Synopsys, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Synopsis Earnings Conference Call for the first quarter of fiscal year 2021. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call, you may press star followed by zero. Today's call will last one hour. Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded and at this time, I would like to turn the conference over to Lisa Eubank, Vice President of Investor Relations. Please go ahead.

Thank you, Lori. Good afternoon, everyone. With us today are Arch DeGias, Chairman and Co-CEO of Synopsis, and Trak Fom, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsis 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 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. Reconciliation 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 synopsis.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call. Finally, we are again all participating from different locations today. Please forgive any delays, technology glitches, or awkward handoffs in the Q&A session that occur as a result. Thank you very much for that. With that, I'll turn the call over to Art Tagia.

Good afternoon. Q1 was a very good start to the year as we met or exceeded all of our guidance targets. Revenue was $917 million with GAAP earnings per share of $1.03 and non-GAAP earnings above our target range at $1.52. Business was strong across all geographies and product groups. And for the year, we are reaffirming our guidance with low to mid-teens non-GAAP EPS growth, revenues surpassing the $4 billion milestone, non-GAAP operating margin of 29 to 30%, and more than $1 billion in operating cash flow. Meanwhile, our markets are strong. Where everyone looks, be it at AI and machine learning, hyperscale-enabled cloud computing, 5G, next-generation automotive, massively connected IoT, or software-enhanced medical devices, all require more chips and software. Chips to store and move huge amounts of IoT data through the cloud. Chips for massive general compute and AI-driven smarts in every vertical end market. Still more chips to tie these huge hardware and software systems seamlessly together and make them both secure and safe. And the escalating need for ever more secure software, whether embedded on an electronic system or in the enterprise software space. This is the center of gravity for Synopsys. With our photo portfolio that not only excels in advanced system on chip design, but reaches down into the critical foundation of silicon manufacturing and up to the intensifying needs of smart software, we are uniquely positioned at the heart of this opportunity space. It's quite rewarding to see the adoption and business momentum of the innovations we've introduced over the past several years and the enthusiasm around our further expansions into brand new domains through our next wave of technology disruptions. Let me share some highlights, beginning with EDA. Our groundbreaking Fusion design platform continues to drive proliferation and competitive displacements, supporting strong revenue growth. This includes major expansions and evaluations as historical competitor strongholds. Customers clearly recognize our leadership at the most advanced nodes, now down to 5 and 3 nanometer. Our Fusion compiler product specifically delivers superior performance, power and area results. With numerous competitive wins and wide deployments with influential high impact semi and systems companies around the world, we see growing business momentum. Integral to our sustainable differentiation is native integration of our golden sign-off products, which guarantees the most accurate and timely results. Our deep collaboration with foundries ensures that our mutual customers can access the most advanced technologies with well-honed design flows. This quarter, for example, we announced a collaboration with Samsung Foundry to deliver the fastest design closure and sign-off for 5 and 3 nanometers. We continue to also see good growth and momentum in custom. We again added several new custom compiler customers, including two in the wireless communication segment. Also further inroads with memory companies who are adopting our complete -to-end custom solution. A never-ending challenge in today's complex designs is verification, not only of the chips, but also the intersection of the chips with the software that runs on top of them. Our verification continuum platform is uniquely powerful in this sweet spot of modern design and is driving strong growth. Adoptions are expanding rapidly at influential customers, ranging from leading hyperscalers to automotive to the most sophisticated global semi and systems companies. For example, AWS, which utilizes our verification software to accelerate the development of data center chips and automotive supplier AllMotiv for its autonomous driving application. Storm demand continues for our market-leading hardware solutions. Just this quarter, we added 10 new customers and have 45 repeat orders. The power of our comprehensive design plus verification solution is evident in full portfolio adoption. This quarter, it included a global design services leader who adopted both fusion and verification platforms for highly complex designs, replacing their legacy tools. Now to IP, where we again delivered strong double-digit revenue growth. Outsourcing of sophisticated IP blocks continues unabated. Our track record of innovation, reliability and advanced node leadership have led to our number one position in interface, embedded memory and foundry-specific IP. We provide the broadest portfolio by far, accelerating time to market and reducing risk for our customers. This quarter, we continue to show strong momentum across multiple applications and products. In high-performance compute, which is one of the most dynamic segments today, our comprehensive IP portfolio has driven more than 450 wins in 7nm and over 100 in 5nm. We achieved silicon proof of our 112Gb ethernet PHY on 5nm, driving the leading edge in this key product area. With the tremendous growth in internet traffic, security is a big concern in protecting the data transfer in hyperscale cloud centers. This quarter, we launched the industry's first security IP modules for PCI Express 5.0 and CXL communication interfaces. We have already secured the first design win with a growing pipeline. Building on our lead and advanced technology, we released the first phases of our 3nm foundation IP offerings. Building on our innovation and momentum in EVA and IP, we have invested in unique and breakthrough solutions to next-generation challenges that our customers face. We do this in close collaboration with ecosystem partners through a combination of R&D and technology acquisitions. While we have a number of these in our innovation pipeline, let me highlight three that we recently announced. 