Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for First Quarter of Fiscal Year 2022. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. [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, Eric. Good afternoon, everyone. With us 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 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 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. And with that, I will turn the call over to Aart de Geus.

Good afternoon. Q1 was an excellent start to the year, building on the strength and momentum from 2021 we met or exceeded all of our key guidance targets with strength across all product groups and geographies. Revenue was $1.27 billion, with GAAP earnings per share of $1.99 and non-GAAP earnings at the high end of our target range at $2.40. As a result of this solid start and confidence in our business, we are raising our full year revenue and earnings guidance. We're also executing well on the long-term accelerated revenue growth and margin expansion objectives we communicated to you in December. The excellent results can be attributed to three reasons, strong semiconductor market, strong technology with increasing differentiation, strong execution by our teams and adoption of new products. Trac will provide more financial details. Assessing the landscape market is very sound and growing in a way that is positive for Synopsys. As the power and impact of massive amounts of big data are increasingly realized, demand for smart everything continues to intensify. As a result, customers ranging from traditional semiconductor companies to AI startups, hyperscalers and vertical system houses are all investing heavily and prioritizing design activity. Rapidly escalating technical complexity as big data and AI software are brought together in increasingly advanced ways means that today's products require highly complex chips, systems of chips, and more security and safety. As a result, customer investments are increasing across all market segments. Synopsys has invested heavily over the past five years in a wave of unique innovations, targeted apps and ideally suited for this new era. These investments are yielding excellent technical differentiation and business results. At the center of enabling the smart everything era sits the power of AI to develop more complex chips better and faster. Our solutions…

Thanks, Aart. Good afternoon, everyone. First quarter results reflect good momentum across the company. We delivered a very strong start to the year with significant revenue growth across all product groups and geographies, expanded --expanding non GAAP operating margin, non-GAAP earnings at the high end of our target range and solid operating cash flow. Driving these results is a compelling combination of unprecedented market opportunities, accelerating customer adoptions of our groundbreaking new products and our excellent execution. Our confidence in our business is strong, and we are raising our full year 2022 targets. I'll now review our first quarter results. All comparisons are year-over-year unless otherwise stated. We generated a total revenue of $1.27 billion up 31% over the prior year. As expected, the quarter reflected strengths in EDA software, as well as outstanding demand for IP and hardware. Total GAAP costs and expenses were $923 million, total non-GAAP costs and expenses are $811 billion resulting in a non-GAAP operating margin of 36.2%. GAAP earnings per share were $1.99, non-GAAP earnings per share were $2.40 up 58% over the prior year. Semiconductor and system design segment revenue was $1.16 billion with both EDA and IP performing well. Software integrity segment revenue was $108 million a better than expected start to the year. We are on track to reaching our 15% to 20% growth objective for software integrity with expanded adjusted operating margin in 2022. Turning to cash, we generated $156 million in operating cash flow higher than planned primarily due to early collections. We used $250 million of our cash for stock buybacks and ended the quarter with cash and short term investments of $1.27 billion with total debt of $24 million. Now the guidance. We are raising our full year outlook for revenue, earnings and cash flow. For fiscal…

[Operator Instructions] And we'll start questions from the line of Joe Vruwink from Baird. Please go ahead.

Great/ Hello everyone. I was hoping maybe to get a bit more detail on the product areas or geographies driving the $50 million increase in revenue guidance for the full year. And then in thinking about the sequencing of quarters this year since 1Q finished within the guidance range, is it fair that most of this upside is maybe coming in 2Q, just thinking about maybe your original expectations?

Let me start with the first part and maybe Trac can do the second part. Our strength has been really very much across the board. We can certainly say that the IP continues to stand out as growing very well. But some of the new capabilities that we see at EDA tools really are showing more and more opportunity going forward. Now you heard about the Software Integrity Group. They continue on an excellent path. Last year was really a return to good growth and now we are improving the growth there as well. And lastly, the systems area, which is sort of at the intersection between -- so we like to call it at the end of the section between silicon and software is an area that will continue to grow because most of the systems get now optimized to make the software run as well as possible on the hardware and the hardware to be as responsive as possible to the software all the way to trying to optimize even the power consumption. So these things are very linked and our hardware and prototyping solutions are extremely well suited for that to have been strong.

Hi, Joe, let me take the second part. I would characterize the upside for the year, the raise of $50 million. That's simply a Q2 upside. We delivered Q1 largely as planned. It was the biggest quarter of the year. The deal -- the business that we booked in Q1, we saw very strong growth in EDA software, which should give us a nice trajectory not only for this year but going forward. And then we continue to see very strong demand in IP and hardware. The momentum that we saw through last year continued in Q1 in terms of results for revenue, but also just the overall demand, as Aart highlighted. And traditionally, we don't raise the full year at this point -- this early point of the year, but just given the visibility we have, not only Q2 but for the rest of the year. We have the confidence to raise the overall guidance.

