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

Hi, everybody. My name is Jason Celino. I am the vertical software analyst here at KeyBanc, and I'd like to welcome Trac Pham, the CFO of Synopsys.

So -- yes, maybe first question. You just reported last week, pretty good start to the year. Continuation of momentum you saw in 2020. I guess, what are the key drivers you're most excited about for 2021?

Yes, you're right, Jason. It's good to see you again. We just chatted last week post earnings. And you're right, it was a good quarter. We've had a really strong outlook for the year in terms of continued growth on the top line and further margin expansion. So it's nice to have one solid quarter behind us towards a very good outlook for the year. The results for the quarter was very similar to what we saw over the last several quarters, which is really broad-based strength across all the product categories, all geographies. And to your question, what gets me excited? I think it's that very fact that the growth was so broad-based, and the strength in the business is so broad-based. And it's a reflection of what is a very healthy environment for us right now. Customers are continuing to invest in design. There's a variety of new customers designing chips. And we are in a great position with regards to a very strong portfolio.

Okay. Great. And I forgot to mention when we started, but we do have this awesome Q&A feature at the bottom. So if you want to ask a question, we'll try to weave those in. But maybe kind of talking about the quarter a little bit. You specifically didn't raise guidance. Actually, the last couple of years, you hadn't raised guidance after Q1. So it wasn't really a surprise to us, but a good start to the year, but maybe talk about your relative visibility and how that relates to guidance and how that compares to previous years?

Visibility remains very good. I think that's a key element of our business model. We've got a large portion of our business that continues to be [ time-based. ] And so the visibility going into the year and the visibility that we have now for the rest of the year is very, very solid, and that hasn't changed. The -- as you mentioned, it's a good start. And similar to prior years, a good start gives -- positions us well, certainly for the full year outlook, but it's one quarter, and there's still plenty of business to book. And the fact that we didn't raise is just us being very mindful about the business that we have left to book in the year. But otherwise, we feel really optimistic and feel very good about where we are.

Okay. Great. And then maybe changing subjects a little bit. A couple of quarters ago, you introduced this Rule of 45. What drove the confidence to raise that range? And then how do -- could the composition between that revenue growth and operating margins look like?

Well, the confidence comes from the fact that we've executed well on what we committed to investors almost 2 years ago. At the beginning of 2019, coming out of a period of pretty significant investment across the entire business, whether it's across the different product groups or our infrastructure side, we felt that we were well positioned for good growth in over that '19 to '21 period. And we also felt that it was an opportunity for us to leverage that growth and operate more efficiently to drive margins up. And we described getting to roughly $4 billion of revenues in high 20s operating margins for -- by FY '21. And when you look at guidance that we gave back in December, we are very much on track to that or, in fact, better ahead of that goal based on the results. And so confidence really starts with the fact that we've executed well and been able to deliver and balance very good growth and margin expansion. And as we evaluated where we are now with the product portfolio and the products that we're launching, where we are from a competitive perspective, we do feel that there's a good opportunity to continue to drive good growth, while further expanding margins. The mix of it, it's going to be fairly balanced. It's not going to come all from growth or all from margin expansion. I think that the -- there's an opportunity for us to see a step-up both in -- on both sides.

Okay. Okay. Maybe changing subjects a little bit to your SIG business. We -- my colleague hosted a DevSecOps panel earlier today. But specifically for that SolarWinds hack, is that a tailwind for the SIG business? And then how would that flow through to sales cycles?

Certainly the -- it's unfortunate, but those sort of events, whether it's the SolarWinds event or in the past where you've seen Equifax get hacked or the various Target hacks, over time, those events really make the security vulnerability, particularly from software, very visible and tangible to Boards and to the C-level execs. I think that the folks who are dealing with it on a daily -- day-to-day basis, whether that's the Directors of Software Development or Security Engineering or the CSOs, they're well aware of it. But these events do make the risk very tangible to the executives. From our perspective, it helps broadly. It helps in terms of driving engagement with our security consulting business because when those things happen, our customers and potential customers want some help coming in to assess in a very holistic way what their security risk is. In addition to that, it certainly pulls through on the software tool side. And typically, we'll see it engage across over time. There's going to be immediate effect because people are immediately reacting to it. And then you also see it come in over time because as they're trying to assess, as they're trying to get a hold on the situation and consider how best to approach it, we'll see them engage more on the consulting side and also start to buy some software. The ones who are very thoughtful about it, do take a very holistic approach and how they're solving it. So typically, we'll see the engagement potentially accelerate over time.

Okay. And so if it's fair to kind of level set it. If there is any type of industry tailwind, there's no reason why Synopsys couldn't see it also?