1. 3D multi-die design. 2. AI-driven design flows. 3. Silicon lifecycle management. Starting with 3D multi-die design. Think of it as combining and stacking multiple dies together not on a board, but on a specialized large chip. This leads to extremely tight configuration with much higher data speed and bandwidth than with a traditional board and packages approach. Our new 3D IC compiler product enables the design and analysis of these complex 3D systems, taking full advantage of our technical breadth by leveraging both Fusion Compiler and our Sign-Up tools. Early momentum is building rapidly with expanding evaluations and adoptions. Designers are seeing the performance and capacity benefits of a single environment and are beginning to move away from older -and-match solutions. For example, 3D IC compiler helped a large Asian semiconductor company complete a highly advanced test chip in record time, saving weeks of design time. With this, we also combined our high bandwidth memory and -to-die IP that enables interconnecting these complex systems. Moving next to AI-driven design. We have a breakthrough and already award-winning new solution. DSO.AI. DSO stands for Design Space Optimization. While maximizing the contribution of engineering teams, DSO.AI leverages machine learning techniques and computation to explore the design space for still better solutions in terms of chip performance, power and area. This autonomous search substantially accelerates the work of the human design team. Indeed, in Q1, customers using DSO.AI reported remarkable productivity improvements, consistently realizing better results in a fraction of the time and effort typically required. On top of that, multiple production take-outs have recently been completed. Our customers are already holding DSO.AI as an anchor product and are beginning to deploy across their organizations. Finally, Silicon Lifecycle Management. A new platform to monitor, analyze and optimize chips as they are designed, manufactured, tested and deployed in the field. Synopsys is uniquely well equipped to provide a comprehensive solution to our long-standing expertise in design, manufacturing and IP. We add sensors, monitors and data analytics on chip to provide insights to test, yield and reliability management tools. This gives smart visibility into critical performance, reliability, safety and security issues for chips' entire lifespan. In Q1, we expanded our capabilities with the acquisition of Moortek, which provides leading edge process, voltage and temperature sensors. Initial interests and activity are strong and expanding. We're in talks with a number of leading IBM and Fabless customers. We're also engaged with major cloud service providers to deploy aspects of our solution into their platforms. These new innovation areas create not only new business growth opportunities, they also leverage strong cross-disciplinary expertise in Synopsys from design to manufacturing to IP. Now to software integrity, testing software code for security vulnerabilities and quality issues. We delivered a solid beginning to the year and are on track towards meeting our fiscal 21 goals to re-accelerate growth. As I mentioned in December, we have implemented several important enhancements, all showing encouraging progress. First, evolving our -to-market strategy and customer success organization, including our sales coverage and building an indirect channel program. Second, bolstering our strategic consulting capabilities to better serve growing market needs. And third, evolving our product roadmap to capitalize on the latest security trends. These improvements are beginning to show in our results. All geographies delivered at or above plan. We have numerous multi-million dollar new agreements and sizable expansions with customers ranging from industrial and aerospace to electronic and financial services. The trend towards adoption of multiple products continues. Customer interest in a consulting-led approach to software security is growing. Recent publicized security breaches only underscore that need. Our expanded team is ramping up and we see very good long-term opportunity. In addition, industry analysts continue to recognize the quality and breadth of our portfolio. Synopsys was again named a leader in the Forester wave for static application security testing. To summarize, Q1 was a very good start to the year. We delivered strong financial results and are reaffirming our outlook for fiscal 21. Our markets are healthy as customer investment in critical chip and system design as well as immense amounts of software remains very strong. Our differentiated portfolio of solutions, including exciting innovations in brand new areas of technology disruption, is generating high demand and strong growth. Lastly, keep an eye out for our second annual Corporate Social Responsibility Report to be published in the next few weeks. We are proud of the progress we have made in the areas of environmental stewardship, social solidarity, and corporate governance. We look forward to sharing with you our metrics and future objectives. With that, I will turn it over to Trak.

