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

Okay. Well, thank you, everybody. This is a D.A. Davidson fireside chat. And today, we are lucky enough to have Trac Pham, the CFO of Synopsys. And it looks like just the 2 of us on screen today, so we will just jump right in. So Trac, thanks for being here. And I just want to start out with the big news, the $5 billion declaration for 2023, but perhaps more importantly, the double-digit growth -- long-term growth rate, which for years and years aspiration was high single digits, maybe get earnings in the low double digits, but now to have revenue growth in the double digits.

Maybe just talk a little bit about that. What's changed? What are the big drivers behind that?

Well, first, it's great to connect with you, Tom. Always good to see you. And you're jumping right into this headline. Because you're not bearing the lead here. You know what, Tom, the confidence is based on a few things. One, the market is definitely healthy. That helps. And more importantly, it's where we are with our portfolio and the position we have with our technology. And that combined with how well we've been executing over the last couple of years, particularly with the headwind of the pandemic, the headwind of the entity list just highlight how strong this company is and this team is with regards to execution. And so that's a pretty potent combination between a healthy market combined with us going to market with a probably the best portfolio I've ever seen us have during my tenure or during my career at Synopsys. And we're executing well, but the conversations that we're having internally is really all about how do we get even better and drive as much success out of the available opportunity that we have in front of us. So for sure, when we look at the results and we think about what's possible on balance over the last couple of years, we felt that we -- confident in being raised long-term revenue growth model from high single digits to double digits. And mathematically, that would get us to cross $5 billion by FY '23.

Okay. So when you look at that increase to double digits though, is it the end market strength? Or is it your product portfolio enables you to gain share and then maybe look at the 3 different segments of your business? And is there a particular segment that is behind that big growth?

Short answer is really strong growth across the entire business from EDA, IP to Software Integrity. And secondly, it's the confidence in the portfolio that we have and the -- our ability to execute, combined with the business model that really drives a lot of that. The market will ebb and flow over time. It happens to be a good market, and we do think it can continue. But what we have shown, and you're familiar with the company for a long term. What we've shown as a company is that our business model and execution really makes the exogenous events seem manageable, right? So if you go back through time, the pandemic last year, the global recession, the tech bubble, 9/11, all those events are -- have been very manageable. Now it hasn't been easy, but very manageable.

Yes. And I remember back, looking at these companies 10, 12 years ago, and we were talking about 3%, 4% EDA growth rates. So we've come a long way in the last decade for sure.

We've definitely come a long way.

Yes. So you mentioned COVID. That's still front and foremost on a lot of investors' minds. What are you seeing as far as impacts on your business or maybe even your customers' business through the supply chain?

It touches a number of different areas, right? So it hasn't affected their design activity. If anything the design activity continues to keep pace or accelerate in certain areas with certain customers. Secondly, I think our customers as well as we have learned to work effectively under the constraints. I -- from a supply chain perspective, it's been challenging because it's been challenging. But so far, we've managed it very well, and it hasn't affected our ability to deliver to our customers or affected our results. But that said, lead times are extending. And the lead times are extending and we're working with our customers on that, and we continue to be very -- we continue to spend a lot of time on the supply chain, specifically around hardware to ensure that it's effective. As from the things that we really are spending a lot of energy around, a lot of it is how to manage a transition back to the office and doing that because that's an important part of being productive, being healthy. Just finding a way back to some sense of normal. And the other element is how to keep our team healthy, right mentally and physically healthy throughout this because it's a strain. And it's a strain that they're carrying not only from work, but the strain that they're carrying from what they're dealing from life in their -- with our families and their life situation. So there's a lot of dimensions that we're focused on. It's not just one. But right now, a lot of energy is really around the employee health and burn out, maintaining and showing that burnout is the case and just making sure that we're able to continue to be productive and execute against our plan.

So what is your return to the office plan at this point? And what does the company look like going forward on a work-from-home or a hybrid basis?

For the most part, we've -- the vast majority of the company is still working remotely. We've opened up some offices as the circumstances around those locations permit. Some areas have a higher ratio of going back, the higher ratio of folks being in the office. But in each area, we're looking at the health metrics. And we look at the mix of employees functionally that would be best served to be in the office to support their work and to support our customers. And so this is what's consuming a lot of time. It's not a black and white. It's not a binary decision back at the office or not, it really is optimizing on a case-by-case and geography-by-geography basis.

That makes sense.

But for another support, I think we're graduate coming back, and those who are back in the office are pretty excited to have that option.

Yes. I agree. Okay. You mentioned that from a supply chain point of view, the hardware group is the most impacted, that makes sense. And the lead times were stretched out a bit. How -- what are lead times today versus where they were? And is that going to impact -- well, how long do you think these supply issues are going to be around and impact your -- out your view?

I don't want to get into specifics of lead time for -- in this public forum. I would say that we're managing that really well with our customers. I think they recognize the challenge. But so far, we've been able to help them maintain their design schedules and meet their needs. And from a planning perspective, we haven't seen an impact on our results so far. Our guidance reflects our ability to manage that. And we'll give you more clarity as far as the '22 numbers when we guide in December. But we're working really hard to ensure that it doesn't affect our ability to capture the growth and the market opportunity right now.