Certainly, certainly. We've seen that in the past, and I would expect that to repeat itself.

Okay. Because your software integrity business is recovering, you did talk about a return to double-digit growth for that business. What drives it? And I guess, what are some benchmarks or flag posts that we can think about?

Ultimately, you're going to -- the key metrics that you're going to see are our revenue curve and margin expansion. And we're absolutely committed to that. We strongly believe that we'll get back on that path. We've been able to successfully build up a business of reasonably good scale. And it's a natural transition as we try to scale it up for the next level. This year is going to be -- you're not going to necessarily see the results immediately. You're going to see it progressively over time. But the bookings for that business got off to a very good start. And more importantly, the way that we achieve those results, the quality of the approach in terms of the discipline, the visibility, the consistency of their forecast and the fact that the results are strong across the different product categories and the different geographies is really good indicator of the progress. And I like the way that the new Chairman for that business who's only been on Board for 2 quarters now, I like the way that he's taking a very disciplined approach to that business. He has a strong background in the industry. He's very familiar with the space and the competition. So he's bringing deep domain knowledge. But what we're benefiting from in the very immediate term is a very disciplined approach to how we go to market.

Okay. So is it fair to think that you get double-digit bookings growth into this year, and then that will drive the acceleration in revenue next year?

The plan and what we communicated back in December was we do expect to grow bookings in that 15% to 20% for the full year. And in fact, the bookings momentum per our plan and we're off to get started in Q1 should be improving over time. And given the time based business model, you're going to see that slowly ramp-up in revenues. So by the time we exit the year and we execute to our bookings plan, we should be exiting the year at double-digits growth rate. And -- but for the full year, probably it will be in the single-digit range. But if we execute the way that I believe we're capable of, and so far, we're off to a good start, we should be able to get that business back on to the growth rates that we've communicated in the past, which is a 15% to 20% sustainable growth model.

Okay. And I did have several questions on China. I know this is a hot topic as expected. And if you do have questions, please feel free to ask them in the chat box below, but China has been strong for a couple of years now. It actually seems to be accelerating. At face value, it looks like it's being driven by IP and hardware. But I guess, what gives you continued confidence that it's just not [ pulling? ]

Well, our confidence is based on the fact, it's more than just IP and hardware, that it's very broad-based, right? So if you widen the lens and we started reporting China as a separate segment back in Q4 and the full year disclosure because it grew beyond 10% of total revenues. Now it's been growing very well. And the growth over the last several years has been driven by a very balanced mix of products. And despite the Entity List restrictions that we saw and are still dealing with today, we've been able to diversify our customer base and maintain a very healthy growth rate despite the headwind. And to date, when we -- when I look back over the last couple of years with the Entity restrictions in effect, we haven't seen any unusual profile in the customer behavior. And the fact that it's -- we've been able to maintain it and maintain that growth rate shows you the breadth and the health of the business that we're managing there.

Okay. And staying on this topic, there was another EDA company that reported last night. Like you, they saw some really robust acceleration in China. But their confidence level is a little bit different than yours. I guess, what's -- I guess what -- you kind of already talked about it, but maybe what are you seeing? Is it just being more broad-based? Or I guess, how would you describe kind of what Synopsys is seeing?

In China, specifically, in terms of visibility?

Yes.

Yes. Well, the market is healthy. The market there is healthy. There is a strong investment. The level of investments are high. The number of customers that we're seeing, there seems to be new entrants developing to fill the void of customers that are facing the restrictions of Entity List. And the traction that we are getting with those customer engagements have been really healthy on all different elements. So it's been really strong demand on EDA. Hardwares, we've seen really good healthy demand for hardware. And our IP business is well suited for that market with the large numbers of design houses in China right now. And the fact that there are newer entrants, they are not necessarily locked into a traditional way of designing chip. They don't have massive amounts of resources that they have to feed and that they have to -- they're not locked into designing everything themselves. And so they're certainly open to buy more IP if it accelerates their time to market or if it allows them to leverage their business model and really target those limited resources on the areas where they can differentiate. And so we're seeing strong demand for IP. Strong demands for, frankly, all of our products. And the fact that we've been able to respond well to -- and grow in China despite the Entity List, should give you a sense of why we're -- we continue to be confident. Now I would take that confidence for a lack of concern or a lack of focus. And obviously, we're very mindful. It's a very dynamic market. And there's a lot going on, and the tension between the U.S. and China certainly creates a headwind for us. But we've shown the ability to balance it very well. And I think that the business model, which allows us time to adapt to any new event, and also just the fact that we've been able to adjust with each subsequent event gives me pretty good confidence that we should be able to manage good growth in China over the long term.