Synopsys, Inc. (SNPS) CEO Aart de Geus on Q2 2022 Results - Earnings Call Transcript

Synopsys, Inc. (NASDAQ:SNPS) Q2 2022 Results Conference Call May 18, 2022 5:00 PM ET

Company Participants

Lisa Ewbank - VP, IR

Aart de Geus - Chairman and CEO

Trac Pham - CFO

Conference Call Participants

Gary Mobley - Wells Fargo Securities

Jason Celino - KeyBanc

Ruben Roy - WestPark Capital

Charles Shi - Needham & Company

Joe Vruwink - Baird

Jay Vleeschhouwer - Griffin Securities

Vivek Arya - Bank of America Securities

Pradeep Ramani - UBS


Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the Second 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. 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, Caroline. Good afternoon, everyone. Here 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 the 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 In addition, the prepared remarks will be posted on our website at the conclusion of the call.

With that, I’ll turn the call over to Aart de Geus.

Aart de Geus

Good afternoon.

We delivered an outstanding second quarter, exceeding all of our guidance targets and reaching record revenue, operating margin, earnings per share and cash flow.

Revenue for the quarter was $1.28 billion. Business was very strong across all product areas and geographies. Backlog grew to $7.3 billion. GAAP earnings per share were $1.89, with non-GAAP earnings of $2.50 and non-GAAP ops margin of 37%. We generated $750 million of operating cash flow.

With our significant first half strength and high confidence in our business, we are raising guidance substantially for the year. We expect to grow annual revenue approximately 20% to pass the $5 billion milestone, drive further ops margin expansion and grow earnings per share by more than 25%, while generating approximately $1.6 billion in operating cash flow. Trac will discuss the financials in more detail.

Our financial momentum builds on three drivers: an unmatched product portfolio with groundbreaking new innovations; robust semiconductor and electronics market demand; and excellent operational execution. The backdrop for our outlook sits at the intersection of massively growing amounts of data and the demand for Smart Everything, empowered by machine learning and AI. This is synonymous to stating that in both, consumer and business applications, the need for electronics and chips is relentless, chips for data capture and IoTs, for data transmission, for data storage and, of course, for faster high-bandwidth and dedicated computation, plus a huge and intensifying need for more security and safety.

All of this means escalating opportunities for Synopsys. We’ve seen growing demand, not only from our traditional semi and systems customers, but also from impactful new entrants such as hyperscalers, a mounting number of start-ups and nontraditional systems companies across vertical markets.

Notwithstanding macroeconomic choppiness in an uncertain geopolitical environment, these companies are investing heavily in highly complex chips, systems of chips and chiplets and security initiatives. Synopsys is a catalyst in enabling this new Smart Everything era as many customers race forward to invent and deliver highly creative and optimized chips and systems. Our innovations, particularly in AI-driven design flows and at the intersection of hardware and software, are crucial for our customers and have fueled our accelerating momentum. In addition, our IP focus, particularly in high-speed connectivity and advanced interfaces supporting multichip design is second to none and yielding excellent business growth.

Let me begin this quarter’s highlights with AI as we continue to deliver groundbreaking results and as machine learning is revolutionizing chip design. Our solution, which learns and automates a substantial portion of the design flow, is seeing rapid adoption for production use. Many of the largest, highest profile semiconductor companies are reporting tremendous productivity benefits using in production today.

At our user conference in March, MediaTek, Intel, Samsung and Sony shared with fellow engineers their impressive achievements using our The reported results were truly remarkable, as much as 20x productivity improvement, 7% to 25% lower power and a dramatic reduction in turnaround time with a single engineer completing four design blocks in half the time that had previously took four engineers.

Critical to the high impact of is our powerful digital design solution, resulting in significant cross-selling opportunities and competitive wins at cornerstone semiconductor and systems customers. Orders were well ahead of plan, contributing to our backlog growth.

In Q2, two major hyperscalers selected Synopsys’ highly differentiated Fusion Compiler product for multiple advanced designs. We also significantly expanded our share at a top U.S. communication semiconductor company. In aggregate, the trailing 12 months revenue for Fusion Compiler more than doubled.

At our user conference, I had the opportunity to highlight not only some of the exciting capabilities to come such as using AI and verification, but also how Synopsys overall is technically helping to transform EDA design more broadly. Our custom design solutions, for example, are seeing strong market disruptions as well, including 19 full-flow competitive displacements year-to-date.

