Lisa Ewbank - Vice President, Investor Relations Aart De Geus - Chairman and Co-Chief Executive Officer Trac Pham - Chief Financial Officer

Rich Valera - Needham & Company Tom Diffely - D. A. Davidson Krish Sankar - Bank of America/Merrill Lynch Jackson Ader - JPMorgan Jay Vleeschhouwer - Griffin Securities Gary Mobley - Benchmark Company Monika Garg - Pacific Crest Securities Mitch Steves - RBC Capital Markets

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys Earnings Conference Call for the Third Quarter of Fiscal Year 2016. [Operator Instructions] Today’s call will last 1 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, Lori. 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 would 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. 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 will turn the call over to Aart De Geus.

Good afternoon and thank you for joining us. I am happy to report that we continue to execute very well. Our third quarter financial results were strong and we are 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 are 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 concede and deliver the next killer products. While the latest customer earnings results are better than originally anticipated, the forecast for 2016 semiconductor revenue remained 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 products with the highest impact and we balance short-term and long-term investments to drive sustainable EDA and a new TAM growth and profitability. While it’s still early to talk about 2017 specifically, given the ongoing semiconductor volatility and lumpiness of our growing hardware revenue, I will say that we are 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 powerful semiconductors today, I would 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 have worked with a number of our customers through the consolidation process and in numerous cases we are 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 are 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 key cat 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 installed 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 results. In our mixed signal, our newly introduced Custom Compiler product has come out of the gate with great promise. Intrigued by its innovative visually artistic automation, which cuts importantly our task from days to hours, customers are showing high level of interest and we are seeing some good initial adoption. ADAC, GSI, Samsung and ST Micro shared their design challenge experiences and how they have deployed Custom Compiler to improve their productivity. In addition, we announced support for Samsung Foundry’s 40-nanometer FinFET process. Also highlighted ADAC was the power of our EDA ecosystem with the 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 at 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. ADAC, 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 are outpacing 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 are 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 have substantially grown our portfolio in this market segment from design, to verification, to IP, to security, including excellent progress in automotive standards certification. We are 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 ATBG, which reduces costs and offers order of magnitude and faster runtime. 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 nanometer and 7 nanometer projects, a testament to the trust customers have in us as they tape out critical chips containing our advanced IP. In Q3, we announced the availability of the new USB 2.0 type CIP, 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 multifaceted challenges, immense software complexity with 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 points 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 are making good progress towards our comprehensive vision of software sign off. During software co-development, our solution enables detection and fixing of security vulnerabilities, quality defects and compliance shortcomings early in the development lifecycle. It also helps customers gain visibility into their software supply chain, thereby reducing risk inherits in third-party code. Having substantially strengthened our go-to-market approach and channel, we are 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 are 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 have executed very well in a 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 on 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. Upfront 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 3 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 have used over 80% of our free cash flow for buybacks. We have $175 million remaining on our current authorization. Now to the 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 zero and $2 million; our 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 $2.45 billion, a growth rate of 7.5% to 8%; other income between $6 million and $8 million; non-GAAP normalized tax rate of 19%; outstanding shares between 153 million to 156 million; non-GAAP earnings of $1.72 to $1.81 per share; non-GAAP earnings of $3 to $3.03; 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 have 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 businesses as customer requirements drive the timing of shipments and revenue, which is recognized upfront. 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’s 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, our 2016 targets are substantially better than they were at the start of the year. With that, I will turn it over to the operator for questions.

Thank you. [Operator Instructions] We will go to Rich Valera with Needham & Company. Please go ahead.

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

Actually, we are fortunate that strength was very much across the board. And you highlighted already at the verification specifically the emulation ones would 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 are executing well and we have seen our run-rate grow again.

That’s great. And just from a geographic perspective, it looks like you had another 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? Is that sort of 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 is 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.

So 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 is a couple of 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 on the services line. It’s a function of this year’s 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 driven, dropped a little more at the bottom line. Wondering if you are actually sort of reinvesting some into the business and if so, maybe what areas you might be sort of reinvesting some of that upside into?

Yes, Rich. So, you are right. When you look at the business for this year, margins will be relatively flat year-over-year. And what you are 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 the business, there are 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 think I like the balance that we are striking between driving for growth as well as slowing earnings to the bottom line.

And in that context, I would add that we are looking at the software integrity business as one that continues to be a very interesting opportunity and so we did 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.

You’re welcome.

And our next question from the line of Tom Diffely with D. A. Davidson. Please go ahead.

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 I guess through acquisition and also homegrown?

Well, of course, this is a slightly loaded question, because we don’t comment about acquisitions before we do them, but we have been very clear that we look at this as a new emerging TAM that is in a market that has many, many players, a few large ones and many very small ones all having one hotter technology than the other and in a field that is clearly almost overwhelmed by the number of security issues popping up everyday. So, just to be clear, yes, 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 upfront 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. 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 with Underwriters Laboratories is a very good example of that and we have also worked with a number of people that need help in assessing. We are in the supply chain that their software come from and it brings about some interesting surprises at times. So, I think we are in a good position, but there are 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 has 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 pale off a bit next year or is it strictly just the lumpiness of that business that gives you pause for 2017?

Well, we would like it to be usually strong, but this is a business that we have gradually grown into. And we are well aware that it’s a business that by nature is lumpy, because when people buy a hardware equipment, the equipment gets bought when they feel that they are in a good cash position and the shipments invariably are functional 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 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 are not commenting about the ‘17 yet.

Okay. And then I guess just one more long-term question, when you look at the emergence of the Chinese semiconductor market and how some of the domestic players have talked 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 sets, the investments, the structure of the industry, its evolution, the ups and downs. And the fact that there is now an increase and emphasis on manufacturing is not a surprise, because the volume of design in China that could potentially manufactured 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 our revenue, you will see that the growth in Asia-Pacific has certainly been substantial and there is no reason to believe that it will not continue at the similar rate at least for the time being.

