Synopsys, Inc. (SNPS) Earnings Call Transcript & Summary

Good day, and welcome to the Synopsys Annual Meeting of Stockholders. I would now like to turn the conference over to your Co-CEO, Aart de Geus. Please go ahead.

Good morning, and welcome to Synopsys' 2020 Annual Meeting of Stockholders. I'm Aart de Geus, Co-Chief Executive Officer and Chairman of the Board of Synopsys. I thank you all for attending and participating. As you are aware, due to the public health and safety concerns related to COVID-19, we are not only conducting our meeting virtually, but with each of us participating from a different location. Fortunately, we in Hi-tech are accustomed to conducting business from throughout the world. We will start with the formal items of business for the annual meeting and once that is complete, I will finish up with a brief commentary on how Synopsys is adapting to the current COVID-19 situation. Before turning to the formal items of business, I would first like to introduce our Board members, officers and others who are participating in the meeting today. Joining us by phone are Board members; Chi-Foon Chan, who is also our Co-Chief Executive Officer and President; Janice Chaffin; Bruce Chizen; Mercedes Johnson; Max Nikias; John Schwarz; Roy Vallee; and Steve Walske. Each of them is standing for reelection at today's annual meeting. Also attending today's meeting telephonically are Trac Pham, our Chief Financial Officer; Rick Runkel, our General Counsel and Corporate Secretary; and Lisa Ewbank, our Vice President of Investor Relations. Rick Runkel will facilitate the formal portion of today's meeting and take the minutes. In addition, Prasadh Cadambi and Jeff Ford of KPMG LLP, our independent registered public accounting firm, are participating at today's meeting. Finally, Christopher Hummel is joining us to represent Broadridge Financial Solutions as our inspector of election. I will now turn the meeting over to Rick Runkel. Rick?

Thank you, Aart, and welcome, everyone. It is now 8:03, and I call this meeting to order. I will briefly go over today's meeting agenda. First, I will conduct the official business of the meeting which will be to vote on management's proposals contained in our proxy statement. If you have any questions about these proposals, please enter them in the space provided on the virtual meeting screen. Before asking a question, we invite you to refer to the proxy statement for this meeting, which contains information about the proposals on today's agenda. We are not planning to answer any question, which is not related to the formal business of today's meeting or if the answer of the question is substantially covered in the proxy statement. After the vote, I'll adjourn the official part of the meeting and turn it back over to Aart. We have appointed Broadridge to serve as our inspector of election, meaning that it will tally the votes. Chris Hummel of Broadridge has taken an oath of office agreeing to fairly and impartially perform this duty. We will file this oath with the records of the meeting. If you have already sent in your proxy card or voted by Internet or telephone, you don't need to vote here in the meeting. If you are a stockholder as of February 10, 2020, the record date for this meeting, and haven't voted yet or you would like to change your vote, you can do so via the website used to access this meeting. It is now 8:04 a.m. The polls are open for voting on the matters to be considered at this meeting as set forth in the proxy statement dated February 18, 2020. The matters are: one, to elect 9 directors nominated by our Board of Directors to serve until our next Annual Meeting of Stockholders or until their successors have been elected; two, to approve our 2006 Employee Equity Incentive Plan as amended, in order to, among other items, increase the number of shares available for issuance under the plan by 3,500,000 shares; three, to approve our Employee Stock Purchase Plan, as amended, primarily to increase the number of shares available for issuance under the plan by 5 million shares; four, to approve, on an advisory basis, the compensation of our named executive officers, as disclosed in the proxy statement; and five, to ratify the selection of KPMG LLP as our independent registered public accounting firm for the fiscal year ending October 31, 2020. Are there any questions regarding the matters to be considered during this meeting? There were no questions asked that were not covered in the proxy statement. So we will proceed. I will confirm that we have a quorum present for this meeting. Only stockholders of record as of February 10, 2020, the record date for this meeting, are entitled to vote. I have been informed by Chris Hummel, our inspector of elections, that at this meeting, we have represented in person or by proxy, a total of 134,464,414 shares out of a total of 150,210,879 shares of Synopsys common stock outstanding on the record date, which constitutes more than a majority of the outstanding voting shares. A quorum is therefore present. This meeting is authorized to transact business. I have also received an affidavit of mailing from Broadridge Financial Solutions, the company's investor communications agent, certifying as to the giving and notice of this meeting and sending to stockholders of record as of February 10, 2020, the notice of Internet availability of proxy material commencing on February 24, 2020, and a confirming of mailing of the notice of additional information regarding the 2020 Annual Meeting commencing March 22, 2020. The polls are about to close. So if you've not yet voted, please do so. [Voting]