Over the past year, revenue grew double digit in this area, with adoptions ranging from large semiconductor companies designing at advanced nodes to automotive to memory vendors. With advanced chips -- while advanced chips are the foundation of continued scale complexity, electronic systems now increasingly grow systemic complexity by tightly connecting many chips and the software to drive them.

Synopsys excels at this. An ideal example of systems leadership and impact is our IP product line. Here, too, business momentum continued with another excellent quarter as demand remains very high, especially in the AI, high-performance compute and automotive markets.

In Q2, we enhanced our comprehensive AI IP portfolio with the introduction of the industry’s highest performance neuroprocessor IP. Simultaneously, we extended our lead in the most advanced commercial processes. We can report significant traction with our interface and foundation IP, achieving more than 30 3-nanometer design wins for high-performance compute and networking, as well as notable wins in mobile applications.

In automotive, our decade-plus investments, safety certifications and market engagements are not only generating continued momentum with leading semiconductor suppliers, but also with OEMs and Tier 1s now developing their own chips.

We count among our customers the top 12 leading automotive semiconductor suppliers, 10 automotive OEMs and 12 Tier 1 companies worldwide. For IP, we have close to 600 automotive design wins in advanced nodes, demonstrating the strength of our portfolio.

At the hub of the system is the intersection of hardware and software. This is precisely where our verification solutions are targeted. Let me highlight three success drivers. First, there is high demand for our market-leading emulation and prototyping hardware products. Demand is high, and we’re heading towards another record year. Fueling this are our new powerful application-specific ZeBu emulation and HAPS-100 prototyping systems. While demand is broad-based across customers and geographies, we continue to see significant growth in usage expansion at many of the largest hyperscalers in the world.

Second, multi-die, sometimes called chiplet-based system design, is driving a strong need for innovation. Synopsys is uniquely differentiated with our 3DIC Compiler solution and the industry’s leading portfolio of die-to-die interface IP, both of which are essential. Our focus and execution are driving adoption momentum with engagements across multiple market segments, including AI servers, automotive, telecom and aerospace.

And third, cloud-enabled design. One of the challenges for chip designers is access to sufficient yet flexible compute power. Of course, our EDA customers have been using cloud compute for years, but true flexibility hasn’t been available until now. In Q2, we expanded our cloud offering with the industry’s first broad-scale cloud SaaS solution. It offers unique flexibility in both, access and business model. Synopsys now offers three cloud approaches usable for peak demand to full deployment: One, bring your own cloud with pay-per-use access on the customer’s choice of third-party cloud provider; two, a SaaS model with tools, flows and Microsoft Azure-based compute; three, hardware-based verification with ZeBu Cloud. Initial customer reception has been excellent, ranging from very small startups to large companies seeking peak compute flexibility.

Now, to Software Integrity, which is both enabling and benefiting from intensifying demand for security and safety across all market verticals. Bolstered by momentum of products and consulting as well as broadening geography strength, we delivered another strong quarter with 20% year-over-year growth, exceeding our internal plan. Internationally, we had our best quarter ever, reaching 10 new countries that we’ve never sold to before through our channel partners. We also continue to make good progress improving our renewal rates and new logo engagement metrics.

From a product perspective, our broad portfolio is unique in the market, as our three-pronged approach provides differentiated value for all stakeholders, the developers, the DevOps group and the corporate security team. Over the past year, we’ve launched significant new products in each of these areas, and customer response has been excellent. Industry analysts continue to recognize Synopsys’ strength. For the fifth year in a row, we were named a leader in the Gartner Magic Quadrant for application security testing, and for the fourth straight year, we were rated the farthest up and to the right.

Finally, a few weeks ago, we announced a definitive agreement to acquire WhiteHat Security, a leading provider of SaaS-based dynamic application security testing, or DAST technology. This acquisition will further expand our portfolio and accelerate the build-out of our SaaS solutions. We look forward to welcoming the WhiteHat team after the close, which we currently expect to be in our third fiscal quarter.

In summary, we delivered a high momentum quarter and are substantially raising our outlook for fiscal ‘22. Building on a wave of technology innovations, fueling growth, strong and resilient markets and excellent operational and financial execution, we’re poised to cross the $5 billion mark revenue milestone this fiscal year. These results are not possible without the unwavering commitment and diligence of our employee teams. We thank you all.

With that, I’ll turn it over to Trac.

