Synopsys' Senior Vice President of Investor Relations, Trey Campbell, welcomed everyone to the Synopsys Earnings Conference Call for the Third Quarter of Fiscal Year 2023. Campbell then introduced Aart de Geus, Chair and CEO of Synopsys; Sassine Ghazi, President and COO; and Shelagh Glaser, CFO. Campbell reminded everyone that during the call, Synopsys would discuss forward-looking statements that could be affected by risks and uncertainties. The company also referred to non-GAAP financial measures during the discussion. Campbell then concluded his remarks and handed the call over to Aart de Geus.

Synopsys announced that Sassine Ghazi will be the company's President and CEO starting in January 2024, and Aart de Geus will become Executive Chair of the Board at the same time. Ghazi is a proven leader, innovator, and partner to customers and ecosystem friends. De Geus expressed his support for Ghazi and his determination to build upon the company's strong foundation and propel Synopsys to greater heights of success. The company also reported outstanding results in the third quarter, exceeding guidance targets and reaching a quarterly revenue record.

Synopsys is taking advantage of the AI-driven Smart Everything era and is making progress in the semi-conductor industry. They are increasing their revenue and non-GAAP ops margin expectations, and are looking to monetize their AI leadership through three distinct value streams including design participation, embedding AI across their EDA stack, and AI-driven efficiency transformations.

Synopsys is a leading EDA provider to AI chip designers, offering unmatched capabilities in design tools and a leading interface IP portfolio for faster and lower power interconnect protocols. Synopsys.ai, pioneered by Synopsys in 2017, has seen rapid adoption with nine out of the top ten semiconductor vendors using it in production. The AI-driven chip design solution has enabled customers to reduce design times from months to weeks while achieving better results in terms of speed, power and area. As of February 2021, there have been 270 commercial tape-outs using Synopsys.ai. The AI chip market is projected to grow to over $100 billion by 2030.

Synopsys.ai, an AI-driven full EDA suite, was launched in 2020 for design optimization and now includes AI-driven test and verification flows. Customers have seen up to 10x faster turnaround time, double-digit improvements in verification coverage, and more than 20% silicon test cost reduction. Synopsys.ai is now driving more than 20% value increases in digital implementation renewals, and has driven multiple full-flow displacements due to its 10x productivity advantage. Generative AI is a key disruptive technology that will catalyze innovation opportunities for Synopsys to deliver leaps in productivity.

Synopsys.ai is leveraging Gen AI capabilities to provide design assistance, exploration, and generation to customers, and Synopsys is also using AI to increase operational efficiency across the company. Synopsys' Design Automation segment achieved its first $1 billion quarter, and Fusion Compiler has seen increased customer share and successful tape-outs to leading manufacturing nodes.

Synopsys had a successful quarter in terms of Fusion leadership, HPC core wins, multi-die chip design, Zebu hardware-assisted verification, and Synopsys Cloud. They also had a comprehensive agreement with Intel to speed up the design and manufacturing of advanced SoCs and multi-die systems for Intel processes, making Synopsys the key supplier of advanced node IP for customers and the manufacturing ecosystem.

In Q3, the company announced a broad portfolio of silicon IP for TSMC and Samsung Foundry's advanced process technology, and exceeded 30 design wins in 5-nanometer and won a 3-nanometer design at a marquee automotive OEM. Despite the challenging macro environment, the Software Integrity segment delivered solid results. The company is investing in technology leadership, multi-die design solutions, IP, and an AI-driven EDA suite to help catalyze the decade of smart, secure, and safe products. They are also raising their guidance for full year revenue, operating margin, and non-GAAP earnings per share expectations. Lastly, they welcomed their new CEO, Sassine.

Q3 was a successful quarter for the company with record revenue and earnings. Revenue was up 23% and non-GAAP operating margin was 35.3%. The Design Automation segment had a 41.4% adjusted operating margin and the Design IP segment had a 24.7% adjusted operating margin. Software Integrity revenue was up 12% and adjusted operating margin was 16.9%. The company generated $560 million in operating cash flow and used $300 million for stock buyback. The company is confident in the business and is raising its full year targets for revenue, non-GAAP operating margin improvement and EPS.

The company is raising its full year targets for revenue, non-GAAP operating margin improvement, earnings, and cash flow from operations. For the fourth quarter, the targets are revenue between $1.567 billion and $1.597 billion, total GAAP costs and expenses between $1.184 billion and $1.204 billion, total non-GAAP costs and expenses between $1.005 billion and $1.015 billion, GAAP earnings of $2.17 to $2.28 per share, and non-GAAP earnings of $3.01 to $3.06 per share. The company's strong results and outlook have been praised by Aart and Sassine.

