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

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This is John McPeake. I am the senior software analyst here at Rosenblatt Securities or one of the two, I should say. And we're really lucky to have Trac Pham as well as Lisa Ewbank, who's IR. Trac is the CFO of Synopsys. He has been at Synopsys for 7 years. I'm sorry. He has been CFO for 7 years, and he has been at Synopsys for 15 years. He's responsible not only for finance, but information technology, operations and strategy and corporate business development. I have a buy rating on Synopsys. They are benefiting from more than Moore's laws, what I'm calling it, which is the proliferation of digital solutions all the way from the metal to the software. And they are one of, if not the key enabler of those types of solutions. And we recently raised our target for the third time since launching. So we're really happy with Synopsys. Trac is going to talk about primarily the operational side of the company, although we'll field and I will ask some moderately technical questions as well. And hopefully, you guys will think of some questions yourself. You can either unmute or you can e-mail me at tmt@rblt.com. So why don't we just kick it off right there? Trac, great to have you.

Hey, John. It's our first time at the conference. So really glad to participate and see you again.

Me, too. And so let's just start with the good stuff. So on top of your guidance raise for the year of $145 million, you raised your long-term revenue growth expectations for the company from high single-digit to low double-digit. And it sounds like a small increase, but you guys are conservatively run and guided company. So to my ear, that's a big thing. And maybe you can just talk a little bit about what gave you guys the confidence to go out and to raise the number like that?

Well, let me say that we take our external commitments. We take our commitments very seriously. So you're right. While it may sound small, to raise it, the long-term growth prospects from high single digits to double digits, it does say a lot about our confidence in the business and what we're seeing in the business today and our confidence in our ability to execute against that to make that kind of commitment. Really, it's a continuation of what we've seen over the last several years. We are -- we've been doing very well financially. We're executing well, posting very good growth, improving margins. Over the last 4 years, we've increased margins on the order of 8 points. This year, after 3 quarters, the business and the momentum in the business continues to be very strong. We're seeing strength across all business lines, all geographies and really across the broad customer base. So this year, we're on track to deliver at the midpoint roughly $4.2 billion of revenues. That's mid-teens growth on top line, while raising operating margins by over 200 basis points. So business is great. And how does that translate to the future? Really, the results that we're seeing over the last couple of years is really a function of the investments we've made in the business broadly across the last 5-plus years and our ability to commercialize that and really capture that growth. We're just seeing it -- we're seeing very good momentum in that. And we feel confident we should be able to execute that kind of growth over the next couple of years. That can drive us past $5 billion in '23 and also basically deliver top line growth in a double-digit range.

As you're even bigger, which is impressive in and of itself versus deceleration at size. And you did say all business lines, all geographies, EDA. Core EDA is obviously an important part of the business. It's -- let's just call it, 2/3, 3/4, roughly. And what can you point to or what is business like in that part of your revenue stream right now in terms of renewals, in terms of components added to the software packages that customers are buying? Could you talk a little bit about that, what that's like?

The highest level, let me generalize it, and I'd give you kind of a broader context. We have great products in a healthy market, right? That's a great combination, right? So the -- and the products that we're bringing to market and the reactions and the results that we're delivering to our customers, and therefore, the engagement that we have with our customers, we're seeing that benefit both in the near term with regards to renewals that were -- that are being completed. And we're seeing that in the medium term in terms of these products, many of these new products being in the early stages of their launch and so not yet fully factored into the renewals. And then longer term, we're seeing really good traction from the technology in terms of -- and I'll highlight DSO.ai. That's an example of a new product that we launched 1.5 years ago that is delivering extremely strong results to our customers. And so that's affecting both near-term renewals because that -- near-term renewals because they're seeing the benefit of that. But it also bodes well for the long-term prospects. And so the pace of the new products that we're launching, the pace of results that we're getting from those new products really gives us confidence that we can deliver strong results over a multiyear period.

