Synopsys, Inc.

Ladies and gentlemen, welcome to the synopsis earnings conference call for third quarter of fiscal year 2022. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session. If you'd like to ask a question, please press one then zero on your touch tone phone. You may remove yourself from queue at any time by repeating the one zero command. If you should require assistance during the call, please press star then zero. Today's call will last one hour. And 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, Kerry. Good afternoon, everyone. Hosting the call today are Art DeGias, Chairman and 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 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 website at the conclusion of the call. With that, I'll turn it over to Art DeGias.

Good afternoon. We delivered another excellent quarter with enduring broad-based strength. Revenue for the quarter was $1.25 billion. Gap earnings per share were $1.43 with non-gap earnings at $2.10. We generated $440 million of operating cash flow. Notwithstanding the normal ebb and flow of the semiconductor market, design activity remains robust. In addition, our business model sets us apart by adding a solid level of stability and resilience to the accelerated growth we're seeing. Based on this strength and confidence in our business, we are raising guidance for the full year. We expect to grow fiscal 22 revenue approximately 21% and pass the $5 billion milestone. We continue to drive notable ops margin expansion and we intend to grow non-GAAP earnings per share by approximately 29%. In the process, we expect to generate $1.6 billion to $1.65 billion in operating cash flow. Tarek will discuss the financials in more detail. Over the last five or so decades, semiconductor chips and software have transformed every aspect of our world. From traditional computers to networks to mobile devices, from entertainment systems to home security to medical wonder machines. Every vertical market is affected and expecting more. As a result, not only does the world demand more chips, but more chips are being designed by an expanded group of semiconductor and systems companies. Those chips are much more complex. They need to be designed faster due to time to market pressure and with increasingly constrained engineering talent resources. For the last 35 years, Synopsys has been privileged to grow as an essential catalyst of this transformation, delivering 10 million X in productivity. Today, Synopsys uniquely sits at the intersection of the dual system forces of semiconductors and software, enabling both with the bold ambition to catalyze another thousand X this decade. We partner and collaborate with the most advanced companies in the entire supply chain, and while the technical challenges are huge, so are the opportunities. On top of this, security, safety, and reliability are now a must for markets such as robotics, automotive, and aerospace. Meanwhile, more and more systems companies, from large hyperscalers to AI startups to verticals like automotive, have decided to own their destiny and design their own chips and systems to accelerate their differentiation. Today, Synopsys is successfully bridging technologies from silicon to software to systems as we engage with all these companies. In the last few years, we have delivered a number of groundbreaking innovations that are making tremendous impact. For example, in chip design, we're automating not only individual design steps, but entire subflows. Our preconfigured IP blocks not only speed up chip design, but also let architects rapidly explore new market-specific chip and system configurations. Our emulation and prototyping solutions are now essential to verify and optimize the interplay between hardware and software in the system. And in addition, we continue to grow our solutions that enable high-quality and more secure software, as well as provide security IP blocks. Leading the way is our award-winning DSO.AI artificial intelligence design solution, which is revolutionizing chip design. First to market over the three years ago with technology that is still unmatched today, it delivers outstanding productivity improvements that are already driving substantial increases in customer commitments. The technical results are truly groundbreaking. Customers are seeing tremendous benefits from DSO.AI's ability to learn from prior designs. For example, two of the largest, most advanced semiconductor companies in the world achieved