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

Gary Mobley - The Benchmark Company Rich Valera - Needham & Company Tom Diffely - D.A. Davidson Krish Sankar - Bank of America Merrill Lynch Farhan Ahmad - Credit Suisse Sterling Auty - JPMorgan Jay Vleeschhouwer - Griffin Securities Monika Garg - KeyBanc Capital Markets Inc. 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 2017. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions]. Today’s call will last one hour. Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Thank you, Ernie, and good afternoon. With us today are Aart de Geus, Chairman and Co-CEO of Synopsys; and Trac Pham, Chief Financial Officer. Before we begin, I’d like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results 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 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. I’m happy to announce that Synopsys completed another outstanding quarter. Last October, we entered fiscal 2017 with expectations for solid revenue, earnings, and cash flow. As a result of excellent execution and robust customer demand, we’re on track to substantially exceed those expectations for the year. For Q3, we posted revenue of $695 million, with good growth across all product groups, most notably hardware and IP. Non-GAAP earnings per share were $0.92, and we generated $280 million in operating cash flow. We completed our thirdmerchandise share buyback of 2017 for a total of $300 million so far this year. Lastly, we’re raising our revenue and non-GAAP earnings per share guidance for the year. Trac will discuss the financials in more detail. As we look at the dynamics of the three customer groups we serve; semiconductors, systems companies, and software developers, I would characterize the environment as exciting, visionary, and intensely competitive. The age of smart everything, some call it, digital intelligence is here. Following the decades driven by computation and mobility, we viewed Smart Everything as the third major wave of electronics impact. In verticals, such as automotive, medical devices, virtual reality, and industrial applications, big data and machine learning are quickly becoming familiar terms and early results are promising. This is good news for the semi-industry, as these techniques require more and more compute power, cloud storage, and networking infrastructure to support massive data, complex software, and to add one more challenge, the imperative of security. Synopsys is uniquely placed at this vital intersection of hardware and software. Through our IP and design platform, we enable faster, lower power, and denser silicon chips. Through our verification and software integrity offerings, we make possible the verification of hardware/software systems and the optimization of software for security and quality. From a business perspective, we’ve successfully grown and broadened Synopsys by building the leading position in EDA, a highly successful IP business group and by branching out into the larger adjacent TAM of software security and quality. In this context, let me provide some highlights for the quarter. Companies continue to prioritize aggressive adoption of advanced silicon, while relying heavily on Synopsys. The evolution and use of FinFET technology continues to progress rapidly, with total designs reaching well over 500. From 16, 14, 12, 10, down to 7-nanometer, Synopsys is involved in 95% of designs through our design platform. For designs below 20-nanometer, our VCS verification is the primary simulator used in nearly 90% of chips, and we’re very pleased with the growth of our emulation of prototyping solutions. In IP, we continued to deliver the largest catalog of IP titles now rapidly becoming available down to 7-nanometer through close collaboration with the leading silicon providers. Enabling the astounding next-generation of 5, 3, and 2-nanometer technology nodes, our TCAD lets our customer partners create upfront process and transistor modeling, while giving us early access insights towards readying our design tools for new nodesmerchandise . In this rapidly advancing and highly competitive semiconductor market, our design platform drove solid business in Q3. From synthesis to place and route to signoff to physical verification, we’re engaged in the world’s most critical designs. In Q3, we announced qualification for Samsung’s 8- and 7-nanometer LPP, low power processes, as well as Global Foundries 7-nanometer FinFET node. At the Design Automation Conference, HiSiliconmerchandise , Renesas, Samsung, and Qualcomm presented details of their successes on very demanding digital circuits ranging from 14 to 7 nanometer. In custom design, ST, TDK-Micronas, and Panasonic highlighted the significant benefits they’ve realized with custom compiler, while TSMC showcased their certification collaboration with us around their 7-nanometer technology. Some comments now on verification, where we again delivered excellent growth. Our verification continuum platform, essentially the fusion of best-in-class software and hardware products into an integrated differentiated solution is ideally placed at the intersection of semiconductors and systems customers. Semiconductor customers want to verify that their chips implement the functionality dictated by the systems house’s software requirements. Meanwhile, the systems companies want to debug and optimize their software to run on the most advanced chips being designed by their semiconductor suppliers. These companies share common pressure points and time-to-market demands and growing complexity. Synopsys’ verification solution provides the bridge between the two. Over the past three quarters, technical advances have delivered substantial growth in formal verification, verification IP, and our newest VCS generation, which is rapidly proliferating its new fine-grained parallel simulation. Hardware verification product had a record Q3 and are delivering another excellent year. For example, in emulation, ZeBu was selected by Konica Minolta as their standard hardware platform for verification and early software bring up of their multifunction printer designs. In FPGA prototyping, MediaTek standardized on our HAPS-80 for their next-generation SoCs motivated by its scalability and performance. Moving to IP where we continue to generate strong results including excellent growth in the quarter. In Q3, we further expanded our market-leading interface portfolio by introducing complete solutions for the CCIX and HBM2merchandise standards. In addition, our IP continues its rapid adoption into the most advanced process technologies, including 7- and 10-nanometer processes. We see strong demand for our embedded vision processor and announced a new generation that quadruples the performance of our Neural Network Engine. Interest is coming from ADAS, video surveillance, and general AI applications. We also continued to expand our IP ecosystem with the partnership with Morpho to optimize their machine-learning scene recognition technology for our embedded vision processor. Now to software integrity, where we focus on security and quality testing tools, as well as services for software developers in many industries. While our traditional system customers are a prime growth opportunity for us, given increasing embedded software complexity and an acute need for security, the number of companies who develop and rely on software as a critical component of their business is much larger than an EDA and IP. The compounding challenges of exponentially increasing software complexity and the growing risks and cost of defects associated with data safety, security, and privacy affect companies across the Board. This need is clearly visible in verticals such as medical devices, financial institutions, automotive, aerospace, and industrials. At Synopsys, we’re focused on the software development process and are making excellent progress. In Q3, we announced key updates to our software integrity platform included expanded language and industry standards coverage. We’re pleased with the Q1 acquisition of Cigital, which adds high-value security consulting, enabling earlier, more strategic discussions at the CIO and CSO levels of our customers. The recognition of Synopsys in Gartner’s Magic Quadrant combined with Cigital’s consulting practice is generating new interest, new business and growing brand recognition. At the popular Black Hat Security Industry Conference in July, which drew more than 15,000 attendees, the number of enquires by current and potential customers quadruples over last year to more than 2,000. From a financial perspective, we’re also executing well. And while still in the early stages of scaling this part of the business, we’ve reached critical math and are enthusiastic about its potential. Earlier I mentioned, the opportunities in the vertical spaces for software security and quality. Many companies are impacted by security worries, while simultaneously raising towards the promise of Smart Everything. Automotive is a prime high visibility example of this. And is a vertical market that touches almost everything that Synopsys does, ranging from TCABs to optical, to FinFET design to IP, to verification to hardware/software prototyping, all the way to code security and quality. Automotive stands out because of its sophisticated supply chain from OEMs to Tier 1 and Tier 2 suppliers, but also because of its complex standards and in guaranteeing safety. Our influence in business here is evolving in many ways, including increasing verification growth at leading car companies; new capabilities in our simulation tools for reliability of automotive chips; competitive wins at automotive lighting software; a growing number of businesses wins for our 16 and 7-nanometer IP, that is qualified for the most stringent automotive safety and reliability standards, all the way to active leadership with the Society of Automotive Engineers cybersecurity task force focused on setting new standards for software security. In summary, we delivered another excellent quarter and are raising revenue and non-GAAP earnings guidance for the year. Our strategy increasingly demonstrates the value of our rationale, the investments we’ve made over the years are paying off. Near-term, our strong products and customer relationships in EDA and IP are leading to very good revenue and EPS growth. Longer-term, our expansion into the new software security and quality TAM is showing great promise. Let me now turn the call over to Trac.

