新思科技 (SNPS) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys earnings conference call for the fourth quarter and FY15.

(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 conference is being recorded.

At this time, I would like to turn the call over to Lisa Ewbank, Vice President of Investor Relations.

Please go ahead.

Thank you, Cary.

Good afternoon, everyone.

Hosting the call today are Aart de Geus, Chairman and Co-CEO of Synopsys, and Trac Pham, Chief Financial Officer.

Before we began, I'd like to remind everyone that during the course of this conference call Synopsys will discuss forecasts and targets and will make other forward-looking statements regarding the Company and its financial results.

While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect.

In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC report and today's earnings press release.

The reconciliation of the non-GAAP financial measures discussed on this call to their most directly GAAP financial measures and supplemental financial information can be found in the 8-K, earnings press release, and financial supplement that we released earlier today.

All of these items plus the most recent investor presentation are available on our website at www.Synopsys.com.

In addition, the prepared remarks will be posted on the site at the conclusion of the call.

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

Good afternoon and thank you for joining us.

We're happy to report an excellent fourth quarter finish, wrapping up a strong fiscal year for Synopsys and providing a solid foundation as we enter 2016.

During the year, we made excellent progress with a new generation of design and verification EDA tools and are now in the midst of a multi-year product upgrade cycle.

We also continue to invest in and grow our new Software Integrity products with several important acquisitions in the software quality and security space.

Let me summarize our financial results for the quarter and year.

We delivered fourth-quarter revenue of $587 million and $2.242 billion for the year, a 9% increase, reflecting both solid organic growth and important acquisitions.

We reported non-GAAP earnings per share of $0.67 in Q4, a 9.5% growth for the year to $2.77.

Strong Q4 orders helped grow our three-year backlog to $3.6 billion.

We generated approximately $495 million in operating cash flow and bought back $280 million in our stock, keeping share count flat.

Building on our strong year-end position, we are setting a 2016 non-GAAP EPS objective of $2.93 to $3, a revenue target of $2.35 billion to $2.39 billion, and an operating cash flow goal of at least $500 million.

Trac will discuss these in more detail shortly.

Several years ago, we embarked on a path to augment our leading silicon-enablement technology with a seamless connection to increasingly critical software elements and challenges.

In 2015, we made excellent progress on our Silicon to Software vision.

This vision and our execution put us at the right place at precisely the right time to help semiconductor and systems companies as they transition to their next phase of growth.

If you look back at history, the first phase in semiconductors was computation driven by the PC, followed by mobility driven by the smartphone, each of which prompting significant technology advances.

We are currently seeing the beginnings of a third phase, aimed squarely at the next decade of the Internet of Things or what I prefer to call, smart everything.

In smart everything, machine learning, image recognition and interpretation, reasoning, and various other forms of artificial intelligence will impact every segment of the market.

One remarkable example is in automotive, an industry that traditionally has only gradually adopted new technology, but is progressing by leaps and bounds from assisted to now autonomous driving.

During these transition periods, we see some turbulence in the landscape, as many companies compete by refocusing the end product differentiation, while others combine forces to ensure sufficient resources or market presence.

In the last 18 months, we've seen just that, with a large number of sizable company consolidations contributing to analyst semi growth estimates of 2% for 2015 and 1% for 2016.

In isolation, consolidations are a headwind for the EDA industry; however, they are also a hallmark of healthy restructuring in electronics, which drives major innovation from advanced silicon all the way up to software.

Synopsys is well-equipped, both technically and through our multi-year business model, to navigate industry challenges.

Our Silicon to Software center of gravity positions us well to again be a keystone provider in the next phase of the industry.

Looking at 2016 and beyond, it's useful to assess how we are systematically evolving the Company to deliver on this vision by focusing on four areas.

First, develop and roll out the next generation of silicon design systems, capable of handling the most complex chips.

Second, develop and roll out the highest performance verification solution for both the most complex chips, while addressing the intersection of hardware and software that is the very essence of modern electronic products.

Third, grow in IP with a portfolio of building blocks well-suited for the next market of smart Internet of Things devices.

Fourth, grow in our new TAM of software quality and security, which addresses the needs of both software embedded in electronics and application software in market segments as diverse as automotive, finance, health, energy, and others.

Let me report on our business from a product perspective in each area.

In advanced design, we are tracking a rapid adoption of 16, 14, and 10 nanometer FinFET technology.

The cumulative number of active FinFET designs is approaching 260, a 50% increase in just one year.

Synopsys is relied on for 95% of those chips and 42 of the 43 leading-edge designs at 10 nanometer are using our design tools.

Through our TCAD and OPC technology, we are also the go-to partner at 7 and 5 nanometer, collaborating with all top silicon providers, as well as research consortia such as IMEC.

IC Compiler II is our cornerstone next-generation physical design platform.

Announced about 18 months ago, it saw rapid, broad-based customer adoption during the year.

In fact, it's the fastest ramping product in our history, with now over 50 unique customers active on 135 complex production designs in 19 different process nodes.

Its broad foundry certification enables continued momentum and customers such as AMD, ARM, MediaTek, Renesas, Socionext, and Samsung have spoken publicly about their successes with IC Compiler II.

Now looking at verification.