Okay. Great. And then I was going to ask you about 3 recent acquisitions, then Lisa reminded me that they were not material to your results. But then maybe just a broader question about M&A in general. You do a lot of little acquisitions, technology tuck-ins, if you will. What is your view of acquisitions going forward? And what is the big picture plan to have acquisitions augment the core business

I'll talk in conceptual returns because you're right in terms of a reminder, these are small acquisitions that really don't have a material impact on the results. We're in a great position. So let me step back before I talk about acquisitions. We're in a great position with the assets that we have and the portfolio that we have. So we're able to make decisions from a position of strength rather from position of weakness and reacting to the market or reacting to competitive pressure. The acquisition we have made for the most part of our -- broadly speaking, are really complementing and amplifying our strengths, whether that's in IP, EDA or even software integrity. We've positioned ourselves so that when we make these acquisitions, they are -- we're in a position to negotiate a good price that makes sense strategically, that makes sense in terms of return. And they are amplifying the position rather than fulfilling weakness. For the most part, I can't remember or think of an acquisition where we were reacting to something or dynamic, and that's part of having a business model that gives us the longer-term horizon to think beyond just the quarter and the year. And secondly, it's a management-in-green behavior that we take advantage of that business model, right? It's one thing to have the business model. But if you don't really take advantage of that longer horizon to think strategically about where things might be headed and plan accordingly. We are -- we will be suboptimum, right? So for the most part, the acquisitions fit within that framework.

Okay. And do you have kind of a big picture plan as to how much you want to set aside for acquisitions versus maybe share repurchases versus internal development programs?

Not in a fixed way, I would say that we continue to invest significantly in organic investments because that's -- that has been core to our recipe for success. So that will continue to be a fundamental element. The key is being very disciplined, being very focused and making sure that we're investing in the areas that will give us the best return, right? And so that's how we've been able to drive margins up over the last few years significantly while also investing for growth and put ourselves in a position to raise the long-term growth profile. Secondly, from a buyback and M&A perspective, we are really balanced in terms of making sure that we return cash to investors with buying backs and doing that fairly consistently and fairly methodically and thoughtfully but keeping the flexibility so that if there's an opportunity to do acquisitions, like I said, giving us the optionality that we're not operating from a position of weakness, making sure that we have plans that have enough latitude and flexibility that we can largely manage share dilution but not be so fixed that we per sells in the corner and not be able to make more organic investments or make an acquisition as the opportunity comes up because M&A. It's not just us in that equation, right? We may want to buy but the target has to be interested in selling. And it's that timing and that opportunity hasn't matched up from both sides. So it's about managing the balance. But -- if you look at our history over the last few years, we spent billions on buybacks, and we've done a really a job with share repurchases and managing dilution. And we've been able to fund a fairly healthy M&A activity.

Okay. That makes sense. And then some of the key trends you're seeing across EDA today are integrating AI and perhaps more importantly, machine learning into EDA tools. What are you doing at Synopsys on this front? And where do you see that going?

In a nontechnical way, it is, one, I think it's -- you're going to see more of it and you're going to hear more of it from us over the coming years. I think we have a pretty significant lead from AI built into design capabilities from a competitive position, right? And as just us saying that, it's the industry analysts and our customers saying that and given the results that they've achieved with our products. So broadly speaking, I think you're going to hear more from us on this topic over the years and the portfolio will broad in. From an investment perspective, it's clearly a pillar of -- a pillar is a priority for us. And this is where I say that this is where it goes back to my early point, making sure that we're really critical in terms of our focus because this is an opportunity for us to widen our lead and we want to make sure that we can deliver margin improvements by making sure while also being able to fund these types of investments.

Okay. Yes, we've heard that machine learning and as kind of an umbrella above the tools themselves enable a particular engineer to do more than one project at a time. And it wasn't too long ago, we used to talk about the number of engineers, the number of seats as a big driver of business. And now it seems like there's an acceleration of what a single seat can do on how many of your tools they can use over time. So it seems like as you get more of the AI machine learning tools out there, it's just going to accelerate the demand for your other tools?

You're right. You're right, Tom. And there's also a second -- there's a second virtuous cycle element to it, which is that it pulls other products, but if we can make those engineers more productive, it enables our customers to do more, right? So that is if they're going to take their productivity badge and they sit on it. They're going to take that pretty good advantage and get them to do more and different stuff, right? So it is actually an accelerant to growth and the opportunity for us as opposed to just from a product perspective, it's going to pull through demand for the products for EDA tools for IP because our customers would want to do more. No one is telling us if I'm going to take my productivity gains and drop to the bottom line. I take my productivity gains and sit on it. They're going to do the same thing we're doing is they're going to take those productivity gains and try to widen their lead with a competitive advantage. And so we're seeing just a better, healthier, more robust demand in general as a result of that. So it really does create a virtuous cycle for a -- virtuous benefit for us along.