Thanks, Aart. Good afternoon, everyone. For the first three quarters of 2017, we’ve executed very well across the Board, driving strong financial performance and reinforcing the confidence we have in our future. in Q3, we delivered double-digit revenue and non-GAAP earnings growth and generated significant operating cash flow. In addition, we repurchased $100 million of stock and continue to invest strategically to drive long-term growth and profitability. As we enter the final quarter of the year, we re confident in our outlook and are raising revenue and non-GAAP earnings guidance. As I talk to you specific results and targets, all comparisons will be year-over-year unless in specify otherwise. Total revenue increased 13% to $695 million, driven by solid performance across all product groups, led by hardware and IP. About 90% of revenue came from beginning of quarter backlog and one customer accounted for more than 10% of revenue. Largely because of record hardware sales, upfront revenue was greater than 10% of the total. Investors should expect continued variability in revenue due to the growth of our hardware products and their upfront revenue recognition. Excluding hardware, our revenue model remains at approximately 90% timebase. The weighted average license duration was approximately 2.5 years and we expect the 2017 average to be somewhat less than three years. Total GAAP costs and expenses were $590 million and total non-GAAP cost and expenses were $521 million, within our target range. Non-GAAP operating margin was 25% for the quarter. For the year, we expect solid organic margin expansion over 2016, moderated by the impact of the Cigital and Codiscope acquisitions. GAAP earnings per share were $0.75 and non-GAAP earnings per share were $0.92. We generated $280 million of operating cash flow, driven by strong collections in business levels. We ended the quarter with cash, cash equivalents and short-term investments for the $1.3 billion and total debt of $436 million. We have repurchased $300 million of stock so far this year and have $500 million remaining on our current authorization. Now to the fourth quarter and fiscal 2017 guidance. As we indicated in May, due primarily to the timing of hardware revenue and seasonally higher expenses, we expect Q4 to be the lightest quarter of the year. Q4 targets are, revenue between $642 million and $657 million, total GAAP costs and expenses between $586 million and $602 million, total non-GAAP costs and expenses between $535 million and $545 million, other income between negative $1 million, our non-GAAP normalized tax rate of 19%, outstanding shares between 153 million and $156 million, GAAP earnings of $0.26 to $0.33 per share, and non-GAAP earnings of $0.55 to $0.58 per share. For 2017, we are raising our revenue target range to $2.67 billion to $2.685 billion, a growth rate of 10% to 11%, other Income between $4 million and $6 million, our non-GAAP normalized tax rate of 19%, outstanding shares between 153 million and 156 million, GAAP earnings of $1.92 to $1.99 per share. We’re also raising the midpoint of our non-GAAP earnings target range by $0.03 to $3.29 to $3.32 per share, a growth rate of 9% to 10%, capital expenditures of approximately $90 million, and cash flow from operations of $580 million to $600 million. Finally, we are still preparing our 2018 budget and would suggest it’s premature to change your 2018 estimates until we provide detailed guidance in late November. Having said that, we believe the current 2018 consensus non-GAAP EPS estimates look reasonable. This is consistent with our long-term objective of driving high single-digit non-GAAP EPS growth. In summary, we’re executing very well on our goal to maximize long-term shareholder value. We substantially increased our 2017 targets compared to initial expectations, reflecting good growth across the board with particular strength in hardware. We continue to prudently invest in our next wave of growth, software integrity, while simultaneously driving ongoing EDA and IP growth and profitability. And lastly, in the first three quarters of the fiscal year, we have returned $300 million of capital to shareholders through our stock buyback program. With that, I’ll turn it over to the operator for questions.

