Synopsys, Inc. (SNPS) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for Fourth Quarter and Fiscal Year 2020. [Operator Instructions] Today's call will last one hour. Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Rich. Good afternoon, everyone. Hosting the call today are Aart de Geus, Chairman and Co-CEO of Synopsys; and Trac Pham, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement and 8-K that we released earlier today. All of these items, plus the most recent investor presentation are available on our website at Synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call. Finally, we are all again participating from different locations today, so please forgive any delays or technology glitches or awkward hand-off in the Q&A session that occur as a result. And with that I will turn the call over to Aart de Geus.

Good afternoon. I'm pleased to report another outstanding year for Synopsys. Despite unprecedented macro challenges, we built considerable financial, technology and customer momentum. We substantially exceeded our original plan with business strengthening through the year. We grew revenue nearly 10% to $3.685 billion, led by EDA software and IP, expanded non-GAAP operating margin by 3 percentage points, delivered more than 20% non-GAAP earnings growth and record cash flow of $991 million. Contributing to these very positive results were the new EDA and IP products we've introduced over the past few years. We expect to further build on this momentum with several groundbreaking technologies that we launched this year. In addition, our re-energized Software Integrity business is on its way to scaling to the next level and re-accelerating growth. About two years ago, we communicated a three-year financial plan to drive double-digit non-GAAP earnings growth through a combination of topline growth and operating margin expansion, to the high '20s by 2021. We achieved our initial ops margin target a year early and have consistently delivered high single-digit revenue growth. As we enter 2021, we expect to surpass $4 billion in revenue with non-GAAP operating margins of 29% to 30%, low to mid-teens non-GAAP EPS growth and more than $1 billion in operating cash flow. Beyond 2021, we will raise our ambition to a rule of 45 as we drive revenue growth and further operating margin expansion. Trac will discuss the financials in more detail. Meanwhile, design activity remains strong across the board. Opportunities in key end markets such as AI and machine learning, high performance computing and cloud, 5G and automotive are massive as all drive increasing adoption of our advanced solutions at a time that Synopsys enjoys particularly strong differentiation. This includes ambitious companies such as AI start-ups and cloud hyperscalers as they position themselves to leverage big data generated by the billions of cloud connected IoT devices. They need a trusted partner who not only has the most advanced high-impact products today but complete solutions capable of scaling well beyond the traditional demands of Moore's Law into the powerful intersection of hardware and software. Let me provide some highlights. In EDA, our unrelenting innovation push in digital design has strengthened our longstanding market leadership. More than 95% of advanced designs today rely on our Fusion Design Platform and over the past year, revenue growth has accelerated. In particular, we continue to see strong adoption momentum for our Fusion Compiler product, the industry's premier digital design solution. Fusion Compiler significantly exceeded its orders targets increasing 140% in 2020. The progression from technical benchmarks to competitive wins, to growing orders and production proliferation is trending even better than we anticipated. We've seen widespread adoption from customers ranging from the largest global communications processor and graphics firms to high-impact cloud hyperscalers to influential system houses and AI start-ups. For our customers, production deployment yielded excellent results as evidenced by five times the number of tape-outs in FY20 compared to last year and for us a rapidly growing pipeline across many market segments. The Fusion technology foundation also dovetails exceptionally well with the challenges inherent in the next wave of chip and system design. Specifically, Synopsys is addressing new term opportunities in AI-driven design flows, in 3D multi-chip design and in the new area of silicon lifecycle management. Let me start with our DSO.ai product, where DSO stands for Design Space Optimization. Our combination of Fusion and AI learns and automatically adjusts and optimizes design exploration for both better results and faster time to market. With this, design teams can also tackle larger blocks and more projects, thus focusing on more value-added tasks. Even in this early stage, the power and potential of DSO.ai is being widely recognized as it received a 2020 World Electronics Achievement Award for innovative product of the year. Next is our extremely timely 3DIC Compiler solution. This disruptive technology that enables the design and analysis of multiple die together on a chip. At the very moment that system architects are augmenting traditional chip complexity by connecting multiple chips very tightly together, our 3DIC product provides far better performance and capacity than conventional disaggregated chip and package approaches. Finally, we launched the industry's first silicon lifecycle management platform just last month. On chip sensors and monitors feed into data analytics engine integrated with leading test and yield management. This provides visibility into critical performance, reliability, and security issues for the entirety of chip's lifespan from