Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter of Fiscal year 2022. At this time, all participants are in a listen-only mode. [Operator Instructions] Today’s call will last one hour. And 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, Lisa. Good afternoon, everyone. Hosting the call today are Aart de Geus, Chairman and 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 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 our website at the conclusion of the call. With that, I’ll turn it over to Aart de Geus.

Good afternoon. I am happy to report that Synopsys completed an outstanding year with sustained forward momentum. Since about four years ago, we communicated our dual objectives of accelerating growth and expanding margin. Synopsys has delivered on and, in fact, exceeded those expectations. This is visible through over 60% revenue growth since that point, 11 percentage points higher non-GAAP operating margin and more than doubled EPS. This quarter, we also crossed the $5 billion annual revenue milestone. Simultaneously, we substantially evolved our product offering, expanded customer relationships and increased competitive differentiation. Building on this, we delivered another record year in fiscal 2022. Revenue grew 21% to $5.08 billion, with double-digit growth in all product groups and across geographies. We further expanded non-GAAP operating margin to 33%, grew earnings by 30% and generated record cash flow of $1.7 billion. While semiconductor industry revenue growth has moderated, design activity remains robust. In addition, our time-based business model, with $7.1 billion of non-cancelable backlog and a diversified customer base, all provide stability, resilience and forward momentum. While fully mindful of the macro dynamics around us, including the most recent US government export restrictions, Synopsys is poised for strong results in fiscal 2023. We intend to grow revenue 14% to 15%, continue to drive notable ops margin expansion and aim for approximately 16% non-GAAP earnings per share growth. Trac will discuss the financials in more detail. Looking at the landscape around us, some of you have asked us why customers design activity remains solid throughout waves of the business cycle. Two reasons. First, the macro quest for Smart Everything devices and with its AI and big data infrastructure is unrelenting and expect it to drive a decade of strong semiconductor growth. Second, semiconductor and systems companies, be it traditional or new entrants, prioritize design…

Thank you Aart for the -- those kind of words. It has been a privilege to serve as the CFO of Synopsys. I'm immensely grateful to be a part of this team, and I'm proud of what we've accomplished. While I'll miss the rich interactions with the Synopsys team and the investment community, I'll be here through the end of December to ensure a smooth transition. Synopsys is in a great position as reflected in strong results and outlook. FY 2022 was an excellent year and featured record results in all key metrics, including revenue, non-GAAP earnings, and operating cash flow. We continue to execute well and are confident in our business heading into FY 2023 driven by our strong technology portfolio that is expanding customer commitments, robust chip and system design activity despite moderating semiconductor industry revenue growth, and a resilient and stable time-based business model with $7.1 billion in non-cash backlog. As a result, while the macro environment is stressed, we expect to grow revenue 14% to 15% and expand operating margin more than 100 basis points, driving non-GAAP EPS growth of approximately 16% in 2023. Let me provide some highlights of our full year 2022 results. We generated total revenue of $5.08 billion, up 21% over the prior year, with double-digit growth across all products and key geographies. Total GAAP costs and expenses were $3.9 billion and total non-GAAP costs and expenses were $3.4 billion, resulting in a non-GAAP operating margin of 33%. GAAP earnings per share were $6.29 and non-GAAP earnings per share were $8.90, up 30% over the prior year. Semiconductor & System Design segment revenue was $4.6 billion driven by broad-based strength across all product groups and geographies. Adjusted operating margin was 35.3%. Software Integrity segment revenue was $466 million, up 18%, with adjusted…

Thank you. Just before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants, if you have additional questions please reenter the queue and we’ll take as many as time permits. We'll take our first question from Joe Vruwink with Baird.

Great. Hi, everyone, and let me just say, Trac, all my best wishes. It's been a pleasure working with you. Maybe I'll just start. It seems your customers are heading towards a demand environment that maybe is most akin to what we last saw in 2019. And if I just think about Synopsys in 2019, I think you grew your recurring revenue at a low double-digit pace. Your non-recurring revenue was down at a high single-digit pace. I don't know, it seems both are probably trending better into 2022 than the last down experience to the industry. Can you just compare and contrast similarities, differences? And maybe a little bit more detail on how those two revenue components might track next year?