a 25% reduction in turnaround time and compute resources. DSO.AI is also driving very significant low power improvements, exemplified by a large automotive chip maker achieving a 30% power reduction. These compelling outcomes are driving a high pace of adoption for production tape-outs across verticals and a broad set of process nodes. Examples this quarter include long-term business commitments at a marquee U.S. hyperscaler and top consumer chip company. Our entire market leading digital design solution both empowers and benefits from DSO.AI. This highly differentiated combination led to a competitive displacement at a large automotive chip company in Q3. Our Fusion Compiler product continues to drive accelerated growth and competitive wins across market verticals and a broad swath of technology nodes. This quarter, we expect to pass the 1,000th tape-out milestone with successes in many different customer categories. Fusion Compiler has generated notable runtime and PPA performance power area improvements at top graphics processor companies, and we have gained majority positions at one of the largest mobile SOC providers and at multiple leading hyperscalers. Excellent progress and strong demand also for our modern custom design solutions. This area of growth is fueled by the key segments that include hyperscalers, high-performance compute, and AI machine learning. In custom design, long dominated by older products, We've already surpassed last year's new logos with 36 additional year-to-date, including high-profile semiconductor and hyperscaler customers. Companies driving smart everything continue to innovate at breathtaking speed and are now embracing migration to multi-die system designs for next-generation systems. Our multi-die system solution that includes our 3DIC compiler platform and die-to-die IP portfolio is seeing strong demand. Not surprisingly, the key markets are high-performance compute, data center, and mobile. While we continue to expand deployment as a marquee U.S. IDM, we also experienced increased traction at prominent high-performance compute and hyperscaler customers for complex 3D multi-die and chiplet design. In mobile, we achieved plan of record at leading semiconductor companies for their next-generation multi-die processors. In high-performance compute, multi-die systems incorporate a new interconnect IP standard, UCIE, which stands for Universal Chiplet Interconnect Express. As the term express captures, it is all about speed, and Synopsys is seeing great traction in this area with a healthy pipeline and multiple wins at 3 nanometer. More broadly, IP blocks are a must-have to meet intense time-to-market pressures. Our unique breadth of scale and scale of our high-quality IP portfolio, with early availability at advanced processes, continue to drive strong momentum. Demand is particularly high in markets such as high-performance compute, AI machine learning, automotive, and mobile, where systems are fueled by smart everything, high-speed and secure connectivity, and advanced process geometries. In this context, our Arc Vision Processor IP was named Best Automotive AI Solution by the Edge AI and Vision Alliance. Meanwhile, our industry-leading Arc NPX and VPX processor cores that accelerate neural networks continue to see strong adoption in augmented and virtual reality, automotive, and consumer applications with multiple wins in the quarter. In automotive, we close significant transactions with large traditional and new OEMs, Tier 1s, and semiconductor vendors. Security remains front and center across all market segments. We're gaining strong adoption of our security solutions for interfaces such as PCI Express, CXL, and DDR, with more than 30 design wins across all market segments. Now moving to the crucial intersection of hardware and software. In other words, verifying that the chips and system will do what was intended. Our market-leading emulation and prototyping hardware products are unique strength and clear differentiator for Synopsys. With the fastest engines, highest capacity, and lowest cost of ownership, we're doing very well. Our products not only verify hardware software correctness, but also help find ways to reduce power consumption, one of the most vital metrics of any system. High demand continues for our Zebu emulation and HAPS 100 prototyping systems, growing with many of the largest semiconductor and hyperscaler customers in the world. We are on pace for yet another record year of hardware revenue.