And DSO.ai, your theme of the conference, AI/ML-enabled EDA suite. Could you talk about how that's changing the customer conversations right now?

Yes. I would not do it justice from a technology perspective. But I'll tell you, from a business perspective and from a commercial perspective, it is, in general, just great for the business because it is increasing demand for our products across the board, right? So that it -- not only is it delivering results, but those results in production and in specific projects reinforces our leadership position in the market. And this is not just us talking about the results, but it's our customers highlighting the results. And it's our -- the industry analysts that are highlighting the results that our customers are seeing on this. And I think if you read the industry analysts and their feedback and where we are in this, we -- this is not a marginal increase. This is a significant step function increase in the capabilities. And that capability is creating so much productivity for the customer that they're able to do more in shorter periods of time. And therefore, just they're able to put more resources on their projects, on their designs, which effectively draws more -- pulls more demand for the rest of the products. And so it is not just the tip of the spear, but really it pulls the rest of the products and highlights the strength of the rest of the portfolio.

So if I were to think about it as attach per engineer, dollar attach per engineer, as you try to -- as the customers try to get more productive, and our semi team reports that there is a shortage of chip designers in the industry. Is it safe to say that the dollar attach per engineer has increased partly at least due to DSO.ai and maybe some other innovations that you guys...

Directionally, yes. But I would say we're still in the early stages. We're 1.5 years into this, right? And think about our customer base, they're really on a 3-year renewal cycle. So there's only a small portion of customers that are actually using it that are considering it for production use. And it's going to take time for it to ramp up. But it's -- so far, the indications are incredibly healthy. But you're on to a good point, which is that, that product and its capability allows or creates a significant amount of leverage from a design perspective for our customers, right? So they're short on engineers. This really allows it to address some of those limitations. But imagine that they're able to hire the engineers that they want, they're able to fund the projects that they want, it just increases the overall demand because they're going to apply the DSO.ai. But that in itself doesn't stop there, right? They're going to need other products within that portfolio to accelerate their time to market or to really complete more projects. And so I love DSO.ai, not only for the technology capability, but for the fact that it really does highlight the strength of the business over different phases of that life cycle, the customer's life cycle.

And similarly, what about Fusion Compiler? You do have a single data model across all of the tools now. That's, I think, been in the field a little longer. Maybe you could talk a little bit about that.

I'd still say the same thing. DSO.ai runs on Fusion Compiler, which in itself was a pretty significant step-up in terms of capability, right? That was an accelerant to how customers could design and delivering on the results that they can get with Fusion Compiler. You put DSO.ai, and you're looking at a multiplier effect on that product. And so all the things I've described about DSO.ai, very applicable to Fusion Compiler. And the benefit is that's farther along, and we're seeing more of an impact of that on the results. But still, the beauty of it is that there's still more room for it to impact the business.

Are there any subsegments or do you not think about it that way? Is that you want to think about it more as a suite? We have areas where you've been historically strong versus cadence. I mean, I don't know if there are any areas where you feel like you're taking share because of these products? Or I don't know.

I don't think of it in terms of hitting a sweet spot for certain customer segments. I -- to me, the new products and the new solutions are really -- creates a rising tide for all of our products, right? And as you -- as we look at the results over the last couple of years and where the growth is coming from, it's pretty broad-based. We're seeing it on the semi side, we're seeing on the system side with the hyperscalers, in particular. We're seeing it with customers in different geographies. We're seeing it at customer -- the large customers, new entrants. It's just very -- the benefit really hits across the board and not limited to a narrow segment of the market. And really, that's why when I think about these new products that are rolling out, where they are in their life cycle and the impact that they have in the business and so far, the broad-based benefit that they've had on our growth, that's a significant reason why we feel confident about raising the long-term model for the business.

Right. That makes sense. And of course, system companies have become a bigger percentage of revenues over time. Again, I think that's kind of along that theme of Moore's -- more than Moore, where if Apple wants to have a competitive or the most competitive product, they go all the way from the metal up to the application. They don't just take a chip off-the-shelf from someone. Similarly for the hyperscalers, which now have very large design teams internally to design a chip just to do search better or AI/ML better. What does that market subsegment look right now? What does it look like right now?