Trac Pham

Thanks, Aart. Good afternoon, everyone.

In Q2, we delivered record revenue, operating margin, non-GAAP EPS and cash flow. We continue to execute exceptionally well despite uncertainties in the macro environment. This is a testament to our robust portfolio, healthy markets and financial discipline. Our strong execution is also enhanced by the stability and resiliency of our time-based business model and $7.3 billion of noncancelable backlog. Our results and growing confidence in our business lead us to again raise our full year 2022 targets. After surpassing $4 billion in revenue in 2021, we expect to grow 20% and cross $5 billion in 2022 as our growth accelerates for the third straight year.

I’ll now review our second quarter results. All comparisons are year-over-year, unless otherwise stated.

We generated total revenue of $1.28 billion, up 25% over the prior year, with strength across all product groups and geographies. Total GAAP costs and expenses were $916 million. Total non-GAAP costs and expenses were $809 million, resulting in a non-GAAP operating margin of 36.8%. GAAP earnings per share were $1.89. Non-GAAP earnings per share were $2.50, up 47% over the prior year. Semiconductor & System Design segment revenue was $1.17 billion, up 25%, with robust demand for EDA software and IP.

Semiconductor & System Design adjusted operating margin was 39.2%. Software Integrity segment revenue was $113 million, up 20%. And adjusted operating margin was 11.5%.

Turning to cash, we generated a record $750 million in operating cash flow. We used $250 million of our cash for buybacks and have repurchased $890 million of stock in the trailing 12 months.

Our balance sheet remains very strong. We ended the quarter with cash and short-term investments of $1.72 billion, and debt of $24 million.

Before providing guidance, let me briefly comment on the WhiteHat acquisition, which is subject to regulatory review and customary closing conditions. We will pay approximately $330 million in cash when the transaction closes, which we expect to occur this quarter. Based on our preliminary review, we expect the acquisition to be roughly neutral to non-GAAP earnings this year.

Now to the guidance, which excludes any impact from the WhiteHat acquisition. We are raising our full-year outlook for revenue, operating margins, earnings, and cash flow. For fiscal year 2022, the full year targets are revenue of $5 billion to $5.05 billion, this represents 19% to 20% growth and a $225 million increase versus our prior outlook. Total GAAP costs and expenses between $3.928 billion and $3.975 billion. Total non-GAAP costs and expenses between $3.35 billion and $3.38 billion, resulting in non-GAAP operating margin improvement of approximately 250 basis points. Non-GAAP tax rate of 18%. GAAP earnings of $6.22 to $6.40 per share. Non-GAAP earnings of $8.63 to $8.70 per share, representing 26% to 27% growth. Cash flow from operations of $1.55 billion to $1.6 billion. Capital expenditures of approximately $145 million, up from our prior guidance as we consolidate our campus at headquarters to create a more efficient and economical footprint.

Now to the targets for the third quarter. Revenue between $1.21 billion and $1.24 billion. Total GAAP costs and expenses between $981 million and $1.0 billion. Total non-GAAP costs and expenses between $830 and $840 million. GAAP earnings of $1.32 to $1.44 per share, and non-GAAP earnings of $2.01 to $2.06 per share.

In conclusion, we continue to execute exceptionally well. And based on our strong momentum, we expect to deliver 20% revenue growth 250 basis points of non-GAAP operating margin improvement, more than 25% non-GAAP earnings growth and $1.6 billion of operating cash flow in fiscal 2022.

With that, I’ll turn it over to the operator for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Gary Mobley from Wells Fargo Securities.

Gary Mobley

Let me extend my congratulations on good execution, to say the least. I want to ask a multipart question on the backlog, up, I believe, roughly 50% year-over-year and mid-single-digit percent or high single-digit percent sequentially. So, to what extent is that backlog number growing as a result of longer duration -- average longer -- longer average duration? Excuse me. Maybe we can start there.

Trac Pham

Gary, the backlog is up due to overall run rate growth. Duration remains within the model we communicated in the past, which is 2.5 to 3 years.

Gary Mobley

Okay. And here we sit today with the potential for your company to grow 20% this year, and that’s obviously much -- well, I guess, it’s technically within your long-term view of double-digit percent growth. But that could mean a lot of different things to different people. So, I’m wondering if we can get an updated view on your long-term revenue growth target.