With Smart Everything entering every vertical market,

billion revenue mark, I want to thank our employees around the world for their ongoing efforts and commitment. With that, I'll turn it over to Trak.

Thanks, Art. Good afternoon, everyone. Q3 was another excellent quarter. We delivered revenue and EPS above our targets and achieved cash flow above our plan. For the full year, we are raising our outlook and are on track to deliver over 20% revenue growth an increase in non-GAAP operating margin of approximately 250 basis points, non-GAAP earnings per share growth of approximately 29%, and 1.6 to 1.65 billion in operating cash flow. We continue to execute well, which is a testament to our innovative technology portfolio, ongoing design activity by our customers who continue to invest through semiconductor cycles, financial discipline, and the stability and resilience of our time-based business model. I'll now review the third quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.25 billion, up 18% over the prior year with broad-based strength. Total gap costs and expenses were $1.01 billion. Total non-gap costs and expenses were $856 million, resulting in a non-gap operating margin of 31.4%. Gap earnings per share were $1.43. Non-gap earnings per share were $2.10, up 16% over the prior year. Semiconductor and system design segment revenue was $1.13 billion, up 18%, driven by continued strength in EDNIP. Trailing 12-month semiconductor and system design adjusted operating margin was 35.8%. Software integrity segment revenue was $118 million, up 21%, with trailing 12-month adjusted operating margin of 11%. We continue to expect software integrity to deliver 15% to 20% growth with expanded adjusted operating margin in 2022. Turning to cash, we generated $440 million in operating cash flow. We used $257 million of our cash for buybacks and have repurchased $972 million of stock over the past 12 months. In addition, we paid $330 million to acquire White Hat Security. Our balance sheet remains very strong. We ended the quarter with cash and short-term investments of $1.53 billion and debt of $22 million. Now to guidance. We are raising our full-year outlook for revenue, earnings, and cash flow. For fiscal year 2022, the full year targets are revenue of $5.06 to $5.09 billion, which represents 20% to 21% growth. Total gap costs and expenses between $3.978 and $3.998 billion. Total non-gap costs and expenses between $3.395 and $3.05 billion. resulting in a non-GAAP operating margin improvement of approximately 250 basis points. Non-GAAP tax rate of 18%, GAAP earnings of $6.37 to $6.49 per share. Non-GAAP earnings of $8.80 to $8.85 per share, representing approximately 29% growth. Cashflow from operations of 1.6 to 1.65 billion. capital expenditures of approximately 145 million now to the targets for the fourth quarter revenue between 1.6 1.263 and 1.293 billion total gap costs and expenses between 1.076 and 1.096 billion total non-gap costs and expenses between 919 and 929 million gap earnings of one dollar and six to $1.18 per share and non-GAAP earnings of $1.80 to $1.85 per share. Consistent with our prior years, we will provide additional comments and guidance for 2023 when we report next quarter. In conclusion, we again delivered revenue and non-GAAP earnings above our targets. Based on our excellent results year to date and strong outlook, we are again raising our targets for the full year. We continue to see strong momentum in the business and are executing well with our robust portfolio and resilient business model. With that, I'll turn it over to the operator for questions.

All right, thank you. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants. If you have additional questions, please re-enter the queue and we will take as many as time permits. Again, one then zero if you'd like to ask a question. And our first question comes from Joel Brewink from Baird. Please go ahead.

Great. Hi, everyone. Maybe I'll start with kind of two questions on backlog. One, just where it finished the quarter. And then two, you've been in this stretch of really remarkable sequential backlog growth. And, you know, I completely understand you only get shot to renew an enterprise customer with a three year deal, you know, every three years. So are we reaching a point where maybe the backlog metrics stabilize and you start to pull bigger ACV out of the backlog and that starts to show up and maybe a more meaningful way in forward revenue metrics?

Hi, Joe. Well, I'm glad you started with that question and added some caveats to it. So backlog for the quarter ended at $7.1 billion. And as you alluded to, it will fluctuate quarter to quarter depending on the timing and recognition of revenue. The one thing I'll add to backlog, too, is that, you know, we aim for a duration target in the two and a half to three three year range. This quarter was on the lower end, running closer to 2.3 years. So slightly outside of our range.

Okay, okay, that that is helpful. And then, you know, in your financial supplement, obviously, you reiterated all of the long term targets. And then as a footnote, you know, their current as of today, and they take into account all current entity list restrictions. There were some new updates to entity list restrictions. You've also had a much stronger current fiscal year, so the baseline against which you expect to grow double digits, I guess it might be a bit harder. Is that kind of the right way, a literal interpretation of all of these things when thinking about what Synopsys intends to do next fiscal year?

Let me take the entity list part. All the forward projections that we always give you take into account anything we know about entity list or even suspected entity list increases. Typically, the entity list doesn't grow particularly fast or a lot, but we follow rigorously whatever the government decides there. And I would say at this point in time for projections, it's not material in terms of changes.

All right. Thank you. And now to the line of Gary Mobley from Wells Fargo Securities. Please go ahead.