Complexity not only exponentially grows with more sophisticated silicon, it greatly compounds with the amount of embedded software in all complex systems.

This challenge, and thus opportunity for Synopsys, only increases as one foresees a decade of smart everything with highly sophisticated hardware/software optimized devices.

We recognized this opportunity several years ago and accelerated R&D investments and M&A towards our Verification Continuum.

Built around the fastest simulation, emulation, and FPGA prototyping engines, our solution had an outstanding year of growth.

A number of bellwether global companies have recently adopted our solution and we expect continued growth in FY16.

Specifically, we saw broad-based strength in emulation this year with technology that competitively leads in both performance and cost.

In Q4, we shipped our new FPGA prototyping system, HAPS-80, with significantly faster performance.

It enables customers to validate entire systems and accelerate software development by up to six to nine months.

To further strengthen our Verification Continuum platform, in Q3, we acquired Atrenta, a leader in static and formal verification.

The integration has gone quite well and customers are very supportive of the combined product road map.

Now to our IP products, where we made good progress in expanding and optimizing our portfolio for IoT in key verticals such as automotive.

These applications share many common building blocks, ranging from sensor connectors to embedded low-power processors and memories, to interfaces such as Wi-Fi and Bluetooth, to the security blocks that enable built-in encryption.

In September, we introduced a comprehensive IoT platform built around our very broad IP portfolio, including our sensor subsystem and low-power ARC processors.

Customer feedback has been very positive and we will continue to deliver extensions to the platform over the next year.

This year, we also launched an automotive-grade IP solution, which includes ISO-26262 pre-qualified IP for applications such as vehicle connectivity, infotainment, and advanced driver-assistance systems.

In addition, we closed two key acquisitions.

We acquired Bluetooth IP from Silicon Vision and Elliptic Technologies, a leading provider of security IP and expertise.

Both of these are critical building blocks for a broad set of IoT devices.

Our leadership in FinFET-ready IP continues.

During the quarter, we announced 10-nanometer IP at TSMC and won a premier customer in Asia for advanced FinFET designs.

As customers grow their IP relationships with us, more and more are opting for longer-term volume purchase agreements rather than project-based buying.

For us, this is positively skewing the business mix towards more time-based rather than upfront revenue.

And now to software quality and security, our early-stage high-growth business group that we call Software Integrity.

As a backdrop, I spoke earlier about the mega-trend in the software industry dealing with exploding amounts of complex software content.

A second related trend is the continuous growth in the number of software developers.

One source estimates 20 million developers today, growing to 25 million over the next five years.

And third, the tools market for quality and security, which analysts estimate at about $2.4 billion, is growing at about 20% per year.

Our products help developers write better, more secure code.

This is done by testing for quality defects and security vulnerabilities to help eliminate flaws during the development process.

Building on last year's acquisition of Coverity, 2015 was a year of operational integration and scaling and broadening our presence in the security space.

Coverity expanded Synopsys's customer base.

One-half of its business was with our existing customers, albeit different users, and one-half with companies we had never worked with before in the application software space.

This past year we fully implemented our sales strategy Assisted by software integrity experts, the existing worldwide Synopsys channel now serves semiconductor and systems customers and we have a dedicated enterprise sales team focused on application software firms in areas such as finance and health, for example.

Similar to how we built our EDA and IP businesses, our growth strategy features a combination of organic investment and acquisitions.

During 2015, our organic investment focused on strengthening the sales structure and on broadening language coverage.

With three recent acquisitions, we also significantly invested in the security space, expanding our TAM by about $900 million.

Most notable was Codenomicon, a well-known expert in dynamic security testing and the co-discoverer of the infamous Heartbleed Bug in 2014.

Augmenting the security portfolio were the Seeker products, which find high-risk security weaknesses throughout the software development lifecycle, and in the last month, Protecode, which specialize in managing open-source and third-party source code.

Finally, we are very pleased to welcome Howard Schmidt to our advisory team as security advisor.

Howard is a noted cyber-security expert and former advisor to Presidents Obama and Bush.

These investments will have a near-term slightly dilutive impact as we scale into this higher-growth space.

For 2016, we have three primary strategic goals in Software Integrity.

One, unify all the acquired technologies into a next-generation quality and security platform; two, evolve and expand our focus on vertical segments; and three, address new opportunities in the compliance arena.

For example, we started a collaboration with Underwriters Laboratories on its Cybersecurity Assurance Program.

It's designed to help companies manage security risks via a certification process, similar to what they have been doing for years for electrical hardware devices.

From an overall Company financial perspective, our primary long-term objective remains to drive high single-digit non-GAAP earnings per share growth through a mix of the following.

One, organically grow traditional EDA revenue, generally in the low to mid-single-digit range.

Two, organically grow revenue in IP systems and software solutions generally in the low double-digits.

Three, actively explore TAM-expanding R&D and M&A opportunities.

Four, focus on global operational efficiency to deliver solid non-GAAP operating margin in the mid-20%s range.

And five, optimize the use of our strong cash flow to a balance of M&A, stock buybacks, and debt repayment.

While the combination of elements may vary based on business cycles and in-period priorities, our long-term driving principles remain consistent.

In summary, we completed a very strong year against a somewhat turbulent industry backdrop.