Thank you. [Operator Instructions] Our first question will come from the line of Gary Mobley with Benchmark Company. Please go ahead. Your line is open.

Hi, guys, thanks for taking my question, the question about the software integrity group. Can you give us some color on where the revenue stands? I know, you’ve been talking about how it’s been about 5% of the total revenue mix, and I’m sure that’s plus or minus 100 basis points or so, but could you give us a sense of where we’re at on a run rate, excuse me, for the full-year?

Hi, Gary, this is Trac. We’re pretty pleased with how we’re dealing with the Software Integrity business this year. Let me remind you some of the commentary merchandise we provided at the beginning of the year. Last year, we ended the year for software integrity at about $100 million, and our goal was to get that business to break-even this year and grow at about 20%. When we completed the Cigital and Codiscope acquisitions, we mentioned that it was roughly half of that – the exiting software integrity business. And today, when we look at the results, we’re certainly tracking to the plans that we have laid out, and profitability is trending pretty much to plan, and then as we look forward on these – the Cigital and Codiscope acquisitions, our goal is to get that to break-even probably in the second-half of next year.

Thanks, about a $170 million in revenue this year, or at least annualized?

In that range, yes.

Gotcha. Okay. I did notice your merchandise U.S.-based cash is at a record low in terms of the percentage of the overall cash, and just wondering if that presents a problem with respect to your capital allocation plans?

No, I certainly don’t feel that waymerchandise . For the quarter, we did end with a cash balance that’s lower than it’s been over the last few quarters. But cash flow continues to be very healthy in general as we mentioned in the Q3 results. And our forecast for the year still shows very healthy cash flows. From a cash – from a debt perspective, we have about $280 million outstanding on the line of credit with a capacity to go to $650 million, so we feel like we’ve got a lot of flexibility in terms of managing our capital allocation similar to prior quarters. I think, just to reiterate, the way that we used our U.S. cash this quarter was a combination of the buybacks, which typically comes out of U.S. cash, and then the geo mixmerchandise was a little bit different than it was in prior quarters.

Last question, if memory serves me correct, do you – you haven’t really done a whole lot of M&A in the last couple of quarters, and I’m just wondering if that’s reflective of potential merchandise targets expecting too much, or if it’s anything indicative of how you want to use your cash?

Well, remember, that in in Q1, we acquired Cigital. And so that was a very important acquisition. And if you were to look at our history over many years or how should I say, many decades, you would see that that there is quite a degree of randomness when things get acquired in close for the very simple reason that, while we may have very solid strategic plans on what we do, we have a very little control for when things become available or for sale and even the closing process has many imponderables. Having said that, so we have not changed our fundamental strategy, which is we invest strongly in our own R&D, because that is a very good way to continue innovation and typically provides very good return on investment. And at the same time, we don’t hesitate to bring in forces from outside, be it for technology reasons or for market position regions. And in the case of the sync business, we have been quite successful so far. And I dare to say, it’s probably not over yet.

Okay. I appreciate the comments. Thanks, everyone.

You’re welcome.

Thank you. Next go to the line of Rich Valera with Needham & Company. Please go ahead.

Thank you. Aart, it’s kind of a big picture question for you. There’s been a lot of discussion about the potential incremental spending by systems and particularly Web 2.0 companies that are developing their own hardware that these companies that didn’t exist, say, 10, 15 years ago. But then, you also have companies like Apple that have kind of taken a lot of semiconductor design inside, so they’re designing a lot more, but at the same time they’ve kind of depleted their supply chain. But I just want to get your sense of how incremental you see the new system companies, particularly Web 2.0 companies to the overall EDA spending pie, if you will?