Aart de Geus

Well, right now, we’re not changing any targets for the long term, but clearly, we’re at the right end of the double digit answer. And in general, I would say that we feel that we’re in a strong position that has a potential to continue for quite a while by virtue of not only building up the backlog, but more importantly so, by the conjunction of the demand in the market and what we have to offer being particularly well aligned. So, I think, the Company is very strong right now, and you saw that we changed the objective for the year considerably from where we started the year.


Our next question comes from the line of Jason Celino with KeyBanc.

Jason Celino

Really impressive guidance raise here. I think as we kind of second -- cross into the second half, maybe if we take a step back six months coming into the year versus now, what exactly in your visibility or confidence level has improved so much? Or I guess, what has surprised you to this point?

Aart de Geus

Well, I wouldn’t say it’s a surprise. It’s been hard work that has worked really well. I think we’re executing extremely well at this point in time. And having the products that are needed at the right time, including some that have truly breakpoints in innovation that are very valuable for the future serves us well. Obviously, the markets around us have a lot of noise up and down and sideways, but we cater to a part of the market that is highly competitive where there is a renewed understanding of how important chips are for differentiation in literally every field you can think of. And so, that is an area where the customers want to move faster with better tools, with faster solutions, and I think we’re well positioned in that.

Trac Pham

Jason, we -- keep in mind, when we enter the year, we are feeling very bullish about the business, right? Because in December, we are coming off of several years of very strong growth and margin improvement. And based on that, we had already raised our long-term outlook for the business. What’s different now six months in is that we’ve booked six months worth of business that we continue to see the momentum be very strong and consistent with what we have communicated. So, right now, we’re feeling -- we’re feeling like we’re executing well against the opportunity ahead of us, and the outlook is really positive.

Jason Celino

Synopsys, Inc. (SNPS) CEO Aart de Geus on Q2 2022 Results - Earnings Call Transcript

Okay. And then, maybe just a quick one on margins. If we kind of back into the 4Q kind of implied framework, and I know Q4 is typically kind of one of the lower points on margins, but this year, it seems a little bit lower than on a sequential basis. Maybe can you maybe speak to maybe some of your hiring plans or timing of investments, which may impact that?

Trac Pham

Well, I’ll start with the fact that we are raising the overall margins for the year by 250 basis points versus ‘21. So, it’s a really strong improvement. With regards to the Q4 profile, we continue to invest in the business in the second half. Good hiring, and frankly, the other part that’s contributing to it is the fact that the outlook is so strong that we are increasing our variable compensation accrual in the back half of the year.


And our next question comes from the line of Ruben Roy from WestPark Capital.

Ruben Roy

I’d like to extend my congratulations to you on solid execution. First question, Trac, just kind of around something that you mentioned last quarter and just thinking about durations haven’t changed, but backlog orders well ahead of plan, et cetera. You had talked about being able to extract more value in negotiations. And I’m just wondering if you could comment a little bit about kind of the pricing environment as you’re seeing expansion of tools across large customers, et cetera. Have the pricing dynamics across the business or product areas changed much between last year and this year?

Trac Pham

I’d say, the pricing environment is pretty healthy for us right now. And it starts with the fact that we are -- our products are incredibly competitive. And as you heard in Aart’s comments or prepared remarks, they are creating a lot of value for our customers. And the ability -- when you’re coming to an engagement of the customer with really good products that’s solving their problems in a much more efficient, effective and scalable way, it’s a much more constructive conversation on pricing.

Aart de Geus

Yes. In general, I would add, there is just a lot of demand. People are designing much more complex, not just chips, but systems of chips. The intersection between those chips and the software is more important, meaning that they want to optimize the chips for certain software and optimize certain software for the chips or vice versa. And so, these are all relatively difficult problems that require a lot of our tools and a lot of our IP. And I think the semiconductor market overall is heading towards continued growth by the sheer need of all these parts.

Ruben Roy

All right. Helpful. Thanks, Aart. I guess, just a quick follow-up on that, Aart, around the IP itself. As IP continues to grow for you and your competitor, and a lot of companies are obviously talking about IP or using IP going forward as the existing complexities continue to move up into the right, how are you -- how do you -- should we, I guess, think about IP as sort of a driver for your tool sales? Is it -- or is it kind of the other way around?