Our game-changing design and verification products have made great strides and are yielding excellent results; our IP business continues to grow in sophistication and business breadth; and our drive towards the new TAM of software quality and security is rapidly establishing Synopsys as a key player in this emerging market.

With that, let me pass the mic to Trac for the financial perspective.

Thanks, Aart.

Good afternoon, everyone.

As Aart mentioned, we delivered a strong finish to an outstanding year and continued to demonstrate our commitment to maximizing shareholder value.

We generated 9% revenue and 9.5% non-GAAP earnings growth and $495 million in operating cash flow.

We ended the year with $3.6 billion in non-cancellable backlog and returned $280 million to shareholders through our stock buyback program.

Simultaneously, we continue to make internal investments and acquire key technology to drive long-term growth.

Despite a challenging semiconductor environment, we continue to execute very well and enter 2016 with a solid financial foundation.

Our outlook reflects another year of increased growth and profitability and strong cash flow.

In addition, our stable and predictable business model allows us time to respond if the environment becomes more challenging.

Now to the numbers.

As I talk through Q4, 2015 results, and 2016 targets, all comparisons will be year-over-year, unless I specify otherwise.

We closed another excellent quarter and achieved strong 2015 results.

We delivered total revenue of $587 million in Q4, and $2.242 billion for the year.

We significantly exceeded our original 2015 target, primarily as a result of solid organic growth.

Revenue growth was strong across all platforms, with particular strength in place and route and emulation, and across all geographies except for Japan, which was affected by the yen.

About 90% of Q4 revenue came from beginning-of-quarter backlog and one customer accounted for more than 10% of both Q4 and 2015 revenue.

The weighted average duration of the renewable customer license commitments was about 2.9 years for the quarter and about 2.7 years for 2015.

We expect weighted average duration for 2016 to be approximately 2.7 years.

Our three-year backlog increased to $3.6 billion from $3.5 billion, due to the timing of large contract renewals, business growth, and acquisitions.

We have approximately 80% of the 2016 revenue target already in hand, which provides us a good measure of stability and predictability.

Turning to expenses, total GAAP costs and expenses were $530 million for the quarter and $1.98 billion for the year.

Total non-GAAP costs and expenses were $464 million for the quarter and $1.72 billion for the year.

The annual increase was due to higher costs associated with employee compensation, planned hiring, acquisitions, and cost of goods sold for emulation sales.

We delivered very solid non-GAAP operating margins, 21% for the quarter and 23.4% for the year.

At the midpoint of our 2016 guidance, non-GAAP operating margin is expected to increase by approximately 70 basis points over 2015 levels.

We'll continue to drive Company-wide operational discipline in order to fund our higher growth initiatives with an ongoing goal to deliver solid non-GAAP operating margins in the mid-20%s range.

Turning now to earnings, GAAP earnings per share were $0.31 for the quarter and $1.43 for the year.

Q4 non-GAAP earnings per share were $0.67.

Full-year non-GAAP earnings grew 9.5% to $2.77.

We were able to largely offset the dilution from acquisitions through strong operational execution.

Cash flows were excellent and above guidance due to strong business levels and collections.

We delivered $152 million in operating cash flow in Q4 and $495 million for the year, despite the impact of outflows related to acquisitions.

We ended the quarter with cash, cash equivalents, and short-term investments of $965 million with 16% onshore, and total debt of $205 million.

In 2015, we repurchased 6 million shares of stock for $280 million.

This was roughly 70% of the annual free cash flow.

1.7 million shares were delivered in Q4, as part of the $100 million accelerated share repurchase plan that was set up in August.

The ASR was completed in November, when the final 377,000 shares were delivered.

In September, the Board replenished our share repurchase authorization to $500 million.

We plan to return more cash to shareholders in 2016 by increasing our buybacks to slightly reduce the share count.

We expect operating cash flow to be at least $500 million in 2016.

The quarterly profile will be similar to prior years with a net outflow during Q1.

This is due largely to the payout of the prior year's annual incentive compensation.

DSO was 60 days, reflecting strong business levels.

We ended Q4 with 10,280 employees, with more than one-third in lower-cost geographies.

The increase in the number of employees was due to recent acquisitions, along with planned hiring.

Now to the first quarter and FY16 guidance, which excludes the impact of any future acquisitions.

For the first quarter, the targets are revenue between $560 million and $575 million.

As we communicated in August, we expect increased variability in quarterly revenue due to a lumpiness of hardware and consulting revenue.

Total GAAP costs and expenses between $505 million and $524 million.

Total non-GAAP costs and expenses between $445 million and $455 million.

Other income between $0 million and $2 million, a non-GAAP tax rate of 19%, outstanding shares between 155 million and 158 million, GAAP earnings of $0.25 to $0.33 per share, and non-GAAP earnings of $0.60 to $0.63 per share.

For FY16, revenue of $2.35 billion to $2.39 billion, which reflects roughly a 1 percentage point headwind impact from the yen.

Other income between $0 million and $4 million.

Beginning in 2016, we've adopted a normalized annual non-GAAP tax rate, which is the norm for our industry.

We will continue to use the tax rate of 19% through 2018.

We will monitor the rate for any significant events that can materially affect it.