Thanks Art. Good afternoon everyone. We delivered a very strong start to the year and continue to execute well on our short and long-term targets. We grew revenue broadly across all body, groups, and geographies. We reported non-GAAP earnings above our target range and continue to expand non-GAAP operating margin. We produced another quarter of robust collections, leading to a very strong cash flow, and we announced a $250 million repurchase in the quarter. Our strong start, market leadership, and the resiliency of our business model, with nearly 90% recurring revenue, give us the confidence to reiterate our 2021 financial targets. I will now review our first quarter results. All comparisons are -over-year unless otherwise stated. We grew total revenue to $970 million, a 16% of design activity generally, and demand for our products in particular remained high. The quarter also reflected the timing of some product shipments shifting forward into Q1. Semiconductor and system design segment revenue was $878 million, with both EDA and IP performing well. Soccer integrity segment revenue was $92 million, a solid start towards our full year objectives. Moving on to expenses, total GAAP costs and expenses were $822 million. Total non-GAAP costs and expenses were $684 million, resulting in a non-GAAP operating margin of 29.6%. Adjusted operating margin for semiconductor and system design was 31.8%, and soccer integrity was 8.6%. Finally, GAAP earnings per share were $1.03, and non-GAAP earnings per share were $1.52. Turning to cash, we generated $174 million in operating cash flow, our highest first quarter operating cash flow to date, driven by strong collections and a couple of large customer payments that came in early. We initiated a $250 million stock repurchase, consistent with our commitment to increasing buybacks this year. We ended the quarter with a cash balance of $1.02 billion and total debt of $123 million. I'll now provide our guidance. We are reiterating a very solid outlook of growth and profitability for the year. Revenue of $4.0 to $4.05 billion. Total non-GAAP costs and expenses between $3.234 and $3.279 billion. Total non-GAAP 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 60%. GAAP earnings of $4.29 to $4.45 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 million. Now to the targets for the second quarter. Revenue between $970 million and $1 billion. Total GAAP costs and expenses between $801 and $819 million. Total non-GAAP costs and expenses between $697 and $707 million. GAAP earnings of $0.93 to $1.02 per share. And non-GAAP earnings of $1.50 to $1.55 per share. As we announced in December, we are raising our long-term financial objective to manage to a rule of 45 model over the next several years. We'll achieve this through a combination of solid revenue growth and non-GAAP operating margin expansion further beyond 30%. We're iterating a strong outlook for the year, and executing to our plan is an important step towards that objective. At the same time, we continue to work through our long-term planning process and will provide additional details as we have in the past once that process is complete. In conclusion, we delivered a very good start to the year. We drove double digit revenue and earnings growth and generated strong cash flow. Our ongoing focus on managing the business for sustainable long-term growth has served us well. While steadily expanding profitability, we continue to adjust in the critical next generation technologies driving our confidence and momentum. And we've prudently managed the strong cash flow we generated through a balance of value enhancing M&A and substantial buybacks. And with that, I'll turn it over to the Operators for questions.

Thank you. And 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. And 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. And 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. Thank you. And our first question is from the line of Mitch Steeves with RBC Capital Markets. Please go ahead. Your line is open.

Hey, good afternoon, guys. So obviously a good quarter here. I just had a couple of questions. The first one is actually just on the guidance. I've got a model that goes back pretty far and I realize you guys had a missed a quarter in something like a decade. But I guess historically when you guys beat the first quarter and got up the second quarter, you usually take out the full year at least by the magnitude of the beat. So I guess why is that not occurring this time? And then secondly, just in terms of the software integrity business, can you provide us an update on kind of how you expect the margins to trend? I realize that last year was probably a difficult year in terms of getting new business, but how should that kind of trend through the year? So those are my two questions. Thank you. Okay. Hey, Mitch. This is Jack. Let me take the first question with regards to the guidance for this full year. And we definitely feel very good about the outlook for the year, especially in light of the strong quarter that we just posted in Q1. Now that said, it's still early in the year and there's still a lot of business to look. Our focus is making sure that we execute in the guidance for Q2 and ensuring that we are on track to deliver very good growth and earnings, big growth and earnings growth for the full year. We've got a strong Q2 ahead of us and we'll focus on that and we'll provide more color on the year when we report in May.

Regarding SEG, the good news is I think that we've made a number of changes where we are starting to see some of the positives. And for this year, our main objective was not so much to change the margins, but to come back to a growth rate that we can be more proud of. And so that is trending in the right direction. It's just the first quarter, so it's a little early, but we're very encouraged. And I'm also very encouraged because I can see and feel a change of tone in the team. I can see some very strong people have joined. And so all of that is heading in the right direction. But I said growth is our first objective because invariably once growth does well, margin is much more manageable.

