新思科技 (SNPS) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys earnings conference call for the third quarter of FY16.

(Operator Instructions)

Today's call will last one hour. Five minutes prior to the end of the call we will announce the amount of time remaining in the conference. As a reminder, today's call is being recorded. At this time I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Laurie. Good afternoon, everyone. With us today are Aart de Geus, Chairman and co-CEO of Synopsys, and Trac Pham, Chief Financial Officer.

Before we begin I'd like to remind everyone that during the course of this 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 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 the call, important factors that may affect our future results are described in our most recent SEC reports and today earnings press release. We will also refer to non-GAAP financial measures.

Reconciliations to their most directly comparable 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. I'm happy to report that we continued to execute very well. Our third quarter financial results were strong and we're raising our targets for the full year. We delivered revenue of $615 million with good growth across all product groups, most notably verification and IP. Non-GAAP earnings per share were $0.76. We completed our second accelerated share buyback of 2016 and have repurchased a total of $325 million this year. Finally, we're raising our annual revenue, non-GAAP EPS and operating cash flow guidance. Trac will discuss the financials in more detail.

In assessing the environment around us, we see continued volatility for semiconductor and systems companies, juxtaposed with intense pressure to conceive and deliver the next [killer] products. While the latest customer earnings results are better than originally anticipated, the forecast for 2016 semiconductor revenue remains sluggish and actually worsened slightly over the past few months. Nonetheless, investments in EDA are robust and Synopsys is both ideally positioned and executing well. Our commitment to customer success remains a key source of differentiation. Our technology vision is focused on critical product with the highest impact and we balance short-term and long term investments to drive sustainable EDA and new TAM growth and profitability.

While it's too early to talk about 2017 specifically, given the ongoing semiconductor volatility and lumpiness of our growing hardware revenue, I will say that we're optimistic about our business and long term prospects as we continue a track record of executing well in both good and challenging markets. In that context, I would like to thank our very dedicated employee team for their hard work and excellent execution in an extremely demanding environment.

Let me provide some highlights from the quarter in the context of the three customer groups we serve: semiconductor companies, system houses and software developers in multiple industries. In describing the state and path of semiconductors today, I'd like to use the word rejuvenation. As semi companies reassess and strategize to drive the next generation of growth, they are restructuring their businesses and targeting investments to attack the emerging opportunity wave of smart everything.

For some, joining forces with another company is the chosen route. For others, it's to focus more tightly on their most differentiated areas of success. We've worked with a number of our customers through the consolidation process and in numerous cases we're successful in broadening their relationships. This quarter we saw some additional consolidation and are confident in our ability to work with and support these in a constructive way. Regardless of economic challenges, investment in developing highly complex chips is a clear priority with migration to advance process nodes being a key strategy for our leading customers.

As a technology pioneer, we're known for our expertise, broad portfolio, engineering support and track record of enabling these advanced designs. The cumulative number of FinFET designs continues to grow rapidly. Nearly 15% in just the last quarter and more than 95% of those designs rely on Synopsys' digital tools.

At the other end of the technology spectrum, our TCAD products are also a differentiator for us. Used at the very beginning of process development, they enable customers to simulate and optimize key elements of the manufacturing process. This also provides us early access to critical models and information that gives us a head start in our product development.

In digital design our fastest ramping product ever, IC Compiler II, continues to proliferate. Orders in Q3 were the highest in five quarters. More than 90% of our install base has at least one production project completed or in progress with more than 200 production designs overall. At the design automation conference in June, Infineon, Socionext, Samsung and Toshiba shared with the full house their successful deployment of IC Compiler II to significantly cut design cycle time while achieving excellent quality of results.