Yes, thank you.

You are welcome.

And we have a question from Krish Sankar with Bank of America/Merrill Lynch. Please go ahead.

Yes, hi. Thanks for taking my question. A few of them, one, [indiscernible] you kind of mentioned next year you expect some lumpiness in the emulation revenue, I am 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 ratable and therefore, it tends to look a little bit like a straight line on the 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 is 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 revenues 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 have added some really superb technology in the debugging side, partially via the acquisition of SpringSoft. More recently, you may recall Atrenta and really these building blocks fits very, very well together and are all doing quite well.

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

We will say as what we have said in the past. We will continue to use our balance sheet in the way that makes more 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 that 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 have been pretty – even a little bit more aggressive with that and we have raised the buybacks to be about 8% of free cash flows for the year.

Got it, 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 they have some slight detriment on the margin profile, I am curious, what are the levers that you guys actually have if you want to continue maintaining 8% to 10% kind of earnings growth profile, is it mainly going to come from top line growth or do you have other levers you can put 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 is a balance there of how much do you want to invest in new opportunities. And we have done a very conscious effort already starting in the early 2000 in broadening our portfolio to build a substantial IP business and then most recently in the 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 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 is to drive this business and grow this business sustainably over time, so that’s going through a combination of both – 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 at high single-digits long-term.

Got it. Thanks guys.

You’re welcome.

We have a question from Sterling Auty with JPMorgan. Please go ahead.

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 am not sure how many products we have. And we have big products and many smaller products and so all of the products have waived. But this past quarter actually, economically speaking, the results were quite strong across the board and so nothing jumped out. But always, products that are in investment mode or that are in next generation mode, that’s an ongoing job for us and has been now for many decades.

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

You’re welcome.

And we will go next to Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Thanks. Good evening Aart and Trac. Aart, let me start with you on the subject of technology and products, somewhat broad question, one thing we are 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 answers regarding some new data and architectural issues that they are 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 seems to be doing. In terms of a couple of specific products in your case, it seems very clear that you are putting a lot of incremental or renewed effort behind DC and if you could comment on that and you are also seeing some good new momentum in DFM where you seem to have broken out of the sideways revenue pattern that you are in for quite a number of years or perhaps you could comment on your DFM opportunity as well?

Well, so when you say are you going to have to revise your architecture, we are revising architectures all the time and it tends to come in two ways into a constant smaller tuning and optimizations versus every so often doing a redesign of let’s say, the data structure they use 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 at the very leading edge of what technology can do and that’s a necessity because we are half of Moore’s Law and there is the manufacturing advances and then there are all the tools that make it possible to use these. So in that sense, we are accustomed to being sort of – for 29 years, we are behind the 8 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 a 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 a 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 are good enough. The whole point is to always say we are not good enough and keep pushing.

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

Sure. So the design compiler is a product that itself has gone through a number of these types of generations. And it’s obviously a leading edge tool that has an immense broad utilization on all the most advanced nodes. And so they are two. 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 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 caters directly to some of the strength of that team. And we have made a number of fairly substantial investments, I would say going back 4 years to 5 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 2 years to 3 years later.

To finish up with Trac, a couple of financial questions, you seem now to have pretty much solidified your position as the second largest in relation to target by revenue after 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 maybe 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 you basically have to give that up to get the volume deals done like with XP [ph] for example. And then could you say whether the percentage of revenue from your largest customer was up, down or sideways versus Q2?

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

No, no comment at this point.

Anything else, Jay.

No. Thank you.

Okay. We will go next to Gary Mobley with Benchmark Company. Please go ahead.

Hi everyone. I am not sure if it’s been said, but congratulations on strong execution for the year. With hardware becoming greater mix to the revenue, I am curious to know whether or not this goes to a backlog building quarter, whether or not you can build on your year end backlog for 2015 of $3.6 billion and with some costs 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 backlog?

Yes. Gary, this is Trac. We will give more – actually, we will 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 rate has been up. So the underlying economics of the business is very healthy. And then for the quarter, I guess 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 software integrity represented – 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.

Thanks Gary.

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

Hi. Thanks for taking my question. As a follow-up on the software security verification, your expectation was this segment to go 18% to 20%, is that the growth you are still seeing and when do we expect the segment to break even and then positive operating margin?

Well, we continued 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 ‘16. 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 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 were different than what originally the companies we acquired started with. And we see the opportunity to have a stronger broader 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 overtime, otherwise, it’s a hobby. And so we will continue to push on that as well.

Thank you. And we will go next to Mitch Steves with RBC Capital Markets. Please go ahead.

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

Yes. Well, of course, it was expected, because we have been informed quite a while 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 products 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 help pace or potentially at least keep up with semiconductor IP as a whole?

Yes, certainly. We look at our businesses in terms of growth rate as EDA being suddenly 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.

And we have a follow-up from Monika Garg with Pacific Crest Securities. Please go ahead.

Hi, thanks for the follow-up. Question on the operating margins, if we compare your op margins with Cadence, your margins are still like almost 250 basis points 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 have provided for this year, it’s predominantly driven by operations, right. And so our balance this year is just trying to invest appropriately to drive growth long-term, while also generating high single-digit EPS growth.

Yes. Just a follow-up then, semi industry is in the midst of consolidation, but Synopsys had seen two good growth years last year, it grew 9%. You are guiding to almost 8% for this year. So, the question is, are you not seeing impact on consolidation or do you think you are 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 customers as much as possible, we also try to offer our 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 have 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 were a number of very large consolidations, I think we have fared well with these and we are 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 cornerstone 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 are welcome.

Thank you. And I will 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.