Well, for starters merchandise , I think, they’re very interesting, because of course, that is the center of gravity of where the action is in turning electronics into the next wave of massive impact on the world. Now, these are the companies that do two things at the same time. They have algorithms that are really quite revolutionarily new and practical in the AI space, and then at the same time they continually explore would there be benefits to have hardware that is more specialized, dedicated, or optimize for exactly that. I think the jury is very much out in terms of how many of those companies and which ones would go how far? Again, I know I gave you a lot of questions here, how far into doing their own design, but what is absolutely clear is that, in many situations, they do just the top-end of design, as it is relevant to verify that their software will be able to run very well on it. And of course, we are privileged to be very often in the middle of that story via the very rapid, the prototyping and emulation. But we’re also increasingly in that story by virtue of being close to everything that needs to now be secured. And so we have a lot of interactions with companies that in the past we either had only marginal interaction with, but now are really the drivers for the future. Now some of these people also rely on semiconductor companies to be their partner. And so then we get to see a little bit more of the value chain, I mentioned, automotive as a good example of that.

Got it. And I guess, relatedly, you’ve had a pretty fantastic run in hardware. And it sounds like it’s sort of dual PROM there on both the emulation and the FPGA prototyping side. And I know you early to those to make predictions here. But so I just want to get a sense of how you view that business on maybe sort of a medium-term basis in terms of the growth outlook? And would you distinguish between emulation and the FPGA prototyping in terms of potential growth rates, if you give any color on that? Thanks.

Well, the way to respond is, it is not – it’s not a dual PROM, it’s more a triple or quadruple, because when you look at the verification platform,. other techniques such as the software simulation, the debugging and static techniques, they all play together with emulation and the FPGA. And that platform is becoming more and more solid. And that’s relevant, because even if you have super fast emulation, if you find an issue and you cannot track down what it is, your debugging becomes the bottleneck of success. Having said that, there’s a reason why we have been cautioning you about drawing a straight line on the whole hardware side of our business, because it’s very lumpy. It comes in fairly large increments and those increments are not always predictable. Even if in the long-term, we’re actually a strong believer that that there’s continued good growth in that area. And we certainly continue to invest well in that and the technologies are very promising. Lastly, yes, you mentioned, yes, we don’t really make that much of a difference between the FPGA boards and the emulator. They’re really two sides of the same spectrum, which is essentially used hardware to massively accelerate some software function and both are doing quite well.

Fair enough. And one final one for me, I think, this is for Trac. Trac, when you talked about your model this time, you basically said, you see it as 90% ratable going forward, excluding hardware. And I’m not sure, I think, that’s the first time you’ve used that language, excluding hardware, obviously, hardware is a part of the mix for quite awhile here. Is that new language? And do we think this is, because hardware is likely to be a bigger percentage of the mix on an ongoing basis than it has been historically?

Hi, Rich, it really wasn’t meant to be a deliberate change in the messaging. We just want to highlight that it was an extremely strong quarter. The results are really solid, which was driven largely by hardware much like the year has been. And we just want to highlight that if there’s any concerns about the rest of the business have we changed the business model and the rest of the business we haven’t. I think, we said that early in the year as well, so it’s a pretty consistent message.

Got it. Okay, thanks very much, gentlemen.

.:

Thank you. Next we’ll go to the line of Tom Diffely with D.A. Davidson. Please go ahead.

Yes, good afternoon. I’d like to follow-up on Rich’s questions on the system customers. So do you think that the growth over the last few years was stronger, greater than you expect the growth to be over the next few years. I mean, we kind of gone past the peak growth of that new market?

No, I think for that part of the markets the changes are all ahead of us in terms of the impact on literally, virtually every products in the world. We coined the term Smart Everything, because that’s really what we mean. Meaning that, there are so many areas from services to hard products to infrastructure and so on that all will benefit from this emerging wave of artificial intelligence very much rooted in the combination of big data and machine learning. And I think we’re just touching the tip of the iceberg in terms of its impact. Now that doesn’t mean that instantaneously every system company in the world is going to say, well, I’m going to become a chip design and not at all. But it does mean that that there’s a whole new wave of demand for semiconductor. And I would say, in general, electronics technology to accelerate the very algorithms that finally are starting to yield some interesting and positive results. And we’ve seen this in the past. Once computation became interesting for a broader set of people, immediately everybody became hungry for much more and faster computation, the same is going to happen here. What is slightly different maybe then the wave of computation where computation was fairly segregated from software, meaning, the software people just were designing on a very general platform. I think this time around the platform is going to be adapted much more to the software. And that’s why these intersections between system houses, semiconductors and ourselves are very interesting. And we purposely try to position the company at this intersection of hardware/software, because we see a big long-term opportunities there.