In analog/mixed signal our newly introduced custom compiler product has come out of the gate with great promise. Intrigued by its innovative visually assisted automation, which cuts important layout tasks from days to hours, customers are showing a high level of interest and we're seeing some good initial adoption. ADAC, GSI, Samsung and [IT Micro] shared their design challenge experiences and how they have deployed custom compiler to improve their productivity. In addition, we announced support for Samsung foundries 14-nm FinFET process. Also highlighted at DAC, was the power of our EDA ecosystem with a goal of ensuring our giant customer success, Synopsys, TSMC and ARM hosted a [popular] event highlighting our collaboration efforts to enable design of the latest processors on the latest FinFET technology nodes.

Let's now look at system houses who either develop their own chips or buy them from others. They too are seeing great opportunities as well as substantial challenges where they are leading or established nodes. In particular, opportunities around virtual and augmented reality, big data and digital intelligence are extremely promising. Simultaneously, relatively new and traditional companies in verticals such as automotive and industrial are already adopting these advanced technologies, ranging all the way from silicon to software, the essence of the technical challenge and promise, the intersection of hardware and software. With approximately 40% of our revenue coming from systems companies and substantial investments around the next generation silicon to software continuum, Synopsys is well equipped to engage on next generation opportunities.

First, verification -- the biggest design bottleneck today. A couple of years ago we introduced our verification continuum platform. It integrates all critical software and hardware technologies into an increasingly seamless and high productivity solution. Positive customer reaction is leading to rapid adoption throughout the platform. At DAC, Qualcomm, ST, Samsung and Oracle spoke about their successes using the verification continuum. Q3 business results were strong for both software and hardware elements and we're out pacing our competitors in terms of growth.

Integration of the SpyGlass technology from Atrenta has taken our solution to a high level of impact for customers. Both the technical and business results have been better than initially expected. Hardware verification showed strength again. We're now the fastest growing emulation vendor in the industry and also saw record orders for our HAPS physical prototyping solution. An excellent example of our customer success this quarter is NXP, which selected Synopsys as its primary SoC verification and emulation solution for its next generation automotive, secure connectivity and smart connected products.

Let me talk for a moment about automotive. Over the past couple of years, we've substantially grown our portfolio in this market segment from design to verification to IP to security, including excellent progress in automotive standards certification. We're beginning to see real momentum in this high promise area.

During the quarter we announced enhancements to two of our virtual prototyping development kits, which are used by automotive OEMs and tier 1 suppliers. One, models of Bosch IP to speed software development for electronic control units. And two, a new model for Infineon's next generation TriCore architecture. We also introduced a brand new test solution, TetraMAX II ATPG, which reduces costs and offers order of magnitude faster run time. While broadly used for many applications in the automotive context, TetraMAX II has already been certified for the stringent ISO 26262 automotive functional safety standard.

Moving to IP. We again saw a very good demand across product lines and continued to expand our portfolio to address ever evolving market and product dynamics. At the leading edge of process technology, we won several important 10-nm and 7-nm projects, a testament to the trust customers have in us as they tape out critical test chips containing our advanced IP. In Q3, we announced availability of the new USB 2.0 Type C IP, cutting power and area for cost sensitive and energy efficient IoT edge applications, as well as the latest PCI Express 4.0 targeting advanced data intensive cloud computing. We also introduced our second generation embedded vision processor to strong demand, driven by emerging automotive, drone, surveillance and augmented reality applications.

Closing with our software integrity products, our third customer group, software developers, range from semis and systems to enterprise companies in the financial, medical, industrial and energy segments. These developers face multi-faceted challenges, immense software complexity with the resulting product quality issues and the potentially devastating financial and safety impact triggered by security vulnerabilities. Software integrity is an emerging highly fragmented market, ripe for bringing multiple point tools together under a single integrated umbrella. Similar to how we build our EDA and IP positions over the years, our goal is to build a coherent highly differentiated and productive platform which drives quality and security in software development.

To that end we're making good progress towards our comprehensive vision of software sign off. During software code development, our solution enables detection and fixing of security vulnerabilities, quality defects and compliant shortcomings early in the development life cycle. It also helps customers gain visibility into their software supply chain, thereby reducing risk inherent in third party code. Having substantially strengthened our go-to-market approach and channel, we're beginning to see the number of large agreements grow, contract durations expand, international business improve and renewals increase. While still early, these are good signs.

