新思科技 (SNPS) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the first quarter of fiscal year 2021. (Operator Instructions) Today's call will last 1 hour. 5 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.

And 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 are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release.

In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement and 8-K that we released earlier today. All of these items, plus the most recent Investor Presentation are available on our website at synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call.

Finally, we are again all participating from different locations today. Please forgive any delays, technology glitches or awkward handoffs in the Q&A session that occur as a result. Thank you very much for that.

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

Good afternoon. Q1 was a very good start to the year, as we met or exceeded all of our guidance targets. Revenue was $970 million, with GAAP earnings per share of $1.03 and non-GAAP earnings above our target range at $1.52. Business was strong across all geographies and product groups. And for the year, we are reaffirming our guidance with low to mid-teens non-GAAP EPS growth, revenues surpassing the $4 billion milestone, non-GAAP operating margin of 29% to 30% and more than $1 billion in operating cash flow.

Meanwhile, our markets are strong. Wherever one looks, be it at AI and machine learning, hyperscale-enabled cloud computing, 5G, next-generation automotive, massively connected IoT or software-enhanced medical devices, all require more chips and software. Chips to store and move huge amounts of IoT data through the cloud, chips for massive general compute and AI-driven smarts in every vertical end market, still more chips to tie these huge hardware-software systems seamlessly together and make them both secure and safe, and the escalating need for evermore secure software whether embedded on an electronic system or in the enterprise software space.

This is the center of gravity for Synopsys with our product portfolio that not only excels in advanced system-on-chip design but reaches down into the critical foundation of silicon manufacturing and up to the intensifying needs of smart software, we are uniquely positioned at the heart of this opportunity space. It's quite rewarding to see the adoption and business momentum of the innovations we've introduced over the past several years and the enthusiasm around our further expansions into brand-new domains through our next wave of technology disruptions.

Let me share some highlights, beginning with EDA. Our groundbreaking Fusion Design Platform continues to drive proliferation and competitive displacements, supporting strong revenue growth. This includes major expansions and evaluations at historical competitor strongholds. Customers clearly recognize our leadership at the most advanced nodes now down to 5- and 3-nanometer. Our Fusion Compiler product, specifically, delivers superior performance, power and area results. With numerous competitive wins and wide deployments with influential, high-impact semi and systems companies around the world, we see growing business momentum.

Integral to our sustainable differentiation is native integration of our golden signoff products, which guarantees the most accurate and timely results. Our deep collaboration with foundries ensures that our mutual customers can access the most advanced technologies with well-honed design flows. This quarter, for example, we announced the collaboration with Samsung Foundry to deliver the fastest design closure and signoff for 5 and 3 nanometers. We continue to also see good growth and momentum in Custom. We, again, added several new Custom Compiler customers, including 2 in the wireless communications segment, also further inroads with memory companies who are adopting our complete end-to-end custom solution.

A never-ending challenge in today's complex designs is verification, not only of the chips, but also the intersection of the chips with the software that runs on top of them. Our Verification Continuum platform is uniquely powerful in the sweet spot of modern design and is driving strong growth. Adoptions are expanding rapidly at influential customers, ranging from leading hyperscalers to automotive to the most sophisticated global semis and systems companies. For example, AWS, which utilizes our verification software to accelerate the development of data center chips and automotive supplier automotive for its autonomous driving applications.

Strong demand continues for our market-leading hardware solutions. Just this quarter, we added 10 new customers and had 45 repeat orders. The power of our comprehensive design plus verification solution is evident in full portfolio adoptions. This quarter, it included a global design services leader who adopted both Fusion and Verification platforms for highly complex designs, replacing their legacy tools.

Now to IP, where we again delivered a strong double-digit revenue growth. Outsourcing of sophisticated IP blocks continues unabated. Our track record of innovation reliability in advanced node leadership have led to our #1 position in interface, embedded memory and foundry-specific IP. We provide the broadest portfolio by far, accelerating time-to-market and reducing risk for our customers. This quarter, we continued to show strong momentum across multiple applications and products.

In high-performance compute, which is one of the most dynamic segments today, our comprehensive IP portfolio has driven more than 450 wins in 7-nanometer and over 100 in 5-nanometer. We achieved silicon proof of our 112-gigabit Ethernet PHY on 5-nanometer, driving the leading-edge in this key product area.

With the tremendous growth in Internet traffic, security is a big concern in protecting the data transfer in hyperscale cloud centers. This quarter, we launched the industry's first security IP modules for PCI Express 5.0 and CXL communication interfaces. We have already secured the first design win with a growing pipeline. Building on our lead in advanced technology, we released the first phases of our 3-nanometer foundation IP offerings.