In what -- I mean, it's obviously a good contributor to growth for us. It plays to our strength. That market segment, in particular, plays to our strength because they are much more open to thinking about how they get to market with their design, right? And given their history where they're coming from, they don't have hundreds or thousands of design engineers. And so what they do have is smarts and money. And they're willing to approach it from how do I use my smarts and my money in a way that creates the best outcome, right? Best product, it gets me to market the fastest. And so they'll consider buying, obviously, the tool because they're doing very advanced designs. But also they're very open to IP building works, right? And their ability to focus in on the areas of the design where they can differentiate. They are much more open and willing to buy IP blocks from us. And then the other part is they are very open to design services, the pro service to -- engagement that allows us to put that wrapper around the business such that us working with them, us leveraging our IP and our tools to get them the outcome, the best outcome they can get in the time frame that they want. The other thing that's differentiated is also, given -- you talk about the systems companies and the integration between the hardware and software. You've seen that model with Apple on display. You're seeing more of it with Samsung in terms of creating the leverage and the operating leverage and the user leverage, try having both the hardware and software melded together. When you talk about a system and you've got a lot of software applications running on and now you're looking at security vulnerabilities. And that's where the software integrity business also plays into that segment, that market segment very well. I don't know if that's where -- that's what you're looking for, but that's at least a high level how we're seeing the market.

Yes, that makes sense. And while you're on software integrity, you guys did raise the guidance there. Can you talk a little bit about the drivers of getting to double digit faster than expected?

It's just really good execution, John. The market continues to be really healthy. And that's always the -- that was always a very encouraging sign. The market was healthy that what we set out 7 years ago to build out this business and target this opportunity, we had conviction in it. And it's played out very well. Two, we felt very confident about the technology, and that continues to be a differentiator for us. And that's not just, again, not us describing it, but really, you look at the industry analysts, Gartner, Forrester and the like, they continue to highlight us as leaders in both execution and strategy and technology strategy. The piece that was missing along that 3-legged stool is really the execution. We're going to -- we went through the natural evolution of the market kind of growth. Growth wasn't where we wanted to be in. So we had to really pause and relook at how we're executing in a healthy market with great technology. And the new leader that we've had in place now for just over a year came in and was very focused on executing on very specific priorities around targeted go-to-market changes, channel changes, focusing the product and focusing their energy and development on very specific areas of the product. And those changes, we were seeing good traction on those changes. But for us, 1 quarter or 2 quarters doesn't really make -- doesn't mean the momentum is back. But really, 3 quarters in, and when we look at the outlook for Q4, it's clearly, we're on the right path for that. And at this point, we feel confident in our ability to actually execute to a full year growth of approaching double digits rather than what we had described at the beginning of the year, which was exiting the year double digits. And we're doing this, and the team is doing this while maintaining margins relatively flat year-over-year, which is pretty remarkable. It says a lot about the team's discipline, right, that we weren't throwing money on it. We were willing to, but we weren't throwing money at the problem to fix it, that we're being very thoughtful, very precise and very specific about the changes that we need to make. So that certainly bodes well in terms of our ability and our commitment to continue to bring that back to a 15% to 20% growth business while driving margins up overtime.

And any verticals leading the way there, automotive or enterprise?

Historically, the verticals that we've been -- that we've done well and that we continue to see really good results from, we've highlighted the financial services, obviously, given the importance of security. Automotive has been a good area for us. A&D is a good place. And then just broadly, we continue to do well within the enterprise, and that's reflected in the -- in enterprise in specific -- broadly speaking, when I talk about enterprise, we're seeing companies that are -- we're getting really good traction with the companies that are on the leading edge of building security into their methodology, right? That those who are being very strategic about how they approach security and thoughtful about a road map over the next 3 to 5 years of making sure that security is an integral part of how they develop software. We're getting really good traction with those customers in particular. And that highlights the strategy that we have and the portfolio and the solutions that we offer. And keep in mind, I haven't emphasized it, but keep in mind, we're unique in this space, right? It's a highly fragmented, nascent market with a lot of point tool solutions. And in this competitive environment, we have both a broad product offering combined with security consulting. And that's really an unusual combination in this space.