In summary, we delivered another excellent quarter and are raising our full-year guidance. Our state-of-the-art technology and engineering support are key differentiators as we continue to drive excellent customer relationships. And we're seeing good progress as we invest in a promising brand new TAM. Let me now turn the call over to Trac.

Thanks, Aart. Good afternoon, everyone. Through the first three quarters of the year we've executed very well in the challenging semiconductor environment. As a result, we are raising our full-year guidance and, again, achieving our multi-year objective of driving high single digit, non-GAAP EPS growth. In Q3 we delivered double digit revenue of non-GAAP earnings growth and generated significant operating cash flow. In addition, we completed our $125 million ASR last week and year-to-date we bought back $325 million of stock. Now to the numbers.

As I talk through the results and targets, all comparisons will be year-over-year unless I specify otherwise. Total revenue was $615 million, above our target range. We achieved double digit growth across all product platforms with particular strength in hardware. Up front revenue slightly exceeded 10%. We anticipate more quarterly variability as our business evolves; however, we continue to expect annual revenue model that is approximately 90% time based. Over 90% of Q3 revenue came from beginning of quarter backlog and one customer accounted for more than 10% of revenue. The weighted average license duration was approximately 3.1 years and we expect the full year average to be about three years.

Total GAAP costs and expenses were $538 million and total non-GAAP costs and expenses were $473 million. Non-GAAP operating margin was 23% for the quarter and 23.7% year-to-date. GAAP earnings per share were $0.42 and non-GAAP earnings per share were $0.76 above our target range. We generated $252 million of operating cash flow, driven by strong collections and business levels. We are again raising our 2016 operating cash flow target to a range of $525 million to $545 million. We ended the quarter with cash, cash equivalents and short-term investments of $1.1 billion with 12% onshore and total debt of $278 million. Last week we completed our $125 million ASR. Year-to-date we've used over 80% of our free cash flow for buybacks. We have 175 million remaining on our current authorization.

Now to our fourth quarter and fiscal 2016 guidance, which excludes the impact of any future acquisitions. For Q4 the targets are: revenue between $621 million and $636 million, total GAAP costs and expenses between $537 million and [$556] million, total non-GAAP costs and expenses between $483 million and $493 million, other income between $0 million and $2 million, a non-GAAP normalized tax rate of 19%, outstanding shares between 152 million and 155 million, GAAP earnings of $0.46 to $0.55 per share and non-GAAP earnings of $0.75 to $0.78 per share.

For 2016, revenue of $2.41 billion to $2.425 billion, a growth rate of 7.5% to 8%, other income between $6 million and $8 million, a non-GAAP normalized tax rate of 19%, outstanding shares between 153 million and 156 million, non-GAAP earnings of $1.72 to $1.81 per share, non-GAAP earnings of $3 to $3.03 per share, a growth rate of 8% to 9%, capital expenditures of approximately $70 million and cash flow from operations of $525 million to $545 million.

Finally, we've executed very well in a challenging environment and expect to deliver outstanding results in 2016. Growth is strong across all product platforms with better-than-expected hardware sales driving a good portion of the upside for the year. This does add more variability to the business as customer requirements drive the timing of shipments and revenue, which is recognized up front. As we look to 2017, we are currently working on our budget and are assessing this year's hardware strength and how it will trend next year. Therefore, we would suggest that it is premature to change our 2017 estimates until we provide detailed guidance in November.

In summary, the entire Synopsys team has executed very well. Our Q4 outlook is strong and our 2016 targets are substantially better than they were at the start of the year. With that, I'll turn it over to the operator for questions.

(Operator Instructions)

We'll go to Rich Valera with Needham & Company.

Thank you. Yes, I'd like to get a little more color on where the upside came from both the quarter and for the fourth quarter guidance. It sounds like, clearly, hardware is better than expected in your original guidance. Was there any other product area or GO that is coming in stronger than you previously expected?