design to in-field operation. Early customer interest in all of these new solutions is very high. Turning to custom design, momentum for our Custom Compiler product Accelerated with more than 30 new logos and 15 plus full flow competitive displacements during the year. This resulted in over 50% revenue growth. Having seen the power of our innovations targeting advanced FinFET designs, a number of the highest impact semiconductor and systems companies are putting their trust in us. Let me now move to our Verification Continuum Platform, which combines market leading anchor products into a seamless, high efficiency solution with a complexity increase of intersecting chip systems and software, the need for verification continues to rise. Our number one market share position in both software and hardware puts us at the center of this wave as we continue to innovate aggressively in state-of-the-art native integration of the fastest engines. Contributing to our solid growth on the software side, our influential high profile customers ranging from hyperscalers to AI to automotive and mobile. Our hardware-based verification products are totally focused on unmatched speed, highest capacity, lowest cost of ownership and lowest power consumption for high complexity designs. Building on our record year in 2019, in 2020 we again expanded our customer base, adding more than 50 new customers and well over 100 repeat orders. This includes major expansions at some of the world's largest semiconductor and systems companies. Now to IP, where strong market demand for our rich portfolio drove another record year, growing approximately 20% to more than $900 million in revenue. Our strength is broad based across all regions and key market segments particularly high performance compute, cloud and networking, AI and automotive. In automotive, momentum continued in 2020 as we have achieved more than 400 wins on advanced processes across more than 30 major semiconductor companies. An area of particular automotive strength is our ARC processor. This year we extended our lead in automotive qualified title by delivering the industry's first processor certified for full ISO26262 Automotive Safety Integrity Level D compliance. We also broadened our portfolio introducing DSP, high-performance embedded vision and a 64-bit processor family. As the undisputed leader in interface IP, we continue to see very strong adoption of generation upon generation of important titles including PCI Express, memory interfaces and MIPI which had an exceptional year. In USB, we extended our leadership by introducing the industry's first USB4 IP. We also saw continued traction in very high-speed 30s with multiple 56 and 112 gig wins. Building on our lead in foundation IP, we extended our portfolio to include specialty memories used in AI and cloud compute and general purpose IOs which had an excellent year. Finally, our track record of being first to market with IP and advanced process nodes continues and is highly valued by our customers. We announced the full portfolio of 5-nanometer IP with multiple silicon proof points including our industry leading PCE - PCIe 5.0 and USB4 solutions. With already more than 50 5-nanometer design wins, we started development of next-generation 3-nanometer products targeting high-end mobile and high performance compute. Now to Software integrity, testing software code for security vulnerabilities and quality issues. This area contributed approximately 10% of our revenue. The market opportunity is vast with the need to address critical security challenges steadily increasing in importance. As the industry leader with the broadest portfolio of products and services available today, we are well positioned to serve this growing space. Over the past several years, we have successfully expanded our customer base with enterprise companies now representing about 75% of revenue. In 2020, we saw an increasing number of customers adopting multiple products and services, leveraging our broad portfolio. An important example is a Fortune 100 technology, industrial and aerospace conglomerate. The depth and breadth of our products and services allow them to consolidate from multiple vendors to Synopsys, while significantly expanding their investment and user base. Having said that, software integrity is one area that saw an impact from COVID as well as some near term operational transitions. Our new General Manager hit the ground running a little over three months ago and has already made significant enhancements in three areas. First, we evolved our go-to-market strategy and customer success organization to better address and serve new and existing customers. This includes timing our sales coverage and building an indirect sales channel. Second, we are bolstering our strategic consulting capabilities and third, we are evolving our product road map to capitalize on security trends in DevOps and cloud adoption. The recent moves are encouraging and we expect to see continued progress towards ending the year with re-accelerated growth. We are very optimistic about the long-term opportunity as we work to scale past the $0.5 billion mark mix. In summary, we're entering 2021 with significant momentum. Market demand is strong, fueled by complex technologies and a multitude of high-profile verticals. Our innovation engine continues to deliver advanced capabilities as our product offering is increasing in differentiation while seeing strong adoption. Financially we're executing very well and raising our long-term ambition. Thank you to our dedicated employees who quickly and effectively adapted to unprecedented challenges this year and to our customers and partners for their commitment and support. With that, I'll turn it over to Trac.

