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

Rich Valera - Needham & Company Krish Sankar - Bank of America Sterling Auty - JPMorgan Tom Diffely - D.A. Davidson Gary Mobley - Benchmark Jay Vleeschhouwer - Griffin Securities Monika Garg - Pacific Crest Xiao Yuan - RBC Capital Markets

Welcome to the Synopsys earnings conference call for the fourth quarter and fiscal year 2015. [Operator Instructions] At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Kerry. Good afternoon, everyone. 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 and targets, and will make 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 this call, important factors that may affect our future results are described in our most recent SEC report and today's earnings press release. The reconciliation of the non-GAAP financial measures discussed on this call 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 these items plus the most recent investor presentation are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call. With that, I'll turn the call over to Aart de Geus.

Good afternoon, and thank you for joining us. We are happy to report an excellent fourth quarter finish, wrapping up a strong fiscal year for Synopsys and providing a solid foundation as we enter 2016. During the year, we made excellent progress with the new generation of design and verification EDA tools, and are now in the midst of a multi-year product upgrade cycle. We also continued to invest in and grow our new Software Integrity products with several important acquisitions in the software quality and security space. Let me summarize our financial results for the quarter and year. We delivered fourth quarter revenue of $587 million and $2.242 billion for the year, a 9% increase, reflecting both solid organic growth and important acquisitions. We reported non-GAAP earnings per share of $0.67 in Q4, and 9.5% growth for the year to $2.77. Strong Q4 orders helped grow our three-year backlog to $3.6 billion. We generated approximately $495 million in operating cash flow and bought back $280 million in our stock, keeping share count flat. Building on our strong yearend position, we are setting a 2016 non-GAAP EPS objective of $2.93 to $3, a revenue target of $2.35 billion to $2.39 billion and an operating cash flow goal of at least $500 million. Trac will discuss these in more detail shortly. Several years ago, we embarked on a path to augment our leading silicon-enablement technology with a seamless connection to increasingly critical software elements and challenges. In 2015, we made excellent progress on our Silicon to Software vision. This vision and our execution put us at the right place, at precisely the right time, to help semiconductor and systems companies, as they transition to their next phase of growth. If you look back at history, the first phase in semiconductors was computation, driven by the PC; followed by mobility, driven by the smartphone; each of which prompting significant technology advances. We're currently seeing the beginnings of a third phase, aimed squarely at the next decade of the Internet of Things or what I prefer to call, Smart Everything. In Smart Everything, machine learning, image recognition and interpretation, reasoning and various other forms of artificial intelligence will impact every segment of the market. One remarkable example is in automotive, an industry that traditionally has only gradually adopted new technology, but is progressing by leaps and bounds from assisted to now autonomous driving. During these transition periods, we see some turbulence in the landscape, as many companies compete by refocusing their end-product differentiation, while others combine forces to ensure sufficient resources or market presence. In the last 18 months we've seen just that, with a large number of sizeable company consolidations contributing to analyst semi growth estimates of 2% for 2015 and 1% for 2016. In isolation, consolidations are a headwind for the EDA industry. However, they are also a hallmark of healthy restructuring in electronics, which drives major innovation from advanced silicon all the way up to software. Synopsys is well equipped, both technically and through our multi-year business model to navigate industry challenges. Our Silicon to Software center of gravity positions us well to again be a keystone provider in the next phase of the industry. Looking at 2016 and beyond, it's useful to assess how we're systematically evolving the company to deliver on this vision by focusing on four areas. First, develop and rollout the next generation of silicon design system capable of handling the most complex chips. Second, develop and rollout the highest performance verification solution for both the most complex chips, while addressing the intersection of hardware and software that is the very essence of modern electronic products. Third, grow in IP with a portfolio of building blocks, well suited for the next market of Smart Internet of Things devices. And fourth, grow in our new TAM of software quality and security, which addresses the needs of both software embedded in electronics and applications software in market segments as diverse as automotive, finance, health, energy and others. Let me report on our business from a product perspective in each area. In advanced design, we're tracking rapid adoption of 16, 14 and 10-nanometer FinFET technology. The cumulative number of active FinFET designs is approaching 260, a 50% increase in just one year. Synopsys is relied on for 95% of those chips, and 42 of the 43 leading-edge designs at 10-nanometer are using our design tools. Through our TCAD and OPC technology, we're also the go-to partner at 7 and 5-nanometer, collaborating with all top silicon providers as well as research consortia, such as IMEC. IC Compiler II is our cornerstone, next-generation physical design platform. Announced about 18 months ago, it saw a rapid, broad-based customer adoption during the year. In fact, it's the fastest-ramping product in our history, with now over 50 unique customers, active on 135 complex production designs, in 19 different process nodes. Its broad foundry certification enables continued momentum, and customers such as AMD, ARM, MediaTek, Renesas, SocioNext and Samsung have spoken publicly about their successes with IC Compiler II. Now, looking at verification. Complexity, not only exponentially grows with more sophisticated silicon, it greatly compounds with the amount of embedded software in all complex systems. This challenge, and thus opportunity for Synopsys, only increases as one foresees a decade of Smart Everything, with highly sophisticated hardware/software-optimized devices. We recognized this opportunity several years ago