Building on our innovation and momentum in EDA and IP, we have invested in unique and breakthrough solutions to next-generation challenges that our customers face. We do this in close collaboration with ecosystem partners through a combination of R&D and technology acquisitions. While we have a number of these in our innovation pipeline, let me highlight 3 that we recently announced: one, 3D multi-die design; two, AI-driven design flows; and three, silicon life cycle management.

Starting with 3D multi-die design. Think of it as combining and stacking multiple die together, not on a board, but on a specialized large chip. This leads to extremely tight configurations with much higher data speed and bandwidth than with a traditional board and packages approach. Our new 3DIC Compiler product enables the design and analysis of these complex 3D systems, taking full advantage of our technical breadth by leveraging both Fusion Compiler and our signoff tools.

Early momentum is building rapidly with expanding evaluations and adoptions. Designers are seeing the performance and capacity benefits of a single environment and are beginning to move away from older mix-and-match solutions. For example, 3DIC Compiler helped a large Asian semiconductor company complete a highly advanced test chip in record time, saving weeks of design time. With this, we also combined our high-bandwidth memory and die-to-die IP that enables interconnecting these complex systems.

Moving next to AI-driven design. We have a breakthrough and already award-winning new solution, DSO.ai. DSO stands for design space optimization. While maximizing the contribution of engineering teams, DSO.ai leverages machine learning techniques and computation to explore the design space for still better solutions in terms of chip performance, power and area. This autonomous search substantially accelerates the work of the human design team. Indeed, in Q1, customers using DSO.ai reported remarkable productivity improvements, consistently realizing better results in a fraction of the time and effort typically required. On top of that, multiple production tapeouts have recently been completed. Our customers are already heralding DSO.ai as an anchor product and are beginning to deploy it across their organizations.

Finally, Silicon Lifecycle Management, a new platform to monitor, analyze and optimize chips as they are designed, manufactured, tested and deployed in the field. Synopsys is uniquely well equipped to provide a comprehensive solution through our long-standing expertise in design, manufacturing and IP. We add sensors, monitors and data analytics on chip to provide insights to test yield and reliability management tools. This gives smart visibility into critical performance, reliability, safety and security issues for chip's entire lifespan.

In Q1, we expanded our capabilities with the acquisition of Moortec, which provides leading-edge process, voltage and temperature sensors. Initial interest and activity are strong and expanding. We're in talks with a number of leading IDM and fabless customers. We're also engaged with major cloud service providers to deploy aspects of our solution into their platforms. These new innovation areas create not only new business growth opportunities, they also leverage strong cross-disciplinary expertise in Synopsys from design to manufacturing to IP.

Now to Software Integrity, testing software code for security vulnerabilities and quality issues. We delivered a solid beginning to the year and are on track towards meeting our fiscal '21 goals to reaccelerate growth. As I mentioned in December, we have implemented several important enhancements, all showing encouraging progress. First, evolving our go-to-market strategy and customer success organization, including tuning our sales coverage and building an indirect channel program. Second, bolstering our strategic consulting capabilities to better serve growing market needs. And third, evolving our product road map to capitalize on the latest security trend.

These improvements are beginning to show in our results. All geographies delivered at or above plan. We have numerous multimillion-dollar new agreements and sizable expansions with customers ranging from industrials and aerospace to electronics and financial services. The trend towards adoption of multiple products continues. Customer interest in a consulting-led approach to software security is growing. Recent publicized security breaches only underscore that need. Our expanded team is ramping up, and we see very good long-term opportunity. In addition, industry analysts continue to recognize the quality and breadth of our portfolio. Synopsys was again named a leader in the Forrester Wave for static application security testing.

To summarize, Q1 was a very good start to the year. We delivered strong financial results and are reaffirming our outlook for fiscal '21. Our markets are healthy as customer investment in critical chip and system designs as well as immense amounts of software remains very strong. Our differentiated portfolio of solutions, including exciting innovations in brand-new areas of technology disruption is generating high demand and strong growth.

Lastly, keep an eye out for our second annual corporate social responsibility report to be published in the next few weeks. We're proud of the progress we've made in the areas of environmental stewardship, social solidarity and corporate governance. We look forward to sharing with you our metrics and future objectives.

With that, I'll turn it over to Trac.

