Synopsys, Inc. (SNPS) Earnings Call Transcript & Summary
September 9, 2020
Earnings Call Speaker Segments
Thomas Diffely
analystOkay. Well, welcome, everybody, and thanks for joining the D.A. Davidson Software Conference this year. We have another great fireside chat with the CFO of Synopsys, Trac Pham, thanks for joining us again this year, Trac.
Thomas Diffely
analystSo let's just start with a few current topics. We know we only have 25 minutes. So we're just going to jump right into it here. So if you could maybe just give us a quick industry update on COVID-19 and really looking at both the impact it's had on your operations with the supply chain issues for hardware, working remotely, but also what the impact you're seeing on your customers in their design activity levels?
Trac Pham
executiveYes, Tom, let me let me work backwards from the customers. From that perspective, the design environment continues to be very healthy. So despite the macro challenges, our customers continue to keep pace with their schedule. Their goal is to stay on schedule, deliver the products as planned. And so from that perspective, it's provided a really good context for us. And operationally, despite the kind of short-term issues that we faced when we transitioned to working from home and working remotely back in March. For the most part, we've done a really good job managing through this period. I think it's certainly added -- required more focus, a lot more energy. I think the first couple of months were just physically and mentally very tough. But for the most part, we are able to manage through that pretty well. And you can see that in results. We got off to a very good start in Q1. And when COVID really hit hard in mid-March, we made some of the changes, but then delivered really good Q2 results. And then Q3 followed up with another Q3 strong quarter. And then as a result, we raised the guidance for the full year. So despite some of the near-term challenges, I think we've done -- we've executed very well.
Thomas Diffely
analystSo when you look back, was there a meaningful onetime charge to get everybody up to a speed kind of out of the office? Or is there an ongoing charge to that?
Trac Pham
executiveI think of it as 2 stages. One, in the mid of March when we transitioned almost the entire company, I think for practical purposes, the entire company, which is over 15,000 employees, to working remotely, there was a huge lift from the IT team, from the human resources team to make sure that people are adapting, right? So that was a pretty significant lift, that was heavy for the first 2 to 3 to 4 weeks-ish. And then since then, it's just been a continuous fine-tuning to make sure that everyone remains productive. And I think as we learn more, as things change, as there is more information, we certainly try to adapt to it. So it's an ongoing learning and ongoing implementation. But the heavier lifting was probably within the first month of the transition.
Thomas Diffely
analystOkay. And then finally, on this topic, do you see yourselves going back into the office in full? Or is it a hybrid model going forward? What's your vision now?
Trac Pham
executiveWe're going to evaluate that. Certainly, what we learned from these last 6 months is that things that we had taken for granted as fact, I think, we've learned that there are definitely different ways of doing things, I think, and I think you can still be productive in a variety of forms. And so we're using the chance now to evaluate what makes the most sense going forward. And I think there's benefit from a culture, from a productivity and from a cost perspective. I think it's too early for us to say if it's going to be extreme, one way or the other. I think some companies have come back and make statements about where they're going to be on that spectrum. I think for us, the balance is going to be somewhere in between, and we'll try to maximize and leverage the good things about working remotely. And -- but also take advantage of the fact that there is something that you just can't -- that we missed in terms of the interaction, the physical interaction and some of the collaboration that's hard to do when you're not physically present.
Thomas Diffely
analystYes. That makes a lot of sense. And another question we're getting a lot from investors these days has to do with the semiconductor industry and the much more restrictive commerce department rules, as it is proposed to China. So obviously, Huawei was a big concern over the last year. It's been taken out of your numbers, out of your guidance. But what is the risk in your mind, if this expands further, I mean, over the weekend, we heard SMIC might be put on this list as well. So how do you view the whole dynamic situation right now?