Yeah, I would add to Archie's comment that it is a good start to the year. And as we resume growth in that business over the long term, certainly, the leverage on that business is both a combination of very strong growth and margin expansion that should contribute to the overall margin story as well. I understand. Thank you so much. You're welcome.

Thank you, ladies and gentlemen. As a reminder, if you have a question, you may press 1 then 0 on the telephone keypad. We'll go next to the line of Jason Salino with KeyBank. Please go ahead.

Hey, thanks for taking my questions. Maybe for my first one, you know, for track, you mentioned a little bit of pull forward in the quarter, you know, very solid, deep, but maybe could you just quantify maybe what the amount and what products?

Jason, it's mostly on the hardware side. We saw hardware was a little bit better than expected for the quarter. And then with regards to IP, we had some IP deals that were scheduled in Q3 that we saw in Q1. But, you know, that was an element of the quarter. But for the most part, the results in Q1 were with the function of really good execution across the board. And you can see that in the mix of how we did geographically and also by the different products.

OK. And then for my follow up, it looks like you've broken out China and it accelerated, you know, meaningfully in Q1, even from the whole year of last year and even with limited data here, it seems to be kind of confirming your confidence that China was in Poland. But, you know, I'm curious, you know, what specifically about Q1 versus maybe what you saw all of last year?

Well, in simple terms, China is growing well as a high tech country. And so there are many customers that are all doing more and more chips, that are doing more sophisticated chips and that rely on our tools to get there. And so we see this essentially as a growing economy that will continue to do well for a number of years.

Thank you. And I'll remind everyone again, if you wish to enter the queue, please press 1 then 0 on your telephone keypad. Thank you. Our next question will be from the line of Jackson Ader with JP Morgan. The line is open. Please go ahead.

Great. Thanks for taking my questions, guys. Art, you mentioned that the kind of recent breaches, specifically with SolarWinds, has increased the awareness or the demand on consulting-led software integrity deals. But just curious, on the product side, you know, either from Tinfoil or the Black Duck products, are these also seeing an increased demand? And is there anything that those products do specifically that might help this type of attack in the future?

Well, you know, our business tends to be not so much in the diagnostic of issues and more in the prevention of them. Now, some of the products that you mentioned are sort of on the boundary of that. And to be honest, I don't know if these had any bump up. In general, I would say that these types of breaches initially go through almost like a panic phase where people just want to find out, have they been breached and so on. That is not the business that we are in. Then they go into the longer-term considerations, which is how do they make their environment much more solid? And that is precisely where our software integrity group is focused on. And more often than not, this is why sophisticated consulting is of value because there are so many different product offerings in the world. And plotting a strategy that over the long term makes the development of environments stronger actually requires some sophistication. And so that is why we're trying to staff up further in those areas because we do see that it has an impact.

Okay, great. And then just a quick follow up. Given the supply chain disruptions that we see in the automotive market, can you just remind us how much of your IP revenue is booked on royalties or product shipments? And should we expect to see any kind of headwinds from the automotive sort of?

Well, I'll start with the second part of the question. So far, we haven't seen a change in the momentum of the IP business. You know, there's the IP business is pretty diversified. Obviously, automotive is a good segment and a good element of growth for that business. But so far, we're not seeing any impact in terms of the momentum that we've experienced over the last several years. With regards to the upfront mix, that's more a function of the fact that we switched over to 606 in 2019. And so you're going to see a little bit more upfront in the business, which will create more variability. But that's something that I think we've got some good experience in the last couple of years managing. So I don't see that as a as an issue, which, of course, I don't have those numbers specifically in mind, but it tends to be a smaller portion of the overall revenue.

OK, Mark, thank you. You're welcome.

You're

welcome.

Our next question will be from the line of Joe Verwink with Baird. Please go ahead.

Great. Hi, everyone. I wanted to start. I was hoping to maybe get an update on where backlog gets finished the quarter and relatedly in recent quarters, you've been making some comments to suggest, you know, order trends being in line or better than your expectations. Just wondering if we could maybe get an update on how new business track relative to your thinking at the start of the quarter.

Hi, Joe. We backlog for the quarter ended at around 4.6 billion. And the bookings trend for the quarter was pretty much as planned. We did well in the quarter. So keep in mind that the backlog and the bookings will vary from quarter to quarter depending on the large yields that are expected to be in that quarter. So it will vary. And what we typically emphasize more is looking at the quality of the year that we close in the quarter and whether or not run rate, what the trend of run rate was. And that was definitely higher this quarter.