Since all those desiring to vote have done so, I hereby declare the polls for voting on matters before this meeting close at 8:08 a.m. The inspector of election has delivered his preliminary report to me on each of the proposals before this meeting, and I will now announce the preliminary results. Matter one, election of directors. The first matter considered at this meeting is the election of 9 directors to serve until the next Annual Meeting of Stockholders or until their successors have been elected. As set forth in the proxy statement, the 9 nominees standing for reelection are: Aart de Geus, Chi-Foon Chan, Janice Chaffin, Bruce Chizen, Mercedes Johnson, Max Nikias, John Schwarz, Roy Vallee and Steve Walske. No other nominations were received prior to the deadline for submission set forth in Synopsys' bylaws. Therefore, no additional nominations may be made at this meeting. All votes have been cast in the election of the directors. Based on the preliminary results I have received from the inspector of elections, each of the 9 director nominees has been reelected to serve as a Director of Synopsys until the next Annual Meeting of Stockholders or until his or her successor has been elected and qualified. The second matter considered is the approval of our 2006 Employee Equity Incentive Plan, as amended. All votes have been cast on this matter. Based on the preliminary results I have received from the inspector of elections, Synopsys' 2006 Employee Equity Incentive Plan, as amended, has been approved. The third matter considered is the approval of our Employee Stock Purchase Plan, as amended. All votes have been cast on this matter. Based on the preliminary results I've received from the inspector of elections, Synopsys's Employee Stock Purchase Plan, as amended, has been approved. The fourth matter considered is the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in the proxy statement. All votes have been cast on this matter. Based on the preliminary results I have received from the inspector of elections, the compensation of Synopsys' named executive officers, as disclosed in the proxy statement, has been approved on an advisory basis. The fifth and final matter considered is the ratification of the selection of KPMG LLP as Synopsys' independent registered public accounting firm for the fiscal year ending October 31, 2020. All votes have been cast on this matter as well. Based on the preliminary results I've received from the inspector of elections, the appointment of KPMG as Synopsys' independent registered public accounting firm for the fiscal year ending October 31, 2020, has been approved. The final tally of votes will be reported in a current report on Form 8-K to be filed with the Securities and Exchange Commission by April 15. This concludes the formal business of the meeting. It is 8:11 a.m., and I hereby declare the meeting adjourned. I will now turn the discussion over to Aart to provide his commentary on the COVID-19 situation. Before I do so, however, I would like to remind everyone that he will be making certain forward-looking statements, which include, but are not limited to, the levels of business activity we see in our current plans, expectation and outlook for the future. While these statements represent our current best judgment as of today, our actual plans, performance and results are subject to many risks and uncertainties, both known and unknown, that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Accordingly, we caution you not to place undue reliance on these statements. In addition to any risks that we highlight during this discussion, important factors that may affect our future results are described in our SEC filings, including our most recent annual report on Form 10-K and subsequent reports on Form 10-Q. These reports are available on the SEC's website and the Investor Relations section of our website. With that, I'll turn the meeting back over to Aart de Geus.