Thanks, Aart. Good afternoon, everyone. We delivered a very strong start to the year and continue to execute well on our short- and long-term targets. We grew revenue broadly across all product groups and geographies. We reported non-GAAP earnings above our target range and continue to expand non-GAAP operating margin. We produced another quarter of robust collections, leading to a very strong cash flow, and we announced a $250 million repurchase in the quarter. Our strong start, market leadership and the resiliency of our business model with nearly 90% recurring revenue gives us the confidence to reiterate our 2021 financial targets.

I'll now review our first quarter results. All comparisons are year-over-year unless otherwise stated.

We grew total revenue to $970 million, up 16% as design activity generally and demand for our products in particular remain high. The quarter also reflected the timing of some product shipments shifting forward into Q1. Semiconductor & System Design segment revenue was $878 million, with both EDA and IP performing well. Software Integrity segment revenue was $92 million, a solid start towards our full year objectives.

Moving on to expenses. Total GAAP costs and expenses were $822 million. Total non-GAAP costs and expenses were $684 million, resulting in a non-GAAP operating margin of 29.6%. Adjusted operating margin for Semiconductor & System Design was 31.8%, as Software Integrity was 8.6%. Finally, GAAP earnings per share were $1.03, and non-GAAP earnings per share were $1.52.

Turning to cash. We generated $174 million in operating cash flow, our highest first quarter operating cash flow to date, driven by strong collections and a couple of large customer payments that came in early. We initiated a $250 million stock repurchase, consistent with our commitment to increasing buybacks this year. We ended the quarter with a cash balance of $1.02 billion and total debt of $123 million.

I'll now provide our guidance. We are reiterating a very solid outlook growth and profitability for the year. Revenue of $4 billion to $4.05 billion; total GAAP costs and expenses between $3.234 billion and $3.279 billion; total non-GAAP cost and expenses between $2.825 billion and $2.855 billion, a non-GAAP operating margin of 29% to 30%; Other income and expenses between minus $11 million and minus $7 million; non-GAAP normalized tax rate of 16%; GAAP earnings of $4.29 to $4.45 per share; non-GAAP earnings of $6.23 to $6.30 per share; cash flow from operations of $1.2 to $1.3 billion, and capital expenditures of approximately $100 million.

Now to the targets for the second quarter. Revenue between $970 million and $1 billion, total GAAP costs and expenses between $801 million and $819 million, total non-GAAP costs and expenses between $697 million and $707 million, GAAP earnings of $0.93 and to $1.02 per share and non-GAAP earnings of $1.50 to $1.55 per share.

As we announced in December, we are raising our long-term financial objective to manage to a Rule of 45 model over the next several years. We'll achieve this through a combination of solid revenue growth and non-GAAP operating margin expansion further beyond 30%. Reiterating a strong outlook for the year and executing to our plan is an important step towards that objective. At the same time, we continue to work through our long-term planning process, and we'll provide additional details, as we have in the past, once that process is complete.

In conclusion, we delivered a very good start to the year. We drove double-digit revenue and earnings growth and generated strong cash flow. Our ongoing focus on managing the business for sustainable long-term growth has served us well. While steadily expanding profitability, we continue to invest in the critical next-generation technologies driving our customers' momentum. And we've prudently managed the strong cash flow we've generated through a balance of value-enhancing M&A and substantial buybacks.

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

(Operator Instructions) And our first question is from the line of Mitch Steves with RBC Capital Markets.

So, obviously, a good quarter here. I just had a couple of questions. The first one is actually just on the guidance. I've got a model that goes back pretty far and I realize you guys haven't missed a quarter in something like a decade. But I guess, historically, when you guys beat the first quarter and guide up the second quarter, you usually take out the full year at lease by the magnitude of the beat. So I guess why is that not occurring this time?

And then secondly, just in terms of the Software Integrity business, can you maybe provide us an update on kind of how you expect the margins to trend? I realize that last year is probably a difficult year in terms of getting new business, but how should that kind of trend through the year? So those are my 2 questions.

Okay. Mitch, this is Trac. Let me take the first question with regards to the guidance for this full year. We definitely feel very good about the outlook for the year, especially in light of the strong quarter that we just posted in Q1. Now that said, it's still early in the year, and there's still a lot of business to book. And our focus is making sure that we execute in the guidance for Q2 and ensuring that we are on track to deliver very good growth and earnings -- good growth and earnings growth for the full year. We've got a strong Q2 ahead of us, and we'll focus on that, and we'll provide more color on the year when we report in May.