Sassine Ghazi explains that Synopsys's AI journey began in 2017 and that customers are now using it in production stages and many tape-outs have been completed. Synopsys.ai is expanding the impact of AI into test, verification, analog custom, and manufacturing. Customers are now buying AI solutions as part of their subscription license, and in some renewals, there is a 20% increase in value due to the combination of the AI technology and the additional money added to the agreement.

Aart de Geus and Sassine Ghazi have implemented changes in the organization that have resulted in a more comprehensive segment reporting, allowing for the observation of trends such as the downward trend in the operating margin for the IP business and the increase in the operating margin for the Software Integrity business, despite the lack of revenue ramp.

Aart de Geus is stepping down from his role as CEO of Synopsys, and Sassine Ghazi will be taking over. Synopsys is investing in IP and has signed contracts with customers for a specific amount of dollars with a specific term. The IP margins are expected to be slightly below the corporate margin, but Synopsys has a positive outlook on this business. With regards to Software Integrity, they are focused on improving the margins as they scale the business.

Sassine Ghazi and Shelagh Glaser have discussed the company's three priority vectors - growth ambition, scaling and technology leadership and innovation - and the success they have seen from these initiatives, such as 17% CAGR revenue growth and 700 basis points in non-GAAP operating margin. They have also committed to short and long-term operating margin improvement, with a goal of at least a 100 basis point improvement in the year.

Aart de Geus discussed three sources of monetizing AI chips and the associated market opportunity: AI products for customers, wallet share for Synopsys, and using AI internally for higher margins. Joshua Tilton thanked Aart and Joseph Vruwink congratulated Aart and Sassine before asking a question.

Aart de Geus explains that the semiconductor industry is experiencing an exciting wave of demand as end users look for faster, lower power, and more data-driven solutions. He notes that the architectures are changing and that the ability to stack chips vertically is opening up new possibilities. He also suggests that the complexity of chip design will require more engineers and more automation, similar to the conditions experienced in the 80s, 90s, and 2000s.

Synopsys.ai started with project-based licensing to help customers figure out the number of licenses needed for AI jobs. In 2020, Synopsys started providing subscription licenses to enable easier adoption of AI technology, resulting in increased monetization from selling licenses and AI technology.

Synopsys' design IP sales have been flat year-to-date, but they are confident in their long-term growth due to customer contracts. The pull-downs of IP are dependent on customer design schedules and Synopsys expects robust chip activity and pull-downs over the near-term horizon. For the next two to three years, Synopsys expects their sales growth to stay in the mid-teens range, although AI growth may contribute to an acceleration.

Aart de Geus states that while it is too early to provide guidance for the future, the business is strong across the board and outside of AI, and they have established themselves as a provider of necessity for foundries to be successful. He states that for a foundry to be successful with a new node, they need the technology, capacity, and EDA tools which they are always on time for.

Aart de Geus and Sassine Ghazi discussed the potential of AI chips, with Ghazi noting that AI tools will be more pervasive than just large designs with complicated place and route. Ghazi stated that AI tools can be used in the three stages of design: the front end, implementation/optimization, and sign-off. AI systems can be used to optimize physical implementations, reduce test patterns, and improve verification and analog mixed signal coverage.

Sassine and Aart discussed the opportunities for leveraging AI in chip design and manufacturing, including stages of design assistance, design exploration, and design generation. They highlighted the importance of getting as close to zero errors as possible, and how they have integrated AI into their process to achieve this. Aart also mentioned that they will continue to explore other techniques to broaden their opportunity space.

Jay Vleeschhouwer asks Aart and Sassine a product roadmap question relating to AI. He references a question from an analyst meeting in 2019, where Aart estimated the longevity of the new data architecture and Fusion platform to be around a decade.

Charles Shi congratulates Aart de Geus and Sassine Ghazi for their work in the EDA and semiconductor industry. He then asks a question about whether AI will extend the useful life of the architecture introduced a few years ago or require an acceleration of the rebuilding of the architecture. Sassine Ghazi responds by discussing the digital platform data model and how it is helping them innovate faster, and how they are looking for more efficient data models. Aart de Geus then mentions the 2019 Investor Day.

Shelagh Glaser answered a question about IP revenue, saying that they expect a strong Q4 and that they manage their model in a 12-month increment. Aart de Geus then discussed the go-to-market strategy for SIG, which involves transitioning customers to the Polaris platform while also selling other products.

The company has seen difficulty in customer negotiations due to tighter budgets, but is committed to improving operating margin. In regards to the IP business, they are looking to invest in 3D multi-die interconnects, chip design IP, and other areas to meet the demands of new speeds and bandwidth.

The speaker is discussing the improvements in 3D aspects, such as the number of spin counts, the speed on pins, and decrease of energy to switch a pin. He explains that AI processes are different because of the large amount of data that must be treated dynamically. These improvements are positive for the field, as they will lead to more design, new chips, and more differentiation among customers. The call is then concluded.

This summary was generated with AI and may contain some inaccuracies.