Outstanding shares between 155 million and 158 million.

GAAP earnings at $1.55 to $1.71 per share, which includes the impact of approximately $101 million in stock-based compensation expense.

Non-GAAP earnings of $2.93 to $3 per share.

Capital expenditures flat with 2015, at approximately $90 million, and cash flow from operations of at least $500 million.

To help in your modeling, we expect second-half revenue to be slightly higher than the first half, with Q4 the largest revenue quarter, total non-GAAP expenses to skew slightly toward the first half of the year, and second-half non-GAAP EPS to be moderately higher than the first half with Q1 the lowest EPS quarter.

We are also reiterating our multi-year goal of high single-digit non-GAAP EPS growth.

In summary, even in the context of a challenging semiconductor environment, we are delivering very good results.

Our 2016 outlook reflects solid growth in revenue and profitability and strong cash flow; our healthy cash position, conservative business model, and excellent backlog provide a stable financial foundation for this year and beyond; and our focus remains centered on managing the business to maximize shareholder value.

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

(Operator Instructions)

Our first question comes from Rich Valera from Needham & Company.

Please go ahead, sir.

Thank you.

Good afternoon.

Aart, as I'm sure you're aware, most of the large semi deals that have been announced have not yet closed, so presumably there could be some increased EDA headwinds as those deals closed and deals renew.

Can you say what if any allowances you've baked into your guidance to allow for that potential pressure as those deals close and the contracts renew?

We think we have fully allowed for that, in the sense that, in my preamble I may have used the word being prudent under the circumstances.

That's exactly what it meant is understanding that these shifts are occurring, have occurred, but also understanding that we are actually quite well-positioned in those.

Meaning that in a number of situations, customers, when they combine, they rethink where they want to go with their tools, they rethink how they can be more efficient and more often than not they also select the better solution.

I hope that we can say that we are that solution in those cases.

So from a guidance point of view, we obviously are well aware of this picture and have tried to bake in our best estimation of what is likely to happen.

That's helpful.

It sounds like you a strong year with emulation and I take it that means you didn't see any significant pause in that business in the fourth quarter.

Is that accurate, Aart?

Yes, I don't think that we saw any change in the fourth quarter versus the rest of the year.

When we look at emulation, we look immediately at our overall Verification Continuum, and at this point in time, we have a value proposition that is really exciting because all the sub-pieces are very good and now we're starting to see the leverage between the different products and aspects of the solution.

So, no the fourth quarter in general was a maybe slightly surprisingly strong quarter for us and bodes well for the next year.

So you feel pretty good about the growth prospects of your hardware business, the emulation, and the FPGA prototyping?

Is that a fair statement?

Yes and there's a reason for that, which is that the entire industry, and what I mean with that is both the semiconductor side, as well as the systems side, is really focused and centered now on providing value that sits at this intersection of hardware and software.

And you say, what does the software have to do with these EDA tools?

It has to do a lot because what people would like to do is to try out their software on the hardware before it's built.

In that context, that requires super-fast simulation and debugging.

Emulation and FPGA-based prototyping sits right in the middle of that and so this is a very big trend that is going to be positive for the entire EDA industry.

Great.

Just one more to clarify.

Did you say in the prepared remarks -- I think this was Trac, actually -- that you expected to do a greater dollar amount of share repurchase in FY16 versus FY15?

That's right, Rich.

We did $280 million in 2015 and we expect to do more than that in order to reduce the share count slightly to the range of 155 million to 158 million for 2016.

Perfect.

Thanks very much, gentlemen.

You're welcome.

Now to the line of Krish Sankar of Bank of America.

Please go ahead.

Yes.

Hi.

Thanks for taking my question.

I had a couple of them, Aart.

Just to follow-up on the M&A question.

Even though some of these M&A deals have not closed, are you seeing a change in the behavior from the EDA purchasing managers at semi companies, anticipating the potential M&A?

Are they scaling back EDA purchases?

That reaction happens about 10 minutes after the deal is announced, meaning that within companies that are contemplating mergers, every employee in those companies asks themselves so what about me and what happens next and how do you align the company, and so on.

There is a whole set of restriction in terms of what they can do between companies that have announced mergers and have not merged yet.

But there is clearly a large amount of planning that goes on in parallel to the process of seeking the various national approvals, and in that process, they look at where their future will lie.

It is certainly true that, in practice, the actions occur really only once the mergers are closed, but the thinking precedes that.

Got it.

In your prepared comments, you said that one of the goals is to have a low to mid-single-digits core organic EDA growth rate.

That seems like a shift from prior growth rate expectations.

I'm just curious if semi M&A is impacting EDA in the long run, at least being a headwind in the near term, do you still need to have a 32% R&D, as a percentage of sales, given the fact that even if moves were slowing and companies are consolidating, is there room to actually bring that R&D down, because it seems like a pretty high run rate?

It's an excellent question because whenever there are major shifts in the industry the make up of the industry and the characteristics of differentiation may evolve.

What is clear, and by the way, very exciting is that from a silicon perspective, we can see the next 10 years still cruising forward rapidly in terms of complexity.

What this does is that it provides the computational platforms that will make a whole different phase of software possible.

