Synopsys, Inc. (NASDAQ:SNPS) Q4 2022 Earnings Call Transcript

Synopsys, Inc. (NASDAQ:SNPS) Q4 2022 Earnings Call Transcript November 30, 2022

Synopsys, Inc. beats earnings expectations. Reported EPS is $1.91, expectations were $1.85.

Operator: 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. 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.

Lisa Ewbank: 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.

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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 engineering throughout economic cycle precisely to be ready to feel competitive new products when the market turns upward again. We've seen this dynamic consistently in past up and down markets and expect it to continue. Today, Synopsys aims to be a key engineering catalyst towards this Smart Everything world as our mission is to enable innovation at the critical interplay between semiconductors and software.

Our customers are racing to differentiate along three axes; first, still higher complexity chips with massive compute capability; second, super tightly integrated systems of chips optimized for the software that will run on them; and third, increasing focus on security and safety across both software and hardware in virtually all vertical segments. Synopsys is uniquely positioned to address these challenges as we provide the most advanced and complete design and verification solutions available today, the leading portfolio of highly valuable semiconductor IP blocks and the broader set of software security testing solutions. In the past few years, we have introduced some truly groundbreaking innovations that radically advance how design is done.

Let me begin the highlights with our DSO.ai artificial intelligence design solution. With already well-over 100 commercial production design, it continues to deliver amazing results. Applied simultaneously to multiple steps of the design flow, DSO.ai reduces efforts for months to now weeks, while also delivering superior performance and reduced power. Results reported by customers include 25% reduction in turnaround time and compute resources and up to 30% power reduction. With customers such as Samsung, Renesas, Intel, MediaTek, Sony and many others reporting impressive achievements, customer adoptions have accelerated across a wide range of process nodes and market verticals. In FY 2022, the number of customers more than doubled, and we've already seen significant repeat orders and broadening proliferation.

Seven out of the top 10 semiconductor companies have adopted DSO.ai for production design. Meanwhile, we're also extending machine learning capabilities across other EDA workloads from verification to test, to custom design. These next phase solutions are already in customers' hands, showing excellent impacts and promise. Central to the impact of DSO.ai are the powerful digital design solution engines underpinning it, specifically our Fusion Compiler products. It drove numerous competitive wins with accelerated proliferation for a wide variety of customers. Key adoptions range from the largest processor firms to influential systems companies, to major hyperscalers. Fusion Compiler is used in over 90% of advanced nodes down to 3 and 2-nanometer, with a majority exclusively using Synopsys.

In Q4, cumulative customer tape-outs surpassed 1,000, more than doubling the combined total of FY 2020 and 2021. Our customer solutions also saw strong market momentum this year, continuing the drumbeat of competitive displacements. With options ranging from large semiconductor companies at advanced nodes to automotive to memory vendors, as we added more than 45 new logos this year, nearly one per week with double-digit revenue growth. To address the highly advanced chip mentioned earlier, multi-die system design, sometimes also called chiplet-based design, is opening a whole new era of silicon complexity. Having forecasted this a number of years ago, Synopsys now provides a differentiated multi-die solution that enables architecture, analysis, design, and sign-off all integrated in one place.

This includes our 3DIC Compiler solution and our industry-leading portfolio of state-of-the-art die-to-die interface IP. Today, we're already tracking more than 100 multi-die designs for a range of applications, including high-performance compute, data centers, and automotive, seeing strong adoption of our broad solution. A notable example is achieving plan of record for multiple 3D stack designs at a very large, high-performance computing company as well as expanded deployment at a leading mobile customer. Meanwhile, the recently introduced UCIE protocol, short for Universal Chiplet Interconnect Express, has become the interconnect of choice for multi-die systems. Both our UCIE interface IP and HBM3 memory IP are at the forefront of enabling multi-die designs with multiple wins at Tier 1 customers.

More broadly, third-party IP is a must-have for designs across the board. Our market-leading IP portfolio, by far the broadest in the industry, continues to drive significant adoption and growth. In fiscal 2022, our IP business delivered another record year with more than 20% growth. We continue to see particularly strong demand in key markets such as high-performance compute, automotive and mobile, where the systems are driven by smart everything, high-speed secure connectivity and advanced process geometries. While maintaining technical leadership in IP for advanced process technologies, we delivered multiple IP products in the most advanced 3- and 4-nanometer process nodes to our customers in high-end mobile and HPC applications. Very strong adoption also of our automotive-grade IP solutions as cars are being re-architected towards both electrification and autonomous driving.

The acceleration of car electrification driven by urgent climate considerations notably drives a slew of new sensor, actuator, and control chip designs. Our automotive solutions had outstanding growth. Today, we have engaged with hundreds of designs from more than 30 leading semiconductor providers, more than 10 OEMs, and three of the top four Tier 1 suppliers. At the core of these systems is the intersection of hardware and software. To optimize the system, our customers must verify both the software in the context of the hardware and the hardware in context of the software. While verification is fundamentally an unbounded problem, our state-of-the-art simulation, emulation and prototyping products tackle these tough verification challenges at unparalleled speed with the fastest engine, highest capacity, and lowest cost of ownership.