Trac Pham
executiveI think we're going to approach it the same way we have over this past year and approach it the same way we have with any issues that come up. We'll deal with the things that we can control, right? We are mindful of some of the potential changes. But we balance it -- we try to approach in a balanced way, right? You can't spend too much time worrying or driving behavior for things that are still in speculation mode. But knowing that when things do occur and things are -- rules are clear and the regulations are clear, we're certainly are going to abide by the rules. And then we'll have to adapt. We've been dealing with the headwind of the Entity List now for a little over a year. And very early on, what we have learned is that our focus was just, let's deal with the things that we can control, which is, if we can't sell these customers, which customers can we sell to, and how do we broaden the number of customers that we can support. And then secondly, with those customers that we can support and how we can continue to increase the share of wallet there. And that's worked out very well for us. The -- despite the headwind from the Entity List, we continue to grow across the board in all geographies, but particularly in China where this has the most pronounced effect, we continue to do very well.
Thomas Diffely
analystOkay. So on a go-forward basis, it seems like there's not a developed EDA company in China that could support a local industry. And so I mean, how do you view kind of the long-term view? Is it just going to be -- chips will have to be produced elsewhere? Or is it a situation where you think there can be a homegrown solution in China?
Trac Pham
executiveWell, I think the reality is that the government is going to try to create as much self-sufficiency as possible, right? But the reality of it is, I think, it will take many years for them to actually get to a point where they can effectively compete with the breadth and the capabilities that we offer, not only in EDA but in IP as well. And so the best thing that we can do and I think the things that we can control is continue to innovate and continue to improve on our product, continue to deal -- figure out ways to help our customers deal with the continuing pace of complexity of chip design. And as we do that, I think we'll position ourselves well, which is exactly what we've done, not only this past year, but over our history.
Thomas Diffely
analystOkay. Great. And then the third and final of the current topics is Intel. They've had a highly public manufacturing hiccup of late, talking about their 7 nanometers being delayed. From your point of view, I assume it doesn't matter whether or not Intel or any other large company, customer of yours is producing their own chips or outsourcing to foundries. Is this really the design side that impacts you, and that seems to be pretty healthy?
Trac Pham
executiveYes. So I think you've answered that question pretty well and set up the context really well, Tom. So I would 100% agree. The -- I've got a lot of the questions. We have gotten a lot of that questions since Intel's announcement and post earnings. And from our perspective, it's exactly what you described. Ultimately, when you break it down and look at the essence of what is driving -- what would drive demand for EDA and IP, it's really design, the number of people -- companies are going to do design, the number of designs out there. And I think regardless of where it ultimately gets with manufactured that shouldn't change the opportunity that we have in front of us. I think there's been a lot of -- I think some of it is concerned because things are good. The results have been very good. I get the sense that there's questions about whether or not there's risk in the horizon, and this is not an area where we're particularly worried about.
Thomas Diffely
analystOkay. And then one more just semiconductor-related question. In the past, we've seen logic be a lot more important to your business than memory. However, over the last couple of years, well, less -- evolution in the last 5-plus years, the speeds of memory have gone up quite a bit, and we're starting to see more kind of logic front ends to pieces of memory. So just curious, from your business point of view, how important is memory for you going forward? And how much of a bigger opportunity is it than it was, say, 5, 10 years ago?
Trac Pham
executiveIt's been a tailwind of growth. We certainly have benefit from it. And I think that regardless to whether it's logic or memory leading it, I think they're still going to need tool. They're still going to need EDA tools to design those chips and they're in need of IP in some cases for that. So it's been good, but memory, like any other tailwind that we've seen, there are so many positive tailwinds, so many layers of potential growth for us that we're not overly dependent on one particular area or focus on any one particular driver of growth. There's been so many different contributors to our results. And then I think that as I look forward over the next several years, there's enough variables. And those variables, I think, are positive, mostly positive, but regardless of which ones go on the positive or the negative side of the ledger, there's enough there that we feel like we can comfortably sustain the growth, growth rates as we've described and are managing to over the multiple year period.
Thomas Diffely
analystAll right, great. That leads me into my next set of questions on the long-term growth drivers. So you have seen a pickup over the last, call it, 7 to 10 years from single digit to double -- I'm not going into that, but high single-digit unit growth. We are probably in the 3% to 4% to 5% range for many years. And then we're now up in the 6%, 7% growth range. When you look at the next 5 years, it sounds like you may have just answered this question, but do you see a sustainable level of growth we've had in the last few years? Or do you think there's a reversion to the mean back to where we were, say, a decade ago in this industry?