So from that perspective, yes, you may say our R&D is high, but it has always been at that level because for literally 29 years of our existence, we have driven the state of the art of [war's law] and from a technical point of view there is no slowdown.

If nothing else, there is an acceleration because it's multiplied by the software side of things.

We do look at presently being in somewhat of a phase shift in the semiconductor industry as a number of companies look at these opportunities, invest, and reconfigure themselves towards them.

We are already well moved in that direction, and hopefully, I was able to communicate a little bit with the notion of the vision that we've had now for a number of years of Silicon to Software as really moving the center of gravity exactly where the customers are going to be in the next few years.

So notwithstanding the normal turbulence whenever you have new opportunities emerging, but not yet having big economic impact, we're very well-positioned for that.

Got it.

Then just a final question from my end, Aart, if you look at the backlog growth, which is probably 2 or 3 percentage year-over-year, looks like bookings might have declined on an annual basis.

Where was the biggest weakness you saw in the bookings?

The challenge with looking at bookings when you have a business profile that has a majority of the deals that are on the average about round numbers three years, if some of the larger deals fall in a certain year, the backlog will grow, in other years it may actually shrink.

So maybe more relevant to your question therefore are two other points.

One is that the run rate is continuing to grow for us, but secondly that we're entering again a year with essentially 80% of the revenue in hand.

So when we look at the backlog, the real main value of that is a degree of stability that allows us to continue to invest precisely in turbulent times, so that as the economic opportunities come out, we're ready to grow with them.

Got it.

Thanks a lot, Aart.

You're welcome, Krish.

Now to the line of Sterling Auty from JPMorgan.

Please go ahead.

Aart, let's actually follow that line of thinking, because that was actually one of my questions.

But also shouldn't the two other factors that are in that backlog that impact the calculated bookings growth, one, the timing of your largest customer and when that renewed, and how that impacts calculation, as well as any contributions to the backlog from acquisitions?

And if you could actually give us any additional color on what the acquisition contributions to backlog last year and this year, that would certainly be helpful to understand the--?

Sure.

You're making exactly the point that I intended to make, which is that there is a variability from year to year depending on, not just one, but some of the larger customers.

Most large customers don't have just single contract, they have multiple contracts, so it's actually, in practice, more complicated.

But let's say for arguments sake, if we had only one customer and that customer renewed every three years, well you would have every three years a big backlog increase and the next two years, a big decrease.

Obviously, that's an extreme case, but if you look at the universe of our customers, there is a variability depending on where the bulk of the renewals fall, and sometimes these timelines change as a function of us having different tools that we engage.

We have new products or customers have changed circumstances, such as consolidations.

So, we're managing a dynamic set of relationships.

But fundamentally, our duration, I don't know it -- the average number is maybe 2.7 years, or 2.8 years or so, and so that has been remarkably constant.

So if I look at the guidance on revenue and the growth either at the midpoint or even at the high end of the guidance range, it still seems to imply some deceleration, even though you've got Atrenta in there for a full year.

How should I think about where the biggest parts of that deceleration is coming from?

Is that factoring in the M&A headwinds and a slowdown in EDA?

Is that some sort of normalization to the higher growth parts of the portfolio?

Help me connect those dots?

Sure.

The first point is actually more from an [end all], which is if you look at the semiconductor industry, its own growth rate is somewhat anemic right now.

In all fairness, this can go up and down by 5% without anybody being able to predict it.

That's just the normal noise in that industry.

But against that backdrop, customers are cautious, and it's also against that backdrop that consolidation manifests itself.

As I mentioned in a previous answer, we have a very good understanding of the potential impact of consolidation and we've taken a prudent approach to it.

The other thing I'm reminded of is that there is about a 1% impact of the yen.

But in all fairness, I always discount these things a little bit, not because they are not right, it's just that it feels like a somewhat simplistic comment, when the reality is, hey, we are hustling for business and that's how we should grow the Company.

Lastly, I do think that there's no question that our largest market is the one that is most impacted by semiconductors, but we continue to invest in these new areas with quite good success.

And so in that sense our product portfolio is evolving well.

And that's precisely what one should do in these phase shifts on an industry.

And then last question, can you give us a sense -- you gave some statistics around IC Compiler II.

I don't know if there's a way for you to quantify or if you measure, but what perhaps the win rate in terms of IC Compiler II adoption in situations where you saw side-by-side RFPs, bake-offs, tasks, however you want to describe it, just to see how the tool in those heads-up competitions actually fared during the quarter?

There are a lot of head-to-head competitions, largely because the industry is very engaged in both looking forward from a technology point-of-view while simultaneously being very cost-conscious.

I don't think that, in general, this is not quite a zero-sum game and a number of customers use tools from multiple vendors, partially to, quote, keep us honest, which I never quite like as a terminology, but I can sympathize with their desire to make sure that we stay on the ball.

And, partially because they want to negotiate on price.

Having said that, our product is technically doing extremely well.

This year was really the year were we were almost overwhelmed by the number of customers that adopted us on a product that is now rapidly gaining in solidity as it gets applied to more and more extremely, extremely complex chips.

What is exciting about that is that many of the capabilities that this was built for are precisely the capabilities that are now being exercised.

I'm talking here about 10 nanometer and the beginning of 7 nanometer design.