and accelerated R&D investments and M&A towards our Verification Continuum. Built around the fastest simulation, emulation and FPGA prototyping engine, our solution had an outstanding year of growth. A number of bellwether global companies have recently adopted our solution and we expect continued growth in FY '16. Specifically, we saw broad-based strength in emulation this year with technology that competitively leads in both performance and cost. In Q4, we shipped our new FPGA prototyping system, HAPS 80, with significantly faster performance. It enables customers to validate entire systems and accelerate software development by up to six to nine months. To further strengthen our Verification Continuum platform, in Q3 we acquired Atrenta, a leader in static and formal verification. The integration has gone quite well, and customers are very supportive of the combined product roadmap. Now, to our IP products, where we made good progress in expanding and optimizing our portfolio for IoT and key verticals, such as automotive. These application share many common building blocks, ranging from sensor connectors to embedded low-power processors and memories, to interfaces such as Wi-Fi and Bluetooth, to the security blocks that enable built-in encryption. In September, we introduced a comprehensive IoT platform built around our very broad IP portfolio, including our sensor subsystem and low-power ARC processors. Customer feedback has been very positive, and we'll continue to deliver extensions to the platform over the next year. This year, we also launched an automotive-grade IP solution, which includes ISO-26262 pre-qualified IP for applications such as vehicle connectivity, infotainment and advanced driver-assistance systems. In addition, we closed two key acquisitions. We acquired Bluetooth IP from Silicon Vision and Elliptic Technologies, a leading provider of security IP and expertise. Both of these are critical building blocks for a broad set of IoT devices. Our leadership in FinFET-ready IP continues. During the quarter we announced 10-nanometer IP at TSMC and won at a premier customer in Asia for advanced FinFET design. As customers grow their IP relationships with us, more and more are opting for longer-term volume purchase agreements, rather than project-based buying. For us, this is positively skewing the business mix towards more time based rather than up-front revenue. And now to software quality and security, our early-stage, higher-growth business group that we call Software Integrity. As a backdrop, I spoke earlier about the mega-trend in the software industry, dealing with exploding amounts of complex software content. A second related trend is the continuous growth in the number of software developers. One source estimates 20 million developers today, growing to 25 million over the next five years. And third, the tools market for quality and security, which analysts estimate at about $2.4 billion, is growing at about 20% per year. Our products help developers write better, more secure code. This is done by testing for quality defects and security vulnerabilities to help eliminate flaws during the development process. Building on last year's acquisition of Coverity, 2015 was a year of operational integration and scaling, and broadening our presence in the security space. Coverity expanded Synopsys' customer base. Half of its business was with our existing customers, albeit different users, and half with companies we had never worked with before in the application software space. This past year we fully implemented our sales strategy. Assisted by software integrity experts, the existing worldwide Synopsys channel now serves semiconductor and systems customers. And we have a dedicated enterprise sales team focused on application software firms in areas such as finance and health, for example. Similar to how we built our EDA and IP businesses, our growth strategy features a combination of organic investment and acquisitions. During 2015, our organic investment focused on strengthening the sales structure and on broadening language coverage. With three recent acquisitions, we also significantly invested in the security space, expanding our TAM by about $900 million. Most notable was Codenomicon, a well-known expert in dynamic security testing and the co-discoverer of the infamous HeartBleed bug in 2014. Augmenting the security portfolio were the Seeker products, which find high-risk security weaknesses throughout the software development lifecycle. And in the last month, Protecode, which specializes in managing open-source and third-party source code. Finally, we are very pleased to welcome Howard Schmidt to our advisory team as Security Advisor. Howard is a noted cyber security expert, and former advisor to Presidents Obama and Bush. These investments will have a near-term, slightly dilutive impact, as we scale into this higher-growth space. For 2016, we have three primary strategic goals in software integrity. One, unify all the acquired technologies into a next-generation quality and security platform. Two, evolve and expand our focus on vertical segments. And three, address new opportunities in the compliance arena. For example, we started a collaboration with Underwriter's Laboratories on its Cybersecurity Assurance Program. It's designed to help companies manage security risks via a certification process, similar to what they have been doing for years for electrical hardware devices. From an overall company financial perspective, our primary long-term objective remains to drive high-single digit, non-GAAP earnings per share growth through a mix of the following. One, organically grow traditional EDA revenue generally in the low-to-mid single-digit range. Two, organically grow revenue in IP systems and software solutions generally in the low double-digits. Three, actively explore TAM-expanding R&D and M&A opportunities. Four, focus on global operational efficiency to deliver solid non-GAAP operating margin in the mid-20s range. And five, optimize the use of our strong cash flow, through a balance of M&A, stock buybacks and debt repayment. While the combination of elements may vary, based on business cycles and in-period priorities, our long-term driving principles remain consistent. In summary, we completed a very strong year against a somewhat turbulent industry backdrop. Our game-changing design and verification products have made great strides and are yielding excellent results. Our IP business continues to grow in sophistication and business breadth. And our drive towards the new TAM of software quality and security is rapidly establishing Synopsys as a key player in this emerging market. With that, let me pass the mic to Trac for the financial perspective.

