Synopsys, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Synopsis Earnings Conference call for second 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, please press star followed by zero. Today's call will last one hour. Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Eubank, Vice President of Investor Relations. Please go ahead.

Thank you, Eric. Good afternoon, everyone, and thanks for joining us. Speaking today are Art 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 the 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 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 8 that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at Synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call. With that, I'll turn it over to Art Tagia.

Good afternoon. Synopsys continues to execute very well, delivering record revenue and non-gap earnings in the third quarter. Revenue was $1.057 billion, with gap earnings per share of $1.27 and non-gap earnings of $1.81. We again made excellent progress on our margin expansion goals and generated $422 million of operating cash flow. Thanks to the hard work of our entire Synopsys team, on a TTM basis, we have surpassed the major milestone we set our sights on a few years ago. $4 billion in revenue, and 30% operating margin. Reflecting our strong year-to-date results, the vibrant markets we serve, and technology innovations driving customer momentum in all product groups and all geographies, we are raising fiscal 2021 revenue, non-GAAP ops margin, earnings, and cash flow targets. We are well on the way towards our next goal of crossing $5 billion in revenue by 2023 and raising our long-term revenue objective to double-digit growth with continued margin expansion. Track will discuss the financials in more detail. Meanwhile, the market is not only strong, it is transforming in a way that is very positive for Synopsys. Both consumer and business demand for smart everything continue to intensify and grow. Smart devices intersect many skills and technologies. massive amounts of data to be stored, transmitted, and processed, sophisticated machine learning, and application software specific to each market segment. In this megatrend, semiconductors are absolutely critical. This means not just more chips, but more advanced chips, lower power chips, and chips that can be abutted or stacked for tight implementations. In addition, security and safety are rapidly becoming must-haves, integrating more and more system requirements. To make smart everything possible, companies need more automation while transforming the way they approach the development of their systems. New entrants, such as large hyperscalers, increasingly design their own specialized chips, and our business with them is growing rapidly. Other systems companies, such as automotive, increasingly exert heavy influence on their suppliers by specifying key elements of chip performance as well as functional safety and security. Synopsys is a crucial enabler, and the broad economic pool is now augmenting the traditional Moore's Law push, thus driving more opportunity for us. Synopsys is ideally suited to capitalize on these tailwinds. Over the past five years plus, We've invested heavily in breakthrough innovations that are now driving excellent customer results and, with it, accelerated business growth. Let me highlight three areas, AI and autonomous design, silicon IP, and security. Let's start with AI. Designing today's most advanced chips with the additional vertical market requirements is among the most difficult engineering tasks, period. As schedule-pressured designers reach the practical limits of human design efforts, we must use the power of AI to automate not just design tasks, but entire segments of the design flow. This is exactly what Synopsys pioneered a year and a half ago, AI-driven autonomous design. Sitting on top of our fusion design platform, We have built an AI design solution that automatically explores, implements, and optimizes multi-month design efforts in a matter of weeks. Called DSO.AI, which stands for Design Space Optimization Using AI, the system has been used by customers on real chips, gone through production tape-outs, and seen silicon-backed for manufacturing. DSO.AI is breakthrough technology. The results are great. Through this, we've already achieved important customer renewals. Not only does it literally reduce design times from months to weeks, it improves performance, power, and areas substantially beyond what teams of experts achieve on their own. In addition to early industry recognition, as it won a 2020 World Electronics Achievement Award for Innovative Product of the Year, customer engagements have been exceptional. with early endorsements by Samsung and Renessa. In addition this quarter, a large Asia-Pacific provider of advanced chips achieved with one engineer in one month what previously required several experts over three months of manual work. One high-profile U.S. customer using DSO.AI attained better quality of results through a remarkable 20% reduction in power consumption. Next Monday, I'll keynote the Hot Chips Conference reporting on further great DSO advances and another exciting customer success. The impact of this AI brain is greatly leveraged by the powerful system that it sits on top of, our Fusion design platform. We pioneered the Fusion concept several years ago by literally fusing together critical segments of the design flow into a single platform. The outcome best in class results in terms of chip speed, power, and area. Today, Fusion Compiler is the only solution available that seamlessly integrates market-leading synthesis, place and route, with timing, power, and physical sign-off, all into a single tool. It's the fastest-ramping new design solution in Synopsys history, already surpassing 500 tape-outs across multiple verticals, including AI, 5G, and high-performance compute. for process nodes from 40 nanometer down to 3 nanometer. Notably, our leading Foundry partners are already actively leveraging Fusion Compiler towards 2 nanometer enablement. Our Fusion design platform is relied on by the world's largest influential and hard-driving companies. Production successes include an advanced tape-out by Samsung Foundry for its next-generation chip in 3 nanometer gate-all-around technology. In parallel to autonomous design, another way to reduce risk and