And so we expect that the benefits of the products are now becoming rapidly more and more visible, and so far, from a market share point of view, we have done quite well.

Thank you.

You're welcome.

Now to the line Tom of Diffely from D.A. Davidson.

Please go ahead, sir.

Yes, good afternoon.

First question on the balance sheet, you mentioned that only 16% of your cash was onshore.

You're going to increase your share repurchasing and ongoing M&A.

A couple of questions here.

First, what is the cost to repatriate some of your cash that is offshore?

And of the $500 million cash generation this coming year, how much of that is expected to be onshore?

Tom, this is Trac.

Let me take the first question.

The simplest answer is any cash that you patriate through the US would be taxed at the 35%-plus rate.

The intent is we would, obviously, look at debt and find a way to manage that effectively.

Second part is when we look at the $500 million cash from operations for next year, it should be similar to the mix that we've had in the past, which is about 50%/50%, US versus non-US.

Okay.

When you look at the potential acquisition targets out there, are they predominantly in the US or is there a pretty good international mix?

The international mix is growing.

Actually, if you look at some of the acquisitions we did in the security domain, albeit that they were relatively small companies, they are literally a bit all over the map because software is being developed in a much more distributed fashion in the world than silicon or chip design.

So that is an interesting perspective because that also says that our TAM is much more global from a software point of view.

We never really looked hard at doing business in Australia.

Now we are in Australia.

At least there is sufficient software opportunities there to warrant having a presence, whereas from a hardware design point of view, there's very, very, very little.

These profiles change us as a Company, and four out of seven deals this year were offshore, but the reality is we have a balance sheet that we have structured on purpose to be flexible enough so that if there are great opportunities, we will not hesitate to do them wherever they are.

Okay.

It sounds like this is -- 2016 will be another year of investment for the software security space.

Should we expect operating expenses to go up in this space, or maybe just a shift over from some of the core EDA into the software?

How do you view the OpEx as it goes through the year with the ramping software security business?

Our hope, of course, is to continue to grow well the Software Integrity business and so far so good.

We are very happy that we invested in this area.

It's actually a very complex area and we're seeing that many of the things that we have learned over literally decades in the hardware world do apply in the software world in terms of building a platform of tools that is very sophisticated.

So from that perspective, we will continue to push on investing in this area, as long as we see really good growth.

We will and are gradually improving the profitability of the business, but if I had to push on priority growth versus profitability, I'd go for growth any day, because we know that in a new market, you can drive the profitability overtime.

Having said that, just to make sure everybody understands, we do believe that the notion of a business means that you are profitable over time.

So, we're heading there and the acquisitions we did were really only very marginally dilutive.

And so, these things get absorbed very quickly.

Tom, this Trac.

I would add that these investments are done in the context of us also expecting the drive ops margins up this year, in 2016.

When you look at the EPS guidance that we provided, at the midpoint, we should be looking to increase operating margins by about 70 basis points versus 2015.

So these investments are important, but we're going to manage it, strike the right balance between growth and profitability.

Okay, great.

Finally, Aart, when you look at the customer consolidation, over time, say over the next few years, is your view that the number of engineers in the world continues to grow, or are you seeing a plateauing of engineers that ultimately drive the seats that drive your business?

Our past experience has been that certainly in the electronics domain, the number of engineers has certainly not shrunk.

It may have grown actually quite a bit in the development countries that initially had good engineers, but not the same level of productivity.

The second comment I would make is that the notion of engineer is evolving, because if you buy into the picture that I painted of a really, an intersection between hardware and software, that's much more optimized for the end applications.

You will see that the value of engineers that are having one foot in each camp will grow and we see that in our own Company, having a number of people that have this ability precisely because we developed a new generation of tools and systems to deal with that.

Then on the software side, there's no question that the number of engineers, or they don't call themselves necessarily engineers, call themselves software developers, but it's fundamentally an engineering schooling, and that number is still growing rapidly.

Okay.

Great.

Thank you.

You're welcome.

Now to the line of Gary Mobley from Benchmark.

Please go ahead, sir.

Hi, everyone.

Thanks for taking my question and congratulations to a strong finish to the fiscal year.

I wanted to start out by asking a question about the core EDA business.

Could you give us a sense, and it doesn't have to be precise, because I'm sure you don't have it at your fingertips, a sense of the mix between systems OEMs and pure merchant chip companies, and can you give us some sense of how the systems OEMs licensing activity has trended maybe relative to historical trends or relative to the merchant chip vendors?

We actually do have that sort of at our fingertips, and I say sort of because the notion of semiconductor and systems, there is a whole bunch of companies that are in the middle of that.

But for many years, Synopsys has had about 40% of its revenue coming from what one would call system companies, meaning companies that are closer to end product versus semiconductor companies that are closer to the physical manufacturing of chips.

I don't think it will change all that much.

There are a few more companies that used to do manufacturing that are now relying on foundries to get there, but it's really a spectrum.

Precisely because it's a spectrum, it's useful to understand what new system companies do more often than semiconductor people, and of course, you arrive again at this word of software, meaning that for them, a lot of their differentiation is how their software performs certain end tasks.

Increasingly, these end tasks will be optimized by dedicating hardware to the specific nature of that task.