Thanks Aart. Good afternoon, everyone. 2020 was another excellent year. We reported record results in all key metrics, including revenue, non-GAAP EPS and operating cash flow. We finished the year well ahead of our initial expectations. Our ongoing financial success reflects a dynamic end market, our portfolio of best in class solutions, our resilient business model with nearly 90% recurring revenue and our determined execution. We're entering 2021 well positioned to exceed $4 billion in annual revenue and further expand non-GAAP operating margin. As a result, we are on track to deliver strong double-digit non-GAAP earnings growth and more than $1 billion in operating cash flow. I'll now review our full-year 2020 results. We generated total revenue of $3.685 billion, up nearly 10% over the prior year with strength across all geographies. Backlog grew approximately $500 million during the year to $4.9 billion. Total consolidated GAAP costs and expenses were $3.065 billion and total non-GAAP cost and expenses were $2.654 billion, resulting in a non-GAAP operating margin of 28%. GAAP earnings per share were $4.27 and non-GAAP earnings per share were $5.55, up nearly 22% over the prior year. Semiconductor and System Design segment revenue was $3.3 billion with particular strength in EDA software and IP. Adjusted operating margin was 30%. Software Integrity segment revenue was $358 million with adjusted operating margin of 11%. While Software Integrity results were affected by COVID and our near-term operational transition, we are enthusiastic about the dynamic market and our leading industry position. Our long-term objective remains to grow software Integrity in the 15% to 20% range, exceeding market growth as we and the industry evolves. We believe operating margin can reach or exceed our corporate average over time. For 2021, as our operational adjustments take hold, we expect business levels to ramp throughout the year and to achieve 15% to 20% orders growth for the full year. Revenue will feather in over time due to our time-based model, our objective is to exit the year with double-digit growth in Q4 with the full year in the high single-digit range then accelerate in 2022. We increased the level of internal investments in 2021 as we implement our adjustments and we intend to resume margin expansion in 2022. Turning to cash, operating cash flow for the year was a record $991 million reflecting our strong results as well as robust collections. We ended the year with a cash balance of $1.2 billion with total debt of $128 million. During the year, we completed buybacks of $242 million. At this time, we expect to increase our total buyback in 2021 versus 2020. Now to guidance, which assumes there are no changes to the current Entity List restrictions. For fiscal 2021, revenue of $4.0 billion to $4.05 billion, total GAAP cost and expenses between $3.226 billion and $3.271 billion, total non-GAAP cost and expenses between $2.825 billion and 2.855 billion, a non-GAAP operating margin of 29% to 30%, other income and expenses between minus 11 million and minus 7 million. Non-GAAP normalized tax rate of 16%, GAAP earnings of $4.39 to $4.54 per share. Non-GAAP earnings of $6.23 to $6.30 per share. Cash flow from operations of $1.2 billion to $1.3 billion and capital expenditures of approximately $100 million. Now to the targets for the first quarter, revenue between $935 million and $965 million, total GAAP cost and expenses between $767 million and $785 million, total non-GAAP cost and expenses between $674 million and $684 million. GAAP earnings of $1.05 to $1.16 per share and non-GAAP earnings of $1.44 to $1.49 per share. Longer term, we are raising our financial objectives. We intend to manage to a rule of 45 over the next several years through a combination of solid revenue growth and continued operating margin expansion beyond 30%. In conclusion, we enter 2021 with excellent momentum, reflecting strong markets we serve, the resiliency of our business model and the outstanding execution of our team. And with that, I'll turn it over to the operator for questions.

[Operator Instructions] We will start the Q&A with Rich Valera with Needham. Please go ahead.

Congratulations on delivering some really solid results in challenging conditions this year. And with that you finished off the year with another really strong quarter in Asia-Pac second quarter in a row and I'm guessing China was a factor in that and one of the concerns that's raised is that maybe some of that business is being pulled forward for various reasons, but just wanted to get your thoughts on the strength out of Asia-Pac in particular China and if you guys have any concerns about maybe some of that business having been pulled forward and what that implies for next year.

Thank you, Rich. It was indeed a very good year and China definitely contributed substantially. In general Asia-Pac overall was very, very strong. We have no indication of pull-forward from China. Obviously, there's always questions around that, but nothing really out of the ordinary except the fact that we had very strong business with also quite a number of additional new customers.

Just a follow-up on the SI business, are there any sort of green shoots you can point to, at this point. I know you've made a lot of nice sort of organizational and structural changes. Are you seeing anything on kind of the bookings pipeline or funnel that might show some of those are actually starting to have an impact?

We cannot say that yet because Jason Schmitt, the new GM has been there for just about 100 days. He has made already a lot of very good changes, specifically on the whole go-to-market side where we have been able, I think, to optimize much better. So as indicated, our expectation is that through this year we will gradually see the growth rate accelerate again because the business is fundamentally actually the right thing at the right time. And so I think as our execution improves, we will see the results probably fairly quickly.