Actually, we are fortunate that strengths was very much across the board. And you highlighted already the verification and, specifically, the emulation -- one should also highlight the IP business as having been quite strong. On the borderline between those businesses is also the hardware prototyping that has done quite well. And then it's also interesting that all the way into our silicon engineering business we have had quite good results there also. And so I think across the board we're executing well and we've seen our run rate grow again.

That's great. And then just from a geographic perspective it looked like you had another quite strong quarter in Japan after probably a year or 18 months of really tough certainly year-over-year performances there. Is there anything going on there or is that lumpiness in terms of the seeming Japan recovery here?

Well, as you well know Japan has been sort of a bit of an up and down economy now for many, many years. And so I think our team continues to execute particularly well in Japan but it is against the backdrop of a challenged economy. Maybe Trac can make a couple of comments about the year-to-year yen fluctuations that are really the only currency that we continue to deal with. But our business has been quite solid and there's a bit of hope that the Japanese economy after many years of restructuring and refocusing is actually seeing some signs of emerging health, let's say.

Yes, Rich. This is Trac. Let me just add that across the board and at the top level we are actually doing very well. And then when you look at the geographic split as well as the product mix, we are doing well across the board. There's a couple areas that might -- that I would highlight is when you look at the services line from a product perspective in Europe, that, again, is also doing well. And I just wanted to let folks know that it's really a function of -- on the services line it's a function of this years hedge gains being just slightly less than last year. And then Europe continues to do well but last year we had an unusually strong product shipment that makes the comparison a little odd. But other than those anomalies, we are doing very well across the board.

That's great. Just one final one for me. Given the revenue upside you had for both 3Q and 4Q guidance, it seems like you could have possibly dropped a little more to the bottom line. Wondering if you're actually reinvesting some into the business and, if so, maybe what areas you might be reinvesting some of that upside into?

Yes, Rich, you're right. When you look at the business for this year, margins will be relatively flat year over year. And what you're seeing is really two factors. One, the upside was, as we mentioned, driven by hardware, which has COGS. And the second part -- as we look at a business, there are a couple of opportunities to invest in both customer support as well as in product development. The ROIs on those investments were good and so we proceeded with that. I think, overall, I like the balance that we're striking between driving for growth as well as flowing earnings through the bottom line.

And in that context, I would add that we're looking at the software integrity business as one that continues to be a very interesting opportunity. And so we did a few acquisitions in the last 12 months that are being integrated well. And all of that has a lot of life but it does require some level of investment.

That's helpful color. Thanks, gentlemen. Excellent results.

Our next question from the line of Tom Diffely with D.A. Davidson.

Yes. Good afternoon. So first, following up on the last question on software integrity, what percentage of your long term portfolio is in place today? And how much do you think you have to add there, both through acquisition is also homegrown?

Well of course this is a slightly loaded question because we don't comment about acquisitions before we do them. But we've been very clear that we look at this as a new emerging TAM that is in a market that has many, many players and a few large ones and many very small ones, all having one hotter technology than the other and in a field that is clearly all almost overwhelmed by the number of security issues popping up every day. And so just to be clear, we have no plan and are not addressing the overall space of security. We are focusing specifically on the development of software and how to recognize and avoid issues up front during that development.

In that context we are making excellent headway because a number of years ago we started with a fairly narrow offering in terms of languages. And we have substantially broadened that. That is all our own R&D investment. We have broadened in terms of adding a number of security techniques and we are now integrating these all on a more coherent platform, which allows us to deal with the people that have to confront the security and quality issues in a more coherent fashion. And so we have now moved to starting to build a relationship with other companies that can help certify again standards. The alignment who is Underwriters Laboratories is a very good example of that. And we've also worked with a number of people that need help in assessing where in the supply chain does their software come from?