So it's in that context that -- you're asking a good question because we're connecting well with that part of the world and more rapidly maybe then even we had expected, people are using our verification tools to check out the software while the hardware is still in development.

Okay.

I had just one follow-up question.

If I'm not mistaken, you were targeting about $80 million in sales from the Coverity business, and perhaps targeting roughly $100 million for FY16.

Did we in fact finish somewhere around the $80 million mark for the fiscal year and are you still looking at roughly a 25% growth for 2016?

We have communicated when we acquired it that we would pass the $100 million mark in 2016.

We're well on track for that.

We don't disclose the intermediary numbers, but I said the prediction that we had made then, which was with, granted, significantly less knowledge, still appears to be right on.

All right.

Thank you.

You're welcome.

Thank you.

Now to the line of Jay Vleeschhouwwer from Griffin Securities.

Please go ahead.

Aart, Trac, I was wondering if you could speak a bit more about how you went about allowing for the possible effects of semiconductor consolidation.

We, for our part, for example, have calculated that the pre-merger EDA budgets of the companies known so far to be merging, with the exception of Intel who keep their budget aside, is somewhere between 5% and 10% of total EDA industry revenue.

Even if you haircut that, as you have to, that would still amount to a relatively small percent of total EDA spend.

It's probably not going to be affecting the vendors according to their market share.

In other words, it's likely to be some unequal effects on the vendors.

Anyway, I'm just wondering if you could talk about how you actually went about haircutting and thinking through the pre-merger to post-merger budgets of the companies involved?

I'm glad you did this exercise because we do this exercise every day, right?

This is part of running the Company.

Without going into the specifics of any of these companies, fundamentally what you did is the right type of calculation.

I would make sure, though, that as much as there is a lot of talk about consolidation, we should really look at the macro numbers on semiconductors, which is really the growth rate of semiconductors.

While that growth rate itself does not impact EDA all that much from year to year, for the simple reasons that, A, we're much more tied to the R&D budgets and those don't change so fast and, B, we have multi-year agreements, so in that sense we feather through the up and downs of the industry, nonetheless that is as big as factor as the consolidation itself, how the two relate.

So we did essentially an exercise multiple times like you did and then the question is, okay, any individual situation, how does it play out?

We will put our best foot forward in those.

Given that the number of those this year was clearly higher than what we've seen in the past, so we decided to be prudent in the guidance, but we are clearly outexecuting significantly our host industry, and from that perspective, we're going to be able to continue to invest to be well-positioned as it finds its next wave of growth.

Just a follow-up on the consolidation thing and then a change of subject.

With respect to the transfer of licenses, one company gets merged into another, is there uniformity in the terms and conditions affecting the transfer of licenses and whether or not the acquired company or the surviving company needs to reacquire or recontract for those licenses?

Is there some uniform method to that?

And similarly, this is somewhat speculative, but is there any reason to believe that companies -- customers not involved in merging might somehow also change their behavior that they see all the budgetary fun that the merging companies are having and they might want to have some too?

Every company, every customer, at all points in time is always trying to see if they can get more value at a lower cost and nothing wrong with that.

We have always been successful in providing lower cost, but also providing so much more value that we have continued to grow as a Company, and as a matter of fact, as an industry, and so that will continue.

The transactions or the contracts that we have with customers are non-cancellable, but at the same time we all want to have long-term good relationships with our customers, and so when changes happen, one will discuss that with them.

The last comment I would make is that all the contracts, they are like phonebook thickness, complexity because there are so many different variables and conditions and so on.

Because these are typically very deals.

So from that perspective, there is a certain degree of built-in stability.

That stability, especially when you have a well-structured, multi-year set of agreements, is precisely what has allowed us to do really well in any of the more turbulent phases of the industry over years, and so we know well how to behave in such a phase.

Lastly, at the Design Automation conference back in June, during the investor meeting that you hosted with analysts, there was some discussion about some price changes that you had made with respect, for example, to verification and place and route, in terms of your core-based pricing, that's essentially a price increase, if I remember correctly.

Could you talk about the effect of that change of pricing on your 2015 results and how are you thinking about pricing going into 2016 and beyond?

I'm a bit embarrassed to say that I'm drawing a blank about that discussion.

Generically speaking, we typically increase the prices of our products when there is a major shift in additional value that's been provided.

So for example, the move from our IC Compiler I to IC Compiler II is on a very different price base.

Then you have all kinds of discounts and arrangements and volume situations.

It's a function of the number of cores it's run into, so it's actually a fairly complex set of calculations.

But as of the end of this day, it's what I tried to mention earlier, which is customers will drive on costs, we will drive on value, and let the two meet at a place that lets us grow.

So far so good, and I look forward at this coming year, in terms of Synopsys really delivering a lot of incremental value.

So, as customers will need these capabilities, we have an opportunity to continue to do very well.

Thanks.

Thanks, Aart.

Thank you, Jay.

Now to the line of Monika Garg from Pacific Crest.

Please go ahead.

Hi.

Thanks for taking my question.

The first is on the cash flow guidance.

Cash [from] operations, guidance is flattish year-over-year.

Especially given last year you had one time charges, one to retirement and acquisition-related charges.

So the question is, is the number conservative?

