So from that perspective, we keep moving up in the percentage of what we do, but what we do itself is moving up in its complexity and complexity. in its transistor density on an ongoing basis. And I think that's why this business is very healthy, is likely to continue to grow well, and we will be very close to the differentiation side of our customers.

Got it, got it. That's helpful. And then this is a follow-up. It's a longer-term question. In the past, when customer consolidation happened within your semiconductor customers, like you know, Obago, Broadcom, etc., you know, there's a view that it's going to be negative for EDA companies, which did not happen, but also at the same time, the EDA companies also consolidated, so therefore your customers went with the bigger supplier. Now, when I look forward, like, you know, there's still a lot of semi-M&As left to be done. With future customer consolidation, there seems like there's not the tailwind of the supplier consolidation. So do you feel like that would make a difference in the future or you think it doesn't make a difference R&D is going to be spent?

Well, it's a good question because many, many years ago, you recall it well, every time that the word M&A in your customer base came up, it felt like a four-letter word. And actually, it wasn't because the one thing that doesn't disappear are the very designers that are being M&A'd around, so to speak. And so from that perspective, it didn't harm EDA and IP businesses as much as initially expected. Secondly, you're absolutely correct that we have done a certain amount of consolidation in our market. largely to actually stay at critical mass in order to be able to afford the amount of R&D needed for all of these new capabilities. Now, I think in our core technology, we are very well equipped to do these things ourselves and invest in it. But on the sort of what's sitting at the boundary between existing SAM and new TAM, there are a lot of new opportunities that are opening up. And so if you take, for example, Silicon lifecycle management, we have acquired some capabilities, we are developing a lot of capabilities ourselves, but it's a new territory, it's a new town. Maybe a little hard to describe how big it will be, but the promise is extremely good. And so from that perspective, I think we will grow with our customer base in aggregate, and I think that our customer base is doing well because they're at the center of what will drive the technologies of the next decade. We will race with them.

Got it. Thanks, Bob.

You're welcome. And with that, we've exhausted the Q&A queue. Please continue.

Well, with that, thank you so much for participating today. We hope, of course, that all of you have stayed healthy within your family and yourself. It's not always been an easy time for everybody, but we appreciate the very fact that many of you have stayed in contact with us through the entire year. We look forward to 2021 with momentum, and we hope that that momentum also includes your health and your well-being. We look forward to talk to you soon again.

Ladies and gentlemen, that does conclude our conference for today.