And it brings about some interesting surprises at times. So I think we're in a good position but there's clearly many opportunities. And the focus really for the last 12 months has been to broaden in security and to substantially strengthen our ability to go to market and move towards gradual larger deals. And the overall vision for what we want to offer is really a software sign off just like there's been a hardware sign off for 25 years. Software needs this.

Okay. Thanks. Moving over to the hardware side of the business. Do you view 2016 as an unusually strong year in hardware that might tail off a bit next year? Or is it strictly just the lumpiness of that business that gives you pause for 2017?

Well we like it to be usually strong but this is a business that we've gradually grown into. And we're well aware that it's a business that by nature is lumpy because when people buy hardware equipment, the equipment gets bought when they feel that they are in a good cash position and the shipments invariably are a function of when they actually need it and so under much less control than, let's say, a recurring revenue run rate. Nonetheless, it's a good business and it ties well to our overall verification of proposition. And so we are encouraged by the quality of the products that we have and, of course, continue to invest in driving the state-of-the-art forward in this area.

Okay. And do you think this year will be a record year both in terms of both dollars and share for you?

Well, it certainly was versus the past. We aren't commenting about 2017 yet.

Okay. And then just one more long term question. When you look at the emergence of the Chinese semiconductor market and how some of the domestic players are talking about doing manufacturing over time, how big do you think that market gets over time and how is your positioning in that market?

Well, for us it's always a little strange when we hear about the emergence of that market given that we were already in China in the mid-90s. And so we have been very intimately involved in all the steps of the development and emergence of both the talent set, the investments, the structure of the industry, its evolution, the ups and downs. And the fact that there's now an increase in emphasis on manufacturing is not a surprise because the volume of design in China that could potentially manufacture in China has grown substantially, both in actual amounts and in the sophistication.

And so, we are well involved with all the leading companies there. And I think we are well equipped to participate in this ongoing growth rate, which I think will continue to be high. In general, if you look at revenue you will see that the growth in Asia Pacific has certainly been substantial and there's no reason to believe that it will not continue at the similar rate at least for the time being.

Thank you.

You're welcome.

We have a question from Krish Sankar with Bank of America Merrill Lynch.

Yes. Hi. Thanks for taking my question. A few of them -- one, [auto track] -- you kind of mentioned next year you expect some lumpiness in [emulation] revenue. I'm trying to figure out what does it mean exactly for your revenue and margin profile?

Well, fundamentally, what it means is that we have a very high portion of our business that is very rateable and, therefore, tends to look a little bit like a straight line on a graph. Lumpiness means that sometimes you get a large order that needs to be shipped at a certain date and that revenue gets recognized at that moment. And some other quarter you may not get that. And so there's some variability that is possible in this. And maybe, Trac, you can comment on the profitability or the COGS aspect of hardware business versus software.

Obviously, hardware is a little lower than software but it's still very profitable for us. And our goal ultimately is to balance that in the portfolio to drive earnings growth in the high single digits.

Do you guys have any color or is there a way to quantify how much of your total revenue is from emulation?

No. We don't break out individual products. Obviously the EDA part is a large portion of our business and verification is substantial in that. But it's clear that this is an aspect of the business that's doing well. But I would highlight that the whole verification proposition has many, many other products. And over the last few years we've added some really superb technology in the debugging side, partially the acquisition of SpringSoft. More recently you may recall Atrenta. And really these building blocks fit very, very well together and are all doing quite well.

Got it. That's helpful. And then I wanted to follow-up -- looks like you guys have under $200 million left in the buyback. What is your capital allocation strategy on a go-forward basis to the extent that you can comment on it?

It'll be the same as what we've said in the past. We'll continue to use our balance sheet in the way that makes the most sense. In the past that's been a combination of investing in M&A to drive long term growth and then returning cash to shareholders when it makes sense. Just for reference, when you look at last year, we spent over $280 million on buybacks, which is almost 70% of free cash flow. And then this year to date we've been a little bit more aggressive with that and we've raised the buybacks to be about 80% of the free cash flow for the year.