Aart de Geus

You’re right with both, meaning that in decades ago, clearly, was EDA driving things, and then you would sell some IP in some of the regions that have come online, let’s say, in the last 10 years, IP has often been the first decision-making point and then the EDA followed. And in the system world, it’s a little bit of both. But very often when people decide about what architecture they’re going to build, they make big decisions on the building blocks and then they immediately look in the catalog from Synopsys, okay, which building blocks can I have, ready to go or which ones can I get with some modifications. And that is, of course, a dramatic shortcut in design and effort.

So, I think they’re sort of, in my perspective, two sides of the same coin. You need both, and both need to be working very well.


Our next question comes from the line of Charles Shi from Needham & Company.

Charles Shi

Congratulations on the strong results. I want to start with another question on IP. Thanks, Aart, for your answer on the synergy between EDA and IP. When I look at your numbers, it looks like your IP growth so far in this fiscal year has been far above your long-term target, like mid-teens. Really just wonder, do you still holding the view that IP is mid-teens kind of growth long term? Or do you think it may grow faster than that given how strong the results are so far in the year?

Aart de Geus

Well, as you know, so far, we want to hold on to the general directives that we’ve given for the long term. At the same time, there’s no doubt whatsoever that IP was particularly strong this quarter and actually has been strong for quite a while. And so, IP tends to be a little lumpy because you often sell IP over a period of time and then the customers pick it up as they need it, or some of the things that are subject to milestones if they want to have IP that’s modified for their purpose.

So, it’s not always as easy to predict as some of the other things that are more time-based. But overall, they reflect very well the new designs, the new chips, but also the new types of chips. And we’re particularly strong already in those interconnectivity blocks that will be used when you put chips in very, very tight proximity, sometimes also refer to as chiplets. And so, that’s a whole new wave of opportunity for us.

Charles Shi

Maybe a second question. I know during the quarter, there was a press article about the subpoena -- the administrative subpoena you received probably like last year, by the end of last year. Can you give us an update as this is kind of an overhang, I mean, in terms of what investors think about Synopsys? And any update you -- is it closed, or when do you expect it to close?

Aart de Geus

Well, there’s not really an update. We received this, if I’m not mistaken, in November ‘21. And so, typically, you get a number of questions, and then there’s some follow-up on those questions. And by the way, a lot of these are being given out to a number of companies. And so, we have diligently followed up. It’s not for us to know actually when these things finish. So, it’s wait and see, but we’re following up, and no issues from our perspective so far.


And our next question comes from the line of Joe Vruwink from Baird.

Joe Vruwink

I’m wondering if it is possible to maybe compare the new product cycle we seem to be in at the moment and thinking of fusion verification, hardware, 3DIC? How does kind of this cycle compare to, I think, 2019 was a big one, I think 2015 with IC Compiler was a big one? I mean, do you get the sense that there is greater traction or that this era of product is different and better than some of the prior recent experience?

Aart de Geus

That’s actually a fun question because you seem to know some of our better birthdays here. In ‘15 and ‘19, we had absolutely great products that hit markets that substantially advanced the existing state-of-the-art. I think when you talk about things like DSO or some of the hardware-software interaction, you’re essentially talking about a new state of the art. And having had the privilege to be here for a long time, I strongly feel that the early days of synthesis felt very similar to what we’re doing right now with AI applied to our own design flows, because it is so revolutionary from a computer science point of view as AI has essentially brought a whole new way to look at problems through the lens of can you recognize patterns versus can you do deductive calculations.

And we have already demonstrated literally a month after month new results that are getting better and better, and also broadening the applicability beyond just design but also in verification. And so, I think there’s a long runway with that. But it is also literally fun to watch how excited our own teams are every time they get some better results.

Joe Vruwink

Okay. That’s great. And then, you went through a period of time thinking about fiscal ‘19, ‘20 and actually a lot of 2021 where your backlog, it was solid but sequentially stable. And now we’ve had 1 big step up, and actually this quarter is another big sequential step-up. How much of that would be renewal-driven and within the scope of a renewal getting uptake behind some of these more advanced solutions versus what might be new logo growth?

Aart de Geus

It’s a little bit of all of that. We have always wanted to say that backlog goes up and down because if you do, let’s say, a large transaction over multiple years, you get your backlog to go up, and then it gradually decreases as the revenue is recognized and then it gets renewed. Now, of course, we have many renewals, so it’s not that spiky in aggregate. But that’s the one flag I want to raise for backlog.

On the other hand, there’s no question that our business is strong and that we have many growing renewals and are broadening the portfolio of what we offer as a company. And so, we are very purposefully building the Company for growth at this point in time. And so we’re watching to make sure that the backlog is in sync with the guidance that we give you going forward.