Good afternoon, everybody. Thanks for taking my question. Apologize for the background noise. I want to start out with a question about headcount. If I read your supplemental data correctly, it's up about close to 2,000 quarter per quarter. Does that reflect, you know, just aggressive hiring, some acquisitions, all of the above? And is it part of the reason why we're starting to see a pretty sharp increase in the OPEX?

So, Gary, the increase from Q2 to Q3 does reflect some amount of acquisitions for White Hat, but it also reflects the planned organic hire for the year. um the the increase in in expenses for the quarter and q4 that we're guiding to does reflect you know our expected hiring as well as frankly given how strong the year has been we are accruing for some additional uh variable comp okay and for the past two years we've had a pretty good backdrop in which you you license right so we've had a above trend semiconductor industry revenue growth

But, you know, it's clear that the industry is entering a more challenging time. And we've heard from some companies about, you know, a minimum point back on hiring, just tightening down, so to speak. And so my question to you is, have you seen any hesitation on the part of customers in signing large deals? Or are you having to go to a higher level to get approvals for large deals?

We are well aware of companies having reduced their hiring at least temporarily somewhat. I have not heard of any significant pullback or hesitation. The design activities typically don't mirror immediately what happens in the market because the market is really a function of the end sales. i.e., the quantity of chips being sold. And so R&D is very stable against that. And more often than not, when there's a flat period or even a downturn, people invest in R&D to make sure that they have differentiation coming out of it. So as we, I think, said in preamble, we feel that our business is actually very robust right now.

Gary, in addition to that, from a business metric perspective, we saw run rate up pretty strongly in Q3, so we're not seeing any indication of those concerns.

All right. Thank you. And now to the line of Gal Munda from Wolf Research. Please go ahead.

Hi. It's Arsenio for Gal. If you think about It's been a year of pretty outstanding execution. If you look back at when you first guided, what surprised you most this year so far that has allowed you to kind of walk up to it throughout the year? Thank you.

Yeah, if you look at the guidance that we just gave for this close to the year and compare it to where we were back in December, at the midpoint, we're up north of $300 million in terms of the outlook for the year. And what we're seeing in terms of that better outlook is just really strength across all of the products. Going into the year, we did expect it to be a strong year, but the traction that we've gotten on the new products – the continued strength on our IP business, and it's just the continued momentum on SIG that we saw for the last, the previous four quarters continued. So we really saw strong growth across the customer base, across all geos, across all product lines. So business is doing really well.

Great. That's helpful. I just want to have one quick follow-up. How is BSOAI contributing financially to growth? Is it at any material level yet? And just kind of your growth outlook on that and what you guys are looking forward to with that offering. Thank you.

Sorry, it was a little hard to understand the whole question, but on DSO.AI, you have to think of this as sort of a multiplier on our existing products. And it's of products working together in a flow. And so DSO.AI really improves both the speed of getting results and the quality of the results in terms of typically the performance and the power utilization of the resulting chips. And so that is of super high value, but that also encourages our customers to work with our suite because the suite of tools is particularly well-matched to DSO.AI. And so that is really one of the reasons that we see strong growth around that entire digital design solution.

All right. Thank you. And now to Harlan Sir from J.P. Morgan. Please go ahead.

Good afternoon and congratulations on the solid results and execution. On the one-time growth outlook, you know, yeah, with the passing of the CHIPS Act combined with the recent semiconductor supply chain disruptions that we've seen over the past two and a half years, you've got growing geopolitical risk. Many of your semiconductor customers are prioritizing manufacturing diversification, and they're now starting to put in place plans to support one or more new Foundry partners. So this is going to entail new library development, new IP blocks, and even in some cases, new design flows. This is for both leading-edge digital and analog. I know that your customers have to add design engineers every time they add a new Foundry partner. So is this focused on diversification, a forward driver of both your EDA and IP businesses as well?