We'll now go to the line of Tom Diffely with D.A. Davidson. Please go ahead.

So, Aart, first question for you is based on the news we got out of Intel this summer, little hiccup with a node transition. So, just a bigger broader question, what is the impact to you in the EDA industry when a large customer stalls out a bit on node transition. I know that they'll redesign at the current node for a while, but just in general what - how does that impact EDA?

Well, Tom. As you know, I never comment about individual customers, but one of the things that we know well for many decades is if anybody at any point in time stumbles a bit or gets ahead, the race is on among everybody. And at this point in time, I think all the companies that aspire to be at the leading edge in technology are investing and moving very fast to move the ball forward. Now, this is not just because they want to be first in line with the technology. It's that the demand of the market is very high. So it's not only do you have the latest node, it's also can you deliver in volume with the right level of yield because the production rates are pretty high. So, to us this is all good news. It is a good news because we see a strong wave of new designs, the new designs are very much aimed at the latest technologies. So people are taking advantage of that. And in parallel to this, the fact of continuation of, let me call it Moore's Law classic, we also see more and more customers now very actively looking at multi-chip or multi-chiplets in a design. And so I think the hunger for more capability is insatiable.

Great, thanks.

This is Trac, I just want to add that you're going to see this in the 10-K in a couple of weeks that will highlight that we continue to do very well at Intel and our business there has grown in 2020.

Okay, great.

To reiterate Aart's point.

Yes, that makes sense. And then, Trac, I guess in the comments transcript you talked a bit about you the Software Integrity and putting in an indirect sales channel, is that a different sales line - sales approach than before and is that going to have any impact on the margin or profitability?

If I may chime in. I think I may have misspoken about the indirect sales channel, it is really a parallel utilization of a channel that typically goes to a large companies that actually help install things at our customers and so it's really sort of working more closely with the existing ecosystem and not really a different sales channels.

Okay, great, thanks for the clarification.

Yes, sorry, I got in the middle of almost cough and started to misspeak, my apologies.

We'll now go over to the line of Joe Vruwink with Baird. Please go ahead.

I wanted to start with the cash flow outlook for next year. It's quite strong and a pretty nice step-up, can you maybe provide a bit of a bridge, other than just the improvement in net income and the reduction in CapEx that factors into the improvement in cash conversion next year?

The two things you highlight are really the biggest contributor, the fact that we are growing up income and reducing our CapEx spend. The other thing I'll highlight is over the last couple of years, as mentioned, we've had some unusual one-time events that has hit us and we've always described that heading into 2021 things will start to normalize a bit with regards to one-time adjustments, whether it's tax related or legal settlement related or build out of our facilities. But going back to the point, the biggest parts of the fact that we are driving margin expansion up in '21 that's contributing to the strong cash flows.

And then it's a really strong improvement in backlog at year end. Nice to see the acceleration. I'm wondering if you could maybe help decompose some of the bigger contributors, I'm sure there is quite a bit contributing, but if I kind of step back and thank it probably helps the broader environment seems to be improving now and in terms of R&D activity accelerating until next year. So I'm sure that helps across the portfolio. But in terms of any of the individual product contributors, is it really just increased momentum behind or some of the things you called out in your prepared remarks. So things like Fusion and Verification continuum, anything else you maybe point to as being also extra good here at year-end?

Sure. Well, if I were to find a common denominator among all of those things it is the adoption of advanced technologies and the reason for that is that the race is so much on in everything that has to do with big data be it from transport to storage and of course, especially to computation i.e., various forms of machine learning et cetera that people want to adopt the most advanced technologies. In order to do that, they really need to have the most advanced tools and Fusion Compiler is really doing terrifically well. We can see the benefits, our customers see that and it's in broad deployment. But the other thing is the building blocks and the building blocks are IP blocks and those IP blocks with the advanced nodes are becoming more and more difficult to do for many of our customers or just economically, not all that viable if they do it themselves. And we are absolutely ready for the most advanced nodes as they come out and so those are the areas that stand out. The last one I would just highlight is that with all these systems that use more and more and more transistors these transistors have one mission in life, which is have software run on it, and so the intersection between hardware and software, which we often refer to as prototyping overall is also very healthy.

You're right. I would also add that it's great to have $4.9 billion a backlog and have that certainty and the visibility to the future, it does reflect the broad based strength that Aart described, but more importantly, I think the more critical measure for us is run rate and that was up pretty substantially for the quarter and the year as well, which is the one thing that we are more encouraged by when we look at the key metrics for our business.

