Ladies and gentlemen, thank you for standing by, and welcome to the Synopsys Earnings Conference Call for the First Quarter Fiscal Year 2019. At this time, all participants are in a listen-only mode and then later, we will conduct a question-and-answer session and instructions will be given at that time. [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. Hosting the call 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'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 today’s earnings press release, financial supplement, and 8-K. Also included in the financial supplement is detailed information around our long-term financial objective, our transition to ASC 606 and newly disclosed results by segments. 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. With that, I'll turn it over to Aart de Geus.

Good afternoon. Q1 was an excellent start to the year. Revenue was a record $820 million, and non-GAAP earnings per share were $1.08, both above our target ranges. Strength was across all product groups, including some large, expanded renewals with cornerstone semiconductor companies. We are confident in our outlook for the year, and are reaffirming our guidance. Please note that this is the first quarter we are reporting two segments: Semiconductor & System Design, and Software Integrity. In Semiconductor & System Design, results exceeded plan, with strength across the board, augmented by timing of customer shipments. In Software Integrity, revenue was right on plan, and operating margin continued to move towards sustainable profitability, as we build for the long-term in this high-growth space. Trac will discuss the financials in more detail. Looking at the overall landscape, solid demand for our solutions has continued into 2019, notwithstanding the somewhat increased uncertainty in the market. While the global narrative focuses on geo-political realities, electronics companies continue to design ever-more-complex chips and devices at an unabated speed. One notable driver, of course, is artificial intelligence. The development and proliferation of AI-dedicated chips brings great potential for us, as the number of customers and designs is growing quickly. Competition among AI-specific company is fierce, and indeed for anyone incorporating AI into their chips, with an intense race to market and a broad set of competing architectures. In addition, we’re seeing an escalation of the security challenges in highly interconnected systems loaded with software. This is in part driven by the proliferation of data-intensive IoT devices, and the emerging 5G connectivity standard, among other applications. The power of AI and the risks of security breaches require attention for all the products we use every day. From cars to mobile phones to smart homes to medical…

Thanks, Aart. Good afternoon everyone. Q1 was a great start to the year. Our financial results met or exceeded our targets in all key metrics, as we continue to execute well across the board. Beginning with this quarter, we are also initiating segment reporting for Synopsys. The investment we made five years ago in Software Integrity has reached critical mass and grown to approximately 10% of sales. Reporting this segment separately allows us to better highlight the strengths of the two businesses we’re building within and beyond our traditional semiconductor vertical. Our increasingly diverse customer base and our strong product portfolio, combined with our nearly 90% recurring revenue model, positions us well for success in periods of high demand, as well as those of greater uncertainty. Reflecting this dynamic, we are reaffirming our guidance for the year. Before I begin with the first quarter results, I want to remind everyone that Synopsys adopted ASC Topic 606, the new accounting standard for revenue recognition, beginning in fiscal 2019. All results I provide today will be under ASC 606. For a summary of these results, as well as equivalent financial metrics under ASC 605, please refer to our financial supplement. Now to the numbers. All comparisons are year-over-year unless otherwise specified. We generated total revenue of 820 million, a 7% increase over Q1 of last year, which included an extra week. Our growth reflects both strong demand and timing of customer shipments. Recall that ASC 606 creates additional quarterly revenue variability. Trailing 12-month revenue growth was strong across all product groups and geographies. These results reflect both the depth and breadth of our product portfolio, the increasing diversity of our customer base, and the impact of the investments we’ve made to drive long-term growth. Our contracted, but unsatisfied performance obligations or backlog,…

[Operator Instructions] Our first question is from Rich Valera with Needham & Company. Please go ahead.

Thank you. Aart, you mentioned a couple of times in your prepared remarks about the uncertain macro environment and a couple of questions on that, first is, has that any changed from last quarter you reported? And secondly, have you seen this uncertain macro impact your business in anyway at this point, I guess particularly on the hardware side, which might be more susceptible to that kind of pressure?

Thanks Rich. Good question. It's always difficult to say if there's a big difference from one quarter to another because these quarters flow from one to the other in somewhat not distinct fashion. The way I would answer it, it has had no impact on our business. I do think – I do see that some of the reports looking at the forward look and the predictions for 2019 were a little softer than before, but they are also now a little bit better informed. And so, this pertains to really the chip volume business more than anything else. So, it doesn’t really touch us as the design starts and the design difficulty have continued to grow. As we have been in the past, while we are not immune completely to the ups and downs of the semiconductor industry, we are relatively touched lightly and we’re actually typically a safe haven during those times.