Got it. It's very helpful. And then just a final question -- when you look into like the future and let's say emulation does get to be a bigger chunk of your revenues, even though it's lumpy and it has some slight detriment of the margin profile -- I'm curious, what are the levels that you guys actually have if you want to continue maintaining a 8% to 10% [person] earnings growth profile? Is it mainly going to come from top line growth? Or do you have other levers you can pull to actually make the earnings profile better? Thank you.

Well as you know, we can always try to drive profitability harder. At the same time there's a balance there of how much do you want to invest in new opportunities. And we've done a very conscience effort, already starting in the early 2000s, in broadening our portfolio to build a substantial IP business and then most recently in last 2.5 years in investing towards the software integrity space as opportunities to grow additional businesses. So over a long period of time we remain very committed to deliver a mid-20s operating margin as the constant objective while maximizing the revenue growth as the way to continue to strengthen and broaden the Company.

Krish, this is Trac. I would add that our focus to drive this business and grow this business sustainably over time. So that's going to come through a combination of revenue growth, operating margin expansion, and then reduce our share count. And so those things collectively should help us grow our earnings in the high single digits long term.

Got it. Thanks, guys.

You're welcome.

We have a question from Sterling Auty with JP Morgan.

Thank you. This is Jackson Ader on for Sterling. One question from our side and that is -- in the software portfolio, is there -- you already spoke about, I think, some things that are outperforming your expectations. Is there anything in the product portfolio that may be underperforming your projections?

Well at any point in time, of course, we have a very broad portfolio. To be honest, I'm not sure how many products we have. And we have big products and many smaller products. And so all of the products have waves. But this past quarter, actually economically speaking, the results were quite strong across the board. And so, nothing jumped out but there are always products that are in investment mode or that are in next generation mode. That's an ongoing job for us and has been for many decades.

Okay, fair enough. Thanks. That was all from us.

You're welcome.

We'll go next to Jay Vleeschouwer with Griffin Securities.

Thanks. Good evening, Aart and Trac. Aart, let me start with you on the subject of technology and products -- a somewhat broad question. One thing we're seeing pretty much across all of engineering software, not just in the EDA part of it, are some fundamental issues that are being addressed by some of the major companies around basic software architecture, computer science, if you will, in that respect as it relates to EDA. One of the more interesting announcements I thought at DAC was from [Ansis] regarding some new data and architectural issues that they're addressing.

And so the question for you is do you think that you and EDA generally are positioned well enough in terms of capacity and so forth for the next number of years architecturally? Or do you think that these are some issues that you are now going to have to fundamentally address as some of your peers in engineering software seem to be doing? In terms of a couple of specific products in your case, it seems very clear that you're putting a lot of incremental or renewed effort behind DC. And if you could comment on that. And you're also seeing some good new momentum in DFM where you seem to have broken out of a sideways revenue pattern that you were in for quite a number of years -- if you could comment on your DFM opportunity as well.

Well, when you say are you going to have to revise your architecture -- we are revising architectures all the time. And they tend to come in two ways into constant smaller tuning and optimization versus every so often doing a redesign of, lets say, the data structures that are used or the approaches to problems. And it is only through that, that we have literally been able for now 29.5 years to constantly be of the very leading edge of what technology can do. And that's a necessity because we are half of [Moore's Law]. The manufacturing advances and then there are all of the tools that make it possible to use these. So in that sense, we're accustomed to being -- for 29 years we were behind the eight ball because every customer wants it to be better and so do we.

Having said that, I think your generic observation that there are new opportunities emerging I think is interesting, not just for us but for the very fact that a lot of people are now looking at processor architecture changes to accommodate the fact that various forms of digital artificial intelligence will become more and more important for different types of applications. And so we see a number of customers focusing now on what can they do to essentially reinvent computation to satisfy and enable that. And that ranges literally from what to do around big data all the way to pattern recognition, learning, and so on that gets applied to now a number of fields, including automotive. So I can certainly never say that we're good enough. The whole point is to always say that we're not good enough and keep pushing.