Okay, that's helpful. And then, you know, our going back to the new product discussion between 3DIC compiler, DSO.AI and then SLM. You throw out DSO.AI becoming an anchor product for customers. Are you demonstrating the type of PTA where that, you know, if we think a few years down the road, this is going to be a flagship like some of your other flagships? Or would you maybe point me towards one of the other products in your discussion as being more influential to Synopsys revenues in the midterm?

Well, you know, of course, every team at Synopsys has its own preferred one, meaning the one they're working on. But you're certainly very correct to say that DSO is of high potential because DSO really applies to some of our other flagships. And in the case of design automation, it uses a Fusion compiler and a number of the tools that go with it. And so therein lies its power because if you can amend the human with machine learning driven enhancements and acceleration, that is very similar to what we literally did 30 years ago when we came into the market with automatic synthesis, where the human did a lot of work and the synthesis became essentially a powerful tool for them. And so I expect that we will see impact of that already this year and certainly next year. If we look at 3DIC, that will be a little bit more gradual, but it's very fundamental because, as you well know, a lot of people have predicted the death of Moore's Law. And by the way, it's far from dead, but it has slowed down. And what is so interesting about 3DIC is that that is another way to adding substantial complexity, where instead of doing it all on one chip, you can do multiple complex chips and connect them very closely together. So over time, this will grow in importance. And then silicon lifecycle management is particularly interesting because the word lifecycle is in there. And that would tend to say, well, the utilization will be over a longer timeframe, but the interest turns out to be extremely high already now because people see that if we could put a variety of data sources and intelligence inside of the chip for self-diagnosis, that's going to be rapidly more and more important for all the places where chips are used on applications that could endanger human life. And of course, the car comes up as the first example for that, but robotics and a number of other areas would have the same. And so what, from our perspective, is exciting about this, these are also very much organic innovations, maybe amended with some small acquisitions, and it bodes well for sort of the speed in which we are creating new value. And that's an additional reason to emphasize it to you.

Great. I will leave it there. Thank you both.

You're welcome.

You're welcome.

And our next question from the line of Gary Mobley with Wells Fargo Securities. Please go ahead.

Good afternoon, everybody. Thanks for taking that question. I wanted to ask kind of an intangible type question to Art, and maybe you have a good answer, maybe you don't. But one of the things that we've been hearing from fabulous chip companies as they're struggling to get access to adequate manufacturing capacity, in particular, at leading edge process nodes, is that there really seems to be less of a hurry to develop the latest and greatest sub-5 nanometer chip. And so my question to you is, have you seen any slowdown or any feedback from customers indicative of perhaps a slower pace of design innovation in light of the capacity constraints the chip industry is seeing?

OK, I do think I have a good answer for that. For starters, on the advanced node, we see none of that. On the contrary, I think the race is fully on. A lot of companies understand that the impact of, let me call it, AI-enhanced computation is going to be enormous on a lot of end markets. And those are sophisticated chips. A lot of people are essentially chasing that opportunity all in the hope of having the best offering. And so no slowdown as far as we can tell. And I emphasize in the preamble the many new technologies we have precisely because that is of high appeal. I think part of the confusion around the capacity question comes from the fact that the automotive industry, which is hammered right now by essentially the lack of a few parts in order to ship a car, it's really quite pathetic because these are little parts and they hold back high value products, is actually mostly in older technologies and in older manufacturing. And so not even 300 millimeter, but the smaller wafer sizes. And for those, there's not really an alternative because there's a limited number of these foundries. And sure, you could redesign these chips, but who wants to redesign these old chips just because right now for a couple of months you don't have enough parts. And so that is the picture that we see. I expect that that will go away in a few months. But nonetheless, meanwhile, if you're caught in essentially a supply chain, narrow spots, you can see the impact. And so over time, I think what we will see is that a number of companies will become more careful in saying, hey, if I have to move this design to a newer technology, I want to design it already now so that it's better documented and can be essentially remapped to a new technology.

Okay, appreciate the thoughts there. As my follow up, I want to pin you down a little more detail relating to software integrity. If I go back to your last earnings call, I think you guys were mentioning that perhaps you can generate 15 to 20% bookings growth in the current fiscal year, which would ultimately end up translated to that similar growth rate in the out year of cost of fiscal year 22. Just to pin you down here on that, is that what you're reaffirming today given the start to the year?

Yes, Gary. That's what we're reiterating. All right, great. Thank you.

And ladies and gentlemen, as a reminder, if you'd like to join the queue for questions, you may press 1 then 0 on your telephone keypad. And our next question from the line of Jay Vleeschauer with Griffin Securities. Please go ahead.