Well, first, actually, I think your comparison is pretty good because 2019 was really just waving around the medium for the growth of the semiconductor industry. And so in that sense, I don't see a long-term change in the trajectory, which essentially forecast that for this decade, semiconductors are making it to $1 trillion, and we see all the reason why it will get there. The fact that some years are higher, others are slightly lower is just a given. And in a context like that, Synopsys has the good fortune to have a business model that is very stable and self-sustainable, but also a set of customers that have no interest in going up and down in their R&D force, because it's a continual investment over typically products that take two to three years to develop, and so I think we provide a good solidity in pretty much all the fronts.

In general, Joe, but I'd also add that we're seeing just better momentum today than we did a few years back when you look at where our products are and with regards to the strength of the portfolio, how we're executing the changes that we're making and just the overall strength of the business. I think we're heading into an environment that may be stressed outside, but we're well positioned to grow there.

Okay. Great. And then I was hoping maybe just reconcile some of the year-over-year changes with your cash flow outlook. Even, I guess, if I adjust for the $100 million in early collections, I think cash from operations is growing a bit more slowly than your core EBIT and earnings. And then the -- it looks like a big step-up in CapEx. Maybe just what's behind that?

So, let me start with the cash from ops. The second thing in addition to the $100 million of early collections is the -- our cash flow projections reflect the change in the tax rules that now requires us to capitalize R&D expense. And so as a result of that, cash taxes are going up in 2023. So, that affects the number. With regards to the CapEx, it's a little higher than it's been over the last couple of years, primarily because of our efforts to consolidate space and our facilities in the US, mostly to drive better productivity in the employee base going forward.

Okay. Thank you very much.

You’re welcome.

Thank you, Joe.

We'll take our next question from Gal Munda with Wolfe Research.

Hey thank you for taking my questions and Trac, congratulations on your last quarterly call as well. I hope you enjoy your retirement. The first one is just I wanted to focus a little bit on the DSO. You mentioned, Aart, that you've doubled the amount of customers in 2022. My question is, how early are you in that potential to penetrate the customer base, especially the ones that move the need and the better and within the ones that already adopted? Do you feel it's just the beginning from them in terms of being productive? Or do you think there's still a lot of room to sell deeper into those accounts?

I think there's a lot of room. As a matter of fact, I think that the whole AI-driven design wave is easily the next decade because it fundamentally changes so many things at the very moment that the customers one way or another are going to grow complexity dramatically because they see so many opportunities in this notion of smart everything. And so in order to do that, you don't want to just have tools that use AI and be better and faster and so on, you want actually to impact the very design flow. And to me, the big breakthrough in DSO.ai felt very similar, as a matter of fact, as some 30 years plus ago, synthesis, it changed how things are happening. Now, in that sense, the adoption will, on one hand, take time; on the other hand, I think he is very fast. Literally just a couple of days ago, among the team, we were discussing how do we manage the number of people that have interest because they all want support, they all want to be the first ones, and it's a good problem to have.

That's very interesting. Thank you. And then just as a follow-up, you mentioned automotive solutions and the OEMs as well coming in, both from the semi companies and the OEMs kind of increasing demand, and that's kind of driving part of the growth. I guess if I do math and I think about your growth vectors today, I'm thinking maybe specifically about next year when you look at your pipeline, how does the reliance on the core semis, the leading-edge companies, compared to the systems companies in terms of the growth? Who's bearing the higher proportion of growth in terms of responsibility to deliver those targets that are pretty impressive? Thank you.

Well, I'm glad you bring up automotive, because looking at the numbers; I was surprised myself how well we had done this year. At the same time, I think there's some good explanations for it. For starters, the very fact that there was a supply shortage in automotive; suddenly everybody gets full attention of automotive. And then simultaneously, the world has now recognized that the cost of climate change is upon us. And I expect that the rate of change toward electrification is absolutely going to accelerate. And so investments that started probably seven, eight years ago. And we always sell, oh, automotive is so slow, is so slow, now suddenly are moving forward very fast, and it's along the entire supply chain that is reconfiguring itself around new architectures. So I think there's a lot of opportunity, lot of challenges there as well, but I think we're in a great position for it.

Thank you so much.

You're welcome.

We'll take our next question from Jason Celino with KeyBanc.

Hey thanks for fitting me in. Trac, it's been an absolute pleasure. Bad to say goodbye. So hopefully, we can chat with you later.

Thanks Jason.

The 14% growth guidance is very impressive, especially the year that you are coming out of. I'm curious, though, with the upfront business having a tough comp. You did 40% growth there this year. How much of upfront or hardware, I'm using those terms interchangeably, are you kind of taking into the guidance for 2023?