Regarding SIG, the good news is I think that we've made a number of changes where we are starting to see some of the positives. And for this year, our main objective was not so much to change the margins but to come back to growth rates that we can be more proud of. And so that is trending in the right direction. It's just the first quarter, so it's a little early, but we're very encouraged. And I'm also very encouraged because I can see and feel a change of tone in the team. I can see some very strong people have joined. And so all of that is heading in the right direction. But as said, growth is our first objective because invariably, once growth does well, margin is much more manageable.

Yes, I would add to Aart's comment that it is a good start to the year. And as we resume growth in that business, over the long term, certainly, it's going to -- the leverage on that business is both a combination of some very strong growth and margin expansion that should contribute to the overall margin story as well.

(Operator Instructions) We'll go next to the line of Jason Celino with KeyBanc.

Maybe for my first one for Trac. You mentioned a little bit of pull forward in the quarter, very solid beat, but maybe could you just quantify maybe what the amount and what products?

Jason, it's mostly on the hardware side. We saw hardware was a little bit better than expected for the quarter. And then with regards to IP, we had some IP deals that were scheduled in Q3 that we saw in Q1. That was an element of the quarter. But for most part, the results in Q1 were -- was a function of really good execution across the board, and you can see that in the mix of how we did geographically and also by the different products.

Okay. And then for my follow-up, it looks like you've broken out China and it accelerated meaningfully in Q1 even from the whole year of last year. And even with limited data here, it seems to be kind of confirming your confidence that China wasn't pulling. But I'm curious what specifically about Q1 versus maybe what you saw all of last year?

Well, in simple terms, China is growing well as a high-tech country. And so there are many customers that are all doing more and more chips, that are doing more sophisticated chips and that rely on our tools to get there. And so we see this essentially as a growing economy that will continue to do well for a number of years.

(Operator Instructions) Our next question will be from the line of Jackson Ader with JPMorgan.

Aart, you mentioned that the kind of recent breaches, specifically with SolarWinds, has increased the awareness or the demand on consulting-led Software Integrity deals. But just curious, on the product side, either from Tinfoil or the Black Duck products, are these also seeing an increased demand? And is there anything that those products do specifically that might help this type of attack in the future?

Well, our business tends to be not so much in the diagnostic of issues and more in the prevention of them. Now some of the products that you mentioned are sort of on the boundary of that. And to be honest, I don't know if these had any bump-up.

In general, I would say that these type of breaches initially go through almost like a panic phase where people just want to find out, have they been breached and so on. That is not the business that we are in. Then they go into the longer-term considerations, which is how do they make their environment much more solid. And that is precisely where our Software Integrity Group is focused on. And more often than not, this is why sophisticated consulting is a value because there are so many different product offerings in the world and plotting a strategy that over the long term makes the development of environments stronger actually requires some sophistication. And so that is why we're trying to staff up further in those areas because we do see that it has impact.

Okay. Great. And then just a quick follow-up. Given the supply chain disruptions that we see in the automotive market, can -- Trac, can you just remind us how much of your maybe IP revenue is booked on royalties or product shipments? And should we expect to see any kind of headwinds from the automotive slowdown?

Well, I'll start with the second part of the question. So far, we haven't seen a change in the momentum of the IP business. There's -- the IP business is pretty diversified. Obviously, automotive is a good segment and a good element of growth for that business. But so far, we're not seeing any impact in terms of the momentum that we've experienced over the last several years.

With regards to the upfront mix, that's more a function of the fact that we switched over to 606 in 2019. And so you're going to see a little bit more upfront in the business, which will create more variability, but that's something that I think we've got some good experience over the last couple of years managing. So I don't see that as an issue.

With regards to royalty, I don't have those numbers specifically in mind, but it tends to be a smaller portion of the overall revenue.

Our next question will be from the line of Joe Vruwink with Baird.

I wanted to start, I was hoping to maybe get an update on where backlog has finished the quarter. And relatedly, in recent quarters, you've been making some comments to suggest order trends being in line or better than your expectations. Just wondering if we could maybe get an update on how new business track relative to your thinking at the start of the quarter.

Joe, we backlog for the quarter ended at around $4.6 billion. And the bookings trend for the quarter was pretty much as planned. We did well in the quarter. Keep in mind that this -- the backlog and the bookings will vary from quarter-to-quarter depending on the large deals that are expected to be in that quarter. So it will vary. And what we typically emphasize more is looking at the quality of the deals that we closed in the quarter and whether or not run rate -- what the trend on run rate was, and that was definitely higher this quarter.