Thank you. Good evening. Art, let me start with you with a question concerning the breadth of growth in core EDA. Then a follow up for you, Trac. So for Art, it's been quite obvious for the last number of years that there's been a rejuvenation of growth in synthesis and as well in implementation for obviously benefiting you in those two areas. But industry data and just the logic of technology would suggest that there was a close correlation between synthesis and the usage of RTL simulation, where you're also a market leader, and then similarly for implementation correlated to DFM and physical verification. The question therefore is, has the growth, the better trajectory you've seen in both DC and implementation induced more rapid growth as well in those highly correlated technologies and products? And then for Trac, how are you thinking about your headcount growth for the year in the context of your OPEX guidance for Fiscal 21? At the end of the quarter, you had what appeared to be a record number of openings equivalent to over 6% of headcount. So maybe talk about how you're thinking about the rate of bringing people on. And frankly, if you are having issues with availability, given the large numbers that you have in your open recs, as do your two large competitors.

Okay, JD, the question you're asking is complex because fundamentally the picture that you're painting is a picture that started with individual tools and has long moved towards tools that are very correlated with each other and often used in tandem. And so a number of years ago, I coined the term that we're moving from scale complexity more of the same to systemic complexity, which is more of the same plus heterogeneous demands and constraints all coming together. And so if you take as a center of gravity, like you did synthesis and implementation, and you look upward, you arrive at RTL, which is essentially a way to describe hardware. But RTL doesn't very much look like a language. And that's not a surprise because right on top of that is software. And so we very much see a cone upwards that's broadening where hardware and software and hardware software together have to be verified and optimized. And this is increasingly the case for all the large systems. And by the way, around the software for simulation, we added a variety of hardware accelerators, such as emulations and prototyping. If you look downward, you mentioned GFM, which stands for Design for Manufacturing. And that is an absolutely correct term because the manufacturing, which was nicely isolated, somebody else was worried about the physics. As you go to smaller and smaller things, you have to worry about a lot of things when you design a chip. And so the connectivity down to the manufacturing is has grown substantially and we do ourselves way more there. But aside of manufacturing, I could have added the word test because we also do design for tests. You have now heard the silicon life cycle management, which is sort of designing for what happens later. I could have added the word FUSA, functional safety, because for all the cars, there's all kinds of rules that one has to follow. And we have actually a fabulous offering in that. That is, by the way, also manifested in the IP. And reliability is going to grow in importance as well for all of these products. So for a long time, we have always looked at this as the big picture. And the complexity of these intersections is actually one of the areas where synopsis shines. And that's precisely why I mentioned in the preamble a few times that the benefit of the cross disciplines is something that where we can really add a lot of value to our products. And to our customers. And I think that will continue.

Hi Jay, this is Trec. So I want to make sure I understand your question correctly. You're asking about headcount growth and how that matches up with our expense guidance for the year and therefore margin for the year. Is that correct? More or less, yeah. I mean, you're currently looking to bring on a large number of people. So if you were to fill every one of your open positions today, would you stay within the range of optics guidance, for example? I don't want to comment about the rec itself, but in general, generally speaking, we are definitely investing in the business. And that's consistent. The investments that we're making in the business is consistent with the goal of increasing margins to the 29 to 30 percent for this year. In addition to that, that investment is also related to our long term goal of driving to the rule of 45, which is going to be making sure that we continue to grow the business over time and also expanding margins simultaneously. So the headcount itself is really a commitment to a balanced commitment to drive growth and improve profitability. Thanks very much. You're welcome. You're welcome.

Our next question from the line of Pradeep Ramani with UBS. Please go ahead.

Hi, thanks for taking my question. I had a couple of questions on China. I mean, your revenues are growing 24 percent, I guess, year over year. But when I look at, you know, at a company level, your time based revenues are growing 13 to 14 percent year over year and upfront grew 15, 16 percent. So, I mean, is my interpretation correct that with regards to the mix in China with respect to EDA or hardware or IP, it is more or less in line with your core mix overall? Or are you sort of or is the mix sort of skewed more towards EDA or hardware, both in terms of absolute revenue dollars and growth?

Well, let me take it from the from the product side. You know, China, of course, came online, roughly speaking, 25 years after most of the West. And so when they entered the space of starting to do, let's say, significant shifts, not the really small things, but of some meaning, right away they entered with a design methodology that was more up to date than what some of the other companies use. And so that predicated from the start a substantial amount of IP being used in parallel to the advanced technologies. And so from that sense, you know, the balance is slightly different than in the traditional West, if I can call it that. At the same time, increasingly now, all of these companies look the same to us, either in China, either in Korea or in Europe or in the US. All the ones that are driving the state of the art have to deal with the physics underneath, have to deal with the software on top and have to deal with the sophistication of large IP blocks and substantial development capabilities. And so while it was more different, maybe a decade or so ago, I think it is now more the same than it was before. And in hardware, I think it's sort of a very similar picture. The most advanced users are the people that are sitting at the intersection of hardware and software. And that is precisely where Synopsis shines.