It's interesting. You think that producing a more productive tool would shorten or reduce your market size, but as we've seen over the last probably decade, the more productive your tools are, the more your customers demand more tools.

Yes, it just gets harder, right? If you think about it, the chip design process, right, the chip manufacturing process, it's gotten harder. They want to do it faster, it's more complex and there's more functionality that are trying to bake in, so this -- they're trying to maximize across so many dimensions. So tools or capabilities or support that we can provide to our customers that allows them to expand that curve as opposed to optimizing across these different things is really broadening and increasing the market opportunity for us.

Yes. Okay. And then another big trend we've seen over the last few quarters is just this emerging foundry war. You got TSMC, now Intel and Samsung, all with these multiyear plans to ramp up the leading edge and also augment with some trailing edge. At what point do you think that extra capacity gets into your customer base, the fabulous guys makes them believe that they all have access to this leading edge capacity? And when do you think you'll start to see increased design activity based on their belief that they'll get access to this leading edge capacity that was historically only been from top few players.

I think in general, that's -- you characterized it the right way. I agree with the way you're characterizing it, right, which is that it's definitely going to be a tailwind for us, right? So more capacity, more opportunities. And when we think about the -- when we think about the leisure going forward, right, the pluses and minuses, the tailwinds, the headwinds and how it lines up. That's one example. AI is an example, new customers, new applications, those are -- new verticals, right? Those are examples of opportunities that we think are going to keep the market very healthy and they play to our strengths. They play to the portfolio they have and they play to our capabilities. And so anything that increases design activity, anything that increases demand for support services or IP because they want to get the market faster is definitely going to be good. Now will they all line up on the plus side of the ledger at all time? Not necessarily, but there's definitely a lot of pluses that are playing out now, and then we think will continue to play out over for next few years.

Okay. Great. And then maybe moving over to this, the markets themselves. Let's start with the IP market. This has been a good market for you for a decade now. You've become the largest or second biggest player, depending on how you characterize the space. How do you see that going forward. And the fact that IP enables the customer base to go to market faster, I would assume that's becoming even more important as we get more start-ups just around the world getting into the chip making process.

I think it's just easier to agree with everything you said, yes. The IP has been a great business for us. We are incredibly optimistic. And more importantly, we're really confident in our ability to continue to do well there. And it's similar to what we were talking about with AI and the new products that we have that's creating that increased demand. IP is that way too because if you look at the semi IP market, arms are the largest and they're focused on processors. And then near in terms of scope, but really strong in terms of processes, then there's us and you look at the breadth of the IP capabilities that we have, we have interfaces, we have processors. We have memory blocks. The breadth of IP titles that we have is unmatched. And that lead continues to expand every day because we continue to invest. And it is self-reinforcing because as we continue to invest and broaden the portfolio and increase the capabilities where there's no edge or new capabilities, it makes it easier for our customers to come to us to buy more. Why? Because it's simple to -- for nontechnical folks to describe, hey, just bought IP blocks from you, it's easy for me as the CFO describe it. But if I'm the Head of Design. And I'm accountable for getting this chip out of a certain time with certain capabilities and have to outsource and be dependent on Synopsis? That's a hard decision. And we make it easier for them because they know we will deliver on time, on spec and in the price that they're looking for with the -- with all those things. And so it's -- the more you do then the -- the more we do that, it just reinforces their comfort in terms of buying more from us. Because going back to my earlier point, it's harder and harder to design. It's hard and hard to get these chips out on the time frame with the functional capabilities that they're looking for.

So how much of that business is wrapped up in more traditional design versus kind of a royalty stream on a per unit basis for your customers?

We have a royalty stream in that business, but that -- our business is less royalty-based, right, than arm, for example. But it's a healthy business, growing really well, very profitable, directionally less profitable software, but it's something we will continue to invest into because we've got double leverage, we'll have an opportunity to continue to drive good growth while simultaneously improving margins over time.

Okay. Well, we're quickly coming up to the end of it here. So I wanted to first sneak in the old modeled margin question. As you look at the 3 components of your business, and the new call for the 10% growth. I mean how do you see margins progression -- progressing over the next couple of years? And on a segment basis, how does that ebb and flow work?

Yes. We're going to -- you're going to see margin improvements across all the business lines, right? And across all the business lines and particularly across the 2 segments, the semi and the Software Integrity side. For us to continue to drive margin improvements while investing, it's going to have to be pretty balance across all the groups. What I would remind you is that we're a $4 billion company and Software Integrity is only 10% of the company, right? So they can't drive and they can't drive the overall margin growth. They're going to contribute to it. But for us to improve margins at the enterprise level, everyone has contributed. But Software Integrity will certainly do their part.

Okay. Well, we're coming at the end of the time. I want to really thank you, Trac. I enjoyed the conversation today and look forward to many more years of success of Synopsis.

Thank you, Tom. It's great to see you again. I'm glad we had a chance to catch up on the business.

Great. And thank you, everybody, for joining us today.

Bye.