We'll now go to the line of Mitch Steves with RBC Capital Markets. Please go ahead.

Just wanted to double-click a little bit on the operating margin implied guidance here. When I look at the EPS growth, it looks like you're implying around 12% or 13% that will be kind of the lowest you have put up over the last four years, five years or so. Just looking at with the cost performance, Just curious as to why the incremental margin driving for '21 be lower relative to the last three years or so.

Yes the margins there I think is very constructive, we're driving margins up between one to two points and remember that this is coming half way what I consider pretty extraordinary year, right, both in terms of strong revenue growth and margin improvement. At this point, this is the best visibility that we have in the business and I think it's a pretty constructive outlook for growth, profitability, as well as margin, as well as cash flows. So, pretty strong outlook for the year and we feel pretty good about it at this point.

And then just on the Software Integrity business, is there any sort of update you can give us, like the long-term trajectory there. I know you guys moved over a lot of the sales people and kind of the strategy there. Maybe you can put up a big picture as to what that should look like over the next few years or so?

Sure. So aside of the go-to-market improvements and accelerations in some areas, there are two other things that we look at. One is to increase our consulting capabilities because there is demand for that and they have a big impact on how well the rest of the business does. And secondly, on the product side, sort of a double focus - focus on one hand of making sure that each one of our individual products increase more and more their differentiation, because they do battle with a lot of small companies and simultaneously that the overall platform really becomes more and more integrated because there is a lot of demand from the larger companies to be able to look at their overall risk management picture as it applies to software and the more we can provide multiple tools that are integrated in that can jointly report on the status that is very helpful to the CSOs or heads of IT that are typically in charge of that.

We'll now go to the line of Jackson Ader with JPMorgan. Please go ahead. One moment please. Go ahead, Mr. Ader. Your line is open now.

Just on the growth in Fusion. I think you mentioned it was like 140% growth in orders, is that order count and is that also I mean our ASPs basically coming in line with what you'd expected. So total contract value is also exceeding our expectations with Fusion Compiler?

Yes. Fusion is doing very well in every dimension. And as you know, this was a long road to get - it's not only a product, but it's a whole platform to get it to really - to the point that certainly has crossed the bridge, where it became markedly differentiated versus any competition and we see that not only with Fusion Compiler as the core product which, for those of you not familiar does both synthesis and place and route, but also has embedded in it, timing and power and testing a number of other things. In other words, it's intersection of many things that you look for on a design. It is also the linchpin for brand new products such as 3DIC, also connected very well to the Silicon lifecycle management capabilities and so in many ways, we feel that we have literally entered now the next decade of being able to build on that backbone that we have invested in for quite a number of years and so both the technical stats, the booking stats and the revenue stats are all looking very encouraging.

And then a Financial follow up, time based license - time based licenses actually came down sequentially. That's a pretty rare phenomenon. In fact it doesn't, it's not like it never happens, but in a fourth quarter, I think it's even rare then another quarters. So anything that that we should be aware of just in the mix between time-based and services?

No. Jackson, there's really nothing unusual there and over time the time base is pretty steady, but from quarter to quarter. You'll see it be a little bit more volatile given the timing of contracts and would get added or falls off, so it's really nothing unusual in the business.

We'll now go to the line of Gal Munda with Berenberg Capital Markets. Please go ahead.

The first one, the team is just around China, if I had my calculation right based on your in the disclosure, you grew about 30% this year, even more than that. I guess I'm trying to look a few years out and this now represents low teens in your revenue as a proportion of total revenues - we've seen that it can reach - if it continues to grow that rate, it could be up to kind of high teens, is that something that you would expect to happen in the long term, especially considering your comment earlier that you have been really seeing fourth quarter that this is a structural growth, the way you see it?

Well, as you know, the Chinese economy has rebounded post COVID, but in general, is in a phase of growth where technology is important to where the country is going and we see many new companies entering the fray for chip design and other areas that we can provide them with tools with and of course, we see many of the companies that have now a number of years under their belt designing much more sophisticated chips. So, I expect that to continue for a long, long, long time. And when you say a decade it doesn't faze me at all, on the contrary, I think that's absolutely what's going to happen. And so our job will be to service that market as well as we can, because it's a great opportunity. Now, I would add to that that the countries around China are doing quite well also and so the whole Asia environment is absolutely moving forward on technology and we have - we're thankful that we have very good connection and in all these countries, be it ranging from Korea, Taiwan, but also Japan that is rebounding somewhat with the China phenomenon.

