Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Third Quarter of Fiscal Year 2023. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session. Today's call will last one hour, and it is being recorded. Now, I would like to hand the call over to Trey Campbell, Senior Vice President of Investor Relations. Please proceed, sir.

Thanks, Lisa. Good afternoon, everyone. With us today are Aart De Geus, Chair and CEO of Synopsys; Sassine Ghazi, President and COO; and Shelagh Glaser, CFO. 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 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 reports and today's earnings press release. In addition, we will refer to certain non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement, and 8-K that we released earlier today. All of these items, plus the most recent investor presentation are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I'll turn the call over to Aart.

Good afternoon. We delivered outstanding results in the third quarter, exceeding the midpoint of all our guidance targets, while reaching another quarterly revenue record. Revenue of $1.487 billion was in the high end of our guidance with non-GAAP operating margin at 35.3%. GAAP earnings per share was $2.17, while non-GAAP earnings per share was above our target range at $2.88. We generated $560 million of operating cash flow, and ended Q3 with a backlog of $7.1 billion. By now, you have all seen our other news. So before I address our segment results and outlook, let me warmly welcome Sassine Ghazi to the call. Today, we announced that the Synopsys Board has named Sassine as Synopsys President and CEO starting January 2024, and that I will take the role of Executive Chair of Synopsys Board at the same time. I'm absolutely thrilled with this transition into the CEO role for Sassine. Sassine is uniquely qualified. He is a proven operational leader, a technology innovator, and a trusted partner to our customers and ecosystem friends, but he is so much more than that. He embodies our values and culture, and inspires our company, including me, with his results-focused leadership. Sassine, welcome to your first of many Synopsys earnings calls.

Thanks, Aart. I'm incredibly honored, humbled, and profoundly grateful to the Board and you, Aart, for placing your unwavering trust in me. You built Synopsys from a disruptive start-up into one of the world's essential semiconductor ecosystem companies. I'm so proud to have been a part of that journey for the last 25 years, working with you, our leadership team, and the many colleagues across the organization. I'm determined to build upon our strong foundation, drive innovation, and propel Synopsys to even greater heights of success. I look forward to engaging with all of you moving forward and to the continuing partnership with Aart.