Thanks, Aart. Good afternoon, everyone. As Aart mentioned, we delivered a strong finish to an outstanding year and continued to demonstrate our commitment to maximizing shareholder value. We generated 9% revenue and 9.5% non-GAAP earnings growth, and $495 million in operating cash flow. We ended the year with $3.6 billion in non-cancellable backlog and returned $280 million to shareholders through our stock buyback program. Simultaneously, we continue to make internal investments and acquire key technology to drive long-term growth. Despite a challenging semiconductor environment, we continue to execute very well and enter 2016 with a solid financial foundation. Our outlook reflects another year of increased growth and profitability and strong cash flow. In addition, our stable and predictable business model allows us time to respond, if the environment becomes more challenging. Now to the numbers. As I talk through Q4 2015 results and 2016 targets, all comparisons will be year-over-year, unless I specify otherwise. We closed another excellent quarter and achieved strong 2015 results. We delivered total revenue of $587 million in Q4 and $2.242 billion for the year. We significantly exceeded our original 2015 target, primarily as a result of solid organic growth. Revenue growth was strong across all product platforms, with particular strength in place and route and emulation, and across all geographies, except for Japan, which was affected by the yen. About 90% of Q4 revenue came from beginning of quarter backlog, and one customer accounted for more than 10% of both Q4 and 2015 revenue. The weighted average duration of the renewable customer license commitment was about 2.9 years for the quarter and about 2.7 years for 2015. We expect weighted average duration for 2016 to be approximately 2.7 years. Our three-year backlog increased to $3.6 billion from $3.5 billion, due to the timing of large contract renewals, business growth and acquisitions. We have approximately 80% of the 2016 revenue target already in hand, which provides us a good measure of stability and predictability. Turning to expenses. Total GAAP cost and expenses were $530 million for the quarter and $1.98 billion for the year. Total non-GAAP cost and expenses were $464 million for the quarter and $1.72 billion for the year. The annual increase was due to higher costs associated with employee compensation, planned hiring, acquisitions and cost of goods sold for emulation sales. We delivered very solid non-GAAP operating margins, 21% for the quarter and 23.4% for the year. At the midpoint of our 2016 guidance, non-GAAP operating margin is expected to increase by approximately 70 basis points over 2015 levels. We'll continue to drive company-wide operational discipline in order to fund our higher-growth initiatives, with an ongoing goal to deliver solid non-GAAP operating margin in the mid-20s range. Turning now to earnings. GAAP earnings per share were $0.31 for the quarter and $1.43 for the year. Q4 non-GAAP earnings per share were $0.67. Full year non-GAAP earnings grew 9.5% to $2.77. We were able to largely offset the dilution from acquisitions through strong operational execution. Cash flows were excellent and above guidance, due to strong business levels and collections. We delivered $152 million in operating cash flow in Q4 and $495 million for the year, despite the impact of outflows related to acquisitions. We ended the quarter with cash, cash equivalents and short-term investments of $965 million, with 16% onshore and total debt of $205 million. In 2015, we repurchased 6 million shares of stock for $280 million. This was roughly 70% of the annual free cash flow. 1.7 million shares were delivered in Q4, as part of the $100 million accelerated share repurchase plan that was set up in August. The ASR was completed in November, when the final 377,000 shares were delivered. In September, the Board replenished our share repurchase authorization to $500 million. We plan to return more cash to shareholders in 2016 by increasing our buybacks to slightly reduce the share count. We expect operating cash flow to be at least $500 million in 2016. The quarterly profile will be similar to prior years, with a net outflow during Q1. This is due largely to the payout of the prior year's annual incentive compensation. DSO was 60 days, reflecting strong business levels. We ended Q4 with 10,280 employees, with more than one-third in lower-cost geographies. The increase in the number of employees was due to recent acquisitions, along with planned hiring. Now to the first quarter and fiscal 2016 guidance, which excludes the impact of any future acquisitions. For the first quarter, the targets are: revenue between $560 million and $575 million, as we communicated in August, we expect increased variability in quarterly revenue due to lumpiness of hardware and consulting revenue. Total GAAP cost and expenses between $505 million and $524 million; total non-GAAP cost and expenses between $445 million and $455 million; other income between 0 and $2 million; a non-GAAP tax rate of 19%; outstanding shares between 155 million and 158 million; GAAP earnings of $0.25 to $0.33 per share; and non-GAAP earnings of $0.60 to $0.63 per share. For fiscal 2016: revenue of $2.350 billion to $2.390 billion, which reflects roughly a 1 percentage point headwind impact from the yen; other income between 0 and $4 million; beginning in 2016, we've adopted a normalized annual non-GAAP tax rate, which is the norm for our industry, we'll continue to use a tax rate of 19% through 2018, we'll monitor the rate for any significant events that could materially affect it. Outstanding shares between 155 million and 158 million; GAAP earnings of $1.55 to $1.71 per share, which includes the impact of approximately $101 million in stock-based compensation expense; non-GAAP earnings of $2.93 to $3 per share; capital expenditures flat with 2015 at approximately $90 million; and cash flow from operations of at least $500 million. To help in your modeling, we expect second half revenue to be slightly higher than the first half, with Q4 the largest revenue quarter. Total non-GAAP expenses to skew slightly toward the first half of the year. And second half non-GAAP EPS to be moderately higher than the first half, with Q1 the lowest EPS quarter. We are also reiterating our multi-year goal of high-single digit non-GAAP EPS growth. In summary, even in the context of a challenging semiconductor environment, we're delivering very good results. Our 2016 outlook reflects solid growth in revenue and profitability and strong cash flow. Our healthy cash position, conservative business model, and excellent backlog provide a stable financial foundation for this year and beyond. And our focus remains centered on managing the business to maximize shareholder value. With that, I'll turn it over to the operator for questions.