And then the second one, I just wanted to follow up a little bit on the margin itself. If I look at the incremental margins, you guys have achieved this year, it's been quite remarkable around 60%. Your higher-end of the guidance kind of implies 45% for next year, is that really a reflection of the fact that perhaps COVID situation made it a little bit of a - little bit of more inexpensive year this year and some of the investments might come back just generally in terms of the hiring and so and it's 40% something that you feel comfortable kind of than achieving on an ongoing basis as we move past FY21?

Yes, Gal, So I would say that you're right. With regard to COVID. We did get some benefit of COVID in 2020. So, and that was from most of the year and as we look at 2021, we do expect things to sort of stay that way for the first half, but we do expect some resumption of normal activities, so that's a bit of a drag on margins. But overall, as we've said, we are expecting to drive margins up this year. With regards to the question regarding incremental margins, we'll have more to say throughout the year because we're in the process of further refining our next multiyear financial plan. But if you think about the objective of rule of 45 and the idea of driving really strong growth while expanding margins towards a rule of 45, you're going to see pretty healthy income, incremental margin improvements year-over-year. So we'll have like I say what I to more specific details to provide as we progress in the year.

We'll now go to the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Aart, let me start with you on the Silicon lifecycle management strategy and platform. When we look at the stack of that platform as you depicted at your design symposium a couple of months ago, it looks like they would seem to be some logical connections that you could make between that and core EDA and/or perhaps even SIG, so perhaps talk about what your plans might be with the roadmap might be for connecting SLM to one or both of the remainder of the businesses. And then for Trac, to clarify on your comment earlier about business with your largest customer. I assume you meant in dollars, not necessarily as a percentage of revenue, but given the extent of the decline of that business in 2019 versus 2018 in dollars, could you say whether you've got back to the 2018 level or not in 2020?

Jay, you opened a very big box with silicon lifecycle management because there are multiple entry points to that and one of the entry points that sort of obvious and actually have been asked for many years, is for chips that are in the midst of a situation that could be life threatening i.e., in charge of a car or the brake system of a car, so you really would like to know, is the chip still working. And if the answer is no, you really want to know what to do with that answer or how do you stop the car or whatever you have to do. And so that is already the first example where for a number of years, people have started to put different mechanism inside of a chip via test connections to know is something is broken, is the software still running correctly or are there heat situations and so on. And so from there to go to the notion of, well, why don't we start to add some additional sensors and by the way, sensors are very little things. So you can easily find a corner somewhere to put them in, that brings very quickly the next question, well, why don't we then take some data inside of the chip and can we make the decision of the chips that works inside of it, with other words can you have some machine learning that gets interpreted inside of the chip. In contrast to say, all we can now read out a lot of this data from the chip that comes from these sensors and use external learning or external interpretation of the data, so that we can make better chips going forward. And so I'm trying to just give you a little bit of a visceral sense that the minute you put observation points in anything but certainly on the inside of a chip and you have a way to either bring the data out or use it on site, so to speak, all kinds of new doors open up and that is why this is exciting, because on one hand, you could say, well, nothing new here on the other hand, you'd say there is a lot of new here and a lot new opportunity and specifically the AI that can be applied with it. So hopefully that gives you little bit of a sense that the opportunity space is very big. The good news is we are in a leading position with our test capability, so we have good connectors there, we have a very strong machine learning capabilities, we can use that and by the way our own IP has already use a number of these type of mechanisms for a number of years. So technically we know what to do.

Jay, this is Trac. So on your question, you're right. Thanks for clarifying that the - the dollar revenues at our largest customer is up this year. I know that you like reading our K. So I don't want to give away too much. That's going to come out in a couple of weeks and we can see the details of that relative to the prior years. Okay.

Okay. Just a quick follow-up if I may. I don't think you used the word record to talk about either hardware or IP revenues for the quarter, but certainly for hardware, it looks like you had a record quarter and possibly for IP as well, if you could clarify those.

We had a really good year, good year for good quarter and good year for hardware and it was down slightly versus a record year in 2019. But nonetheless, a really strong revenue year for us and same thing with IP. IP, I want to, yes it actually is a record year for us. Overall.

We will now go to the line of Jason Celino with KeyBanc Capital Markets. Please go ahead.

As the first one going into the introduction of the rule of 45 a little bit, how much of achieving this call is based on the same business being higher margin than the corporate average?