Trac Pham

Yes. I’ll add to Aart’s comments about the backlog. That is noisy, and it will vary from quarter-to-quarter. It’s great to have $7.3 billion of backlog. It’s even better that the backlog is increasing because of run rate growth, as Aart described. And that momentum in terms of run rate growth in the first half is really what’s driving the confidence in the outlook for the full year.


And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

Jay Vleeschhouwer

Aart, you cited you all know that there is much that is new in EDA in terms of certainly accelerated growth, new customers, new customer requirements, new products and the like. But over time, EDA history has a way of repeating itself. And so, when we think about, for example, the thing that you started in your comments with AI -- and by the way, there’s a very interesting Synopsys presentation this morning at the ANSYS conference on AI. The question I have there is about historical precedence for earlier new tools. So, for instance, in the early days, our synthesis and implementation, eventually there were issues with respect to tool capacity, for example, in terms of synthesis blocks, for example, methodology. I’m sure you remember the great debate about flat and hierarchical and extensibility of the tools to new device types or applications.

So, the question with respect to AI is how confident are you that the platform that you have is viable for 5 to 10 years in terms of capacity, performance and meeting the needs of a wider and wider set of device types, so that the kind of walls perhaps at some of the earlier tools eventually ran into, AI doesn’t necessarily run into. That’s question number one.

For you, Trac, you raised the midpoint of your non-GAAP expense expectation for the year by $95 million. Could you talk about that in terms of headcount-driven growth behind that raise and guidance for OpEx? And if, for example, you were to fill every one of the more than 2,000 positions you now have opened, would you still be able to meet your margin objectives for the year?

Aart de Geus

Well, let me start with your first part 1, 2, 3 and 5 of the questions. All the things that you mentioned, I hope we have exactly those problems because we licked them in our history. The fact is that we have the good fortune of starting with synthesis that revolutionized digital design, made it possible, in all fairness, together with simulation, later place and route. And those automations kept growing with every success the customer who wants to do more. It’s like race car drivers, you give them a faster car, they drive fast and they say, "Can you give me something that’s faster?" And the good news is Synopsys for its entire history has always stayed at the state of the art. So, in that sense, this is normal evolution.

Secondly, I think the AI capabilities that we have right now and that we’re building are actually quite broad in terms of the applicability. And if you add the very fact that on the side here, we have just announced that we also have a SaaS model for cloud, that’s theoretically saying, "Oh, there’s infinite compute waiting for you if you want to pay the price." And I don’t know I want to be light-hearted about this, but the fact is that compute is not a limitation for us right now. I think what will be the challenging part is that all the problems that we’re addressing are highly systemically complex, meaning there are so many different things that play together, and you have to nail every single one of them, otherwise, the system doesn’t work. And that plays absolutely to Synopsys’ strength because we are deep in every area that we touch, and we’ve put a high degree of emphasis now for a number of years for Synopsys to migrate its thinking from scale complexity to systemic complexity.

And so, I actually have no fear in this direction. Trepidation on the execution is always there, but I think we’re on a roll here.

Trac Pham

Jay, with regards to your questions on OpEx. There’s two parts to the expense increase. One is the investments in the business. We’ll continue to invest in the business primarily to sustain really strong growth over the next few years. And the second part of the investment is making sure that we can scale this business in a way that we can drive margin improvement over time commensurate with that growth.

The second part of what’s driving expenses is what I highlighted earlier, which is an increase in -- with a strong increase in the outlook for the year, it’s also allowing us to accrue more for the variable compensation to reflect the overachievement.

On the hiring front, our outlook for the year of 250 basis points improvement in ops margin contemplates our ability to hire and our ability to continue to invest in the business. So it’s all closed loop and factored into the numbers.


Our next question comes from the line of Vivek Arya from Bank of America Securities.

Vivek Arya

I actually had two kind of more conceptual questions. So for the first one, I’m curious, why is there such a large gap between the growth rates of your EDA and the IP business? Conceptually, they should be levered to the same underlying trend. So, why is one outgrowing the other so much?

And when I look at your EDA growth, like 9% kind of full year, more like 11%, last year was 10%. So, I don’t see the same acceleration that you are describing. And when I compare it to your peer who is growing in the mid-teens, there also appears to be a difference in growth. So, I just want to make sure I’m looking at things apples-to-apples. So, that’s the first question that I have.