[Operator Instructions] And our first question comes from Rich Valera from Needham & Company.

Aart, as I'm sure you're aware, most of the large semi deals that have been announced have not yet closed, so presumably there could be some increased EDA headwinds as those deals closed and deals renew. Can you say what if any allowance that you've baked into your guidance to sort of allow for that potential pressure as those deals close and the contracts renew?

We think we have fully allowed for that in the sense that in my preamble I think I may have used the word, being prudent under the circumstances. And that's exactly what it meant, is understanding that these shifts are occurring, have occurred, but also understanding that we are actually quite well-positioned in those, meaning that in a number of situations customers, when they combine, they rethink where they want to go with their tools. And we think how they can be more efficient and more often than not they also select the better solution. And I hope that we can say that we have that solution in those cases. So from a guidance point of view, we obviously are well aware of this picture. And have tried to bake in our best estimation of what is likely to happen.

And it sounds like you had a strong year with emulation. And I take it that means you didn't see any significant pause in that business in the fourth quarter, is that accurate, Aart?

Yes. I don't think that we saw any change in the fourth quarter versus the rest of the year. When we look at emulation, we look immediately at our overall verification continuum. And I think at this point in time, we have a value proposition that is really exciting, because all the sub-pieces are very good. And now we are starting to see the leverage between the different products and aspects of the solution. And the fourth quarter, in general, was maybe slightly surprisingly strong quarter for us, and I think bodes well for the next year.

So you feel pretty good about the growth prospects of your hardware business, the emulation and the FPGA prototyping, is that a fair statement?

Yes. And there is a reason for that, which is that the entire industry, and what I mean with that is both the semiconductor side as well as the systems side is really focused and centered now on providing value that sits at this intersection of hardware and software. And you say what does the software have to do with these EDA tools. Well, it has to do a lot, because what people would like to do is to try out their software on the hardware before it's built. And in that context, that require super-fast simulation and debugging, and emulation and FPGA-based prototyping sits right in the middle of that. And so I think this is a very big trend that is going to be positive for the entire EDA industry.

And just one more to clarify. Did you say in the prepared remarks, I think this was Trac, actually, that you expected to do a greater dollar amount of share repurchase in fiscal '16 versus fiscal '15?

That's right, Rich. We did $280 million in '15 and we expect to do more than that in order to reduce the share count slightly to the range of 155 to 158 for '16.

And now to the line of Krish Sankar of Bank of America.

I had a couple of them, Aart, just to follow-up on the M&A question. Even though some of these M&A deals have not closed, have you seen a change in the behavior from the EDA purchasing managers at semi companies, anticipating the potential M&A, are they scaling back EDA purchases?

That reaction happens about 10 minutes after the deal was announced. Meaning that, within companies that are contemplating mergers, every employee in those companies ask themselves, so what about me and what happens next, and how do you align the company and so on. Now, there's a whole set of restrictions in terms of what they can do between companies that have announced mergers and have not merged yet. But there is clearly a large amount of planning that goes on in parallel to the process of seeking the various national approvals, and in that process they look at where their future will lie. It is certainly true that in practice the actions occur really only once their mergers are closed, but the thinking proceeds that.

And then I think in your prepared comments you kind of said that, one of the goals is to have like a low-to-mid single-digits kind of a core organic EDA growth rate. That seems like a shift from like prior growth rate expectations. I'm just kind of curious, if semi M&A is impacting EDA in the long run, at least being a headwind in the near-term, do you still need to have a 32% kind of a R&D as a percentage of sales given the fact that even if Moore's law are slowing and companies are consolidating, is there room to actually bring that R&D down, because it seems like pretty high run rate?