Okay. That's helpful. And then I just wanted to focus in a bit more given it came up in the prepared remarks, just the recent attention around open source vulnerability. I'm curious if you've seen a bit of a lift for Black Duck within the portfolio, maybe an acceleration in interest that could end up benefiting growth for software integrity as we move through the year?

Well, I think in general the Software Integrity Group is doing better and better because it is managed really well and is executing well. But what you have said still bears truth because they have been in the past year, a number of moments of high visibility of hacking on also open source capabilities. Even the U.S. government have made some mandates saying you have to pay more attention to this in their systems. And so I think in general, there's a higher degree of recognition and that helps Black Duck because the capabilities that we have there. And also our consulting capabilities is precisely what customers need.

Great. Thank you very much.

You’re welcome.

Next, we'll move to the line of Jackson Ader with JPMorgan. Please go ahead.

Great. Thanks for taking my questions, guys. The first one is on the -- that hyperscaler that you mentioned, the deployed DSO.ai in the cloud. And I'm curious I guess, number one, the deployment was that in offices cloud, other cloud, the customer's private cloud? And then the follow-up being depending on where the customer chooses to kind of run I think there’s hundreds of CPUs. Is there any kind of revenue leakage? If the customer chooses to do something in their private cloud versus maybe the Synopsys cloud?

Well, let me start at the end. No, there's no leakage, they have to use the licenses like any other licenses. Pretty much all the hyperscalers do have large clouds themselves. Some are also commercial cloud providers, obviously. And it doesn't matter if it's a private cloud or a commercial cloud if you have both, it is the same results. In this case, these are people that are extremely competent on managing clouds so considerate to commercial cloud.

Jack, I would just add that regard. We do see cloud as a very strong incremental growth opportunity, and that is independent of whether or not they're using Synopsys cloud or a third-party cloud. We can support other scenarios, but the goal is to gain that business overall.

Yeah. I mean the point of the question, right, is just see if the customer would say, hey, thanks for DSO.ai and now I'm going to take my ball and go play over here with it, right, and maybe try and game the licenses. But no, that answers that. Thank you. And then the second question is actually around the labor market. Is there anything that you might see in a tight labor market that might suggest a slowdown in the hiring of engineers at your more traditional, maybe semiconductor companies?

I think there is certainly no slowdown attempting to hire. As you well know, throughout most industries, there's an increase in turnover. A lot of people have been sitting at home for a few years and are looking for fair share. And so the entire semiconductor industry right now is looking for people. And so we ourselves have had a bit of that, actually, not that much negative turnover, but we have hired substantially -- substantial amounts of people. And so I think that this will continue because there's no end in sight to the need and the opportunity space, I think, is very, very fertile. So these things tend to last for a year, year and half. And then they gradually equalize again.

All right. Thank you.

You’re welcome.

And next, we go to the line of Gary Mobley with Wells Fargo Securities. Please go ahead.

Good afternoon, everybody. Thanks for taking my question. And congratulations to a strong start to the fiscal year. I wanted to pick up on the last question and ask more so about wage inflation. Just a debate whether it's transitory or structural in nature. But I think it's probably fair to say that wage inflation or at least higher wages are here to stay. And so my question for you is, are you able to pass this along in the way you're pricing license deals? And might there be a period of time in a labor intensive business that you're in where you've got a mismatch in the way deals are priced versus wage inflation?

It's an excellent question because, obviously, especially in the conjunction with the question Jackson had, whenever there is movement, there tends to be some increase in wages because otherwise, people wouldn't necessarily move and we see the same. Fortunately, we have had the good fortune that our business continues to grow very well. And it tends to be a little bit more stable in terms of change because we have many multiyear transactions. But many of the transactions are becoming larger because customers want more tools, need more capabilities. And so we are more gradual in how we pass these costs along. Having said that and track and emphasize from the ops margin perspective, but we are staying on track with not only growing the business but also continuing to improve the profitability of it. So all of these things have been taken into account as we project forward.

I would add, Gary, that it's not -- in effect, we're able to manage the wage installation and still drive margins up. The way we do that, obviously, we factor those costs and the incremental cost into our expense and that's reflected in our guidance and our expectations for improving margins this year. The way -- the best way to deal with it is really continue to invest in the business is twofold. One is over the last several years, we've continued to invest in innovation and new technology to drive value in our products. And that has helped us extract more value in the negotiations and that certainly has helped the accelerated growth in the business. Secondly, we've also been on path over the last few years of redeploying and being really critical about where we deploy resources in order to get the best return. So the combination of those things really is helping us manage wage inflation in that way.