Okay. And for my follow up, I guess, if I look at your, again, the China revenue, how are you looking at it in terms of as you progress through the rest of the year? I mean, do you get a sense that obviously it's going to grow faster than last year overall, or are you sort of seeing the comps get harder in the back house and sort of, you know, de-selling a little bit?

Well, I would say last year was a strong year for us as well. And so in general, as you well know, the Chinese economy did actually grow in contrast to some of the Western economies. The hope, of course, is that the West will start to grow as COVID gets hammered down more. But in general, there's no reason to believe that China will not continue to be a very live market for us. And in general, I would say overall, everything touching chips and around it right now is doing well because of the overwhelming demand of all the end markets and the specialized vertical.

Thank

you.

You're welcome.

And ladies and gentlemen, if you have additional questions, you may press 1 then 0 on your telephone keypad. Thank you. And I have a follow-up question from Pradeep Ramani. One moment. Pradeep, your line is open. Did you have an additional question or should we move on to our next person in the queue? Okay. I'm going to release that line. We're going to go next to the line of Vivek Arya with Bank of America Securities. Your line is open.

Thanks for taking my question. Art, I'm curious, are you seeing more customers design with ARM technology in the PC and the server markets? How would you think about that trend now versus what it was in the last one or two years? Any way to kind of quantify whether it has gone up or down?

It's hard to quantify if there are more, but it is easy to quantify that they have progressed, meaning that already a number of years ago, and it was more than two years ago, a number of people started to look at is it possible to use ARM cores in the server space. And some have continued to try. Others have given up at that time. But now there's definitely a small group that is looking at using the servers actually in cloud environments. And I don't want to announce who these people are. Some have probably spoken publicly at this point in time. But that has followed a lot of hard work to make that possible. And now the question will be, are the economics and the capabilities sufficient to be a good counterweight to the x86 family of processes that are typically used in the cloud? So it is well possible that we're actually going to see a further diversification of computation, largely because cloud is not only the regular general purpose computation, but now we have specialized efforts, certainly in everything dealing with big data and machine learning. And for that, clearly a number of players have put processes on the market that are dedicated to that and are particularly fast for it. And so ARM fits into all of these categories. But so are a number of other people doing their specialized processes.

Got it. Very helpful. And then for my follow-up track, just two clarifications. I think you mentioned somewhere that some shipments moved into Q1. I was wondering how much did they impact sales and EPS? And part B of that is you've given a fuller outlook of about 10% or so growth at the midpoint, I believe. What is the implied growth in the software integrity part of your business as part of that 10% growth for the full year? Thank you.

Okay. So the first part of the question is, I'm sorry, was...

The shipments moving into Q1. I recall you said something along those lines. Yeah,

there are some IPs that shipped into Q1 that was originally planned for Q3. But overall, it was a significant amount. Most of the quarter was really strong execution. With regards to the SIG software integrity business, what we had commented on at the beginning of the year was that we expect to grow bookings by over 15 to 20% for the full year. And that with the time-based model that we have on revenue, that we would exit the year at double-digit growth. But for the full year, we're probably in the high single digits. And so far, we are...after Q1, we are on track for delivering that. All right. Thank you. You're welcome.

Our next question from the line of John Pitzer with Credit Suisse. Please go ahead.

Yeah, good afternoon, guys. Thanks for letting me ask the question. First one, track, just going back to the OPEX guide for the year, maybe another way to ask an earlier question, was there anything about the COVID environment that hindered your ability to actually bring people on board to actually accelerate growth in some of the markets like software integrity such that if we get to a point where the vaccine is widely distributed and things open back up, you guys might take that opportunity to kind of reaccelerate OPEX for future growth? Or how do I think about the COVID dynamic within OPEX? And I have a follow-up.

Yeah, overall, I think we've done a pretty good job of bringing headcount on and bringing people on board. You know, as a matter of fact, they seem to bring up the topic. You know, we brought our new general manager for the software integrity business on without ever physically meeting him. So, you know, it's something that we're managing through and much like the rest of the business, we're just learning how to work remotely and adapting pretty well, I think. And I think that we'll continue to do that throughout the rest of the year and adjust as things free up or change with the health environment.