It's an excellent question, because whenever there are major shifts in the industry or the makeup of the industry, the characteristics of differentiation may evolve. What is clear, and by the way I think, very exciting, is that from a silicon perspective, we can see the next 10 years still cruising forward rapidly in terms of complexity. What this does is that it provides the computational platform that will make a whole different phase of software possible, and so from that perspective, yes, you may say, our R&D is high, but it's always been sort of at that level, because for literally 29 years of our existence, we have driven the state-of-the-art of Moore's law. And from a technical point of you, there is no slowdown. If nothing else, there is an acceleration because it's multiplied by the software side of things. Now, we do look at presently being in somewhat of a phase shift in the semiconductor industry as a number of companies look at these opportunities, invest, and reconfigure themselves towards them. I think we are already well-moved in that direction. And hopefully I was able to communicate a little bit the notion of the vision that we've had now for a number of years of silicon to software as really moving the center of gravity exactly where the customers are going to be in the next few years. And so notwithstanding, the normal turbulence, whenever you have new opportunities emerging, but not yet having big economic impact, I think we're very well-positioned for that.

And then just a final question from my end, Aart. If you look at the backlog growth, which is probably like 2 or 3 percentage year-over-year, it looks like bookings might have declined on an annual basis. Where was the biggest weakness you saw on the bookings?

Yes, the challenge with looking at bookings when you have a business profile that has a majority of the deals that are only averaged about round numbers three years, if some of the larger deals fall in a certain year, the backlog will grow, in other years it may actually shrink. And so maybe more relevant to your question, therefore, two other points, one is that the run rate continue to grow for us, but secondly, that we're entering again a year with essentially 80% of the revenue in hand. And so when we look at the backlog, the real main value of that is degree of stability that allows us to continue to invest precisely in turbulent times, so that as the economic opportunities come out, we're ready to grow with them.

And now to the line of Sterling Auty from JPMorgan.

Let's actually follow that line of thinking, because that was actually one of my questions, but also shouldn't that sort of factors that are in that backlog that impact that calculated bookings growth won the timing of your largest customer and when that renewed? And how that impacts your calculation, as well as any contributions to the backlog from acquisitions? And if you could actually give us any additional color on what the acquisition contributions to the backlog last year and this year, that would certainly be helpful to understand the [multiple speakers].

Sure, actually, I think you're making exactly the point that I intended to make, which is that, there is a variability from year-to-year depending on not just one, but some of the larger customers. And most large customers don't have just single contracts, they have multiple contracts. So it's actually in practice more complicated. Let's say, for arguments sake, if we had only one customer and that customer renewed every three years, while you would have every three years a big backlog increase and the next two years a big decrease. Obviously, that's an extreme case, but if you look at the universe of our customers, there is variability depending on where the bulk of the renewals fall. And sometimes these timelines change as a function of us having different tools that we engage. We have new products or customers have changed circumstances such as consolidations, so we're managing a dynamic set of relationships, but fundamentally our duration, I don't know, the average number is maybe about 2.7 years or 2.8 years or so, and so that has been remarkably confident.

So if I'm look at the guidance on revenue and the growth either at the midpoint or even at the high-end of the guidance range, it still seems to imply some deceleration, even though you've got Atrenta in there for a full year, how should I think about where the biggest parts of that deceleration is coming from? Is that factoring in the M&A headwinds and a slowdown in EDA? Is that some sort of normalization to the higher growth parts of the portfolio? How do you kind of connect those dots?

Sure. Well, I think the first point is actually more fundamental, which is if you look at the semiconductor industry, its own growth rate is somewhat anemic right now. And in all fairness, this can go up and down by 5% without anybody being able to predict it. That's just the normal noise in that industry. But against that backdrop customers are cautious. And it's also against that backdrop that consolidation manifests itself. And as I mentioned in a previous answer, I think we have a very good understanding of the potential impact of consolidation and we've taken a prudent approach to it. The other thing I am reminded of is that there is about a 1% impact of the yen, but in all fairness, I always discount these things a little bit. Now because they're not right, it's just that, it feels like somewhat simplistic comment, when the reality is, hey, we're hustling for business and that's how we should grow the company. Lastly, I do think that there is no question that our largest market is the one that's most impacted by semiconductors, but we continue to invest in these new areas I think with quite good success. And so in that sense, our product portfolio I think is evolving well. And that's precisely, what one should do in these phase shift on an industry.

And then last question, can you give us a sense, you gave us some statistics around IC Compiler II. I don't know if there's a way for you to qualify or to measure, but what perhaps the win rate in terms of IC Compiler II adoption in situations where you saw side-by-side RFPs, bake-offs, tasks, however, you want to describe it just to see how the tool and those heads-up competitions actually fared during the quarter?

So there are a lot of head-to-head competitions largely because the industry is very engaged in both looking forward, from a technology point of view, while simultaneously becoming or being very cost conscious. I don't think that in general this is not quite a zero sum game. And a number of customers use tools from multiple vendors, partially to quote, keep us honest, which I never quite like as a terminology, but I can sympathize with their desire to make sure that we stay on the ball, and partially because they want to negotiate on price. Having said that our product is technically doing extremely well and this year was really the year where we were almost overwhelmed by the number of customers that adopted us on a product that is now rapidly gaining in solidity, as it gets applied to more and more extremely, extremely complex shifts. And what is exciting about that is that many of the capabilities that this was built for are precisely the capabilities that are now being exercised. And I'm talking here about 10-nanometer, and in the beginning it was 7-nanometer design. And so we expect that the benefits of the products are now becoming rapidly more and more visible. And so far I think from a market share point of view, we've done quite well.