Okay. So it sounds like that the way you expect the market to rollout over the next several years is a lot more, but perhaps smaller system customers that are more additive versus cannibalizing the semi guys?

.: And a good example that’s so visible to many is the automotive industry, where people that have nothing to do with much of the sophisticated intersection of hardware/software are now deeply involved in changing their fields by using partners to get there. So I’m not worried that semiconductors are going to be jeopardized. Now they are ingredients, and of course, they will have to negotiate hard for pricing as they always have, because the raise is on again.

Okay. And when you see a higher number of smaller customers are meant in the business going forward, does that change the operating model at all as far as, especially the SG&A and R&D line?

Well, the reason for the higher number of smaller customers comes actually from a different angle, which is, as we entered the software quality and security space, as we’ve said in very broad terms fundamentally any company that significantly relies on software has challenges from a complexity and security point of view. And therefore, we’ll start to look for solutions. Now some of those companies are not very large. And very often, the early engagements with these companies are on the basis of rather small purchase orders. And that that brings interesting challenge for Synopsys, because we have the opposite in the areas, where we have grown our business for many decades. And so, we are walking this balance of working with large companies and gradually increasing the purchase orders, while trying to keep the door as effectively open to anybody who wants to talk to us about these problems, because they may well turn out to be large customers in just a few years. But that brings with it a significant increase in the number of logos of companies many of which I’ve never heard the name of some interesting perspective.

Hey, Tom, this is Trac, let me just add to that. From a business model, our operating model perspective, the software integrity business definitely does open up a much broader customer set to us. And they have a different buying pattern, certainly a different scale than we’re accustomed to. And as we think about scaling not only the software integrity business, but Synopsys to grow profitability – profitably, we’re very conscious of making sure that the infrastructure that we build around that business both from a system, from a process perspective and how we deal with that is affected to scale the environment where we’re dealing with many more customers at a lower price point. So we’re conscious of that as we build our long-term model.

We’ll next go to the line of Krish Sankar with Bank of America Merrill Lynch. Please go ahead.

Yes. Hi, thanks for taking my question. A couple of them, Aart, number one, on the IP business you said it’s still pretty strong. Is there a way you can quantify either what do you think the growth rate for your IP business or for the industry is today?

Well, we have stated for our business that it’s in the low double digits, and it’s doing very well in that regard. And it’s also doing very well, because we see many customers that continue to commit more of their needs to us. And that bodes well, because it takes a long time to build a good trust with customers, because there’s a very little tolerance for IP errors, as you would imagine. And so, simultaneously, the IP blocks themselves are subject to continuous evolution, not only do the standards evolve. So, yes, the version one, version two, version three of standards, these are just numbers. But number three is a lot more complex than number two, which is a lot more complex than number one. And then simultaneously, and in parallel to that, they also constantly migrate to the next silicon technology. So that’s a compounding effect of complexity. And so against that backdrop, we continue to broaden our portfolio, both with the existing type tools into the next version, but also with new standards and with support of the most advanced technology nodes. So all of this bodes well for a continual strong business. And yes, we feel that we’re actually in a very good position and we complement extremely well the leader in the industry, which would be ARM around its core offering. So we’re, I think, in a very solid position.

Got it, that’s very helpful. And then on the hardware side actually specifically on emulation, are you guys, I mean, familiar with the term like, are you guys competing with Cadence and Mentor on the traditional emulation? Are you really gaining more traction on the software wrapping side?

Well, in this space, everybody is competing a little bit on everything, but it is also certainly true that we all have our respective strengths. And I think, it is a very, promising part of the industry. And as far as I can tell everybody, it’s doing reasonably well. Having said that, there is no question that we have selected what we think is the sweet spot, which is this intersection of hardware/software. And most importantly, the ability to help software people bring up their software on the hardware that doesn’t exist, so to speak, by using emulation or FPGA-based prototyping as a way to model that very hardware. And it is only in fairly recent years that the technology capabilities and emulation and prototyping became sufficiently fast to do that in a meaningful way. And the fact that, we can bring up, for example, a complete Android operating system on one of the most advanced apps processors on an emulator in less than half an hour, gives you a sense that, hey, if you can do that, you can run some other software too. And that is why, I think, that door has been opened and now people are moving towards use – using it more and more. And so from that perspective, certainly our specialty would be that and I think we’re well-positioned.

Got it. And then I just like two final questions for Trac. One is, can you say how much is auto as a percentage of total sales for you guys?

We haven’t talked about that specifically Krish, but it’s certainly increasing over time, and it’s across all of our product groups.

Hey, if I may add something, one of the reasons we are a little cautious with those numbers is, because it’s actually difficult to define. And the reason is that a number of the very big automotive-related suppliers related to our field are of course the semiconductor folks that are partially specialized. And those companies variably do many other things as well. And then it is also spread in the other parts of our business. So we increasingly do IP for automotive. And when I say IP for automotive, we really mean something different than the regular IP, because automotive is, at a minimum the two very challenging set of standards. One is everything that has to be certified for safety, and we really mean, the safety of the part in the context of utilization. The other thing is the automotive temperature ranges and voltage ranges can be very different. And so these are additional challenges and the very fact that that we manage those and that we have a rapidly growing automotive IP portfolio is a good sign, because it takes a long time to invest in those and make it work.