I appreciate that. And then Trac, lots of nice new disclosure, couple of things. One the backlog which you gave the 4.3 billion, is that something you’re going to discuss more regularly? I’ve never heard you give a backlog number, not at a – at the end of the year, so just wondering why give that now and then should we expect to be getting the operating margins of the two business segments on a go forward basis, while that you are now breaking out that software integrity for both revenue and presumably operating margins?

Hi, Rich. On the first question on backlog, we thought it was important to highlight backlog starting this year because as part of the 606 transition we will be including that and disclosing that in our 10-Q, so yes you will see that on a quarterly basis. With regards to the segment reporting, going forward as part of segment reporting we will provide both revenue and operating margin for both those segments.

Great, definitely appreciate that disclosure. Keep up the good work. Thank you.

Thank you.

Thank you.

Our next question from Mitchell Steves with RBC Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my question, and thanks for all the new disclosures here. So just, first, kind of on the revenue line, I know you guys already gave out a guidance, but this is kind of the third-year straight where you're talking about a [2H deceleration], and that hasn't happened in the last couple of years. So, I guess, instead of me asking about the conservatism, what's kind of embedded in 2H in terms of the guidance?

Mitch, I wouldn’t characterize it that way. We actually had a great start to the year with Q1 and given our outlook for Q2. To us the latest [indiscernible] forecast than we entered the year and frankly from that perspective, I'm feeling optimistic and more confident in the outlook that we have, that’s why we reaffirm the guidance for the full-year.

Got it. And then the second one is on the cash flows. If I heard that correctly, you said that the CapEx should come down in half. Does that kind of give you an implied, like I guess, $900 million plus in cash flow for 2020?

It’s too early to guide on 2020 at this point. We just wanted to give an indication that the CapEx spend for this year is unusually high because of the few items that we highlighted.

Okay. Got it. And then just last one, just on the Software Integrity margins. So, I think there's kind of a bull case here, where that's going to be higher than your corporate average long-term. Is there any reason why that wouldn't be the case if I look out 5 or 10 years?

We don't want to draw out that far, I guess let me abstract that first at the highest level. We are committed to 26% operating margins in 2021. We will be driving improvements across all areas both on – in both segments and across all areas of the business. So, you should see improvements there. At this point, we’re pleased to see off the quarter with profitability in software integrity, but it’s a new market for us that’s growing and we’ll continue to invest in building up the software integrity platform, as well as scaling up that business, so it will be lumpy quarter-to-quarter, but I think long-term the trend that we’ve seen over the last five years should continue.

Okay, perfect. Great quarter guys.

Thank you.

Thank you.

And we go next to Sterling Auty with JPMorgan. Please go ahead.

Great, thanks. Hi, guys. This is actually Jackson Ader on for Sterling tonight. Thanks for taking our questions.

You’re welcome.

First one, there’s been something on investors’ minds today, I guess since last night, Cadence announced a significant new win with a marquee North American semiconductor company. And so, based on their description, it has led to some investors concluding that that company that they mentioned last night maybe Intel. Since Intel is your largest customer, do you have any comment on what’s happening there? Any share shifts that you may be seeing?

We never comment about individual customers and Intel has definitely been a very good partnering customer to us and in general it sounds like both companies have done extremely well recently and I hope that bodes well for the overall markets. So, yes, we do compete in many places, but at the same time our objectives are to do well and I think we just did that this quarter.

Okay, alright, fair enough. And then a quick follow-up, was there any maybe buying behavior, particularly in the emulation space that maybe drove some budget flush spending around the calendar year-end in December where you maybe saw some pull-forward of Emulation purchases?

No, we didn’t see any of that. And a number of people have asked us that question also in the context of China and we didn’t really see that. And so, I think we’re seeing Q1 as just a continuation of now quite a number of good quarters and of a business that is both diversified, well-balanced and growing well.

Okay. Alright. Thank you.

You’re welcome.

We have a question from Monica Garg with KeyBanc. Please go ahead.

Thanks for taking my questions. Firs, I mean you have a very strong beat in Q1 revenue by 20 million almost, EPS $0.10, I guess why the upside not flowing to early guidance both for revenue and EPS?

Monica, this is Trac. As I said earlier, it’s a good start for the year. The results were a combination of us executing very well and growing the business. Some of it is timing in terms of customer deliveries, so in fact there is a lot of business left to book for the full-year. We feel good about the outlook and it’s nice to have the first half look pretty secure.

Got it, and then I think last quarter or before that you said that you have a leadership position in Emulation, could you maybe see if that still holds through?