I think for most part, Jason, we'll provide more details throughout the year. As I said, because where we are in the midst of developing that multi-year view, but for us to continue to drive margins north of 30 a lot of it's going to come from the rest of the business, the 90% of business that is driving the growth and profitability. Our longer-term there - as we said, pretty consistently. There's nothing structural about Software Integrity that would prevent it from converging towards the corporate margins, but that's a bit, but some time out. In the next few years as we think about it, a lot of it is going to come across and some of that's going to continue - but I'd say that a large portion will continue to be driven by the semi business.

Okay. And then…

I would add that throughout the company, everybody understands presently our objective of the rule of 45 and so it really applies to all of the businesses to do their best to move in that direction, but SIG is only about 10% of Synopsys, now it's a high potential 10% and so your conjecture that it will need to both grow and improve its margin is absolutely true, but for the numbers that we or the direction we're indicating to you we think that we have a number of engines that are doing quite well.

And then one to your core quick one, 20% growth in the IP business, I think that's what you mentioned in the prepared remarks, widely understood the tailwind for the design starts and outsourcing, but what are you seeing on the competitive side, any competitive changes on the IP side?

No, not really. There are number of other companies that provide either very specialized capabilities and I could mention Arm as actually very good partner to Synopsys, and then we have some direct competitors that compete on some of the blocks that we do, and in general, if the market is competitive that's actually a good sign that there is opportunity for growth and doing more. I think we will all be very busy because we think that there is a lot of market demand and I think it will increase. I think Synopsys is particularly well placed because increasingly IP is very much a trust business, these things are very complex and somewhat tongue in cheek, I've often said that it's a little bit like organ transplants, you want to make really sure that you're getting some very good quality solutions into your chip because otherwise it causes all kinds of other issues. And so it is very much a trust business, and I think Synopsys is doing very well in that regard.

Next we'll go to the line of Vivek Arya with Bank of America Securities. Please go ahead.

Thank you for taking my question. I think you have given us nice sales growth number for next year about just over 9%. I was hoping if you could give us some relative indication of growth in the different segments. And I think, Aart, in your prepared remarks, I thought you said growth acceleration from 2022 and I'm not sure whether you meant just in the SIG business or whether you were talking about the overall company growth rate.

Well, let me start with that part, what I meant, at that point in time, I was talking about SIG because obviously SIG is lower than our intent and our expectations and so the changes that we've made, I think, are all in the direction to vitalize specifically the go-to-market function and really align better the product consulting and go to market. Three steps for bigger business. So I was talking about that part of Synopsys accelerating back to where it should be. For the rest of the company, I think we're doing very well. I must say that it's very difficult to predict what 2021 will look like in general, there is high hope that as you heard in second half of the year, not only the Far East will do better from an economic point of view but also Europe and the US with the coming about of vaccines, but it's not a simple situation. Having said that, I think the semiconductor segment and the technologies around that are almost immune to that part of the economy because the needs are so high and many of the very things that got started on the COVID, such as the work from home, such as the massive communication, the massive amounts of data being used are just going to continue to be accelerated themselves.

Got it. And so my follow-up. We are starting to see Arm expand into new markets Max and other high-performance markets in the datacenter, even supercomputing. Is that a net positive for you or does it just cannibalize your presence in the x86 market?

No, no. Well, we ourselves are not in the x86 market, we provide all the building blocks around these key processes, right. And so if that part of the market wants to go accelerate themselves through a massive foot, right. By all means go at it because acceleration in general tends to use more technology and newer technologies and so I don't want to handicap any of the players. These are all very, very, very competent and great companies. But I think that's the applicability of various forms of cloud computing is broadening and what we're going to see is that, there will be more and more specialty areas, not only in general processing but various applications of course of graphics processors, but let's not forget, we are serving 200 or so companies all doing the best ever AI chip and these are all specialized computation machines that will - many of those will be very valuable for certain specific applications. So there is no slowdown by any means here.

Next we'll go to the line of Pradeep Ramani with UBS. Please go ahead.

First I guess is for Trac. Can you sort of help us shape the year in terms of how the revenues is going to be weighted, first half versus second half and on the margin front it's almost feels, if my math is correct, Most of the upside in margin is going to come from your semiconductor SSD business basically, is that correct or am I kind of missing something there?

You're right, Pradeep. I'll start with the second part of that the where the margin expansion is coming from for 21 specifically, given that we will make some additional investments in software integrity to get it on to re-accelerate growth, you'll see more of that margin improvement being driven by the semi business. With regards to the quarterly profile, it's certainly going to be a better profile this year than what we saw in 2020. Closer to fairly even but still a strong second half.