Okay. And then just a last question for Trac. Your op margin has been in the 22% to 24% range for awhile. And I understand hardware could we deal it on the gross margin level? This, if you want to look forward and where the margins could expand to, would the best opportunity come from being more efficient on the R&D side or more on the SG&A side?

So let me step back and say that we are still committed to grow operating margins in mid-20s. When you look at our results and you peel back the results for 2017, we’re actually growing margins in a very healthy way from 2016/2017 when you exclude the dilution from this Cigital and Codiscope acquisitions. Looking forward, as we try to determine where we can actually spend margins, I think, it’s going to come across a whole variety of things at the highest level, how do we manage the business from the existing EDA IP business versus scaling up the software integrity business. And then you raise specifically from a function perspective do we see opportunities in both in R&D versus SG&A, I think, it’s going to come through a combination of both of those areas. But I would just continue to reiterate that on the EDA side, it’s a very technical, very complex space there. I think long-term, while we try to drive margins, we’ll likely keep the R&D spend as a percentage of revenue in that 30% range. And if you look at the results for this year, it’s close to a 30% than it’s been north of that over the last couple of years.

Thank you. Next go to the line of Farhan Ahmad with Credit Suisse. Please go ahead.

Hi, thanks for taking my question. Trac, my first question for you is just in terms of how you go from about $0.56, $0.57 in EPS in October quarter to more like a $0.90 per quarter EPS trade over the next year, which is kind of the expectation the Street has for fiscal 2018. And what’s causing so much variability in the hardware or the overall business now that you can go from pretty much the best quarter that you’ve had to the worst quarter in terms of the earnings that you have had over the last four years?

Yes, that’s pretty a straightforward answer. It’s hardware both on the emulation and HAP side. As you described, it’s been a very strong hardware revenue year. Year-to-date, we had increasingly strong growth in hardware. And the profile of it is just that’s the profile for Q4, it’s going down quarter-to-quarter based on what the customer deliverables are. And I would just reiterate that typically we do manage this business on an annual basis over the long-term. And so quarter-to-quarter things would change in the past, because of IP and now increasingly as we are more successful with hardware and it becomes a bigger part of our business. You’ll see more variability. We’re not particularly concerned about Q4, and so, because that’s a profile of the revenue that we see. And we feel comfortable enough with the overall business that we can, at least, guide FY 2018 to where the consensus numbers are right now. And just to remind you that as we – as you look at 2017 numbers and the guidance for 2017, we actually have taken up the revenue guidance for the full-year again.

Got it. So just in terms of hardware, because the variable historically the market share in hardware has tended to move around quite a bit between the different suppliers. I’m just trying to understand like what gives you the confidence that hardware portion comes back or remain strong in the next year?

Well, I think the term has remained strong, because as Trac said, we’re managing everything on the yearly basis. The fluctuations in the quarter is a phenomenon that we signaled to you, at least, four or five quarters ago, saying, hey, this is going to increase, because that’s just the nature of that business. What we also are very clearly signaling to you is that, the problem of being able to run software before you have the chips is growing in importance, that is great news for us. We’re in the right place with these technologies. And of course, we have to stay competitive and we have to continue to invest in the next generations and all of those things, but that’s nothing new for Synopsys. So, yes, we live for 30 years of the edge of driving Moore’s Law from our side. We will continue to exhibit the behaviors that hopefully accomplished that’s going forward. I think the fact is that with the noisiness of the hardware on the P&L from quarter-to-quarter, the way we look at it is on a yearly basis, or a trailing 12-month type basis. And all the indicators we have right now is that, we’re in a very solid position, never say that you all won’t make mistakes. But right now, if anything you should take a fairly positive note away from this earnings release.

Got it. And just in terms of your headcount, it has gone up somewhat this quarter. Can you talk about some of the areas that you’re investing more now?

Sure. And obviously, we are careful of how we invest and in this that too comes a little bit in waves as a function of how we manage the year. And typically, all of our views are careful before they invest, before they get budget for the year. But having said that, we continue to invest in the areas, where we see great opportunity. And we have actually, I think, a reasonably well disciplined internal process, where we watch the profitability of each of the businesses and the ones that that are much below the average of the company have a clear instructions on how to gradually move up. But we also have sometimes clear instructions to invest, because we think that there is an opportunity to grow in SIG. The software integrity group is definitely in that category, and that too can come in lumps by virtue of acquisitions. And so, I think, we’re pretty much investing in every area of the company at this point in time. So and the software part would certainly be a prime example of that.