And now, to the line of Tom Diffely from D.A. Davidson.

The first question on the balance sheet. You mentioned that only 16% of your cash was onshore. You're going to increase your share repurchasing and I guess ongoing M&A. So I guess a couple of questions here. First, what is the cost to repatriate some of your cash that's offshore? And then of the $500 million cash generation this or in the coming year, how much of that is expected to be onshore?

So let me take the first question. So the simplest answer is any cash that you patriate through U.S. will be taxed at the 35%-plus rate. The intent is, we would obviously look at debts and find a way to manage that effectively. Second part is when we look at the $500 million cash from operations for next year, it should be similar to the mix that we've had in the past, which is about 50-50 U.S. versus non-U.S.

When you look at the potential acquisition targets out there, are they predominantly in the U.S. or is there a pretty good international mix?

Well, the international mix is growing. And actually if you look at some of the acquisitions we did in the security domain, albeit that they were relatively small companies, they're literally a bit all over the map, because software is being developed in a much more distributed fashion in the world than silicon or chip design. And so that is an interesting perspective, because that also says that our TAM is much more global from a software point of view. And we never really looked hard at doing business in Australia, I guess now we are in Australia. And at least there is sufficient software opportunity is there to warrant having a presence, whereas from a hardware design point of view, that's a very, very, very little. So these profiles changes as a company. And I think four out of seven deals this year were offshore. But the reality is we have a balance sheet that we have structured on purpose to be flexible enough, so that if there are great opportunities, we will not hesitate to do them wherever they are.

And it sounds like the 2016 will be another year of investment for the software security space. Should we expect operating expenses to go up in this space or maybe just to shift over from some of the core EDA into software? How do you view the drawbacks as it goes through the year with the ramping software security business?

Well, our hope, of course, is to continue to grow well the software integrity business, and so far, so good. I think we are very happy that we invested in this area. It's actually very complex area. And we are seeing that many of the things that we've learned over literally decades in the hardware world do apply in the software world in terms of building a platform of tools that is very sophisticated. And so from that perspective, we will continue to push on investing in this area as long as we see really good growth. We will and are gradually improving the profitability of the business, but if I had to push on priority growth versus profitability, I'd go from a growth any day, because we know that in a new market you can drive the profitability overtime. Having said that, just to make sure everybody understands, we do believe that, the notion of a business means that you're profitable overtime, and so we're heading there. And the acquisitions we did where really only very marginally dilutive since all these things get up sort of very quickly.

I would add that these investments are done in the context of us also expecting to drive off margins up this year in 2016. When you look at the EPS guidance that we provided, at the midpoint we should be looking to increase operating margins by about 70 basis points versus 2015. So these investments are important, but we're going to manage it, strike the right balance between growth and profitability.

And then finally, when you look at the customer consolidation overtime, say over the next few years, is your view that the number of engineers in the world continues to grow? Are you seeing kind of plateauing of engineers that ultimately drive the seats that drive your business?

Well, so our past experience has been that certainly in the electronics domain, the number of engineers has certainly not shrunk. It may have grown actually quite a bit in the development countries that initially had good engineers, but not the same level of productivity. I think that the second comment I would make is I think that the notion of engineer is evolving, because if you buy into the picture that I painted of a really an intersection between hardware and software, that's much more optimized for the end application. You will see that the value of engineers that are having sort of 1 foot in each cap will grow. And we see that in our own company having a number of people that have visibility precisely because we developed a new generation of tools and systems to deal with that. And then on the software side, there is no question that the number of engineers -- they don't call themselves necessarily engineers, they call themselves software developers, but it's fundamentally an engineering schooling and that number is still growing rapidly.

And now to the line of Gary Mobley from Benchmark.

I wanted to start out by asking a question about the core EDA business. Could you give us a sense, and it doesn't have to be precise because I'm sure you don't have it at your fingertips, a sense of the mix between systems OEMs and pure merchant chip companies? And can you give us some sense of how the systems OEMs licensing activity has trended may be relative to historical trends or relative to the merchant chip vendors?

We actually do have that sort of at our fingertips. And I say, sort of, because the notion of semiconductor and systems, there is a whole bunch of companies that are sort of in the middle of that. But for many years, Synopsys has had about 40% of its revenue coming from what one would call, system companies, meaning companies that are closer to end product versus semiconductor companies that are closer to the physical manufacturing of chips. And I don't think it will change all that much. There are a few more companies that used to do manufacturing that are now relying on foundries to get there. But it's really a spectrum. And 3precisely, because it's the spectrum, it's useful to understand what new system companies do more often than semiconductor people. And of course, you arrive again at this word of software, meaning that for them a lot of their differentiation is how their software performs certain end tasks. And increasingly these end tasks will be optimized by dedicating hardware to the specific nature of that task. And so it's in that context that you're asking a good question because we're connecting well with that part of the world. And more rapidly, maybe then even we had expected people are using our verification tools to check out the software, while the hardware is still in development.