Okay. That's helpful. And then Aart, going back to the new product discussion between 3DIC Compiler, DSO.ai and then SLM. Just wondering, over a mid-term framework, which of these things do you think has the potential to be more material to Synopsys performance? When you throw out DSO.ai becoming an anchor product for customers, are you demonstrating the type of PCA where that, if we think a few years down the road, this is going to be a flagship like some of your other flagships? Or would you maybe point me towards one of the other products in your discussion as being more influential to Synopsys revenues in the midterm?

Well, of course, every team at Synopsys has its own preferred one, meaning the one they're working on. But you're certainly very correct to say that DSO is of high potential because DSO really applies to some of our other flagships. And in the case of design automation, it uses Fusion Compiler and a number of the tools that go with it. And so therein lies its power because if you can amend the human with machine learning-driven enhancements and acceleration, that it's very similar to what we literally did 30 years ago when we came into the market with automatic synthesis where the human did a lot of work and the synthesis became essentially a power tool for them. And so I expect that we will see impact of that already this year and certainly, next year.

If we look at 3DIC, that will be a little bit more gradual but is very fundamental because as you well know, a lot of people had predicted the death of Moore's Law. And by the way, it's far from dead, but it has slowed down. And what is so interesting, in my opinion, with 3DIC is that, that is another way to adding substantial complexity where instead of doing it all on 1 chip, you can do multiple complex chips and connect them very closely together. So over time, this will grow in importance.

And then Silicon Lifecycle Management is particularly interesting because the word life cycle is in there. And that would tend to say, well, the utilization will be over a longer time frame, but the interest turns out to be extremely high already now because people see that if we could put a variety of data sources and intelligence inside of the chip for self-diagnosis, that's going to be rapidly more and more important for all the places where chips are used on applications that could engage our human life. And of course, the car comes up as the first example for that, but robotics and a number of other areas will have the same.

And so what from our perspective is exciting about this, these are also very much organic innovations maybe amended with some small acquisitions. And it bodes well for sort of the speed in which we are creating new value, and that's an additional reason to emphasize it to you.

And our next question from the line of Gary Mobley with Wells Fargo Securities.

I wanted to ask kind of a, I guess, an intangible-type question to Aart, and maybe you have a good answer, maybe you don't. But one of the things that we've been hearing from fabless chip companies as they're struggling to get access to adequate manufacturing capacity, in particular, leading-edge process nodes, is that there really seems to be less of a hurry to develop the latest and greatest sub-5-nanometer chip? And so my question to you is, have you seen any slowdown or any feedback from customers indicative of perhaps a slower pace of design innovation in light of the capacity constraints the chip industry is seeing?

Okay. I do think I have a good answer for that. For starters, on the advanced nodes, we see none of that on the contrary. I think the race is fully on. A lot of companies understand that the impact of, let me call it, AI-enhanced computation is going to be enormous on a lot of end markets, and those are sophisticated chips. And a lot of people are essentially chasing that opportunity, all in the hope of having the best offering. And so no slowdown as far as we can tell. And I emphasize in the preamble, the many new technologies we have precisely because that is of high appeal.

I think part of the confusion around the capacity question comes from the fact that the automotive industry, which is hammered right now by essentially the lack of a few parts in order to ship a car, it's really quite pathetic because these are little parts and they hold back a high-value product, is actually mostly in older technologies and in older manufacturing, and so not even 300-millimeter but the smaller wafer sizes. And for those, there's not really an alternative because there's a limited number of these foundries. And sure, you could redesign these chips, but who wants to redesign these old chips just because right now for a couple of months you don't have enough parts. And so that is the picture that we see. I expect that that will go away in a few months. But nonetheless, meanwhile, if you're caught in essentially the supply chain narrow spot, you can see the impact.

And so over time, I think what we will see is that a number of companies will become more careful in saying, "Hey, if I have to move this design to a newer technology, I want to design it already now so that it's better documented and can be essentially remapped to a new technology."

Okay. Appreciate the thoughts there. As my follow-up, I want to pin you down a little bit -- pin you down on a little more detail relating to Software Integrity. If I go back to your last earnings call, I think you guys were mentioning that perhaps you can generate 15% to 20% bookings growth in the current fiscal year, which would ultimately end up translated to that similar growth rate in the out-year, let's call it, fiscal year '22. Just to pin you down here on that. Or is that what you're reaffirming today given the start to the year?

Yes, Gary, that's our -- that's what we're reiterating.

(Operator Instructions) And our next question from the line of Jay Vleeschhouwer with Griffin Securities.