Hey, Farhan, this is Trac, let me add to that kind of it. I think for a fact, we are growing and profitable across the business line. Obviously, in software integrity we’re still in investment mode. But across the businesses, we are growing and have very good profitability. And so we continue to invest across the various groups. On the hiring you might see the pick up from Q3 to Q4, or Q2 to Q3, it’s pretty much for the plan, it’s not unusual. If you remember what we described in our Q1, Q2 earnings call, we were a little bit behind in hiring before we saw visibility to improvements in revenue. But the pick up in the second-half is really for the plan.

We’ll next go to the line of Sterling Auty. Please go ahead. Your line is open.

Yes, thanks. Hi, guys. I wonder if you can give some additional color in where you saw the strength in particular in the IP business that you mentioned? And what the margin profile on that strength actually looks like?

Well, the worst strengths almost invariably brings also a better margin profile, because when your business grows well that is, because it’s partially repetitive on things that you did before, or it is in an area that are of particularly interest to customers and more advanced. We mentioned a little bit automotive before. I think, we’re doing quite well in automotive. Across the Board, the interfaces are doing very well. The embedded vision is interesting, because this is an area that is seeing very rapid technology evolution on our part. We had an early product on the markets late last year, a number of people have done some interesting things with it and immediately came back with a slew of requests and we’re fulfilling those. So these are – that’s as much of fun area as it is a good area for us. And then lastly, we’re also doing quite well in everything that touches the actual physics of semiconductors, because moving things to the advanced nodes is actually a very sophisticated set of tasks, and we are becoming better and better at that.

And how do you characterize the composite dynamics? So it seems like number of players you considered have been putting up good results in IP. Have you found that similar to hardware that you kind of spread out in terms of where the focus is?

Well, we have been, I think, fairly disciplined in making sure that we invest in IP areas, where one has actually a good chance of getting a return on investment. It’s very easy to jump on every piece of IP that move, so to speak, because a customer really wants it. But if they are the only one or if they are customers that may have grand ambitions, but in our assumption, a chance of actually not making it too significant chips. So we become more careful. And so, in general, we look to have clear proof that there’s a lifecycle to the IP that we invest in. But we have now the benefit of many years of experience that’s just said the positive word for having made mistakes and learn from them. But that learning is paying off. And as customers have seen us learn and as they have learned with us, it has built a certain degree of trust, because success is so often achieved by in the last minutes together overcoming some issues and that is only the case in IP. And so that’s why I’m thinking of it as an extremely solid high-quality business that’s very sophisticated. But that will – have – has a very good chance of continuing to grow at a good rate.

Thank you. Next we’ll go to the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Got it. Thank you. Good evening. Aart, let me start with you with a couple of technology questions around core EDA. So with respect to ICC in terms of its adoption, at back two years ago, Synopsys quoted you’re having, I think, 33 customers at the time at back last year more than 90, and now as at back two months ago more than 150 customers. And so the question there is, do you think that the expansion of logos in terms of ICC adoption has largely ran its course, since now you become relatively more dependent on expansion for logo, or do you think there’s still a good logo expansion opportunity? And then second, core EDA question, thinking back also to back two months ago in your joint presentation with TSMC an ARM, there was a lot of discussion, of course, around 7-nanometer and some of the implications for core EDA tools. In that respect, how do you think 7-nanometer or anything under 10 might impact synthesis specifically, imagine that’s still more than $200 million business for you, probably generating some good margin and cash flow. And is there some upside opportunity owing to the technical requirements of advanced submicron for that product line?

Okay. Well, let’s start with the ICC logo expansion. The expansion will continue, but the reality in our field is by the time you’re at a logo number 150, those are typically dramatically smaller in their expenditures than it’s only the top 5, or 10, or 20, or 50. And so the expansion then typically tends to continue more in breadth with the existing companies. And of course, they gradually move over from the previous version ICC-1 to ICC-2. Regarding the intersection of our tools with TSMC and ARM, as one of the key cores that is so relevant to many of our joint customers. And that intersection with us all on the theme of 7-nanometer, I think, there’s no question that 7-nanometer and for similar technologies from other vendors they have a different number for it. But think of it as the most advanced production manufacturing technology, it is growing rapidly. And if we look at the curves of FinFET, in general, while there was probably a discontinuity between playing our technology, which is 28-nanometer and everything underneath that, which became FinFET. At this point in time, we sort of see the same curves of adoption and growth except, of course, that the chips are again dramatically more complex. And the complexity is both in terms of the gate counts, but also in the literal, physical or interconnect demand for the synthesis place and route, verification and timing tools and so on. And so I hesitate to say it like that with each sort of technology business as usual for you stay on the exponential, keep driving it like crazy, and the chips will continue to come out successfully. And so a lot of work has gone into that. And of course, for TSMC 7-nanometer is sort of their flagship. They are – they have pushed very hard. They have multiple versions of 7-nanometer, and all of this is continually aligned with them on a technology basis and continually exercised with ARM on their lock. And so our joint job is to deliver best possible chips, while reducing the risks and then the work that it takes. But I would say, so far, so good, actually. I think, it’s doing quite well.