Thank you, Sassine. You have my complete support. Let's now focus on the current market landscape. The trends within the technology industry are aligning with our strengths. The era of AI-driven Smart Everything is creating favorable conditions for the semiconductor sector to deliver more. Despite facing economic hurdles, semiconductor design starts and R&D investments are continuing without interruption. Our ongoing commitment to innovation has positioned Synopsys as a key player in our customers' success during this new growth phase for semiconductors. The market is developing as we anticipated when we mapped out our plans for the year, and we are moving forward accordingly. Given the sustained strong design activity and our confidence in the business, we are increasing our full-year revenue guidance to a range of $5.81 billion to $5.84 billion. We are also raising our expectations for year-over-year non-GAAP operating margin improvement to 200 basis points, which is about 0.5 points higher than our previous guidance. Furthermore, we are adjusting our full-year non-GAAP EPS range to between $11.04 and $11.09. Shelagh will review the financials in more detail shortly. Before we dive into our segment results, I’d like to update you on our advancements in AI. I believe we all recognize that AI has the potential to unlock substantial new productivity gains. While we keep integrating AI into all aspects of our work, a common question many of you have raised is how we will capitalize on our AI leadership. Let’s tackle that question directly by examining it from a techonomic perspective concerning product differentiation and business model frameworks, including some early indicators. We see three distinct avenues for AI monetization. First, through our involvement in the rapidly increasing demand for AI chips. Second, by embedding our innovative AI capabilities across our entire EDA stack, which we refer to as Synopsys.ai. And third, through AI-driven efficiency improvements as we enhance and automate our internal processes. Let's start with AI chips. Use cases for AI are proliferating rapidly, as are the number of companies designing AI chips. Novel architectures are multiplying, stimulated by vertical markets, all wanting solutions optimized for their specific application. Third parties estimate that today's $20 billion to $30 billion market for AI chips will exceed $100 billion by 2030. In this new era of Smart Everything, these chips in turn, drive growth in surrounding semiconductors for storage, connectivity, sensing, AtoD and DtoA converters, power management, etc. Growth predictions for the entire semiconductor market to pass $1 trillion by 2030 are thus quite credible. We are uniquely positioned to benefit. In the semiconductor ecosystem, Synopsys is the leading EDA provider to AI chip designers, requiring unmatched capabilities in design tools, particularly at the most advanced process nodes. They also need our leading interface IP portfolio as AI chips are banking on enormous amounts of data, driving new, faster, and lower power interconnect protocol. Synopsys excels at this. In summary, AI chips are a core value stream for Synopsys, already accounting on a trailing 12-month basis for well over $0.5 billion. We see this growth continuing throughout the decade. Let's move to our second value stream, Synopsys.ai. This is where, starting in 2017, Synopsys, incidentally led by Sassine, pioneered AI-driven chip design, and we have relentlessly advanced the state of the art ever since. Using our AI to automate entire design sub-flows, our customers report schedule reductions from months to weeks while simultaneously also achieving better results in terms of speed, power, and area of the chips. In February, we reported that our customers had passed 100 commercial tape-outs using our AI. Today, the tally crossed 270 as adoption continues rapidly. Nine out of 10 of the top semiconductor vendors are using Synopsys.ai in production, and the tenth one is already testing our solution. What makes this doubly relevant is that the worldwide semiconductor industry has a significant resource shortage. Third parties estimate a design engineering gap of between 15% to 30% by 2030. Even the multiplicity of National Chip Acts recognizes this, and AI in design automation will be critical to help bridge the gap. That's where the industry's first AI-driven full EDA suite, Synopsys.ai, comes in. Initially launched in 2020 for design optimization, we have since added AI-driven test and verification flows now in commercial adoption. Usage is expanding rapidly as customers are seeing stunning results. In the last quarter, our customers have demonstrated up to 10x faster turnaround time and double-digit improvements in verification coverage. Customers are also reporting more than 20% silicon test cost reduction. Recently, we engaged Synopsys.ai for analog and custom design. One of our top customers used our AI optimized Custom Compiler to achieve a 6% performance improvement over manually crafted custom circuits. Further completing our Synopsys.ai stack, more AI-driven manufacturing flow extensions are coming soon. But back to economics. Synopsys.ai revenue is just starting to ramp, but early proof points give us high confidence in its long-term growth prospects. We've moved from project-based experimentation to customers now adding Synopsys.ai subscription. Synopsys.ai has driven more than 20% value increases in several recent digital implementation renewals, often leveraging significant growth for the underlying core tools used by Synopsys.ai. This quarter, we saw multiple full-flow displacements to Synopsys.ai, driven by up to 10x productivity differentiation versus the competition, which brings me to generative AI. Over our history, key disruptive technologies have catalyzed innovation opportunities for Synopsys to deliver leaps in productivity. Gen AI is such a technology. Anchored in 35-plus years of experience in developing model-based solutions now with unparalleled data assets portfolio, we intend to harness Gen AI capabilities into Synopsys.ai. We see this delivering further advances in design assistance, design exploration, and design generation. On the design flow spectrum from optionality to optimality, in other words, moving from many options in early architectures to highly tuned error-free tape-outs, Gen AI techniques will augment the exploration, accelerate design choices, and automate some design generation. This will further broaden the intelligence dimensions in our Synopsys.ai. These new capabilities represent additional customer value, opening multiple new monetization opportunities. We will elaborate more on our road map in the coming quarters. This brings me to our third monetization value stream, operational efficiency transformation. Gen AI isn't just an opportunity for our customers. We, ourselves, truly intend to eat at our own AI restaurant, so to speak. We see significant operational efficiency and automation potential in processes across the company so that our employees can focus on higher ROI tasks. Our experimentation is in full swing, and we are rapidly learning the strengths and challenges of these new approaches. Overall, fast progress on our AI journey, and it is great to have Sassine on the call for Q&A as he is very focused on our AI business strategy and monetization. Let me now give some color on our segments of Design Automation at roughly 65% of our business, Design IP at about 25%, and Software Integrity at around 10%. Starting with Design Automation, we saw strong revenue momentum, and the segment delivered its first $1 billion quarter. Fusion Compiler momentum continues to grow with increased customer share, and Synopsys-enabled customers tapping out first to a number of leading manufacturing nodes, including TSMC N2 and N5A, Samsung SF3, and Intel 18A. Fusion leadership at advanced nodes has also translated into key HPC core wins at both semiconductor and hyperscale companies. Transitioning to multi-die chip design, our 3D IC Compiler platform continued momentum across verticals, achieving deployment on the industry's first advanced 3D stacked heterogeneous design for smartphones. We also expanded our multi-die ecosystem enablement, including qualification for leading foundries, the latest multi-die flows, and support for key 3D design standards. Of note, we deepened our collaboration with Samsung Foundry to accelerate multi-die system design for advanced processes. Let's move to verification, where the need for acceleration is paramount. In Q3, we won a Zebu hardware-assisted verification engagement with a RISC-V AI chip provider and saw HAPS deployments for prototyping AI chips at a large hyperscaler and a large HPC company. Synopsys Cloud continues to deliver substantial differentiation and time-to-market gains for our customers. Our SaaS solution, which accounts for 70% of our Cloud users, continued to gain strong adoption with multiple AI chip start-ups, leading new SaaS deployments. Now turning to Design IP, which is roughly 25% of our revenue. We had an excellent quarter working closely with some of our partners to enable the most advanced process nodes in the design ecosystem. Just this week, Synopsys and Intel announced a very significant expansion of our long-standing strategic partnership in EDA and IP to speed the design and manufacturing of advanced SoCs and multi-die systems for Intel processes. This comprehensive agreement enables Intel's internal IDM 2.0 teams and their external foundry customers to accelerate chip and system design with a powerful portfolio of essential IP developed by Synopsys for Intel 3 and 18A processes. Synopsys IP is now key to ramping and filling multibillion dollar wafer fabs as the advanced node IP supplier of choice for customers and the manufacturing ecosystem. Further supporting this in Q3, we also announced the industry's broadest portfolio of silicon-proven IP for TSMC's N3E process, as well as an extensive portfolio of IP for all of Samsung Foundry's advanced process technology. In automotive, autonomous driving ADAS systems continue to drive strong demand for our IP. This quarter, we exceeded 30 design wins in 5-nanometer and won our first 3-nanometer design at a marquee automotive OEM. All in all, we have won IP sockets on more than 100 ADAS chips. Third, the Software Integrity segment, which represents 10% of our revenue. Against the continued challenging macro environment for enterprise software, the business delivered solid results. The imperative for security and quality in software has always been critical, and with the rise in Gen AI-generated code, big new risks are emerging. Racing forward, we continue to develop innovative new solutions like our AI code analysis API offering on our Polaris SaaS platform. The AI code analysis API enables developers to automatically submit code snippets from code assistance such as GitHub copilot and ChatGPT to receive instant feedback on whether the code may originate from risky open source projects. In summary, we had outstanding Q3 financial results and operational execution and are confident in our strong close to the year. We are raising our guidance for full year revenue and year-over-year operating margin as well as non-GAAP earnings per share expectations. We have a resilient business model and our customers continue to prioritize investments in the chips and systems that position them for future growth. We continue to invest in technology leadership, multi-die design solutions, state-of-the-art IP and the leading edge AI-driven EDA suite to help catalyze this decade of smart, secure, and safe products. Last but certainly not least, I am just delighted to welcome Sassine as our new CEO. I would like to thank our employees and our partners for their passion and commitment. With that, I'll turn it over to Shelagh.