Aart, let me start with you with a question concerning the breadth of growth in core EDA, then a follow-up for you, Trac. So for Aart, it's been quite obvious for the last number of years that there's been a rejuvenation of growth in synthesis and as well in implementation for -- obviously benefiting you in those 2 areas. But industry data and just the logic of technology would suggest that there was a close correlation between synthesis and the usage of RTL simulation, where you're also a market leader and then similarly, for implementation correlated to DFM and physical verification. The question therefore is, has the growth -- the better trajectory you've seen in both DC and implementation induced more rapid growth as well in those highly correlated technologies and products?

And then for Trac, how are you thinking about your head count growth for the year in the context of your OpEx guidance for fiscal '21? At the end of the quarter, you had what appeared to be a record number of openings, equivalent to over 6% of head count. So maybe talk about how you're thinking about the rate of bringing people on. And then frankly, if you are having issues with availability, given the large numbers that you have in your open recs as do your 2 large competitors?

Okay. Jay, the question you're asking is complex because fundamentally, the picture that you're painting is a picture that started with individual tools and has long moved towards tools that are very correlated with each other and often used in tandem. And so a number of years ago, I coined the term that we're moving from scale complexity more of the same to systemic complexity, which is more of the same plus heterogeneous demands and constraints all coming together. And so if you take as I said of gravity, like you did in synthesis and implementation and you look upward, you arrive at RTL, which is essentially a way to describe hardware. But RTL does very much look like a language, and that's not a surprise because right on top of that, sits software. And so we very much see a cone upward that's broadening where hardware and software and hardware-software together have to be verified and optimized, and this is increasingly the case for all the large systems. And by the way, around the software for simulation, we added a variety of hardware accelerators such as emulation and prototyping.

If you look downward, you mentioned DFM, which stands for design for manufacturing. And that is an absolutely correct term because the manufacturing, which was nicely isolated, somebody else was worried about the physics, as you go to smaller and smaller things, you have to worry about a lot of things when you design a chip. And so the connectivity down to the manufacturing has grown substantially, and we do ourselves way more there. But aside from manufacturing, I could have added the word test because we also do design for test. You have now heard the Silicon Lifecycle Management, which is sort of designing for what happens later. I could have added to word FuSa, functional safety, because for all the cars, there are all kinds of rules that one has to follow, and we have actually a fabulous offering in that. That is, by the way, also manifested in the IP. And reliability is going to grow in importance as well for all of these products.

So for a long time, we have always looked at this as the big picture. And the complexity of these intersections is actually one of the areas where Synopsys shines. And that's precisely why I mentioned in the preamble a few times that the benefit of the cross-disciplines is something that -- where we can really add a lot of value to our customers. And I think that will continue.

Jay, this is Trac. So I want to make sure I understand your question correctly. You're asking about head count growth and how that matches up with our expense guidance for the year and therefore, margin for the year, is that correct?

More or less, yes. I mean you're clearly looking to bring on a large number of people. If you were to fill every one of your open positions today, would you stay within the range of OpEx guidance, for example?

I don't want to comment about the rec itself. But in general -- generally speaking, we are definitely investing in the business. And that's consistent. The investments that we're making in the business is consistent with the goal of increasing margins to the 29% to 30% for this year. In addition to that, that investment is also related to our long-term goal of driving to the Rule of 40 -- 45, which is going to be making sure that we continue to grow the business over time and also expanding margins simultaneously, so the head count itself is really a commitment to -- a balanced commitment to drive growth and improve profitability.

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

I had a couple of questions on China. I mean your revenues are growing 74%, I guess, year-over-year, but when I look at a company level, your time-based revenues are growing 13% to 14% year-over-year and upfront grew 15%, 16%. So I mean is my interpretation correct that with regards to the mix in China with respect to EDA or hardware or IP, it is more or less in line with your mix overall? Or are you sort of -- or is the mix sort of skewed more towards EDA or hardware both in terms of absolute revenue dollars and growth?

Well, let me take it from the product side. China, of course, came online, roughly speaking, 25 years after most of the west. And so when they entered the space of starting to do, let's say, significant chips, not the really small things, but of some meaning, right away, they entered with a design methodology that was more up-to-date than what some of the other companies use. And so that predicated from the start a substantial amount of IP being used in parallel to the advanced technologies. And so from that sense, the balance is slightly different than in the traditional west if I can call it that.