Right. I appreciate that. Actually I was asking for a specific comment on gradually for synthesis. But let me move on to my next question having to do with hardware. So inferring from your results and your comments, it would seem that Synopsys will have been the largest by revenue and emulation for the quarter and for the trailing 12 months, which you’ve not been before, but that’s what the data now suggest. My question is, since this ramp-up in emulation began about two years ago for you now to this new much higher level, has either been consistently larger, either on a quarterly or trailing 12-month basis than perhaps, or have been in periods, where prototyping was, in fact, larger than emulation?

Well, as you all know, we never disclose the very specifics of individual products. But maybe answering at the start of your question, there is no question that the hardware solution and we really think of it as a combination of ZeBu and tabs has done extremely well for Synopsys. And by the way, I think that’s the overall industry has done well. So this is not a negative on our competitors. But for Synopsys, we came from a few years of having zero position there into a very, very strong position. And I think, it is very much on the strength of the technology, but also on the focus of the right place with the customers. And I do expect this area to continue to be strong. And you’ve heard the caveats before of lumpiness and all that. But fundamentally, the theory of understanding design and the importance of software, which I will say, this area will continue to be very important for people getting system products to the market. And so, yes, we’re gratified that the team has executed very well. And that we have a number of very advanced customers that are really seeing the benefit of shortening the time to market of the combination of hardware and software. And therefore, we expect them to continue to want to accelerate the benefit.

Still we have four minutes to the top of the hour. We will go to Monika Garg with KeyBanc Capital Markets. Please go ahead.

Hi, thanks for taking my question. First, if I look at upfront revenue year-to-date, it’s almost growing more than 50% year-to-date. Is it most of it coming from emulation, or something else adding to that too?

Monika, it’s a combination of hardware, which is – it’s hardware, which is a combination of emulation and HAPS.

Got it. Then, Aart, a lot of companies used to do EDA development in-house, given the increasing complexity of EDA tools and design complexity. Do you see more EDA development moving to EDA companies? Also, how do you think the increasing silicon content in autos, artificial intelligence, machine learning, [sell timing costs] [ph] everything, how does that change the TAM for EDA tools?

Well, the move of internal EDA to commercial EDA, i.e., to the EDA companies started to accelerate massively in the 1980s. And I would say that by the 2000s, it was a rare occurrence that people would develop their own EDA tools. There are a few companies that still rely somewhat on their internals, because the internal EDA is specialized for the type of machines they built. And the well-known example that stands out is, IBM for their super big machines. But aside of that, I’d be really hard pressed to point at anybody. Now the exception to that may be that in some areas, people may develop some specialized tools that actually add something to what ours tools are doing. So they may have a special analysis that they put in our time or in our place and route system or so in order to get better results for something that they want to be quiet about and are doing. Your question on the machine learning is very pertinence, because just like we are preaching that the impact of digital intelligence will have importance everywhere, while we are part of everywhere. And so we have quite a number of projects ourselves in that area. There’s a lot of opportunity to rethink about problems. But I also want to caution that, when you have big excitement waves, there can be a little bit of a bubble phenomenon where suddenly everybody thinks that they know what to do and one can easily over invest in that as well. And so we have been fortunate to be quite engaged in this field with both the number of customers and internally. So I think, we have a good balance in it, but it will have an impact on EDA tools. And we certainly are in the camp of having an enormous amount of data and we will try to use that wisely.

Thank you. And the final question will come from Mitch Steves with RBC Capital Markets. Please go ahead.

Hey, guys, thanks for taking my questions. I just have one for Aart and one for Trac. So just from a high-level perspective when I think about people using more tools to kind of design chips, are you seeing more the demand, because people are creating new chips, or because people are trying to fit more transistors onto the chips themselves?

For – I was going to say years, but I really meant to say decades. It’s been the latter, which is it’s the complexity of the chips, not the number of chips that has driven our business. And up until 2000s or so, the number of chips was growing, and after that, it actually came down to about half and has been – as far as I can tell somewhat stable since then, and so it’s complexity that’s driving.

Got it. And then second one for Trac just really quick. I know you’ve just talked how FY 2018 seems like you guys can do that basic consensus numbers. But given the fact that hardware is becoming a larger percent of the business. Do we – should we anticipate hearing kind of a long-term growth rate for that business, given that you’ve given it to us for kind of the software piece, the EDA, the mid-singles, et cetera?

No, we typically don’t break-out product categories. I think to remind you the emulation business hardware rolls up into core EDA. And that’s part of our guidance in terms of the growth rate for the areas in the low to mid single digits.

Right. So despite the hardware increase, you still think you can hit that – the target?

Well, long-term, yes.

Got it. Thank you.

Well, I think we have arrived at the end of our allocated hour. Thank you for your interest and excellent questions. Hopefully, you took away from the earnings release that we delivered good results and feel very solid about the year. We were cautious to not give yet guidance for 2018, we’re not ready for that, but you did get a sense that we support the consensus as it stands. We will be available after the earnings call and thank you, again, for your interest.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thanks, again, for your participation and for using AT&T Executive Teleconference Services. You may now disconnect.