I wouldn't naturally attach hardware to upfront. Of course, it will show up in online. But keep in mind that we do have IP that is reflected in that category as well. And keep -- remember, in our statement, we -- our IP business grew over 20% in 2022. So heading in 2023, really the 14% to 15% guide for revenue growth is coming across all product areas. And that's where we're -- and that's all product areas and all key geographies, and so that's where the confidence and the comfort is in terms of our ability to execute against that plan.

Okay, excellent. And then DSO.ai, it seems that you're getting a lot of traction there, and you mentioned some other areas where you're looking at AI capabilities like verification, tests and customs. Can you talk about this roadmap and where we are with deployments and how customers are using it for some of these other applications?

Sure. I'll be a little careful with giving too much of the roadmap. But I want to make sure that you understand that in all of these areas, we have worked on those now for already quite a while, and we have a number of very positive results directly with customers. And at the end of the day, it's like the old the VC, do the dog, feed the dog, dog food, not that I would ever want to compare customers to dogs, of course. But the fact is, it's in the field that you realize what are the issues that one may not have contemplated, and the feedback is very positive because there, too, while the tools have long been optimized with a variety of machine learning and AI capabilities, changing the very workflow is how you get a more profound impact. And so we have a long opportunity space to grow into, but the engagement already signifies that we have results that customers want to keep and turn into production.

Okay, perfect. Thank you.

Thank you.

We'll take our next question from Harlan Sur with JPMorgan.

Good afternoon and congratulations on the solid results and outlook. And Trac, best of luck, and thanks for all the support. As you guys pointed out, chip design activity in leading-edge digital is very strong, where you have accelerated compute processors, next-gen networking, switching and routing ships, new ASIC programs. Very strong, but also significant increase in design complexity and more importantly, chip design cycle times, Aart, I'm wondering is the complexity and cycle time dynamic requiring your customers to use hardware emulation and prototyping as an integral part of the verification and software development process versus it being somewhat discretionary five, 10 years ago. And is this what's helping to sustain the hardware growth into next year?

The answer is yes. And another yes. Yes, it does require much more attention to the intersection of hardware and software. And in order to do that, you need simulation that is blindingly fast, and that's why you use hardware accelerators or we call them emulators or prototyping to be able to do that. But underneath your question, there was another comment, which is really the comment that is it true that complexity still is increasing massively, and the answer is very true, but it's going to be in a new form, meaning it's not one chip, it's multiple chips as close as possible, and it is architectures dedicated to whatever the end markets are. And so the race is absolutely on in all of these dimensions, but it brings a challenge for our customers that by now after many, many decades, have certainly learned how to optimize for performance and power. They now have to optimize for making it all work: multiple chips, hardware and software, thermal issues. And that complexity is going to drive all kinds of new products on our side, but also necessitates to look to have focus on the entire flow. And that's why I'm very encouraged by being at the dawn of really multiple new decades of new technology.

Thanks for that. And then on your IP business, we've got Intel and AMD, they're now starting to roll out their new processor chips, right, supporting next-gen memory and storage interfaces, right? Strong area for you guys, big DDR5 from memory, PCI Gen 5, CXL for storage. These processors are starting to roll out now. Additionally, you have more of your customers bringing on additional foundries as a part of their diversification and reshoring efforts. I think this should drive higher adoption of your foundational IP as well. So what are the other dynamics that are going to drive the IP business next year? And does this segment continue at strong double-digit year-over-year growth in fiscal 2023?

Well, we'll take 1 year at a time, but there's no doubt that there's an opportunity to continue to grow very well. And a greater respect for you mentioning all the keywords of things that we sell. I would add one other category that we alluded to, which is a category that actually looks at the new types of interfaces in these multi-die integrations because those integrations are predicated mostly on one thing; how short and how fast can you make the wires between the chips? And therefore, it's another form of miniaturization with enormous connectivity between chips. And so these connectors are extremely sensitive to the speed, the voltage and all these things. And so there, too, we are leading in providing the IP that makes this possible. And I think that's an area that will grow on top of what you mentioned.

Thank you.

You're welcome.

We'll take our next question from Charles Shi with Needham & Company.