Trac Pham
executiveOh, absolutely. We've communicated the increase in our outlook, right? Because I use to describe, Tom, for many years, we have described EDA opportunity at a low to mid-single digits. And I think within the last couple of years, we've increased that to that mid- to high single-digit profile. And I think that is the model that we're working with in the next several years, at least in the next multiple years. I think, think about where we are positioned. And I think there's the macro environment, right, which is despite the macro environment that we're in today, right? So just -- this is a pretty good case study. Despite the macro environment that we're in today, the designer environment continues to be very healthy, right? So that hasn't slowed down. The nature of chip design continues to be very complex. That hasn't slowed down. And so complexity in whatever form is good for us. Geographically, you think about different customers in different geographies, right, whether it's China, Asia Pac, North America, like there's been very strong growth and balanced growth across the different geographies. That's good. New customers, the hyperscalers and the systems companies as new entrants to -- as new customers for us because they're doing their own chip design. You think all verticals despite the near-term hiccups with -- or challenges for the automotive market. Automotive, I think, is a long-term opportunity. So there's a number of different growth drivers that are very positive for EDA. Now that's on the macro environment. For us, we position ourselves to capitalize on that, right? The fact that we've invested in EDA and IP over the last several years, positions us well because now you're hearing us talk about new products that are coming to market. And you're seeing the success that we're getting with new products and the traction we're getting with new products. And that's in the -- for the most part, that's in the early stages. And so when you talk about a very positive macro environment, and us positioning ourselves to capture that, I think we feel very good about the growth profile that we've outlined for EDA.
Thomas Diffely
analystOkay. That makes sense. Yes, that's in the core EDA market. If you look at something like IP, it's been growing 10%, 15% over the last decade. Same question, I guess, here, over the next 5 years, the adoption of IP by companies who used to do at the house continues to -- there's enough run rate there to continue that growth?
Trac Pham
executiveAbsolutely. We're -- as more I said on EDA, I'm equally bullish on IP. The demand drivers for IP -- a lot of the things I discussed for EDA, is very similar to IP. What delta to that or different to that is that the amount of outsourcing continues, that hasn't slowed down. The pace of new standards for IP hasn't slowed down. There's constantly new standards are coming out. And I think the trend that we've seen over the last few years, I think, is going to be sustainable over the next few years. It's the fact that given the scale of our IP business and the breadth of what we have to offer, we're at a point where we're seeing this virtuous cycle in IP. There are things that a lot of the customers can't do today, right? Historically, they didn't want to do it for economic reasons. And over time, what we've seen is, they can't do it economically, they can't do what we can do for the same price. And they can't do what we can do in the same time horizon. So in many cases, they're coming to us for solution that they don't have alternatives or practical alternatives. And so the underlying drivers for IP continues to be very healthy.
Thomas Diffely
analystOkay. Well, how much of the growth was from just the, I guess, the adoption of IP and outsourced model by the customers versus actual growth and complexity of IP itself? If no more customers merge over to the IP or outsource, is it still a nice growing market for you?
Trac Pham
executiveOne, it's a combination of all those things, right? It's a combination of things that are hard to do. Two, the complex design, new customers, all those things contribute to it. That said, I don't -- it's really hard to believe that the outsourcing trend will abate, right? Because the design complexity, the demands on the schedules, the demands on the functionality of these chips, I don't see that slowing down. So for practical purposes, I don't think that's a reality that they're going to -- we're going to see. And I think that in some ways, if you think about the macro environment, this is a macro environment that's very positive for IP, right? Because when you're in a financial crunch, you're trying to maximize your investment as much as possible, right? You're trying to still deliver on your schedule, you're trying to maximize the investment. The idea of being able to buy IP and be able to focus your EDA spend and your resources on something else, I think that's very compelling. We saw that in the global recession, we saw that in 2015 with a massive amount of M&A activity in the semi space, and we're seeing that now. So I don't see that slowing down.