Aart de Geus

Well, in all areas, we’re outgrowing our competition. And that includes EDA and IP and the other areas that we’re in. At the same time, all of those have historical precedents of how the business is set up. And if you recall, it’s not that many quarters ago that we were referring to IP as in the mid-single-digits growth rate. And today, we’re clearly in the double digit. So, that has moved up. The IP has moved up very fast. And part of the explanation I tried to give a little bit earlier is that, in a number of situations, IP is leading as IP is, in many ways, the shortcut of EDA, right, which is you have design that’s already done. And so, the combination of IP and EDA actually works really well together, and one should take them in aggregate. And in aggregate, the Company is essentially predicting for this year what is a 19% to 20% growth. And so, you can split the numbers anyway you want.

Vivek Arya

I see. So, you don’t agree with the market share gains or shifts that your competitor was describing in their last call?

Aart de Geus

I cannot fully -- I cannot critique what others say about their business. We are doing well. I think the semiconductor industry is growing rapidly. There’s no question that most advanced nations in the world have all understood that chips are at the heart of all the software that’s needed to be competitive. And so, that is a very fundamental change. And we are, I think, playing very well in this with the technologies we have. And some of the areas that we have highlighted, such as, but I could have also highlighted SLM or a few other areas that are relatively new, we’re doing really well.

Vivek Arya

Right. And just a quick follow-up. The math suggests Q4 earnings could actually be down year-on-year. I imagine it’s more to do with just the pace of hiring because you still have pretty strong sales growth. But it will still suggest Q4 earnings based on your implied guidance would be down year-on-year. Did I get that math right? Is it just conservatism? Is it just kind of the timing of how OpEx and hiring is flowing? Is that the right way to understand why are...

Trac Pham

Yes. I would just look at the profiling. You’ve got two years that have very different profiles. And as a result, the comparisons are -- you’re comparing any particular quarter this year relative to the last year, it’s going to stand out and seem unusual. But I would -- if you zoom out and look at the full year, we’re delivering north of 25% EPS growth. And that’s really on the heels of strong revenue growth and margin improvement.


Our next question comes from the line of Pradeep Ramani from UBS.

Pradeep Ramani

I just had a question on just the sustainability of this 20% revenue growth. It feels like everything you are saying on the call is that there are structural drivers that are accelerating the growth of your business, and yet you’re not taking up the financial model. So, how are we to sort of interpret this? Are we to interpret this as 2022 is going to be a 20% type growth and then you reset back to a lower level, or do you -- or should we take the other side, which is sort of EDA growth is sort of -- when I say EDA, EDA and IP growth is structurally higher than it’s been before?

Trac Pham

Let me try to put it in this context, Pradeep. We are executing incredibly well. And we’re showing 20% growth off of a record year last year. The momentum of the business is really strong. We are feeling very confident about the business, not only for this year, but over a multiyear period. Where the questions are coming from with regards to changing our multiyear model, we literally just are six months into this, and we updated you all on a raise in the model back in December. It’s premature to be talking about changing our model midyear, while we still have six months left in the business to go. But I would just say that we are feeling very bullish and confident in the business over a multiyear period. So, I would not read anything in terms of the results and are concerned about our ability to sustain very strong results over the long term.

Pradeep Ramani

Great. And as a follow-up, maybe, I mean, this has sort of been asked, but let me ask it in a different way. If you grow especially in the back half of the year, is it being driven by maybe one big customer who’s pursuing foundry plans or is it broad-based? Both in terms of customer mix and maybe even in terms of just product mix with respect to hardware or EDA or IP and so on?

Trac Pham

Well, you can see in our disclosures that we are seeing very strong growth in all geographies and across all the product lines. So, it just gives you a sense of the breadth that we have with regards to where the growth is coming from. We don’t disclose, obviously, the customer detail, but the growth in -- all these areas are driven by really strong growth across the broad customer base. So, I -- we’re not attributing the change in the model or the outlook for the year to any one area. That’s just not a sustainable way to run a business.


Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open. Please go ahead. [Operator Instructions]

Aart de Geus

Okay. Well, I guess we can finish on a timely fashion. Thank you very much for your interest. We had not only a very strong quarter, but more importantly, saw momentum in our entire business. It will go forward for, as Trac said, a number of quarters. And so, on that basis, we appreciate your support, and we’ll be talking to you shortly in the one-on-ones.

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