Thank you, Aart. And congratulations, Sassine. I look forward to continuing to partner with you as you transition to CEO and scale the company to the next level of growth. On to results. Q3 was another outstanding quarter with record revenue and earnings. EPS was above the high end of our range. We continue to execute well, which is a testament to our execution and leadership position across our segments, robust chip and system design activity by our customers, who continue to invest through semiconductor cycles and with $7.1 billion in non-cancelable backlog, the stability and resilience of our time-based business model. With our continued confidence in the business, we are raising our full year targets for revenue, non-GAAP operating margin improvement, and EPS. I'll now review our third quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.49 billion. Total non-GAAP costs and expenses were $1.19 billion. Total non-GAAP costs and expenses were $963 million, resulting in non-GAAP operating margin of 35.3%. GAAP earnings per share were $2.17, and non-GAAP earnings per share were $2.88. Now onto our segment. Design Automation segment revenue was $1 billion, up 23%, driven by broad-based strength. Design Automation adjusted operating margin was 41.4%. Design IP segment revenue was $350 million, up 12%. Adjusted operating margin was 24.7%. Software Integrity revenue was $133 million, up 12%, and adjusted operating margin was 16.9%. Due to continued macro impact on this segment, we now expect Software Integrity revenue growth in 2023 to be below our long-term guidance of 15% to 20%. Turning to cash. We generated $560 million in operating cash flow and used $300 million for cash for stock buyback. Our balance sheet is very strong. We ended the quarter with cash and short-term investments of $1.8 billion and total debt of $18 million. Now to guidance. As we have previously communicated, we had expected a strong second half. We are again raising our full year outlook for revenue, non-GAAP operating margin improvement, and earnings. For fiscal year 2023, the full year targets are: revenue of $5.81 billion to $5.84 billion, total GAAP costs and expenses between $4.544 billion and $4.564 billion; total non-GAAP costs and expenses between $3.78 billion and $3.79 billion, resulting in non-GAAP operating margin improvement of 200 basis points; non-GAAP tax rate of 16%; GAAP earnings of $7.85 to $7.96 per share; non-GAAP earnings of $11.04 to $11.09 per share. Cash flow from operations of approximately $1.65 billion. Now to targets for the fourth quarter: revenue between $1.567 billion and $1.597 billion; total GAAP costs and expenses between $1.184 billion and $1.204 billion; total non-GAAP costs and expenses between $1.005 billion and $1.015 billion; GAAP earnings of $2.17 to $2.28 per share; and non-GAAP earnings of $3.01 to $3.06 per share. Consistent with prior years, we will provide additional comments and guidance for 2024 when we report next quarter. In conclusion, we delivered record quarterly revenue and earnings. Based on our outstanding results year-to-date and strong outlook, we are again raising our targets for the full year. We continue to see strong momentum in the business, reflecting our leadership position across our segments, robust design activity by our customers who continue to invest through semiconductor cycles, and the stability and resiliency of our time-based business model.