Okay. And in your case, there was a specific sub question regarding DC and your DFM business.

Sure. So design compiler is a product that itself has gone through a number of these type of generations. And it's obviously a leading edge tool that has an immense broad utilization on all of the most advanced nodes. And so, there too we have a substantial effort ongoing for both optimization and tuning as well as looking at architectures that could improve things going forward.

DFM is a bit different. DFM tends to be a number of economically smaller products that are highly specialized. Many of those have also fewer customers because it addresses mostly the people that are in manufacturing. But I don't have to tell you that the physics of manufacturing in the last few years has done an easy 10x of growth in complexity. And that is actually good news for us because that cases directly to some of the strength for that team. And we have made a number of fairly substantial investments, I would say going back four to five years, where we are seeing some good return on it now. And as mentioned to another question earlier, we have a broad portfolio and so it's a constant allocation of investments with an intent and hope to see a return two to three years later.

To finish up with Trac -- a couple of finance questions. You seem now to have pretty much solidified your position as the second largest emulation supplier by revenue at the cadence. By our calculation, just doing some quick math after the results, it looks like your emulation business might have been up by nearly half sequentially and up even more than that year over year.

And so the question is, given that kind of revenue growth, are you seeing some commensurate margin scaling in the emulation business? Or are you basically having to give that up to get the volume deals done like with [fed XP] for example? And then could you say whether the percentage of revenue from your largest customer was up, down, or sideways versus Q2? Thanks.

If I may jump in -- you just asked Trac a whole set of questions that he's definitely intending to not answer because, not only do we not disclose individual products, we're certainly not disclosing the economic profile of those. But there's no question that whenever products do better, there's an opportunity to either improve the margin structure because that's what good business does or to continue invest and accelerate the development of future technology. And we clearly do both. And so we're thankful for that business being strong. But I think we'll leave the commentary at that. Do you want to add anything, Trac? (laughter)

(laughter) No. No comment at this point.

Thank you.

Anything else, Jay?

No. Thank you.

Okay. We'll go next to Gary Mobley with Benchmark Company.

Hi, everyone. I'm not sure if its been said but congratulations on some strong execution for the year.

Thank you.

With hardware becoming a greater mix of the revenue, I'm curious to know whether or not this was a backlog building quarter, whether or not you can build on your year-end backlog per 2015 of $3.6 billion. And with some cautiousness with respect to the longevity or sustainability of the strong hardware revenue, as you approach 2017 are you still going to try to provide guidance based on the old axiom of 90% of forward revenue coming out of the backlog?

Yes, Gary. This is Trac. We'll give more -- actually we'll give the specific backlog number at the end of Q4. What I would say is that year to date our business has been very strong, bookings have been solid and then run rates been up. So the underlying economics of the business is very healthy. And for the quarter -- I think it's specifically for the quarter, 90% of revenues came from backlog.

Okay. Alright, just one follow-up question. I think in the past you commented that the software integrity might represent about $100 million in the total mix of the broader group for 2016. Do you still feel comfortable with that revenue level?

Yes, that is what we are targeting for this year.

Okay. Alright, thank you, guys. Again, congratulations.

Thanks, Gary.

We have a question from Monika Garg with Pacific Crest Securities.

Hi. Thanks for taking my question. You know as a follow-up on the software security question, your expectation was of the segment to go 18% to 20%. Is that the growth you're still seeing? And when do we expect the segment to breakeven and then a positive operating margin?

Well, we continue to invest. And as you know, we have also made some acquisitions. And so every time you do that, that pushes the profitability down somewhat. But the job, of course, is to bring that up as we integrate things. So we expect it to be slightly dilutive in 2016 but we are very encouraged by a couple of things. One is that the quality, the sophistication of the solution that we have is truly starting to be viewed as a strength. And so I think we have good opportunities. But in parallel to that, especially in the last 12 months or so, I think we have strengthened the ability of our channel to not only sell the solution well but also to gradually move towards larger transactions.