At the same time, increasingly now all of these companies look the same to us be they in China, be they in Korea or in Europe or in the U.S. All the ones that are driving the state of the art have to deal with the physics underneath have to deal with the software on top and have to deal with the sophistication of large IP blocks and substantial development capabilities. And so while it was more different, maybe a decade or so ago, I think it is now more the same than it was before.

And in hardware, I think it's sort of a very similar picture. The most advanced users are the people that are sitting at the intersection of hardware and software, and that is precisely where Synopsys shine.

Okay. And for my follow-up, I guess, if I look at your -- again, the China revenue, how do you think -- how are you looking at it in terms of -- as you progress through the rest of the year? I mean do you get a sense that, obviously, it's going to grow faster than last year overall? Or are you sort of seeing the comps get harder in the back half and sort of de-selling a little bit?

Well, I would say last year was a strong year for us as well. And so in general, as you well know, the Chinese economy did actually grow in contrast to some of the western economies. The hope, of course, is that the west will start to grow as COVID gets hammered down more. But in general, there's no reason to believe that China will not continue to be a very live market for us. And in general, I would say, overall, everything touching chips and around it right now is doing well because of the overwhelming demand of all the end markets and the specialized verticals.

(Operator Instructions) And I have a follow-up question. From Pradeep Ramani, one moment. Pradeep, your line is open. Did you have an additional question? We're going to go next to the line of Vivek Arya with Bank of America Securities.

Aart, I'm curious, are you seeing more customers design with ARM technology in the PC and the server markets? How would you think about that trend now versus what it was in the last 1 or 2 years? Any way to kind of quantify whether it has gone up or down?

It's hard to quantify if they're more, but it is easy to quantify that they have progressed, meaning that already a number of years ago, and it was more than 2 years ago, a number of people started to look at, is it possible to use ARM cores for -- in the server space? And some have continued to try, others have given up at that time. But now, there's definitely a small group that is looking at using the service actually in cloud environment. And I don't want to announce who these people are. Some have probably spoken publicly at this point in time. But that has followed a lot of hard work to make that possible. And now the question will be, are the economics and the capabilities sufficient to be a good counterweight to the x86 family of processes that are typically used in the cloud?

So it is well possible that we're actually going to see a further diversification of computation largely because cloud is not only the regular general purpose computation, but now we have specialized efforts, certainly, in everything dealing with big data and machine learning. And for that, clearly, a number of players have put processes on the market that are dedicated to that and are particularly fast for it. And so ARM fits into all of these categories and -- but so are a number of other people doing the specialized processes.

Got it. Very helpful. And then for my follow-up, Trac, just 2 clarifications. I think you mentioned somewhere that some shipments moved into Q1. I was wondering how much did they impact sales and EPS? And part B of that is you've given a full year outlook of about 10% or so growth at the midpoint, I believe. What is the implied growth in the Software Integrity part of your business as part of that 10% growth for the full year?

Okay. So the first part of the question is that -- I'm sorry, was...

The shipments moving into Q1. I recall you said something along those lines?

Yes. There is some IP that shift in Q1 that was originally planned for Q3, but overall, it wasn't a significant amount. Most of the quarter was really strong execution.

With regards to the SIG, Software Integrity business, what we had commented on at the beginning of the year was that we expect to grow bookings by over -- in that 15% to 20% for the full year. And that with the time-based model that we have on revenue that we would exit the year at double-digit growth. But for the full year, we'll probably be in the high single digits. And so far, we are -- after Q1, we are on track for delivering that.

Our next question from the line of John Pitzer with Crédit Suisse.

First one, Trac, just going back to the OpEx guide for the year. Maybe another way to ask an earlier question, was there anything about the COVID environment that hindered your ability to actually bring people on board to actually accelerate growth in some of the markets like Software Integrity, such that if we get to a point where the vaccine is widely distributed and things open back up, you guys might take that opportunity to kind of reaccelerate OpEx for future growth? Or how do I think about the COVID dynamic within OpEx? And then I have a follow-up.

Yes. Overall, I think we've done a pretty good job of bringing head count on and bringing people on board. The -- as a matter of fact, since you bring up the topic, we brought our general -- new general manager for the Software Integrity business on without ever physically meeting him. So it's something that we're managing through and much like the rest of the business, we're just learning how to work remotely and adapting pretty well, I think. And I think that we'll continue to do that throughout the rest of the year and adjust as things free up or change with the health environment.