Thank you. We'll take our first question from Jason Celino with KeyBanc Capital Markets.

Great. Thanks for taking my question. Frankly, I don't know where to begin. Aart, well run and Sassine, well deserved. And maybe Sassine, sorry to put you on the spot here, but can you frame your vision around AI and how closely you've been working with the AI strategy?

Sure. First, thank you, Jason. And as Aart mentioned, actually, the AI journey for Synopsys started around 2017. I was the General Manager of our EDA business at the time, and no one in our industry was talking about AI in 2017 for EDA applications. Around the 2020 timeframe, we actually had customers using it in early production stages. And now as you saw the number, many, many tape-outs. At the time, we started with the design space as the early stage of high impact using AI. And as you have seen us talk about the last couple of quarters with Synopsys.ai, where we're expanding the impact into test, verification, analog, custom, manufacturing, etc. And Aart mentioned in his remarks that we have customers at this point buying our AI solution as part of their subscription license. And when a customer does that, they already see the value and the impact and they're willing to pay for it. And that's the stage we're in at this point.

Okay. No, that's great. And then my brief follow-up, I think it was mentioned that in some renewals, you're seeing a 20% increase because of AI. Is this mainly driven from the tools themselves, or is this more related to the upsell of the core because of the compute? Thanks.

I'm sorry, the 20% increase in what? I missed the first part of the question.

I think Aart mentioned that in some renewals, you were seeing 20% increases in value. I was just curious on the drivers of that or maybe I misheard it?

We are seeing, yes, absolutely two factors. One, there’s a pull-through of the technology that our AI system uses, Fusion Compiler, Prime Time, etc. The customer is adding money, new money in the agreement based on the AI system that we are selling them. So it’s not only an upsell and a pull-through of the license, it’s incremental value that the customers are adding to their renewal with Synopsys.

Okay. Great. Thank you very much.

Thank you, Jason.

We'll take our next question from Gary Mobley with Wells Fargo.

Good afternoon, everybody and thank you for taking the questions and congrats to both Aart and Sassine on the transition.

Thank you.