And for my follow-up actually when I look at Arm from a different angle, do you feel that customers are sort of indicating greater interest in ARC or simply because of the uncertainty around Arm situation and is that a positive for you guys. And maybe did ARC actually grow - is that, is it growing faster than your other IP business.

Well, I don't really want to comment too much about Arm as they are a strong partner. I would say that there are many different applications for different types of processors and we have never really competed with Arm in its main area, which has been very much the strong processes for mobility that are driven at the low power level in order to work well in affordable form. And so we do an enormous number of what we do - our customers do an enormous number of the Arm cores with our tools, I should say, and we drive them as hard as we possibly can. ARC has done particularly well in super low power situations or in a number of specialty areas, we have the processors just suited to build particularly well and automotive is one of those areas because there is all kinds of other requirements around automotive that have to be followed very strictly. And as we put a major effort in quality overall and in quality specifically for automotive, we paid attention for ARC specifically and that's why it's doing well.

Next we'll go to the line of Krish Sankar with Cowen and Company. Please go ahead.

I had two of them One, Aart, I just wanted to - first question on IP business, you kind of mentioned on the IP side like building IP blocks is getting more difficult to advanced nodes to your customers. Is there a beta quantify what the percentage of outsourced IT blogs too the EDA companies growth at like let's say 28 or 20-nanometer and what is it today like 5-nanometer, is there a way to quantify the percentage? And then I have a follow-up.

Well, to be honest, there is probably a very good way to quantify it, but I cannot do that live for you here because I don't have the credibility. I would have to talk to the people in the IP group. Generically though, I can absolutely say that 28-nanometer feels like a long, long, long, long time ago and at that point in time, we were probably in the 20% or 30% of outsourcing. Now, we are much higher. But what has really changed is that the complexity of the blocks since that time. There is certain blocks especially all these big controller and communication interfaces, they have become particularly tough to do and they are exactly in the area where maybe some customers could do it themselves, why would they because they are often standard and being better than a standard is the same as being worse than a standard, you're not the standard. And so I think that has benefited our taking on more and more of the area on chips. If you add to that the fact that there is a large, large number of embedded memory that covers a large swathe of a chip as well. So from that perspective, we keep moving up in the percentage of what we do but what we do itself is moving up in its complexity and in its transistor density on an ongoing basis and I think that's why this business is very healthy, it is likely to continue to grow well, and we will be very close to the differentiation side of our customers.

And then just as a follow-up. It's a longer term question, in the past when customer consolidation happens within your semiconductor customers is like Avago, Broadcom, et cetera, there is a view that it's going to be negative for EDA companies which did not happen, but also at the same time the EDA companies also consolidated, so therefore your customers rented the bigger supplier. Now, when I look forward like there's still a lot of semi M&A is left to be done with future customer consolidation, there seems like lot of the tailwind of the supplier consolidation, so do you feel like that could make a difference in the future or you think it that it would difference R&D going to be spent.

Well, it's a good question, because many, many years ago you recall it well every time that the word M&A in your customer base came up. It sounds like a four-letter-word and actually it wasn't because the one thing that doesn't disappear are the very designers that are being M&A around, so to speak. And so from that perspective, it didn't harm EDA and IP businesses as much as initially expected. Secondly, you're absolutely correct that we have done a certain amount of consolidation in our market largely to actually stay as critical mass in order to be able to afford the amount of R&D needed for all of these new capabilities. Now I think in our core technology, we are very well equipped to do these things ourselves and invest in it, but on the sort of what's sitting at the boundary between existing Sam and new Tom, there are lot of new opportunities that are opening up. And so if you take for example the Silicon Lifecycle Management, we have acquired some capabilities, we are developing a lot of capabilities ourselves, but it's a new territory. It's a new town, maybe a little hard to describe how big it will be, but the promise is extremely good. And so from that perspective, I think we will grow with our customer base in aggregate. And I think that our customer base is doing well because they are at the center of what will drive the technologies over the next decade. So we will race with them.

And with that we have exhausted the Q&A queue, please continue.

Well, with that, thank you so much for participating today. We hope, of course, that all of you have stayed healthy within your family and yourself. It's not always been an easy time for everybody, but we appreciate the very fact that many of you have stayed in contact with us through the entire year. We look forward to 2021 with momentum and we hope that that momentum also includes your health and your wellbeing. We look forward to talk to you soon again.

Ladies and gentlemen, that does conclude our conference for today.