Just one follow-up question. If I'm not mistaken, we're targeting about $80 million in sales from the Coverity business, and perhaps targeting roughly $100 million for fiscal year '16. Did we, in fact, finish somewhere around the $80 million mark for the fiscal year? And are you still looking at roughly 25% growth for 2016?

Well, I think we have communicated, when we acquired it that we would pass the $100 million in '16. I think we're well on track for that. We don't disclose the intermediary numbers. But as said, I think the prediction that we had made to them, which was we granted significantly less knowledge still appears to be right on.

And now, to the line of Jay Vleeschhouwer from Griffin Securities.

Trac, I was wondering if you could speak a bit more about how you went about allowing for the possible effects of semiconductors consolidation. We, for our part, for example, have calculated that the pre-merger EDA budgets of the companies known so far to be merging with the exception of Intel keep their budget aside is somewhere between 5% and 10% of total EDA industry revenue. And even if you haircut that, as you have to, that would still amount to a relatively small percent of total EDA spent and it's probably not going to be affecting the vendors according to the market share. In other words, it's likely to be some unequal effects on the vendor. So anyway, I just wondered, if you could talk about how you're actually went about haircutting and thinking through the pre-merger to post-merger budgets of the companies involved?

Well, I'm glad you did this exercise. Because we do this exercise every day, right. And so this is part of running the company. And without going into the specifics of any of these companies, fundamentally what you did is the right type of calculation. I would make sure though that as much as there is a lot of talk about consolidation, we should really look at the macro numbers on semiconductors, which is really the growth rate of semiconductors. And while that growth rate itself does not impact EDA all that much from year-to-year, for the simple reasons that, A, we are much more tied to the R&D budget and those don't change so fast; and B, we have multi-year agreements, so in that sense, we feather through the up and downs of the industry. Nonetheless, I think that is a bigger factor of the consolidation itself how the two relate. And so we did essentially an exercise multiple times like you did and then the question is, okay, at any individual situation, how does it play out? And we will put our best foot forward in those. Given that the number of those this year was clearly higher than what we've seen in the past, so we decided to be prudent in the guidance. But I think that we are clearly out executing significantly our host industry. And from that perspective, I think we are going to be able to continue to invest to be well-positioned as it finds its next wave of growth.

Just a follow-up on the consolidation thing and then a change of subject. With respect to the transfer of licenses, one company gets merged into another, is there uniformity in the terms and conditions affecting the transfer of licenses and whether or not the acquired company or the surviving company needs to re-acquire or re-contract for those licenses? Is there some uniformed method to that? And similarly, this is somewhat speculated, but is there any reason to believe that companies customers not involved in merging might somehow also changed their behavior that they see all the budgetary fund that the emerging companies are having and they might want to have some to?

Well, you know every company, every customer at all points in time is always trying to see if they can get more value at lower cost, and nothing wrong with that. We have always been successful in providing lower costs, but also providing so much more value that we have continued to grow as a company and as a matter of fact as an industry. And so I think that will continue. The transactions or the contracts that we have with customers are non-cancellable, but at the same time, we all want to have long-term good relationships with our customers. And so when changes happen, one will discuss that with them. And the last comment I would make is that all the contracts they are like phonebook thickness complexity because there are so many different variables and conditions and so on, because these are typically very large deals, and so from that perspective there is a certain degree of built-in stability. And I think that's stability is especially when you have a well-structured multiyear set of agreements is precisely what has allowed us to do really well in any of the more turbulent phases of the industry over the years. And so I think we know well how to behave in such phase.

Lastly, at the Design Automation Conference back in June during the investor meeting you hosted with analysts, there were some discussion about some price changes that you've had made with respect, for example, to verification and place and route in terms of your core-based pricing, that's essentially a price increase, if I remember correctly. Could you talk about the effect of that change of pricing on your '15 results? And how are you thinking about pricing going into '16 and beyond?

I am a bit embarrassed to say that I'm drawing a blank about that discussion. Generically speaking, we typically increase the prices of our products, when there is a major shift in additional value that's been provided. And so, for example, the move from our IC compiler I to IC Compiler II is on a very different price base. And then we have all kinds of discounts and arrangements in volume situations. And it's a function of a number of cores it's run into. So it's actually a fairly complex set of calculations. But at the end of the day, it's what I tried to mention earlier, which is, customers will drive on costs, we will drive on value and let the two meet at a place that lets us go. And so far so good and I look forward at this coming year in terms of Synopsys really delivering a lot of incremental value. And so as customers will need these capabilities, I think we have an opportunity to continue to do very well.

And now to the line of Monika Garg from Pacific Crest.