And I just want to pick up where the last discussion point left off. I wanted to maybe probe into how many renewals have come up since you went from a per-design subscription for AI tools to rolling into baseline license renewals. I just want to get a sense of how many of these license renewals are now including AI?

As you know, an average EBA contract is about three years. So in 2021, we started with customers, and we have a number of those customers included it in their renewals. So we're already in that first stage with a number of customers, including it in their three-year contract.

Okay. Thanks for that. I wanted to change topics and move to the different trends in the operating margin for the different business segments. I know that you called out in the past, quarter-to-quarter volatility in the op margins for the IP business, but we now have a trend downwards for the past two quarters. So maybe if you can speak to that specifically to the IP business. And then conversely, you're showing nice gains in the Software Integrity business with seemingly not much revenue ramp. So maybe you can speak to the under occurrence there and as it relates to OpEx controls in the Software Integrity side?

Sure. This change was initiated by Aart and Sassine in the organization, leading to more comprehensive segment reporting, allowing us to clearly see activity in our three main segments. Regarding design IP, we approach that business with a long-term perspective. As Aart mentioned in his comments, we're building an IP portfolio for each new node, foundry, and customer. We're continuously investing in IP. When we sign contracts with customers, we're agreeing to a specific amount of money for a set duration. The timing of customers accessing the IP depends on when their designs require it. Over time, we expect the operating margin for IP to be slightly below our corporate margin. What you've noticed, which we have referred to as lumpy, is now visible with our updated segment reporting. Our expectations remain unchanged. Currently, we see customers progressing in their designs, and we understand when they will utilize the IP. We're confident in that business, as it represents a significant strategic asset for us with deep involvement in our customers' designs. We maintain a positive outlook on that operating margin. For Software Integrity, our focus has been on improving margins as we scale the business, and you can observe some of the benefits of that in the third quarter.

Thank you..

Thank you.

We'll take our next question from Joshua Tilton with Wolfe.

Hey, guys. Thanks for taking my questions. First, Aart, I guess, not a guess, but you'll definitely be missed, and congrats Sassine on the new role.

Not like I'm completely disappearing, right? Just to be clear.

More of your voice on these earnings calls, it will definitely. I guess like my first question is just it seems like as of January, we're going to have a bit of a new regime in place. Maybe what are some of the things you can either do differently or just some levers that you feel that you could pull to maybe drive some meaningful margin expansion in the model come next year?

Josh, I've been part of this company for 25 years, and the last three years, it's really been the start of what we call a momentum journey, and we'll continue that pace of the journey moving forward. What Aart and I, when I was appointed to COO and then later President, we really set out three vectors as priorities for the company. The first one is focused on the growth ambition; the second one is scaling and how do we scale efficiently as a company; three, technology leadership and innovation. If you look at the results, they're really amazing. Over that period of time, we're able to grow revenue 17% CAGR, 700 basis points in non-GAAP operating margin and 26% CAGR EPS. And doing all this while pioneering industry-first technologies like the AI solutions that we are talking about, plus 3D IC from a multi-die both IT and design tools, etc. So as we look ahead, January 1, as you commented, it's just the continuity of the pace at a time when the market, the semiconductor chip activity, is so exciting, driven by the AI demand that requires more compute, either in data centers, cloud, or edge, as well as everything going smart, smart everything in a car, in home, in the industry, etc. So it's really continuing that pace of momentum we created on all three vectors.

And I would add that we're committed to short and long-term operating margin improvement. That's what you're seeing the improvement in the second half of the year. We've, of course, will guide 2024 next quarter, but a long-term guide is at least a 100 basis point improvement in the year. So we're committed to that.

Super helpful. And I think just a quick follow-up that on track. When you guys started buying up all these SIG assets, I think the bullish take was we have this portion of the business that's growing a lot faster than the core EDA, and we could see this nice mix shift effect as SIG becomes a bigger piece of the total pie. But I guess, how do we think about when, from an investor perspective, we should kind of expect SIG growth to be back above the corporate average? Like, just maybe help us out with a little color there.