Hi, good afternoon. Thank you for taking my question. I think first question I want to ask is about China. This has been or maybe had been a major bear case on your stock, at least over the last three, four months. And especially after the very, I mean, unprecedented round of restrictions that the USA implemented since the beginning of October. I understand you did qualify that the impact is not material, but it seems to me that investors may still be a little bit skeptical. And maybe can you just give us some sense from your perspective why -- what do you see as a reality being nonmaterial versus what the perception among the investment community is being like a China restriction being a major, major bear case for you? Is there any way that you can provide us some perspective why that has been the case? And what do you think that should help investors to really change or, I mean, have a more grounded view about this issue? Thank you.

It's a very good question, and I understand why it's difficult because a lot of these things are written in terms of hard to understand technology. And so of course, whenever there's a change, we look solidly at all the changes, as is the impact. And actually, I think we explicitly communicated that our assessment showed that it was not material in the financial terms. We highlight that we have factored in, to the best of our ability, exactly what the situation is today in our forecast. And moreover, we have put a lot of emphasis on making sure that we are 100% compliant with all the rules so that we act in a clean fashion. I would add only one more thing, which is China is a very broad market, and so there are many technologies that are not anywhere close to being touched by the advanced restrictions. So we see continued great opportunity, but we understand with you that it's an area to keep watching and to make sure that we grow in other parts of the world as well.

Thank you Aart. Maybe the second question, maybe this is for you, Trac. First off, congratulations on the retirement done. But I want to ask you, I think one year ago, when you gave the guidance about fiscal 2022, you guided fiscal 2022, maybe like first half, slightly first half loaded over second half. But your fiscal 2023 guidance, if I hear you correctly, you're guiding second half likely to be higher than first half. And your number seems to imply that every quarter needs to be somewhere 4% to 5% higher than the preceding quarters throughout the entire 2023. I wonder where exactly the assumptions there for steady growth into the year and that you have assumptions like maybe the semiconductor industry needs to have a rebound or recovery out of the downturn to the second half of your fiscal year. And if possible, can you give us some color what exactly driving the second half rebound, I mean the growth into the second half, which one will be the primary driver. It's EDA? Is it IP? Is it hardware? Or is it the SIG part of the business? Thank you.

Sure, Charles. Let me zoom out a little bit because over the last couple of years, we've had some unusual profiles coming into the year, right? So 2020 was very back end -- 2021 was back-end loaded. Heading into 2022, we said it would be very front-end loaded. When we look at the profile this year, keep in mind that it's based on backlog that we have scheduled out for our software business, IP and hardware. So, there's good visibility into how it lays out throughout the year. And when you look at the profile, you're right, it's slightly to the back half, but just marginally so. And if you look at the first half comparison -- first half, second half comparison for 2023 and you go back in time, it's just actually in line with what we have historically seen, which is kind of unusual but nice to get back to that profile. And it does imply that there is incremental increases in the business as we progress throughout the year. The basis for the forecast, as I said, is grounded very much on visibility of the backlog, but also what we expect to book in the year. And we are playing the year based on what we can execute, similar to what we have said in the past. So it's not a stretch to assume that it's dependent on major market forces or anything out of our control. We want to give guidance in terms of the outlook for the business, both top line and bottom line. That really is heavily dependent on our ability to execute. And at this point, given our visibility, the portfolio that we have and the -- our confidence in our execution, we feel really good about the 14% to 15% growth and driving 16% EPS growth.

Thank you, Trac.

You're welcome.

We'll take our next question from Jay Vleeschhouwer with Griffin Securities.

Thank you. Good evening. Aart, for you first, a product question since the term road map came up a couple of times. I'm wondering if there is some potential development of catalysts that you might be able to bring to market. For example, would it make any sense or would it be feasible for you to increasingly connect SIG with hardware-based prototyping? Along the lines of an earlier question, you haven't mentioned silicon lifecycle management or SLM, but would it make some sense there to connect it increasingly to your sign-off business and so forth and other kinds of intracompany integrations that could be differentiators or new catalysts for product growth? And then my final question for Trac. With regard to SIG, could you comment on the results that you've been seeing for your investments in international expansion for SIG over the last number of years, including, in particular, your investments in security consulting outside of the US?