The answer in a nutshell is absolutely yes. You actually explained the situation very lucidly because it's clearly visible that manufacturing is in the front of the mind of many countries because they want to make sure that they have supply. And, you know, the value of chips has suddenly been recognized by not having them, meaning a supply shortage immediately puts the attention on that. But from a development point of view, when you put more manufacturing in place, you need to have the complete enablement capabilities, which are the tools, the IP, the services, and so on. And you said correctly, and the talent. And if there's one thing that we cannot grow faster than a 20-year rate, it's talent in the world. That is going to be one of the shortages. And so one of the interesting side ramifications for us is this is one additional reason why the value of being able to shorten design time is so valuable. But it's even better than that in some of the capabilities that we have. We can get these results with less skilled people. and fewer of them. And so by no means would this reduce employment in the industry, on the contrary, but it does help a little bit with this talent shortage. And all of this ties together pretty much in the way you described it. Thank you.

I appreciate that. And another, Gryll Turner, I sort of wanted to touch base is on you talked about the expansion of your customer base, right, in chip design to a lot of your sort of systems-level customers. You know, recently one of the largest ASIC semi-companies, it's a big customer for Synopsys, they did a deep dive into their ASIC business, and they've helped customers like Google, Cisco, Facebook, and many others bring their ASIC chips to the market, and they've got a design wind pipeline. I think of like somewhere over like 70 advanced chip designs. Now, obviously, this is the classical engagement model, right? The systems customer does much of the front-end design, which obviously has been a strong growth driver for Synopsys. The ASIC company, like a Broadcom or Marvell, does the backend physical design, design closure, verification, tape out. I'm wondering if you're starting to see the move by these ASIC systems customers to move more towards a full flow or CLT model, which obviously would open up more growth opportunities for your team as well.

Well, we see them go in all of these directions. And for these large hyperscalers that you mentioned, they are all essentially discovering what the semiconductor world looks like because they have figured out that the semiconductor is a direct multiplier on their software. But you can also say it the other direction. The software is a direct multiplier on the semiconductor underneath. And so if they can optimize solutions for just their applications, with other words, narrower solutions, that is their hope to get much higher speed, throughput, and in some cases also much less power utilization. And you're absolutely correct that you can go having a full design flow yourself, You can have a full service company do everything for you, or you can do something in between, which is the ASIC pathway, where you design most of the functionality, structure, the architecture, and then let somebody else do the physical design. And I think these will all three stay alive, but the good news is a lot more people that want chips just for themselves. And that's where you see this broadening of different architectures. And certainly AI was a foreboding example of that because literally 100 or so AI companies are all designing the best chip ever, of course. And the reality is it's a race for different vertical segments.

All right. Thank you. And now it's the line of Charles Shi from Niedermann Company. Please go ahead.

Good afternoon, and thank you for taking my question. Maybe, Art, the first question, you sort of mentioned about absent flows happening in the semiconductor industry and, quite frankly, the broader macro economy. Looking ahead into 23, I know you're not guiding 23, but what do you think that are you going to maintain your low double-digit growth into quite a challenging year in terms of macro next year? Because when I look at your historical numbers after you transition to basically a time-based revenue model, you probably only had one year that is kind of showing flat-ish kind of growth, which was 08, 09, around that time. So maybe very specifically, my question is, how bad the macro has to be for what happened in 08-09 to repeat in 23-24. Do you think that's going to happen? If not, then why? Thank you.

Well, of course, bringing up 08-09 is bringing up something where in 08 people thought this is the Great Depression coming back, right? There was very little consistency or belief that this would go away after a couple of years. Having said that, in 08-09, we were able... to actually every year eke out a little bit of growth, but for all practical terms, we were flat. And I think one of the reasons for that was our stable business model. But the other reason was that people don't stop R&D for a long time before they decide to have to cut that because That is cutting off your future. And so they'd rather starve the rest of the company a bit in order to make sure that new products keep coming out. And the other observation is that even in 08, 09, there was no slowdown of new technology. Meaning if you stop designing for two years, you are definitely no longer in the leading pack from a technology point of view. So am I the right person to ask if we're going to have an 08-09 economy going forward? No, I'm not the right person, but I also don't believe that that's going to happen. And so the indications right now subject to, of course, any crazy political situation. But aside of that, all our key customers are investing in technology and are racing forward.