The thesis behind SIG remains very strong, which is software quality and security. And actually, right now, you can argue and the future is as strong or stronger with AI-generated code and the need for any developer to ensure that they're using secure software in their products. What happened over the last 12 months or so is not unique to Synopsys is you’re seeing it in the industry, especially at the software enterprise industry, is a slowdown and that headwind is really what you’re seeing right now. And as Shelagh mentioned, even though we’re not speaking about long-term projection and guidance for any part of the business, but we are – last quarter, if you recall, we said we’ll be at the lower end of the 15% to 20%, and now it will be slightly below that number, but it’s not due to the portfolio or the execution, it’s truly the headwind we’re facing in the market.

Makes sense. Thanks, guys.

Thank you.

We'll take our next question from Joe Vruwink with Baird.

Great and big congrats to Sassine and Aart. I maybe wanted to start just Aart, in your opening comments, the three sources of monetizing AI chips and that market opportunity that's more market growth for customers, your AI products, that's wallet share for Synopsys, and then how you can employ AI internally? I take that as meaning higher margins. I guess when you just add all of those things together, can you maybe comment on how it could start to influence your long-term financial framework because a lot of these things we're certainly early days or not as present back in 2021 when the framework was first debuted?

Well, you have our basic financial outlook because we have communicated that we're focusing on, number one, growth and continued gradual improvement of operating margin. In many ways, this is against a backdrop that is fantastically exciting because there's going to be a wave of end users, and I mean with systems companies that all want to have AI, that all want to have chips that are way faster, way lower power, and way more data. In other words, the entire industry around us will be on a high growth trajectory. There's nothing better than that because that is what drove the whole Moore's Law at super high growth. We have entered this space, and what has changed is that the architectures are all changing and the ability to bring chips immensely close together, including stacking them vertically is opening up new opportunities. While it is still challenging, it is a space that is exciting as we see increased design complexity needing more automation. Again, that is driving the demand for our product capabilities.

Okay. That's all great. I wanted to go back, and Jason asked about the renewal anecdote. I think that's a pretty interesting one. I guess my question is the 20%, is that pretty typical or emblematic of what placement route has been seeing so far? And maybe if it is, how do you see renewals evolving as customers get more experience, more proof points on things like test, our new AI verification, analog kind of the full Synopsys.ai suite? What could that mean for a typical renewal?

In the early stages of AI, customers faced two main challenges: insufficient compute resources and inadequate EDA licenses. On the compute side, there are various investment avenues, but most customers have managed to identify solutions due to the value they observed. Regarding EDA, we initially approached it on a project basis to determine the right mix of licenses necessary for an AI project, since AI demands significantly more licenses than individual engineering tasks. After our experience around 2020, along with customer requests to scale up, we transitioned to offering subscriptions to facilitate wider and easier adoption. This shift also led to monetization opportunities for Synopsys. We are experiencing incremental revenue growth from more license sales and increased sales of AI technology. While it’s still early days, we have a number of customers who have renewed their subscription licenses with Synopsys and added more technology that requires additional AI licenses.

Great. Thank you all.

Thank you, Joe.

We’ll take our next question from Vivek Arya with Bank of America.

Thank you and best wishes to both Aart and Sassine on your new roles.

Thank you.

So I had a near and a longer-term question. So on the near-term design IP, when I look year-to-date, if the model is right, your sales are basically flattish so far this year, I think maybe up 1%. So I'm curious, why is it well below your long-term growth expectations? And then when can we see this business get towards your target, which I think is to grow at kind of mid-teens annual basis?

So it is a lumpy business, as I described before, the contracts we signed with the customers, we have a term and a dollar amount, and then the timing of those pull downs is really based on customer design. So we're confident in our long-term growth in that business because of the contracts we have signed with customers. But Vivek, it is lumpy because we're delivering IP all the time, constantly refreshing and delivering new IP blocks. And then it's really the pull downs are based on the customer design schedule and we see robust chip activity, and we expect customers' pull downs over the near-term horizon.

All right. And for my follow-up, I'm trying to think of what is the right way to think about your sales growth for the next two to three years? Can it stay mid-teens? Will it decelerate, right, to low double digits, will it accelerate? Because AI is growing, but that's only 10% of your sales. Is that really enough to help Synopsys continue to grow at kind of this mid-teens pace over the next two to three years? Thank you.