Well our Emulation has done extremely well and this is a domain that – and this is I think good news for many that continues to grow well because the demand around very difficult problems for Emulation as acceleration to simulation is high. In addition, Synopsis has focused on a special case that is extremely important, which is can you run software on hardware that doesn’t quite exit yet, i.e., hardware that you mock up and emulate, and the answer is yes. And more and more customers report that that is absolutely crucial because more often than not when a product is ready, the software is not and you cannot go to market, and that is why our area has done particularly well. And while these numbers are not individually disclosed, we are certainly convinced that we are the market leader in this area.

Right. Then Aart you provided some commentary regarding the verification usage in cloud, but maybe could you talk about how ready you think Synopsis solutions are for usage in the Cloud, are you seeing interest from – not only from verification for other product as well?

Let me go backwards on the question. The answer is yes. There are number of other tools that are also used in the Cloud, typically things that require or can benefit from big bursts of competition where a user may not want to buy their own computers just for the burst period, and so these type of tools tend to be optimized little bit differently, so that they can run more easily in a public clouds or various forms of private cloud. And so, there’s quite a bit of interest in that. I don’t think that things are completely back and white though, meaning that there are a lot of practical issues that have to be overcome to make things run very well and there are steady advances on making the various forms of software do that effectively, so that customers can essentially have a more flexible spending on hardware when they want it.

Alright, thank you so much.

You’re welcome.

Our next question from Tom Diffely with D.A. Davidson. Please go ahead.

Yes, good afternoon. I guess first Trac, I was wondering if any of the strength you saw in the quarter was driven by concerns at maybe there would be a worsening of the trade war and some of the customers wanted to buy ahead of that.

We haven’t seen a change in behavior of having that affect our revenues. As I said, it’s pretty balanced in terms of growth, as well as to a lesser degree, timing of customer contracts.

Okay, then maybe just a big picture question for Aart. How do you look at the EDA growth when you have a slowing of Moore’s Law, but then you have an increasing of the use of new materials and technologies along the way? I mean, unbalanced, does that scenario provide growth for EDA or stability, how do you look at that?

You know, it almost feels like a question that you could have asked in 1997 and 2007, and again, and I don't want to sidestep at all the fact that the complexity of Moore’s Law is increasing and the complexity itself is good for us, but with the complexity of course comes an economic equation that will over time bring some changes for customers and so at this point in time though, the demand for really advanced chips is quite strong and that I have illuminated many times by saying that we have entered a whole new phase of what electronics can do in most products and actually in most verticals and that is the age of condition or artificial intelligence, where the early results and have to be called early because they are literally just three or four years old now are very promising, but the demand for dramatically more computation is unabated. And so, I think the push will continue and the challenges that continue with it and I think for a company such as ourselves that’s a good thing, because that is our specialty. By the way, this reaches all the way down to the deep physics of Moore’s Law where we do excellent business in providing simulation tools that allow to check out how a brand-new transistor such as let’s say the gate-all-around type models, will function before even manufacture them. So, the food chain of Moore’s Law is actually pretty long.

But maybe just bring the food chain down a little further or maybe up little further, if you look at it down to packaging taken over some of the increases in more than Moore’s Law if you will, how does that benefit you from an EDA company and is it meaningful?

Excellent question because this is a question that has actually also has sort of ups and downs multiple times in the last couple of decades, every time there was sort of a hint that Moore’s law was coming to an abrupt end, the solution was well instead of putting things in one chip let’s put into to multiple chips, maybe stack those chips on top of each other and the technologies have actually advanced substantially to make that possible, but they are not simple in their own right, meaning that if you can still put it in one chip that is often easier both economically and technically. Having said that, yes there is progress in various forms of packaging and stacking of chips and we think that that will continue to grow over the years to come and there too a sophisticated EDA tool such as ours will be absolutely necessary to do that. So, it sounds like these are very different things, but from my perspective it’s just a continuation of whatever is the best method to deliver a lot of functionality electronically, we will be full focused on.

Okay, great, thanks for your time.

You’re welcome.

[Operator Instructions] We will go next to Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Thank you Aart. Let me start with you regarding SIG and then a backlog question for Trac. So, anticipation of the SIG platform that you have been alluding to, could you talk about what the customer behavior looks like thus far with regard to both the mix of SIG tools that they are buying and services engagements that you’re providing or undertaking for SIG? So, in the case of the product for example, are customers buying multiple solutions are they buying not just Coverity, not just the Duck, but multiple products, and then with regard to the services, would you regard those as leading coincident or lagging indicators for the SIG business and light the platform perhaps mitigate how services intensive that business might be and therefore up margins over time?