speed time to market for complex chips is by using a ready-made IP. Our broad market-leading IP portfolio is delivering excellent double-digit growth towards what will be another outstanding year. Demand is very strong, with customers substantially expanding their reliance on us and renewing multi-year commitments faster than ever before. High-performance compute, automotive, and mobile markets are especially strong, wanting both more and more advanced IP. Let me highlight three areas. First, with growth in cloud data, we're seeing high demand for faster high-performance interfaces, such as DDR5, PCI Express 5.0 and 6.0, and 800-gig Ethernet. We saw great momentum this quarter with multiple customers, selecting our first-to-market next-generation PCI Express 6.0 IP for advanced high-performance compute chips. This is a testament to the success of our PCI Express 5.0 IP, which has nearly 200 design wins. This quarter, we also saw immediate traction for our 400-800-gig Ethernet IP solution through multiple design wins that include our 112-gig Surdeys. Second, the number of highly advanced chip designs across cloud, AI, and 5G applications has been growing rapidly. Our large and experienced R&D team remains at the forefront of delivering highly differentiated IP at the cutting edge of technology. In 5 nanometer, we've secured nearly 400 design-ins across 33 customers. And this quarter, a significant driver of our physical IP business came from 5, 4, and 3 nanometer. Lastly, we're also seeing our customers integrating more security capabilities into their chips. This is driving excellent momentum with our security IP portfolio, including strong demand for IDE IP to secure PCI Express and CXL interfaces, which is a natural segue to software integrity. We're doing well with increasing momentum following the significant execution and operational improvements we've made. In fact, Q3 was our highest order quarter ever, and we expect to eclipse our original revenue goal for the year. As massive ongoing security threats to business safety and health become almost commonplace, companies are rethinking their protection strategies. It's no longer effective to pick and choose point tools with partial capabilities. Protection now requires a holistic, strategic approach. Synopsys is at the forefront of this evolution with the industry's only portfolio that features the broadest set of application testing solutions, strategic consulting to assist executives and boards in charting their software security plan, and now an innovative offering that elevates the impact of the Polaris platform. With the recent introduction of intelligent orchestration, our Polaris platform can seamlessly integrate and automate security testing within each company's protocol. We took another significant step in Q3 with the acquisition of CodeDX. They are the leading provider of application security risk management products that automate and accelerate the discovery, prioritization, and remediation of software vulnerabilities. This combination elevates our capabilities beyond what competitors can provide, a comprehensive, easy-to-adopt, holistic solution. On the go-to-market side, we see very good progress from the enhancements we've made. Our services business, again, did better than planned, with over 20 new logo wins in North America alone. Our win and renewal rates continue to improve, and we're encouraged by the progress we've made. Industry analysts continue to recognize the strengths of our strategy and portfolio. For the fifth year in a row, Synopsys was named the leader in the Gartner Magic Quadrant for application security testing. And today, we were again recognized as a leader in the Forrester Wave for software composition analysis. So far, I've highlighted three major areas, AI, IP, and security. Let me point out a couple of other innovations that enable this new era. One of some of the strengths is focused on the intersection of hardware and software, which is inherently crucial in smart everything. Our hardware-based verification systems continue to generate very strong business with year-to-date 36 new logos and about 150 repeat orders. In addition, With innovation spanning both emulation FPGA-based prototyping, we're off to a solid start to a multi-year product upgrade cycle. Over the last two quarters, we introduced new application-specific emulation products. The Zebu Empower system enables early power analysis to reduce power-related risks. And the Zebu EP1 is the first of its kind high-performance compute for mobile, GPU, CPU, and AI designs. Both are substantially faster with higher capacity than any competitive solution in the market today. And we're already seeing strong demand and deployment at large, influential customers around the world. Q3 was our largest orders quarter ever for our HAPS prototyping product line, fueled by the new HAPS 100. With highest performance and unmatched enterprise scalability, we closed multiple competitive wins in the quarter. With the momentum in both emulation and prototyping, we expect another record revenue year extending our market and technology leadership. With increasing chip and system complexity, growing reliability requirements are now demanding ongoing post-Silicon analysis, maintenance, and optimization. Our new Silicon Lifecycle Management Platform leverages our leadership in both EDA and IP as it monitors, analyzes and optimizes chips from design to manufacturing to in-field adjustments. This innovative approach opens up a substantial new time for us with business ramping ahead of expectations. Even at this early stage, we achieved two large expanded renewals this quarter. In summary, Q3 results were excellent and we are raising our full-year objectives substantially. Vibrant markets, compelling innovations, and strong execution position us to continue to increase shareholder value going forward. While we will provide specific long-term objectives next quarter, we aim to cross $5 billion in revenue by 2023. We are raising our annual revenue growth objectives to double digits with continued margin expansion. These results are not possible without our global team, Through the pandemic, they have demonstrated commitment, resilience, and compassion for others while executing very well. Lastly, I hope you and your families are vaccinated, healthy, and staying safe. With that, I'll return it over to Trek.