And as you probably know, many of these fields that are emerging tend to be very small deals and you build them gradually. Well we have seen now a number of transactions grow in size, a number of them have become multi-year, which was different than what originally the companies we acquired started with. And we see the opportunity to have a stronger broad relationship with the companies that use our software. So all of that feels like the early days of EDA. And in that sense, we will reassess continually how to balance the profitability drive versus the growth. We will prioritize growth but rest assured that it's only a business if it becomes profitable and if it becomes more profitable over time, other wise it's a hobby. And so we will continue to push on that as well.

We'll go next to Mitch Steves with RBC Capital Markets.

Thanks for taking my question. So I guess the first question is kind of an Intel side of the equation. They just announced a new partnership with ARM during their analyst day or their big presentation. I was just wondering if that was something that was expected or if that may potentially impact the business at this time?

Yes. First, it was expected because we had been informed quite awhile ago. And as a matter of fact, we have quite a number of customers, as you know, that do ARM cores and that optimize those for different set of technologies. And so I expect that we will be very helpful at getting the best out of the technology that Intel has to offer for people that want to build their product around ARM cores. And we are already quite engaged in that.

Okay. Got it. And then secondly in the software integrity piece. I know you guys already talked about the 100 million number but if I were to think about the long term growth, is it fair to assume that, that will kind of out pace or potentially at least keep up with semiconductor IP as a whole?

Oh, yes, certainly. We look at our businesses in terms of growth rate as EDA being certainly very profitable but the lower growth rate IP in the middle and software integrity at the top of those. And so, it's almost a classic decision set on how to balance the investments among these different categories as we build the Company that hopefully delivers continuous high single digit earnings growth going forward by essentially balancing a portfolio of different needs.

Got it. Thank you. Great quarter.

Thank you.

We have a follow-up from Monika Garg with Pacific Crest Securities.

Hi. Thanks for the follow-up. A question on the operating margins. If we compare your op margins with cadence, your margins are still like almost 250 basis point lower in spite of the fact Synopsys has much higher revenue base -- almost 30% higher. And we are seeing good top line growth, so why are we not seeing more leverage in the model?

We do have leverage in the model. I think as I mentioned earlier, margins are relatively flat this year but it's important for us to manage this business sustainably over time. And when you look at the earnings guidance that we provided for this year, it's predominantly driven by operations. Right? And so our balance this year is to try to invest appropriately to drive growth long term while also generating high single digit EPS growth.

Just to follow-up then. (Inaudible) is in the midst of consolidation but Synopsys had seen two good growth years last year -- grew 9%. You're guiding to almost 8% for this year. So the question is are you not seeing impact on consolidation or do you think you're gaining market share?

Well, we certainly do see the impact of consolidation because all of these transactions come to us initially always with the request of can you reduce our cost. And while we are trying to accommodate our customers as much as possible, we also try to offer up solutions whereby we can do -- fulfill a broader set of their needs. And in that context, I think we have continued to do well also because many of the technologies that we provide are essential and are at the leading edge.

So none of this is simple. And as you well know, in our industry we've talked for quite a number of times, including at many of our earnings releases, about what's the impact of this. Maybe especially in 2015 where there are a number of very large consolidations I think we have fared well with these. And we're thankful for that. But this is just part of an evolution in the industry around us. And I think we are well positioned to continue to be a corner stone supplier to people that are really going to drive their own companies to the next state-of-the-art level of applications. And that's a good position to be in.

Thanks a lot.

You're welcome.

Thank you. I'll turn it back to our speakers for any closing remarks.

Well, we thank you for your attendance at this call. As usual we will follow-up with a number of you after this. And we hope that you have a good rest of the day. Thank you so much.

Thank you. Ladies and gentlemen, this will conclude our teleconference for today. Thank you for your participation and for using AT&T's executive teleconference service. And you may now disconnect.