Thomas Diffely
analystOkay. And I know you guys have perhaps the broadest portfolio of IP of the new company out there. Are there pieces that you'd like to add as time goes on?
Trac Pham
executiveWell, I will be broadly saying of the firm, that we have the broadest portfolio of IP for sure. I think that's a fact. And it's such a wide margin, that it's a statement of fact that we're very comfortable making. I think when I look at the IP portfolio, Tom, I don't look at it in terms of a weakness, right? I don't look at it in terms of "hey we have this weakness here." We have such a position of strength that we really are in a situation where we have the "where is all" to really make the right decisions about where the technology might go, where we want to invest. As we make these decisions, it's not about trying to fill in a weakness or trying to fill a gap. It's really using what is already a very strong IP business and a strong healthy Synopsys to find ways to further broaden that portfolio, further distance ourselves in the pack. And what we're seeing is that you're -- it is a virtual cycle there because cycle -- virtuous situation there because imagine that you're ahead of R&D somewhere in chip design, and you can go to a customer with the breadth that we have, and we continue to add to that. It makes it harder and harder to go to anyone else, right? Because why would you subject your design to a risk of integrating multiple sets of IP from multiple vendors, right? And so it's definitely not a position of weakness that we have to fill there, and we're operating from a position of strength at this point. And I like the position that we're in.
Thomas Diffely
analystOkay. Let's just move over to your last segment, the software integrity or the systems piece. I guess, same question, the next 5 years, how do you see that growth? And is it going to be kind of slow, steady growth? Or is it going to be step functions along the way, do you think?
Trac Pham
executiveVery bullish about that business, very optimistic and very bullish about the software integrity space. Next, we described it as a 15% to 20% growth segment for us. It remains roughly 10% of overall revenues, but it's an important business for us in terms of the long term. The -- that business in terms of growth, I feel pretty confident that we should be able to sustain that growth on a multiple period. Whether or not it has a step function or not, I think it may -- more likely be a function of the overall market. It's a very nascent market. It can be very dynamic from quarter-to-quarter, year-to-year. I think you maybe expect, but we're comfortable with the model of 15%. I think that it deviates like to the positive side of that is a step function. It's really a function of more factor of how the market evolves. But certainly, just like what I described on the rest of the business, or what I described with regards to China earlier, we think it's a good market. We think the dynamics, the demand drivers are very positive. So we're going to do whatever we can, which is really focus on scaling up the leadership team, scaling our go-to-market efforts, focusing on continuing to improve on what is already a very strong portfolio because however, the market goes, we've got to be prepared to capture that. And I think, I like the position that we're in. Over the course of 6 years, 6.5 years, we've built up a very nice business. That's reaching $350 million and is profitable. And I think that the characteristics of that business in terms of the breadth, in terms of the scale, in terms of the ability to execute both on growth and profitability, you're not going to find many competitors that have -- could tick up the box across all those dimensions. So our focus right now is doing all the things that we need to do in order to scale this to the next level of $0.5 billion or $1 billion because we do see the opportunity there.
Thomas Diffely
analystOkay. This seemed to be the one segment that was a little more impacted by COVID over the last couple of quarters. You mentioned there was a little softness in the orders versus expectations. Have those issues been resolved? Are you back engaged with customers again? What's the update there?
Trac Pham
executiveYes. We continue to work on that, but the reality is a lot of companies continue to work remotely. A lot of the interactions are what we're seeing here are remotely. And so I think we're making progress with that. We're doing the things that we -- we're making -- doing our part to improve on that, but I think the reality is that, given the financial circumstances of a lot of the companies that we're dealing with, I think they're as important as the security is, a lot of these companies are struggling and are trying to figure out how to manage through that. So I think as the situation improves, as there's more face-to-face engagements, I think that situation should improve. Now that said, we still have an opportunity to focus on the things internally, whether it's our internal processes, our systems, or just the -- making the tweaks on our go-to-market process, I think we could focus on those internal elements right now. And I think that when things do improve externally, we should be able to accelerate that business.