Thank you, Rick. We're in a unique and challenging time. So first, our thoughts are with all of those feeling the direct impact of the virus, including those risking their health to help keep us safe. As we, our customers and partners navigate this unprecedented situation, we're all leveraging our prior-hand experience while also adapting with a clear goal of emerging from this even stronger than before. In the past several weeks, we've received a lot of questions from investors. Let me try to address some of them to give you a sense of how we're dealing with the situation. We have 3 priorities. First and foremost, well-being. We will do everything we can to safeguard the health of our team, their families and our broader communities. Second, Synopsys inner workings. We will ensure effective operations, communication and innovation supported by infrastructure and processes adapted to the new circumstances. And third, customer focus. We will give uncompromising attention to enable our customer success, unimpeded by both our customers and our own work-from-home situations. Let's start with well-being. Our first priority is to protect the health of our employees, their families and communities and also our customers and partners. Our global COVID-19 leadership team monitors this fluid situation constantly, meets daily and provides ongoing updates to our team. As many of you know, we have a large presence in China, including Wuhan. Fortunately, our employees in that region are safe, and are now gradually coming back into the office. The early lessons learned are now benefiting the rest of the organization from healthcare precautions to managing stressful family situations, to how to transition to a productive virtual work environment. Today, approximately 13,000 of our 14,500 employees around the world are working remotely. While the regional situations differ in circumstances and time lines, we are abiding by the local social distancing mandates and expect many of these to stay in place for at least the next month. Supporting the communities in which we live and work has always been a hallmark of Synopsys. Our Synopsys Foundation is redirecting many of its programs and grants to COVID-19 relief organizations throughout the world, and we are diligently taking necessary social precautions in our communities. Let me now move to the Synopsys inner workings. An essential priority is to ensure that our internal infrastructure and systems continue to enable us to innovate, operate and execute on the business. Ensuring that our people can work effectively from home is a huge operational challenge that we executed with great agility and purpose. Our IT, HR and facilities teams have led an extraordinary effort to transition the company in a very short time frame. Operations, including financial systems, closed the books and HR systems to support employees have transitioned well. We continue to innovate as our R&D teams have transitioned rapidly to a work-from-home environment. Our engineers are adopting quickly. Their ability to access and manipulate huge amounts of customer data and collaborate with their peers supports our customers well. Simultaneously, innovation and development march forward as we stay on track for new and enhanced product delivery. While still in the early stages, we are encouraged. Meanwhile, we continue to execute on the business side also. While the team is dealing with unique challenges, we are weathering the situation with less disruption than anticipated, which we're certainly thankful for. As we continue to look for creative ways to strengthen productivity, while finding a healthy and sustainable way to live this at home, everybody is learning to adapt fast, be it by having more frequent but shorter meetings, to turning off video to save bandwidth the minute sound quality goes down. We're learning how to take regular breaks while getting the kids to their virtual homework. Finding the new normal, the new work-life balance is the essence of learning fast under new circumstances, which brings me to customer focus. Building on many decades-long relationships, we've been aligning closely with our customers to mitigate the impact of the new situation and work-from-home mandates. Initial customer feedback is that our support is very responsive. All parties are adapting. And while each customer is different, I can generally say that design activity has not slowed down. The level and complexity of designs has not changed since the outbreak began, and a number of customers are aiming at accelerating their own technical differentiation to come out of the downturn stronger. We are able to ship our products and customers are using them in their design. Remote access to our products is nothing new. Our customers are highly global in nature with teams located around the world, and they've been enabling remote access to our products for years. Even our hardware products are well suited for virtual use. It's common for engineers to access Synopsys hardware from around the world. And because our hardware systems are easy to install, they are better suited than the competition to be able to ramp up remotely. We are supporting our customers well even as the situation is rapidly changing. We are providing robust support through multiple mechanisms, such as video calls, audio calls and remote logins. The enhanced CRM and support system that we implemented earlier this year has been quite helpful in that effort. Providing services remotely is also a normal business model for us. Our service engagements continue, even as all parties continue to adjust to their new interaction protocols. And our sales and e-teams continue to actively engage with our partners and customers. Our customer relationships are special. Trust is built over many years and our history of helping our customers navigate the ups and downs of business cycle is one we are particularly proud of. While at times, there may be some audio/video challenges, we've already concluded multiple virtual executive review meetings. Let me step back to the EDA Synopsys business dynamics. I'd like to provide a few comments on the resiliency of the EDA industry, in general, and Synopsys in particular. Several of you have asked how to think about our business in a recessionary environment. While we are, of course, not immune, the nature of our market and business model provides a level of stability, not seen in most software companies. Given the competitive intensity and value of semiconductors, R&D and design activity continue regardless of where a company or industry is in the business cycle. Our experience in past downturns is that chip and system design continues throughout. This makes sense given the relatively long time frame for design, 18 to 24 months, the complexity and impact of current electronics and the necessity to have products to bring to market coming out of the downturn. AI and machine learning, 5G, IoT, servers and cloud expansion will continue to drive advanced design at high speed. We don't see that changing. In addition, Synopsys time-based business model with a high level of recurring revenue and $4.4 billion of noncancelable backlog enables us to weather down cycles relatively well. There's more variability today than during the '08, '09 recession. We now have hardware products with upfront revenue recognition and a supply chain with more complexity that needs to be managed. Also, ASC 606 accounting rules make IP revenue lumpier. Nonetheless, Synopsys is in an invariably stable business position in a market that will remain both important and very active. And lastly, on the business topic, Synopsys has always maintained a strong balance sheet, which together with healthy cash generation and access to credit ensure a robust financial footing. Some of you have asked about the software integrity market dynamics and whether they are different from EDA and IP. While only 10% of our overall business, the model is similar, largely time-based with noncancelable contracts that are slightly shorter than EDA contracts, approximately 2 years. So here too, there is relative stability to navigate business cycles. In an emerging industry such as this, the impact of COVID-19 is a bit harder to predict. On one hand, companies are presently consumed with the practical challenges of transitioning to a work-from-home model. On the other hand, they are increasingly concerned about the very security risk that our products could help them address. We will continue to monitor and navigate the fluids near-term situation with a constant eye towards the substantial, long-term growth opportunity in this space. Finally, we have another month to go in our quarter, and as is our normal protocol, we won't be updating our targets until we report next month. I will say that meanwhile we remain focused on driving to our plan and the targets we outlined in February. We look forward to reporting our Q2 results in May. In closing, thank you for joining our Annual Shareholder Meeting today and for your interest in Synopsys. We hope you and your family stay healthy and safe. Be well.