That's helpful. And then, Aart, as my follow-up, just in the core EDA business. I'm wondering if you could help me just better understand how the business is tracking between sort of some of the more traditional customers you've had in that business. Let's call it, the Intels, Qualcomms and Broadcoms of the world, and maybe some of the more nontraditional customers, the hyperscale companies, we now have a very vibrant private semi market that we haven't had in years. I'm kind of curious, that nontraditional bucket, how big is that now part of the core EDA business? And I'm assuming it's growing meaningfully faster, but can you help me differentiate?

Sure. Well, first, I think your description fits well the situation, meaning the traditional big players continue to invest heavily because they are chasing or driving, depending how you look at it, advanced technology, no matter what. Secondly, the hyperscalers are clearly continuing to see the opportunity to do more designs themselves, to do more manufacturing -- not so much manufacturing, but the control where they get their own products from.

And the one thing that's different about hyperscalers versus other companies, they don't design chips to sell the chips. They design chips in order to use them in their own product offering. Having said that, a number of these companies have been successful already at doing that. Some have acquired small start-ups, and some are literally growing their design teams and their experience to go with it as we speak. And so it's a part of the market that is definitely on very good growth, I would say, probably twice as much as the rest.

And then the other category, you call them start-ups, sometimes we also call them all-AI companies or machine learning-ish companies because there are many companies around that and not that they all do AI processors, but there's a vibrant world that is essentially trying to change the future. And so only anything that is close to machine learning is super highly interested in -- at the minimum, 2 things, which is compute very fast and compute with a lot of data. And once you say these words, you have to also say not using too much power because otherwise you fry the chips. And so those are all good words for us because that means they tend to immediately head towards the most advanced IP, head towards the most advanced utilization of tools. And so that has also been a very good market for us.

So some of the AI guys get acquired by the traditionalist. Some of the traditionalist get acquired by the hyperscalers. It's a live market. And live is a good word in here because this is a field where advanced change in technology opens new doors. At the very moment, we have a lot of opportunities.

And Aart, I know it's fluid, but is there any way to size that nontraditional bucket as a percent of revenue today?

Well, there is a way, but we don't do it for you, unfortunately. Sorry, we don't disclose the individual buckets. But I don't mean to be coy. I want to be very clear, I think hyperscalers, AI and a few other specialty areas are very good growth for us and are also very demanding, which is typically actually good for us because it drives angles of technology that will be meaningful.

And while, for example, I did mention the whole automotive space because it tends to be a little behind on the most advanced technology, it is now looking very much forward precisely because of these needs of life cycle guarantees, reliability, functional safety, and a number of those concepts are very powerful and will, over time, I think, also make it back into the other groupings. So I guess what I'm describing to you is a really live field, and our job is to find which ones of these customers are the nuggets and serve them as well as we can.

And with minutes remaining in our call, we'll take our last question in the queue from the line of Gal Munda with Berenberg Capital Markets.

The first question is just around the EDA growth that you're seeing. Clearly, above what we used to say is kind of sustainable growth of the market, and you're referring to some significant market share wins that you're taking. I was wondering if you're able to kind of separate what you're seeing in terms of what the market is growing at recently, considering the fact that there's been an acceleration in the general market trends. And how much is the market share win as in addition to what you're growing at when you're growing close to the double digits?

Well, I think I'm always a little careful before commenting on competitors. And I do think that the overall market is actually strong, as my response to the previous question. And so I assume that all of us benefit from that. There's no question in my mind that in some of the advanced areas that we have focused on for the last few years and often communicated to you about, we are doing particularly well. And moreover, that we're building on top of that sort of next-generation capabilities that look very, very promising. So in that context, I assume that, over time, we may gain some share. But this is always in the landscape that overall is positive, and we should continue to invest in these areas because now it's a good time for that.

Got you. And then just the last one. Going back to China. And if I look at that revenue run rate that you're on right now implying -- if you just extrapolate that around $460 million-ish of -- without any sequential growth of revenue, which is significant. How much of the China revenue in general would you classify as recurring? Is it similar to what you have in the rest of the business, similar percentage? Or is it more specific?

Overall, the business mix in China is very similar to total Synopsys. We've been able to do very well across the board.

Well, I guess, this brings us to the end of the hour. And so, first and foremost, we hope that you and your families have been able to stay healthy and that in the light of coming vaccines, you have both the patience to protect yourself and get there as soon as possible. And also, thank you for your continued following of Synopsys. And for a number of you, we'll be following up in the next few hours in one-on-one calls. Be well.

Thank you. Ladies and gentlemen, this will conclude our teleconference. Thank you for using the AT&T conferencing service, and you may disconnect.