The first is on the cash flow guidance. Cash flow operation, guidance is flattish year-over-year. And especially given last year, you had one-time charges, one to retirement and acquisition-related charges. So the question is kind of is the number conservative or otherwise why it's kind of flattish number?

So Monika, I would say that we're approaching the cash flow outlook similar to how we're guiding on revenues. We're taking a prudent approach to it. It's early in the year, and as you know, the cash flow is driven a lot by the bookings and the business levels. And so we'll continue to update that throughout the year as we get better visibility. But it's consistent with how we're looking at the rest of the business.

Then on the IP systems and software quarter revenue, it seems both for Q3 and Q4, it is flattish year-over-year. Now, given the Coverity is growing, you require some assets in software security market. Could you help reconcile these numbers?

Sure. I would look at the annualized growth rate and look at over a multi-year period, when you look at their IP business and as we evaluate our IP business, we still believe it's a low-double digit growth opportunity. And the overall market continues to be very healthy. Our business, we feel very confident in. And so over a multi-year period, that should still be the model. You will see it vary from quarter-to-quarter or even occasionally year-to-year, depending on the timing of the percentage of completion for IP consulting. But we still think that the model of a low-double digit for IP is the appropriate one.

And then on the Coverity. Is Coverity expected to be breakeven and then second half accretive? I think that's was the kind of guidance you provided last quarter?

As we mentioned it in the Q3 earnings call that it was going to be slightly dilutive in the second half. Originally, when we first purchased Coverity, we thought it would breakeven. And we, frankly, at the levels that we're operating at, we certainly could have gotten to that level. But given the opportunity to invest in some of the languages, we thought it would be a better investment to allow to be slightly dilutive in the second half in order to drive the growth.

So still expected to be dilutive in second half 2016?

I'm sorry. You're asking about '16. For '16 we're certainly going to exceed the original guidance of over $100 million. And that will be slightly dilutive, given the acquisitions that we made in the second half of '15. Keep in mind, this is in the context of us expanding margins from '15 to '16.

Then the last question so, on the consolidation again, Aart. You kind of talked about you targeting low-to-mid single-digit organic or EDA growth. How much do you think is impact of consolidation in that number, like 1% to 2%? Would you be able to quantify that?

I think you should give Jay a call. He did the computations in detail here. We don't want to go into the specific, because each one of these situations is different and they haven't played out. And as one of other callers correctly said was, many of these things have been announced, but are not closed, and so the impact in timing can still be very far away. Having said that, it's just we have looked at this head on, and actually see in a number of situation some opportunities. It's just that you can't count on them, until they come home to roost. But it is not as dramatic as it sound.

And now to the line of Mahesh Sanganeria from RBC Capital Markets.

This is Xiao Yuan for Mahesh. Thanks for taking my questions. So Aart, there are a lot of questions on this consolidation. And I'm sorry, I have to ask one more. So on the synergy perspective it kind of makes sense for two companies to move to one unified design platform after the merger. I guess, questions, one, do you think there will be any market share shift, as the main deals are getting closed. I guess maybe the impact will not be immediate. But what do you see in the next two to three years? And then, two, given that background what is your expectation of Synopsys' core EDA growth rate in relation to the market?

Well, in relationship to the market, we think that we can do better than the market, which is another way of saying that we think that there is an opportunity for us to gain share. At the same time, there is some degree of headwind by virtue of the customers fundamentally wanting to do this, to pay less, not more. And so in that context, I do think that we have a great opportunity for Synopsys, because: a, we are well-positioned for all the technologies that these very companies aspire to be good at; b, we're well-positioned to also now reach into the domain that they were less in, which is everything that touches their differentiation through hardware and software. And lastly, we are very well equipped to continue with a really good support at the very moment, where they will definitely need some help on the advanced chips and while integrating their companies. And so I think we are not only a safe bet for the technology leadership bet, and that's a good position to be in, in situations like this.

And then, one more question, on the Q1 revenue guidance the midpoint is down about 3.5 percentage point. I understand there is lumpiness in the business because of verification. One of their competitors is shipping their new emulators right now. Are you seeing any impact from that from any changes in market?

No. We don't see any impact of that. The emulation market is actually a very broad one. There is opportunities to grow, just because that as a market segment is I think doing quite well. And typically, when people introduce something, there may be sometime where customers want to look at the new product, whatever it is. In our case, the characteristics of our product are very well known, specifically the super-high speed and low cost per gate is a key differentiator. So for the people that are focused on those type of angles, we have seen no impact by anybody's announcement.

Thank you. And we have no more questions in queue. Please continue. End of Q&A

Well, thank you so much for attending this call, and thank you also very much for supporting and being interested in us for all of FY '15. I think we delivered on the mark versus where we set our guidance a year ago, actually I think a little bit better or quite a bit better than the numbers we had in mind then. We'll, of course, try to do the same in '16, and we hope that you will be part of the team following us at that time. For those of you that have additional questions, as usual, the small crew here will be available for calls after this earnings release. Thank you very much. And have hopefully a good vacation break at the end of the year.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service.