That's helpful. And then Art, as my follow-up, just in the core EDA business, I'm wondering if you could help me just better understand how the business is tracking between sort of some of the more traditional customers you've had in that business. Let's call it the Intel Qualcomm and Broadcoms of the world and maybe some of the more non-traditional customers, the hyperscale companies. We now have a very vibrant private semi-market that we haven't had in years. I'm kind of curious, that non-traditional bucket, how big is that now part of the core EDA business? And I'm assuming it's growing meaningfully faster. But can you help me differentiate?

Sure. Well, first, I think your description fits well the situation, meaning the traditional big players continue to invest heavily because they are chasing or driving, depending how you look at it, advanced technology, no matter what. Secondly, the hyperscalers are clearly continuing to see the opportunity to do more designs themselves, to do more manufacturing, not so much manufacturing, but the control where they get their own product from. And the one thing that's different about hyperscalers versus other companies, they don't design chips to sell the chips. They design chips in order to use them in their own product offering. Having said that, a number of these companies have been successful already at doing that. Some have acquired small startups and some are literally growing their design teams and their experience to go with it as we speak. And so it's a part of the market that is definitely on very good growth, I would say probably twice as much as the rest. And then the other category, you call them startups, sometimes we also call them all AI companies or machine learning-ish companies because there are many companies around that, and not that they all do AI processors, but there's a vibrant world that is essentially trying to change the future. And so anything that is close to machine learning is super highly interested in, at the minimum, two things, which is compute very fast and compute with a lot of data. And once you say these words, you have to also say, not using too much power because otherwise you fry the chips. And so those are all good words for us because that means they tend to immediately head towards the most advanced IP, head towards the most advanced utilization of tools. And so that has also been a very good market for us. So some of the AI guys get acquired by the traditionalists, some of the traditionalists get acquired by the hyperscalers. It's a live market. And, you know, live is a good word in here because this is a field where advanced change in technology opens new doors at the very moment with a lot of opportunities.

And I know it's fluid, but is there any way to size that non-traditional bucket as a percent of revenue today?

Well, there is a way, but we don't do it for you, unfortunately. Sorry, we don't disclose the individual bucket. But, you know, I don't mean to be coy. I want to be very clear. I think hyperscalers, AI and a few other specialty areas are very good growth for us and are also very demanding, which is typically actually good for us because it drives angles of technology that will be meaningful. And while, for example, I didn't mention the whole automotive space because it tends to be a little behind on the most advanced technology, it is now looking very much forward precisely because of these needs of life cycle guarantees, reliability, functional safety. And a number of those concepts are very powerful and will over time, I think, also make it back into the other groupings. So I guess what I'm describing to you is a really live field. And our job is to find which ones of these customers are the nuggets and serve them as well as we can.

Thank you very much.

You're welcome, Tom.

Thank you. And with minutes remaining in our call, we'll take our last question in the queue from the line of Gaul Munda with Berenberg Capital Markets. Your line is open.

Thanks for squeezing me in at the end. I appreciate that. The first question is just around the EVA growth that you're seeing clearly above what we used to say is kind of sustainable growth of the market. And you're referring to some significant market share wins that you're taking. I was wondering if you're able to kind of separate what you're seeing in terms of what the market is growing at recently, considering the fact that there's been an acceleration in the general market trend. And how much is the market share win as an addition to what you're growing at when you're growing close to the double digits?

Well, I think I'm always a little careful before commenting on competitors. And I do think that the overall market is actually strong as my response to the previous question. And so I assume that all of us benefit from that. There's no question in my mind that in some of the advanced areas that we have focused on for the last few years and often communicated to you about, we are doing particularly well and moreover that we're building on top of that sort of next generation capabilities that look very, very promising. So in that context, I assume that over time we may gain some share. But this is all in the landscape that overall is positive. And we should continue to invest in these areas because now is a good time for that. And

then just the last one, going back to China and you know, that revenue run rate that you're on right now is fine, you know, if you just extrapolate that around 460 million ish of without any sequential growth of revenue, which is significant. How much of the China revenue in general would you classify as recurring? Is it similar to what you have in the rest of the business, similar percentage or is it more specific?

No, overall the business next in China is very similar to, you know, total synopsis. We've been interviewing you very well across the board. Okay, that's helpful.

Thank you.

You're welcome.

Thank you, Gail. Well, I guess this brings us to the end of the hour. And so first and foremost, we hope that you and your families have been able to stay healthy and that in the light of coming vaccines, you have both the patience to protect yourself and get there as soon as possible. And also thank you for your continued following of synopsis. And for a number of you will be following up in the next few hours in one on one calls. Be well.

Thank you, ladies and gentlemen. This will conclude our teleconference. Thank you for using the AT&T conferencing service and you may disconnect.