Thomas Diffely
analystOkay. Well, it was a really nice overview of the 3 core markets. Now if we can put all together on how you think it impacts the model over time. I know we've talked about the march to 30% operating margins. But when we look longer-term over the next 5 years or so, how do you think the leverage in the model works out? And is it a situation where you'll continue to drive margins higher and higher over time? Or as these other segments that aren't quite as profitable become a bigger piece, does that impact the margins negatively?
Trac Pham
executiveBroadly, Tom, I think the drivers of margin expansion, the way we look at it, we feel very confident that we should do it in a very sustainable way, right, which is not -- we're not focusing on cost cuts or cost takeouts, but really optimization and productivity improvements. The benefit is -- of the model is that where -- we see very good growth prospects across the entire business. So that will create some leverage in the operating model. With that growth, it will allow us to continue to invest in the business in a healthy way -- at a healthy level that will sustain our leadership position and our competitive advantage. But at the same time, continue to do the thing that we've done over the last couple of years, which is just be more efficient, drive for more productivity. And productivity is coming from both process improvement as well as technology implementations to create -- to help create leverage in the model. Now that's the bulk of the heavy lifting, right? That occurs across all segments of the business and across all functions of the business. In addition to that, we should get the benefit of businesses that historically are less profitable than the corporate average, improving the profitability, and that will complement the growth. But the vast majority of improvements in the business is going to come from just, frankly, hard work in terms of drive growth and cost optimization.
Thomas Diffely
analystOkay. I mean as the CFO, how do you balance investing for growth in some of these new markets versus looking at profitability?
Trac Pham
executiveVery much to say what we've done over the past, which is that the first -- our first priority is investing, right? The business, if we want to run this in a sustainable way, we've got to make sure that we're investing, right? And from where I sit, I want to make sure we maximize those investments, while delivering on margin improvements and the way that you're to do that, the intersection of doing that is creating as much efficiency and -- efficiencies in the business in terms of focus in the business, making sure that we're betting on the right projects, the right areas and being more -- very disciplined about where those dollars go. So if you're disciplined about targeting your investments and cutting the ones that aren't meeting their financial goals and if you are driving for more productivity efficiency, it will allow us to do both of the things that you're seeing in the business now, which is continuing to invest for the long term, while dropping a significant amount of profitability about that.
Thomas Diffely
analystOkay. And then our final question today on technology theme. So over the last 5 years or so, we've seen a nice uptick in the hardware business, driven by the consumer -- high-end consumer and who want to develop software, at the same time as hardware. So obviously, things like emulators have done very well. Do you see that trend continuing? And then when you look forward, what other areas of EDA do you think are going to start to shine going forward?
Trac Pham
executiveI do think that the hardware business will continue to be -- I think, see very positive growth drivers, right, because the amount of code on a chip design these days continue to grow. And our ability -- our customers' ability to do simulation and software and validation and software, I think, is -- there are some cases we're just better suited for hardware. So I think that, that will continue to be very positive. I think the challenge on hardware is really going to be the larger it gets and the lumpiness in that business. It's just going to be a reality that we have to manage and a reality that we have to communicate to our investors. I think that's -- there's only one downside, it's the lumpiness of it, and the variability of that business. But over a multiyear period, I think hardware will continue to be very positive. On the software side, for EDA, new design has always been -- design has always been a strength for us. I guess, EDA has always been a strength in general. We're leading on both design and verification. You're hearing a lot about our success with Fusion Compiler. I think, you'll continue to see more -- hear more about that. And you can see -- and I think you'll start to see more of that flow through the results because it's going to be a multiyear process for the success that we're seeing today, work its way through the financials. I think that's going to be the continued trend.
Thomas Diffely
analystGreat. Well, not seeing any questions on my board here and run-up against the clock. I just want to thank you once again, Trac, for your time today. And it was a great overview of a really solid company. So I appreciate it once again.
Trac Pham
executiveThanks for your time, Tom. It's good to catch up with you again. Take care.
Thomas Diffely
analystSee you. Thank you.
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