Specifically, our hardware-based products delivered a record year with competitive momentum, adding more than 30 new logos and over 200 repeat orders. Moving now to software security, the critical nature of which continues to grow as management teams and Boards are keenly focused on ways to protect their companies and their customers from destructive cyber attacks. Our Software Integrity solution enables organizations to manage the security and quality of software across a wide range of industry verticals from semiconductor and systems to financial services, automotive, industrial, health and more. Industry groups such as Gartner and Forrester recognized Synopsys leadership. Gartner positions us at the top and farthest right of its Magic Quadrant, rating us highly for technology depth, breadth, consulting capabilities and vision.

While this is the one area where we did see some impact from the macro environment in the quarter, revenue growth for the year accelerated over FY 2021. Notably, we saw good progress with the go-to-market and product initiatives introduced last year. Our indirect channel partner business, for example, continues to ramp well by expanding our reach into customer groups and geographies that we haven't connected with in the past. We are building momentum with the goal of another significant increase in indirect sales in FY 2023. On the product side, we expanded our offerings by launching two new SaaS services for static analysis and open source analysis integrated into our Polaris platform. We expect these SaaS capabilities to accelerate adoption and consumption of our solutions as they are particularly well-suited to growth in the mid-market.

Early customer reception has been quite positive. Our continually evolving and strengthening platform also provides more and more valuable insights to help companies drive increasingly robust top-down software risk management. In summary, Synopsys exceeded beginning of year targets and delivered a record fiscal 2022 across all metrics with the additional spark of passing the $5 billion milestone. We enter FY 2023 with excellent momentum and a resilient business model that provides stability and wherewithal to navigate market cycles. Notwithstanding, some economic uncertainty, our customers are continuing to prioritize their chip system and software development investments to be ready with differentiated products at the next upturn. On our side, many game changing innovations across our portfolio position as well to capitalize a decade of semiconductor importance and impact.

Finally, our execution and operational management continue to drive growth and margin expansion, and we're particularly thankful to our employees around the world for their vitality and diligence throughout the year. One more comment. As you may have seen yesterday, we announced the appointment of Shelagh Glaser to become our new CFO on December 2nd. She's here with us today, listening in as we prepare to pass the torch from Trac in a few days. Before I pass the microphone to Trac for his review of fiscal 2022, it's wonderful to say a heartfelt thank you for his contributions that helped build the company we are today. With 16 years on our team, eight as Synopsys CFO, Trac is a cornerstone architect and execution leader of the strong results of the past year.

During his tenure, he strengthened our fiscal discipline and acumen, engineered trusting and effective relationships with the other parts of the company and, most importantly, assembled and grew a great team that we will continue to build on. So it is all the more meaningful to voice our gratitude to Trac at the very moment that we pass this unique revenue milestone. Thank you, Trac. And now one more time, please give us your perspective on the state of Synopsys.

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Trac Pham: 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 operating margin up slightly to 10.1%. For 2023, even in light of some of the marginal macro-related impact in Q4 orders, we expect revenue growth to be within our 15% to 20% objective with increased adjusted operating margin. Turning to cash. Operating cash flow for the year was a record $1.7 billion reflecting our strong results, robust collections, and approximately $100 million in early collections. We ended the year with cash and short-term investments of $1.57 billion and total debt of $21 million. During the year, we completed buybacks of $1.1 billion or 69% of free cash flow. Now to our targets, which reflects the impact from the recently announced export control regulations and assume no further changes for the year.

Based on our current assessment, we expect quarterly revenue and non-GAAP EPS to steadily increase through the year. For fiscal year 2023, the full year targets are; revenue of $5.775 million to $5.825 billion; total GAAP costs and expenses between $4.49 and $4.537 billion; total non-GAAP costs and expenses between $3.81 billion and $3.84 billion, resulting in a non-GAAP operating margin improvement of more than 100 basis points; non-GAAP tax rate of 18%; GAAP earnings of $10.28 to $10.35 per share, cash flow from operations of approximately $1.7 billion. Now to the targets for the first quarter, revenue between $1.34 billion and $1.37 billion, total GAAP costs and expenses between $1.033 billion and $1.053 billion, total non-GAAP costs and expenses between $875 million and $885 million, GAAP earnings of $1.89 to $2 per share, and non-GAAP earnings of $2.48 to $2.53 per share.

Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. Finally, we are reiterating our long-term financial objectives of annual double-digit revenue growth, non-GAAP operating margin expansion of more than 100 basis points per year and non-GAAP EPS growth in the mid-teens range. In conclusion, we entered 2023 with excellent momentum and confidence, reflecting our innovative technology portfolio, ongoing design activity by our customers who continue to invest through semiconductor, through semiconductor cycles and the stability and resilience of our time-based business model. With that, I'll turn it over to the operator for questions.

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