Otherwise why is it a flattish number?

Monika, I would say that we're approaching cash flow outlook similar to how we're guiding on revenues.

Were taking a prudent approach to it.

It's early in the year, and as you know, the cash flow is driven a lot by the bookings and the business levels, and so we will continue to update that throughout the year as we get better visibility, but it's consistent with how we're looking at the rest of the business.

Got it.

Then on the IP systems and software quarterly revenue.

It seems both for Q3 and Q4 it is flattish year-over-year.

Given that Coverity is growing, you have acquired some assets in software security market, could you help reconcile this number?

Sure.

I would look at the annualized growth rate and look at it over a multi-year period.

When you look at the IP business, and as we evaluate our IP business, we still believe it's a low double-digit growth opportunity and the overall market continues to be very healthy.

Our Business, we feel very confident in, and so over a multi-year period, that should still be the model.

You'll see it vary from quarter to quarter, or even occasionally year-to-year, depending on the timing the percentage of completion for IP consulting, but we still think that the model of a low double-digit for IP is the appropriate one.

Got it.

And then on the Coverity, is Coverity expected to be break-even and then in second half accretive?

That was the guidance you provided last quarter?

As we mentioned -- we mentioned it in the Q3 earnings call, that it was going to be slightly dilutive in the second half.

Originally, when we first purchased Coverity, we thought it would break even.

We, frankly, at the levels that we're operating at, we certainly could have gotten at that level, but given the opportunity to invest in some of the languages, we thought it would be a better investment to allow it to be slightly dilutive in the second half in order to drive the growth.

So still expect it to be dilutive second half 2016?

I'm sorry.

You're asking about 2016.

For 2016, it would certainly be -- we're certainly going to exceed the original guidance of over $100 million, and it will be slightly dilutive, given the acquisitions that we made in the second half of 2015.

Keep in mind, this is in the context of us expanding margins from 2015 to 2016.

Got it.

Okay.

Then the last question -- sorry -- on the consolidation again, Aart, you talked about your targeting low to mid-single-digit organic [OEDA] growth.

How much do you think is impact of consolidation in that number, 1%, 2%?

Would you be able to quantify that?

You should give Jay a call.

He did the computations in detail here.

We don't want to go into the specifics because each one of these situations is different and they haven't played out.

As one of the other callers correctly said was many of these things have been announced, but are not closed.

And so the impact and timing can still be very far away.

Having said that, it's just that we have looked at this head on and actually see in a number of situations some opportunities.

It's just that you can't count on them until they come home to roost and so -- but it is not as dramatic as it sounds.

Got it.

Thank you so much.

You're welcome.

Thank you.

And now to the line of Mahesh Sanganeria from RBC Capital Markets.

Please go ahead.

This Shawn Yuan for Mahesh.

Thanks for taking my questions.

Aart, there are a lot of questions on this consolidation, and I'm sorry, I have to ask one more.

From a synergy perspective, it makes sense for two companies to move to one unified design platform after the merger.

The question is, one, do you think there will be any market share shift as the main deals are getting closed, maybe the impact will not be immediate, but what do you see in the next two to three years?

Then two, how, given that background, what is your expectation of Synopsys's core EDA growth rate in relation to the market?

In relationship to the market, we think that we can do better than the markets, which is another way of saying that we think that there is an opportunity for us to gain share.

At the same time, there is some degree of headwind, by virtue of the customers fundamentally wanting to do this, to pay less, not more.

So in that context, I do think that we have a great opportunity for Synopsys because, A, we are well-positioned for all the technologies that these very companies aspire to be good at.

B, we're well-positioned to also now reach into the domain that they were less in, which is everything that touches their differentiation through hardware and software.

Lastly, we are very well-equipped to continue with a really good support at the very moment where they will definitely need some help on the advanced chips and while integrating their companies.

So we're not only a safe bet but a technology leadership bet and that's a good position to be in, in situations like this.

Understood.

Then one more question on the Q1 revenue of guidance.

At midpoint, it's down about 3.5 percentage points.

I understand there is lumpiness in the business because of verification.

One of your competitors is shipping their new emulators right now.

Are you seeing any impact from that -- from any changes in market?

No, we don't see any impact of that.

The emulation market is actually a very broad one.

There is opportunities to grow, just because that, as a market segment is doing quite well.

Typically, when people introduce something there, there may be some time when customers want to look at the new product, whatever it is.

In our case, the characteristics of our product are very well known, specifically, the super high speed and low cost per gate is a key differentiator.

So for the people that are focused on those types of angles, we have seen no impact by anybody's announcements.

That's helpful.

Thank you very much.

You're welcome.

We have no more questions in queue.

Please continue.

Thank you so much for attending this call and thank you also very much for supporting and being interested in us for all of FY15.

We delivered on the mark versus where we set our guidance a year ago; actually a little bit better or quite a bit better than the numbers we had in mind then.

We will, of course, strive to do the same in 2016.

We hope that you will be part of the team following us at that time.

For those of you that have additional questions, as usual, the small crew here will be available for calls after this earnings release.

Thank you very much and have hopefully a good vacation break at the end of the year.

Thank you.

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

Thank you for your participation and for using AT&T Executive Teleconference service.

You may now disconnect.