Just one comment, Vivek, you're asking, of course, a question that you should ask at the end of Q4, right? That's why we gave guidance for the coming year. At the same time, overall, as we mentioned, we are in a market that we perceive as strong for us. We don't see any big changes. There’s variability from year to year. But too early to really talk about that. Fundamentally, we have a degree of momentum that shows that we're in a very strong business at a good time. I wouldn't think that there are any major changes, at the same time, again, we're declining too far out guidance here.

Right. Without giving guidance, I guess what I'm curious about is your insights on the growth in the business, excluding AI because you gave $0.5 billion number over the last two months. Your total...

Okay. A good point. Sorry, I didn't catch that. Outside of AI, the business is just strong across the board. We talked earlier about IP. These agreements that we made over the last quarter are very powerful for a long period of time, and they establish us as a provider that is one of necessity for foundries to be successful. For a foundry to be successful with a new node, it takes fundamentally four things. One, you have to have, of course, the technology. That’s their job. Secondly, you need to have the capacity. Third, the EDA tools, which turns out we are always on time. And fourth, you need the collection of IP-ready tools because otherwise, the end users can’t do design. The fact that we have strong agreements to provide this to the leading foundries in the world is fantastic and that gives us a degree of stability but also potential further growth that is very, very good.

Thank you.

We'll take our next question from Ruben Roy with Stifel.

Thank you and my congrats as well to Aart and Sassine. And Aart, I hope we get to see you plan to more going forward from here.

I look forward to seeing you at the gig.

I wanted to ask about AI and how you see its widespread adoption, especially considering the projected $100 billion market in AI chips by the end of the decade and the 10% share of the $1 trillion semiconductor market. It's still early, but do you think that embedded tools are better suited for a specific segment of the semiconductor design market? It seems to me that generative AI could play a significant role across the semiconductor landscape. For now, is it reasonable to think of it in terms of large, complex designs or do you believe its impact will be even broader? It will be more pervasive than that. But it will definitely be in the stages of design. So if you think of the design as three stages, there is the front end of the design, then there is the implementation/optimization of the design, and the sign-off where we started with DSO.ai and is in the physical implementation. Because the pace of optimization is so large, it was such a perfect opportunity for an AI system to look at that large space of optimization and find the right parameters to tune and then give you the most optimized physical implementation. But as we expand into test, for example, and reducing the test pattern or verification improving your coverage analog mixed signal, there's a whole other place where there is plenty of opportunity to innovate in that domain. Going into manufacturing, we can leverage AI for both productivity as well as the quality of the result that you get. Now, Aart mentioned as well in his script as three stages of design assistance, design exploration, and design generation. Some of those are ambitious, meaning this is where we can see the technology heading in the next one, two years at various levels of R&D, as well as where do we see the technology available today from AI models, etc. You can open up the door to how do you protect your IP, the customer IP, how does the system learn. The opportunity is definitely in early stages in terms of the overall impact of AI on chip design.

Very helpful.

If I may add something because I love what Sassine just said in terms of this opportunity. It is important to understand that what we have done is we started actually with the single hardest problem, which is all the stuff that sits before tape-out. Tape-out is when the design is done and it gets sent to manufacturing. The one thing you don't want to happen is any errors in that. As you add more and more details, you're coming to this notion of the absolute necessity to be as close as you can to zero errors. That's why, Sassine mentioned, not only the design but also the verification steps, the sign-off steps, and we have integrated all of those under our AI. I think it's going to take a long time before many of the other techniques get close to that. But we are going to, of course, put those around. It broadens our opportunity space, as Sassine said, but the core of our pioneering was really we can do it and get correct chips out. Now that is challenging.

Yes, it's a very interesting discussion. Thanks for all the detail, guys. I could ask what I hope is a quick follow-up. Some of your semiconductor customers have started to show their own accelerated compute platforms as platforms for EDA tools, and in those demonstrations, more efficient than current standard server farms running EDA. What's your feeling on that? Do you view that, obviously, early days, but as additional accelerants to EDA use or semiconductor design activity out there as the overall productivity could get faster as we put some of these new systems in place for your tools?

You're right. It's the right observation. Think of it as another tool that you can use to accelerate a workload. We were primarily CPU, then we introduced some GPU acceleration in a number of simulation functions and verification and some other methods. So yes, Ruben, you can think of it that way.