Got it. Appreciate the color. And then I wanted to ask a specific question about the RPOs or backlog. If you can't give us the amount, can you give us at least a sense of whether you built on that record high you published at the end of the fiscal year. And to what degree has a longer average license duration factor? And I know you don't give that metric anymore, but are we are moving higher on that front as well?

Backlog remained at $6.9 billion.

Got it. And average license duration, could you say it either ---

In the normal range. In that normal range that we traditionally managed to, nothing unusual.

And next, we'll go to the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Thank you. Good evening. Aart, for you first. You've spoken often of course, about the intersection of hardware and software as a center of gravity of your business, which is perhaps another way of saying that semiconductor companies are becoming more like systems companies and systems companies are becoming more like semiconductor companies. The question is with respect to the support implications for your business, that is to say the support you have to provide to customers given the growing complexity, the growth of the contracts and so forth. And perhaps you could just talk about that in general, how the profile of what you need to do on behalf of customers as evolving vis-à-vis your evolution of your contracts and the portfolio. For instance, over the last year we've seen that there's been a more than 140% increase in your openings for application engineers, even more than the increase in R&D openings over the last year. So perhaps tying to the earlier questions on hiring, what the AE environment looks like, specifically as a critical component of supporting your customers. And then the second question for Trac. When we look at your segment results, if we strip out from the IP and Systems Integration segment, what we think your hardware business may have been, it looks like your annualized run-rate for IP in Q1 was well north of $1.5 billion as compared to the $1.1 billion-$1.2 billion coming out of Q4. Clearly a substantial increase in the ARR, so to say, of IP. And that looks like it was fairly well correlated to the increase in China in the quarter. So perhaps you could talk about those correlations within the IP business.

Okay. Jay, the question you asked will only take about half an hour. You touch pretty much on everything we have to do. Let me phrase it like this. A number of years ago, we put the silicon to software under our logo. It was aspirational at that time because it meant moving to where the center of gravity was moving. I am absolutely convinced that the center of gravity for everything that will impact smart everything, big data, automation in various ways is actually the intersection of those two. And so let me first go downwards from the hardware. And there, clearly, one trend continues, still smaller, more sophisticated devices, that's technology evolution. The second trend that is complementing that is a multichip and -- or chiplets. And that is because at some point in time, you want 100 times more transistors, but that is technically not feasible. And so you split it up, and we'll see more of that. And the third trend is that many of the chips become specialized architecture for just a limited set of tasks. And this is not new because with graphical processes already 20 years ago, they were essentially accelerators to manage pixels. Now of course, there's a lot of that goes in the AI direction or data management direction and so on. So then we move to the other side of the equation, which is the software. And the software, of course has one ambition, which is do applications that add a lot of value at every domain you can think of, including many of the automation domains, the big data slash machine learning domains. And so the software needs to be matched to the hardware and the hardware needs to be matched to the software. And that is where this…

Hi, Jay. Let me take the second part of your question. So you're right, Q1 was a very strong quarter for IP in addition to the other products. But at a high level, the IP business is strong in all areas, all geographies and across a very diverse customer base. And so tying that connection to China would be misleading. And in fact in China, we're doing very well across all of our product categories. We had very good growth in EDA software. Hardware we did well in addition to IP. So trying to make that connection at the top level of the results that I think would be -- would give you a misleading conclusion.

Thank you very much.

You’re welcome.

Next, we go to the line of Jason Celino with KeyBanc Capital Markets. Please go ahead.

Great. Thanks for taking my questions. Maybe first one for Trac. The semi and design margins in the quarter were really impressive, 38%. That's the highest we've ever seen them. How much of that strength is just from the upfront nature of the IP and hardware strength?

I'd characterize it more as the quarterization of the results, Jason. Because remember, when we talked to you in December, we described expenses as being relatively flat throughout the year, but the mix of revenue and the timing of revenues would skew margins to the front end. But overall, I think margins are doing very well. And we do expect that over a multiyear period, we'll continue to improve margins.

Okay. Perfect. Interesting. And then, Aart, I thought it was interesting how you mentioned hyperscalers with your SIG business comments. I didn't think strengthen with the hyperscalers was levered at all to the SIG business. So my question is, do these hyperscalers typically purchase the EDA and the SIG products separately? Or do they have opportunities to bundle them together? Thanks.