So, let me zoom out a little bit on your question because generically, I think you're pushing absolutely on the right buttons, which is that while many of the things we've done in the past have been sort of point efforts, point tools and so on, for the last decade, we have started to integrate many tools more forcefully together because that's the only way of solving problems of complexity where power and speed and thermal and locations and reliability strongly intersect. Then if you move to the next level up, we have already mentioned the fact that there are strong interconnectivity between software and hardware because the hardware has one mission, make the software faster. And the software has one mission, make the hardware work harder for it. And so these optimizations are already going hand-in-hand. SIG adds an additional angle to that is the angle of security and quality. And we have, by the way, sort of the equivalent of a SIG inside of the EDA side as well and the IP side, because in the IP, we have a variety of security capabilities being built in. I think it will take a little bit of time before you can see a strong connectivity between those, but it has not taken that much time to see at a number of customers that they start to recognize that our vision moves up into the domain of software and moves down into the hardware at the very moment that they are learning about this. And the earlier mentioned automotive, but it could also be industrial and a few other segments, are precisely now arriving at this junction or figuring out that they have to make it all work at the same time. And so while many of the specific things that we're working on, we'll talk about as we release them, the general direction of your question, I think, is very much the way we think about systemic complexity now being the hallmark of the next decade.

Jay, this is Trac. So to your question regarding SIG and international expansion, you're right, that was a really intentional focus for us a couple of years ago in terms of improving the go-to-market function, both internationally and with channel partners. And I would say that when you look at the results over the last couple of years, I think we've made really good progress with regards to how we're executing internationally and the additions and the execution with new channel partners. I'm optimistic not only because of the results has been good, but we're in the early stages of actually seeing strong results from that. So I think there's a lot of progress ahead of us and lot of opportunities ahead of us in both those areas.

Thank you Aart. Thank you Trac.

You're welcome.

Thank you, Jay.

We will take our last question from Ruben Roy with Stifel Nicolaus.

Hi, thank you. And Trac, congrats from me as well. Thanks for all the support over the years. I guess Trac or Aart, one thing I wanted to just touch base on again is on the SIG business. Aart, you mentioned that you did see some impact from the macro during the quarter. The numbers look pretty good. I've got you down for 16% year-over-year growth, so maybe if you could just expand on that. Was that towards the latter end of the quarter and looking ahead or any other detail you can give us, please?

Sure. Well, first, I do think that the results were quite good. What we did see, and it probably started a little earlier than this quarter that some of the negotiations turned out to be a bit longer, maybe some more layers of approval. And actually, that is very, very common when you see economy looking at, well, is it going to be a recession or not, people little bit worried. Well, they just start putting some breaks on the decision making first and foremost. But at the same time, we were encouraged by the fact that growth continues to improve over the previous year. And there's no doubt in our mind that this is a very good part of Synopsys and there's a lot of opportunity, so we'll keep pushing.

Okay, great. Thanks for that detail. And then a quick follow-up. On the DSO.ai, you mentioned Aart that that’s -- you're starting to gain attraction across a wide range of process nodes, which is interesting to me, can you maybe talk a little bit about the value prop across those nodes, proposition across those nodes, is it power reduction for some, reduction in turnaround time for others or how does that work?

Okay, well the first one is turnaround time reduction for everybody and that in itself is interesting because if you remember my other comments about moving into a whole different league of complexity, while people will continue to push on performance and power and right now they're pushing on making just sure that they can finish the job, and in that context, improving the turnaround time is extremely valuable. But the other thing is that in many areas, it opens up doors that they didn't have before because if you can work in multiple nodes, the question is can you also start to translate from one node into another. And we have in the last 12 months specifically seen more and more really outstanding experiments and showcases where we helped people move from one node and design in let's say the next node or even some nodes that are quite different from the ones where they started with the benefit of the learning from the original node. And I think that that opens the fertile space because in reality, most design is redesigned. You try to always use what you did in the past. And the question is, how easy is that when the past becomes more and more complex? And that's where AI I think has a lot of potential going forward. So, sometimes you call that retargeting or remastering and I think it's going to be a lot of need for that.

Very good. Thank you, Aart.

Thank you.

And that concludes the question-and-answer session. I would like to turn the call over to Aart de Geus for closing comments.

Well, first and foremost, thank you for all the support and the good questions over the last year. I think we concluded a very strong year. Of course, again, it's a very strong market, but I think we also demonstrated that there's momentum going forward. And so that 2023, even without Trac, will be a good year for us. And we thank Trac one more time. We also thank you for your support and for your continuing support of our stock. With that, have a great rest of the year, and we'll talk to you soon.

Thank you. And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.