Thank you. Maybe another question about your specific about your IP, excluding the system integration business. 21, definitely you are growing, I believe, slightly ahead of your mid-teen outlook, probably closer to 20%. 22 year to date looks like your IP growth is potentially very strong double digit and probably north of 20%, I assume. But you're still guiding 15% long-term outlook. So maybe this is a kind of simplistic view here. Is there a risk of mean reversion at some point, meaning IP could grow under 15% at some point in the future? Why or why not? Thank you.

I understand that your objective is to look at what we're going to do in 2023, but you know well that in December we'll give you better guidance on that. But I'd like to raise the fact that, you know, when we gave you the long-term objectives, This is only December. You know, so it's not that long ago. And so right now, we certainly state that we're not changing that guidance at all. And so I don't expect that we will surprise you in some big way in December. I think we were on track to continue against those expectations.

All right, thank you. And now to Jason Celino from CBank. Please go ahead.

Great. Thanks for fitting me in. So Art, you know, the references for DSO.ai, the customer wins, they're quite impressive. You know, how are customers using DSO.ai today? Is it more proof of concept type work? You know, is it leading edge type work? And then, you know, are these customers evaluating, you know, cadence, cerebrus, you know, are they simultaneously? Thanks.

Well, the reason I mentioned that it has impact on our business is because they're using this in production. And yes, of course, the most advanced people have always been the people that first pick up on the most capable new tools. And so these are very advanced, often large companies that are doing now many designs with this capability because the value is high and they are definitely seeing the issue of insufficient talent. And so that's sort of the main space. I don't know actually that we see much of our competition, not to put them down or anything like that. I'm sure they're doing good stuff. But the advances that we've made in the last year, even in my own book, are quite remarkable and are broadening, by the way, to more and more capabilities going forward. I think we're into a whole next phase of what EDA will mean to our customers. And, you know, very often, advanced users try very quickly, and then they're very careful. They try very quickly, and they're absolutely adopting.

Okay, great. Thank you. And then track, again, you know, impressive guidance raised here. Sorry to try to parse this out, but how much of the revenue contribution in the guidance is coming from White Hat?

Just to give you a sense of White Hat for the year, it's about $15 million to $20 million in terms of revenue. So a large part of the raise for the full year is really coming from a very strong, healthy, organic business.

Okay, great. Thank you. You're welcome.

Thank you. And now to the line of Jay Leishauer. Go ahead.

Thank you. Good evening. Art, a technology question for you first, and then the follow-up for Trak. So on the subject of AI, Two things. First, could you talk about how you do your own internal development for AI, that is for DSO.AI? The reason I ask is, as I'm sure you're well aware, there's an arms race across multiple software companies, each claiming to have some AI. And obviously you do, it's in production. But I'm curious as to how you distinguish or carve out your own internal AI specifically for EDA purposes as compared to the developments you do for the tools themselves. And then more broadly, how do you think about the implications of AI for the IT business? The reason I ask that is Synopsys in a recent technology presentation at actually an ANSYS conference spoke about, for example, AI in the context of design reuse, design remastering, all of which would seem to have some implication for IT, in which, of course, you're number one, at least in EVA. For track, one number that has become increasingly material in your disclosures, and I'm sure we'll get the update in a couple of days in the queue, is your FSAs, which was a billion dollars as of the end of Q2. Could you talk about the composition of that number? Is that predominantly IP? And how does it factor into your guidance and revenue growth assumptions?