In general, we sell these things relatively separately. There are often very different buyers in the company that are looking at that. And we have proactively kept it somewhat separate. It's a better business practice than negotiating everything to the lowest common denominator. And so -- but of course, these hyperscalers have absolutely big needs in security. And so we are collaborating well with them.

Excellent. Thank you.

You’re welcome.

And next, we go to the line of Pradeep Ramani with UBS. Please go ahead.

Thanks for taking my questions. I had a couple. So your deferred revenue saw a big pop. I think what is driving that? Is that -- first of all, is it from a product standpoint broad-based or sort of concentrated amongst either IP or EDA or hardware? Sorry, IP or EDA? And in terms of just geographical or customer concentration that sort of drove that delta if you could expand upon that, that would be helpful.

I'm sorry, I'll start with the first question, Pradeep. The deferred is very broad-based across all product lines and the variability of deferred from one quarter to next really just reflects the timing of when we bill and invoice our customers. I didn't hear clearly the second part of your question.

Yeah. It was more around whether any one customer or one geography sort of drove the upside or whether that was broad-based as well?

The overall growth was really broad-based customers -- across customers globally.

Okay. And for my follow-up, I guess you're talking about DSO.ai and SLM. How would you characterize just in terms of what percent of your semiconductor and system design revenue they are at right now? And how should we think about sort of the growth path going forward for these two contributors? Yeah.

Yeah. We're in early stage. And typically, we don't disclose for individual products. But both of these areas have the potential to certainly grow faster than the rest of the company because they're in the early stage, but also because they bring a whole set of new values to the customer. And back to an earlier question, I didn't mention that in both of those areas, we also hire more people in order to help our customers succeed and quickly get to the high value that these capabilities offer.

Thank you.

You’re welcome.

[Operator Instructions] Next question comes from the line of Charles Shi with Needham & Company. Please go ahead.

Hi, good afternoon. Thank you for taking my question. Maybe the first question is for Aart. You may be very well aware of the debate right now in semiconductors -- on semiconductor industry cycles, there is a debate about whether we're at the peak cycle or we are stronger for longer. Given your probably 40-year experience in this industry, can you kind of give us a sense how does the cycle -- what do you think about the current cycle? Is it the same as both the previous ones you've seen? Or is there something different? And how do you think the cycle affect the EDA industry and specifically to your business and in one way or another?

Okay. I'm very clear about this. I think that we are into a long-term great opportunity wave. Because the opportunity to change how the world operates with the combination of enormous amount of data combined with machine learning, ultimately, AI and automation has very, very big economic impact for every vertical. And so while one could argue that for many decades, Moore's Law has sort of pushed technology forward and that always had new benefits. Now there is simultaneously a pool from end markets that all realize that hey, they could potentially shave some economics out of their operations by just understanding the data better or even find better solutions. And I think that is so profound that is as profound, I would say as computation 35 years or 30 years ago impacting the world. Now at the same time, we are all well aware that there are some shortage of certain -- actually a fairly limited set but crucial set of parts. And I'm hesitate to call that a cycle. There have been interruptions in the supply chains due to global politics. There have been COVID that stop people from ordering. There have been a lot of things and it's mostly older parts. And so yes, there's some shortage there. There's some additional capacity being built in. Most of the capacity is being lined up for actually advanced nodes because of the earlier point I made all these new opportunities. And so there will be always a little bit of a cycle of supply and providers alignment. But in general, I think that we're in for a decade of great opportunities in semiconductors. By the way, I should add that includes us of course. Yeah, that was maybe the end of the key part of the question for Synopsys. Yeah, we're very much in the middle of that. And we love this term of being a catalyst because we interact with literally the deepest technology with the design, with the system, configuring the optimization there all the way into the software and the security. And so it puts us very much in a position to interact with all the players that have to interact well for success. And that's where a big part of our enthusiasm comes from.

Thank you. Maybe a quick follow-up. Maybe a question for Trac. In terms of your full year guidance and your fiscal second quarter guidance, it does seem to imply there's a bit of a moderation of your revenue in the second half of the fiscal year. I have to think the time-based revenue has been quite linear, typical linear through the year, steadily growing and maintenance service, I don't expect any non-linear parity there. I was kind of wondering if you're sort of expecting a little bit of a moderation in upfront revenue there, either it's the hardware or the perpetual licenses or the IP contracts here going into the second half. Thank you.

Charles, the quarterization profile is a function of when the customer -- when we expect the customers to pull down IP and hardware. So it's really those two items. Everything else, as you described, is quite linear. A little bumpy as well, but little bumpy as well, but generally, very linear. Yeah.

Thank you. That’s all from me. Thank you.

You’re welcome.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.