Got it. Thank you very much.

Thank you.

We'll take our next question from Jay Vleeschhouwer with Griffin Securities.

Thank you. Aart, I've enjoyed our more than 100 quarters of dialogue, and Sassine, I'm sure you look forward to answering another set of multipart questions on the conference call. For both of you, let me ask a question about the product roadmap that relates to AI. As you may remember from your last analyst meeting in 2019, in response to a question about the expected longevity or useful life of your new data architecture or platform, having just introduced Fusion and DC Next, you estimated it would be about a decade. While I understand this was an approximation, do you think that embedding AI in your products will extend the useful life of the architecture you introduced a few years ago, or could it necessitate a faster rebuild of the architecture?

Jay, that's a great question, and I recall that discussion as well. When we launched MDM, which was around 2015 for our digital platform data model, we are now approaching a decade since then. This foundation is essential for building Fusion, where we integrate timeline Fusion Compilers, SRC, and other elements into one unified data model. This approach helps us speed up our innovation process because our tools are interconnected, allowing us to deliver new technology and products more quickly. The team is consistently exploring a more efficient data model to enhance our work. You referred to the 2019 Investor Day, and we anticipate having something to share in the first half of 2024, which would be an excellent opportunity to discuss our outlook on the exciting advancements in technology and the market surrounding us.

What it means is an Investor Day? You didn't say an Investor Day at that time. That's what you.

I was too excited.

Thank you. And we'll take our next question from Charles Shi with Needham.

Hi, thank you for squeezing me in, and congrats to Aart. It's really been my great pleasure and honor actually to work with the luminary of the EDA and semiconductor industry as you are. Also congrats, Sassine.

I'm blushing.

Yes. And congrats to Sassine as well. Looking forward to working with you in the future. Maybe my question. I wanted to ask again on the IP revenue. It seems like so far this year, it's been tracking to like single-digit growth this year. It doesn't sound too right because your long-term guidance is kind of like in the mid-teens. Unless are you expecting we get a big bump in Q4? Or are we going to be tracking below that long-term guidance? But maybe next year, we should expect a somewhat above the long-term guidance kind of growth? That will be my first question. Thank you.

Yes, we do anticipate a very strong Q4. So our model we have, we as well intact, and that’s a long-term model. When you see the quarter-on-quarter variability, we don’t manage it in the 90-day increment. We’re managing it at the full year and 12 months, and we do expect a strong Q4 in IP.

We'll take our next question from Gianmarco Conti with Deutsche Bank.

Yes. Hi, Aart, Sassine and Shelagh. Thanks for taking the questions and congrats on another strong quarter. And for Sassine, so perhaps starting with SIG, could you explain whether the new go-to-market strategy is bearing some fruits? I actually, I know you've mentioned this before, but maybe go a little bit more into what exactly happened this quarter with regards to the marginal slowdown. Is this some part of the macro demand that you have previously addressed? And conversely, what is driving the higher margin for this division right now? Thank you.

Yeah. We set out two priorities for SIG about 1.5 years, two years ago. One is building out our Polaris platform, which is an integrated SaaS, which is the static and dynamic software composition analysis and its cloud-native cloud-ready system. From a go-to-market point of view, we're still in a transition phase or transitioning our customers to Polaris while we're selling Coverity, Black Duck, etc., all the other products that they can be primarily used. So that's from a technology platform point of view. From a go-to-market standpoint, actually, we've done a fairly good job in putting the right investments, how much do we do direct, how much do we do through distribution. And we're still on that journey of evolving our go-to-market. Where we're seeing difficulties right now is the negotiation with the customers, given the headwind, they're ending up being shorter renewals and taking longer to close. So that's really the impact we're seeing, not from a value market share, etc., etc. standpoint. It's just the budget is tighter, in particular, for our enterprise customers.

Just a comment on operating margin. We're committed to improving operating margin. We had set out to do that this year to improve year-over-year, and we feel well on pace for that. The strong results in Q3 give us a positive outlook for the full year.

With that, I guess we close the call. Thank you for your attention. For those of you that will connect with us later on today, we're ready to talk to you. Have a good rest of the day.

Thank you. And that concludes today's presentation. Thank you for your participation, and you may now disconnect.