That’s an excellent question because we of course entered this market as it was just coming about, it’s a highly in development market, there are many different point solutions. And we were fortunate enough to acquire, I believe some of the very best ones. Why do I describe it in that fashion because if you are sitting on the user side, you may have specific problems for which you buy a very specific point tool and may be happy with that? If you are sitting a little bit closer to the IT management of a company that has many users, this is a horror scenario, because now you have all these point tools from all these individual, often small companies, often companies that do not have longevity in being able to support you, may disappear or may get acquired. And so, we noticed already now, I would say a couple of years ago that the number of companies were positively surprised when they found out that of some of the point tools, we had acquired behind that was a company like Synopsis that were actually substantial had a long history and therefore was probably stable. If you now amend that by the fact that a platform really is a mechanism to bring multiple point tools together to make them look and feel the same, be able to share data between the tools have reports that can both work for the individual user, but also for the management to get good overview, you can see how at a minimum this brings a simplification for the people that have to manage the utilization of all of this in large companies, often companies where their core competence is not the software, but they are highly dependent on some sets of software that need to secured and high quality. In that context, the service question is extremely appropriate. We have said, when we acquired it that initially it would give us access to precisely the higher-level management that needed help in plotting their strategies on how to go about security strategy around the software. And in that sense, that would be in your leading category. Meanwhile, there's a number of services that we provide where on a regular basis, we do certain checks for customers that would be in the coincidental category. And then if there are issues that pop up at a customer, that only they don't know what to do there that would be lagging, but we certainly can provide help in a situation where suddenly an urgency comes up. So, maybe summarizing this somewhat long monologue here is that we have a number of puzzle pieces that are now being put together and out of that I think comes both a stronger position for us, a more effective utilization on the part of the customer and the opportunity to continually add incremental value to the platform.

For Trac, you grew your backlog – and thank you for that Aart. That was good explanation. For Trac, you grew your backlog a quarter, by the amount that you grew your backlog for all of fiscal 2018 about $300 million. So, assuming the usual three-year runoff or conversion that isn't translating into any incremental revenues relative to guidance for this year?

Look, Jay we don't want to comment on how to extrapolate the backlog. We're going to disclose that so you will see that trend over time. But given that we will have different contracts renew at different points in time I think it's too – it would be too difficult to really translate that to the health of the business. Overall, I think we'll continue to refer you back to run rate growth in the business and look at that trend. And that tends to be – that has been up.

Thank you.

Thank you, Jay.

We have a question from Josh Tilton with Berenberg Capital Markets. Please go ahead.

Hi, thanks for taking my questions. Have you seen increased stickiness with customers as the Fusion offering integrates many steps of the design flow that may have been accomplished with numerous products in the past?

It is too early to be able to check on stickiness because that is by definition something over a long period of time. But the expectation would be absolutely yes, meaning that, one of the key reasons customers will use this is because on a number of cases they will get better results, they will get the better results in a more predictable fashion and in a shorter amount of time. And so, in that sense, it's really a continuation of our objectives for the last 30 years, which is provide better and better tools for more and more difficult chips. And so, the early adoption has been very positive. We are maturing things rapidly. We're adding already new capabilities some of those will be announced in the not-too-distant future. And so, it is definitely at the core of our platform for the next decade.

Thanks. And then second question what is Software Integrity's current exposure to auto? And then how big is the potential auto's had for Software Integrity?

I don't know the exact number, but I can tell you that we've had a number of very exciting automotive not only interactions, but actually substantial business closures. And just to give a little color to that, in some cases, they have been connected somewhat to the rest of our business as we have moved into automotive. But in a number of cases, it's also that the automotive field has discovered, so to speak, that software is a major issue. And when I say the automotive industry, I mean the OEM, so the actual car manufacturers, and this is interesting from a different perspective. They have in the last 100 years or so relied on an enormously complex supplier chain. And now suddenly the concerns are directly at their door, because if they move into adding way more software and already the advanced cars have about 100 million lines of code, way more software in order to do autonomous driving or any other form of assisted driving, the risk of vulnerability is actually very, very costly. And so, we have a number of customers that have now done large deals with us. We expect those to continue to grow over time. And interestingly enough, as we're coming via the Software Integrity Group sort of down from the software, we're moving up from the hardware with the various forms of virtual prototyping, and this is exactly part of the strategic picture that we have seen now for a number of years, which is this pincer movement around everything is sitting on the intersection of hardware and software. And that's where the value will be created.

Thank you very much.

Thank you.

And I'll turn it back to our speakers for any closing comments.

Well, with that, thank you very much for attending this call. We completed a strong first quarter in the year and thus have renewed confidence in the rest of the year. And we're, as usual, thankful for both your questions and your attention to our company. Have a good rest of the afternoon.

Ladies and gentlemen, this will conclude our teleconference for today. Thank you for using AT&T Teleconferencing, and you may now disconnect.