Okay, let me start with AI. You know, the first thing to understand with AI is AI is a very advanced, different way of programming the solution to a variety of problems. And, of course, we use the traditional approach, but we also use what's called pattern matching where you find situations where the recognition of the situation allows you to improve something for the better. Now, that statement applies to the domain that you apply it to. And so if we took our DSO.ai and say, hey, tomorrow morning we're going to do, I don't know, blood diagnostics and learn something about patients, we should have initially zero to offer because The AI needs to be matched in its intent to the area of the problem. And by the way, I de facto alluded to that a minute ago on the question of why the AI chips, all these people are essentially optimizing for their domain, right? Well, we have optimized for our domain, and our domain is unbelievably complex because we have arguably some of the most complex search spaces, meaning those are all the potential solutions, finding the right one. in any field. And so it's really the combination of the understanding of what we do and then the exploration with AI that fits together. Secondly, AI for IP, of course we use it ourselves. And a very simple reason would be one could consider Synopsys as one of the most advanced design companies in the world for what we do. And so we don't use our designs to put chips on the markets. We don't design chips. We design IP blocks. But the concept is actually similar. Third, you mentioned something interesting that I'm well familiar with, which is the need and the desire to sometimes take an existing design and migrate it to a different technology node. Sometimes it's called remastering. Sometimes it's called retargeting. That's the word you use, I think. And initially we did some experiments already a year ago for going from one node to another node that was pretty similar. And we got excellent results and we got them fast and we could learn from the existing design and apply it to the new one. Meanwhile, we have vastly improved on that because we've been able to move many clicks forward in terms of nodal technology and still get much better results. And so I'm the first one to say we're at the beginning of a big journey, but so far it's a pretty cool journey.

Hey, Jay. So your question on FSAs and the mix of that and how it affects our results, FSAs are predominantly IP, but there's a good portion of EDA software in there as well. With FSAs, what's changed most significantly is since 606 went in effect. Whenever a customer pulls down software or pulls down IP, revenue gets recognized at that point where historically it would have been recognized over time. you'll see that create more variability in the business. Now, on a plus side, from a commercial perspective, what's great about FSAs are that it gives our customer a lot more flexibility in terms of how they can transact. So they'll sign a contract. And this is an area where if we continue to innovate and launch new products, they will actually see them consume those FSAs quicker. So you'll see an acceleration in revenues from that business model. Understood.

Thank you very much. You're welcome. Thank you, Jerry.

Thank you. And now to the line of Vivek Arya from Bank of America. Please go ahead.

Hi, this is Luxen Zhang on behalf of Vivek, and thank you for taking the question. I want to focus on EDA. Obviously, you've raised your four-year guidance, but for EDA specifically, growth has slowed to just mid-single digits, and now it's below a trend of 10% to 15%. So could you help us understand what's causing this slowdown and when do you expect it to go back to the trend line? Thank you.

Let me clarify. The business is doing very well, and certainly we're executing. We're seeing growth in that business line within our business model of double-digit growth. So this, what you're seeing here, is just a function of two things, the fluctuation, the comparisons to last year. Remember, this year you've got hardware that's front-end loaded compared to last year, which is more back-end loaded. So it's a function of comparison, but also when you match up our – When you decompose the EDA software business, which is about 65% of our overall revenues, we're growing very nicely, certainly well within the double-digit model.

Great. And then just a follow-up to an earlier question on the entity list. Is it possible to give us a sense of how much of your sales are coming from gate all-around development in China? whether domestic Chinese companies or multinational. Thank you.

Well, A, none of that is material, but gate all around in China doesn't exist yet.

Got it. Thank you.

Thank you. And now it's the line of Blair Abernathy from Rosenblatt. Please go ahead.

Art, just wondering if there was anything you'd call out from the U.S. CHIPS and Science Act, any change or opportunities it might present for synopsis?

only demands the skills that we have to provide. And we hope that we'll be able to deliver to you what we said for this year. Actually, we don't hope. We plan. And that is passing the $5 billion mark. And that's an exciting moment. So thank you for your support. And thank you to our employees to help make this happen.

All right. Thank you. And ladies and gentlemen, that does conclude our call for today. Thank you for your participation. and for using the AT&T event conferencing service.