Yes. That makes sense. It seems like secure and stable systems are not a given in a lot of enterprises lately. So what about the pricing environment in your core business? How has that been?

It's a competitive environment. But what is different -- it remains a competitive environment, and our competitors have good products. What may be different is that historically, there were other smaller companies with very specific point tools available, that's changed over time. And also, our customers, I would say, have been much more disciplined about focusing their spend because today, the economic requirements and the technology requirements and the time-to-market requirements are such that they just don't have the luxury of spreading their resources across too many customers. And so I think, on one hand, you have fewer competitors. On the other hand, the competitors that remain are -- compete very aggressively. What is -- what works to our advantage and why we're able to deliver the growth that you've seen is the investments we made in the business, right, and the technologies and the solutions that we're bringing to market these days. When you are engaging in a negotiation and you have products that clearly provide differentiated results and very clear results to the customers, that certainly helps your ability to negotiate value for those products. Second thing that, I think, also works to our advantage is the fact that we have such a breath -- a breadth of product offerings, right? We have a full suite of EDA software tools. We have a market-leading position, technology-leading position in hardware. And we also have the broadest set of IP titles in the market. And so when you're going to a negotiation with value in the individual prospect, value from the breadth of solutions that you can provide to the customers and a customer who is facing a situation where they continue to have to get to market faster, they're working on more economic constraints, and they need to deliver even more complex solutions. That's a really compelling position to be in.

That's a nice lead into IP. You guys are second only to ARM. We'll see what happens to that company, where it ends up. What's the strategy in IP? Are you going to be acquisitive there, develop your own? Just maybe you could talk a little bit about that and how you see growth, the growth trajectory.

We'll give an update on the overall growth model for the company, and I will break down where we see the different product lines growing over time. So that -- we'll provide that commentary in December. But I'll give you the context. Historically, we've talked about IP as a double-digit -- low double-digit growth business. It's been a little bit better than that over the last few years. And really, it's -- that's a reflection of the capabilities that we're offering. Not only are we offering -- do we offer the broadest set of IP. But in many cases, our offerings are on the leading edge of technology. And in some cases, they're either capabilities that our customers can't do or aren't willing to take the risk to do. And that's where the breadth of capabilities come in play, that we're able to -- the breadth of the product offerings gives us the scale and the financial scale and the breadth and having the technical capabilities to do some of these advanced designs in IP. And so -- and that, in itself, is a virtuous cycle because when you're doing some of these advanced IP designs and you're offering to the customers, you're going to get some leading-edge customers that will buy that, and in fact, fund that development, which lens allows us to increase our breadth that allows us to invest further. So the results that you're seeing in this business is really this virtuous cycle of scale, creating more scale and creating more opportunities. And growth in this space really is going to be driven by complexity. Similar to EDA, it's going to be driven by complexity as things get more complex. Customers are looking to get to market faster. They're looking to derisk their designs and buying IP blocks from a vendor who meets the commitments consistently. I think that helps. Two, each time there is a change in technology standards, that's a driver of growth. New verticals, automotive is a growth driver of that. New types of customers, the hyperscalers, for example. I mentioned that earlier as a contributor to growth. And there's so many different layers and tailwinds this business that's driving very good growth and a strong outlook for IP.

And you mentioned complexity. Verification of all that complexity, of course, is getting harder and harder. You get more software. You get more IP. You have packaging maybe involved now as people try to optimize tile, chiplets and tiles and whatnot. Talk a little bit about hardware verification, how you see that growing going forward? And then -- go and then...