Earnings Call Transcript - SNPS Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for joining us, and welcome to the Synopsys Earnings Conference Call for the Second Quarter of Fiscal Year 2022. At this moment, all participants are in a listen-only mode. Today's call will last one hour, and please note that it is being recorded. Now, I would like to hand the conference over to Lisa Ewbank, Vice President of Investor Relations. Please proceed.

Lisa Ewbank, Vice President of Investor Relations

Thank you, Caroline. Good afternoon, everyone. Here today are Aart de Geus, Chairman and CEO of Synopsys; and Trac Pham, Chief Financial Officer. Before we begin, I’d like to remind everyone that during the course of the 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 the 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 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 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 de Geus.

Aart de Geus, Chairman and CEO

Good afternoon. We delivered an outstanding second quarter, exceeding all of our guidance targets and reaching record revenue, operating margin, earnings per share, and cash flow. Revenue for the quarter was $1.28 billion. Business was very strong across all product areas and geographies. Backlog grew to $7.3 billion. GAAP earnings per share were $1.89, with non-GAAP earnings of $2.50 and a non-GAAP operating margin of 37%. We generated $750 million of operating cash flow. With our significant first half strength and high confidence in our business, we are raising guidance substantially for the year. We expect to grow annual revenue approximately 20% to surpass the $5 billion milestone, drive further operating margin expansion, and grow earnings per share by more than 25%, while generating approximately $1.6 billion in operating cash flow. Trac will discuss the financials in more detail. Our financial momentum builds on three drivers: an unmatched product portfolio with groundbreaking new innovations; robust semiconductor and electronics market demand; and excellent operational execution. The backdrop for our outlook sits at the intersection of massively growing amounts of data and the demand for Smart Everything, empowered by machine learning and AI. This is synonymous with stating that in both consumer and business applications, the need for electronics and chips is relentless: chips for data capture and IoTs, for data transmission, for data storage, and of course, for faster high-bandwidth and dedicated computation, plus a huge and intensifying need for more security and safety. All of this means escalating opportunities for Synopsys. We’ve seen growing demand, not only from our traditional semiconductor and systems customers but also from impactful new entrants such as hyperscalers, a mounting number of start-ups, and nontraditional systems companies across vertical markets. Notwithstanding macroeconomic choppiness in an uncertain geopolitical environment, these companies are investing heavily in highly complex chips, systems of chips, chiplets, and security initiatives. Synopsys is a catalyst in enabling this new Smart Everything era as many customers race forward to invent and deliver highly creative and optimized chips and systems. Our innovations, particularly in AI-driven design flows and at the intersection of hardware and software, are crucial for our customers and have fueled our accelerating momentum. In addition, our IP focus, particularly in high-speed connectivity and advanced interfaces supporting multichip design, is second to none and yielding excellent business growth. Let me begin this quarter’s highlights with AI as we continue to deliver groundbreaking results and as machine learning is revolutionizing chip design. Our DSO.ai solution, which learns and automates a substantial portion of the design flow, is seeing rapid adoption for production use. Many of the largest, highest-profile semiconductor companies are reporting tremendous productivity benefits using DSO.ai in production today. At our user conference in March, MediaTek, Intel, Samsung, and Sony shared with fellow engineers their impressive achievements using our DSO.ai. The reported results were truly remarkable, as much as 20-fold productivity improvement, 7% to 25% lower power, and a dramatic reduction in turnaround time with a single engineer completing four design blocks in half the time that previously took four engineers. Critical to the high impact of DSO.ai is our powerful digital design solution, resulting in significant cross-selling opportunities and competitive wins at cornerstone semiconductor and systems customers. Orders were well ahead of plan, contributing to our backlog growth. In Q2, two major hyperscalers selected Synopsys’ highly differentiated Fusion Compiler product for multiple advanced designs. We also significantly expanded our share at a top U.S. communication semiconductor company. In aggregate, the trailing 12-month revenue for Fusion Compiler more than doubled. At our user conference, I had the opportunity to highlight not only some of the exciting capabilities to come, such as using AI and verification, but also how Synopsys overall is technically helping to transform EDA design more broadly. Our custom design solutions, for example, are seeing strong market disruptions as well, including 19 full-flow competitive displacements year-to-date. Over the past year, revenue grew double digits in this area, with adoptions ranging from large semiconductor companies designing at advanced nodes to automotive to memory vendors. While advanced chips are the foundation of continued scale complexity, electronic systems now increasingly grow systemic complexity by tightly connecting many chips and the software to drive them. Synopsys excels at this. An ideal example of systems leadership and impact is our IP product line. Here too, business momentum continued with another excellent quarter as demand remains very high, especially in the AI, high-performance compute, and automotive markets. In Q2, we enhanced our comprehensive AI IP portfolio with the introduction of the industry’s highest-performance neuroprocessor IP. Simultaneously, we extended our lead in the most advanced commercial processes. We can report significant traction with our interface and foundation IP, achieving more than 30 3-nanometer design wins for high-performance compute and networking, as well as notable wins in mobile applications. In automotive, our decade-plus investments, safety certifications, and market engagements are not only generating continued momentum with leading semiconductor suppliers but also with OEMs and Tier 1s now developing their chips. We count among our customers the top 12 leading automotive semiconductor suppliers, 10 automotive OEMs, and 12 Tier 1 companies worldwide. For IP, we have close to 600 automotive design wins in advanced nodes, demonstrating the strength of our portfolio. At the hub of the system is the intersection of hardware and software. This is precisely where our verification solutions are targeted. Let me highlight three success drivers. First, there is high demand for our market-leading emulation and prototyping hardware products. Demand is high, and we’re heading towards another record year. Fueling this are our new powerful application-specific ZeBu emulation and HAPS-100 prototyping systems. While demand is broad-based across customers and geographies, we continue to see significant growth in usage expansion at many of the largest hyperscalers in the world. Second, multi-die, sometimes called chiplet-based system design, is driving a strong need for innovation. Synopsys is uniquely differentiated with our 3DIC Compiler solution and the industry’s leading portfolio of die-to-die interface IP, both of which are essential. Our focus and execution are driving adoption momentum with engagements across multiple market segments, including AI servers, automotive, telecom, and aerospace. And third, cloud-enabled design. One of the challenges for chip designers is access to sufficient yet flexible compute power. Of course, our EDA customers have been using cloud compute for years, but true flexibility hasn’t been available until now. In Q2, we expanded our cloud offering with the industry’s first broad-scale cloud SaaS solution. It offers unique flexibility in both access and business model. Synopsys now offers three cloud approaches usable for peak demand to full deployment: one, bring your own cloud with pay-per-use access on the customer’s choice of third-party cloud provider; two, a SaaS model with tools, flows, and Microsoft Azure-based compute; three, hardware-based verification with ZeBu Cloud. Initial customer reception has been excellent, ranging from very small startups to large companies seeking peak compute flexibility. Now, to Software Integrity, which is both enabling and benefiting from intensifying demand for security and safety across all market verticals. Bolstered by momentum of products and consulting, as well as broadening geographical strength, we delivered another strong quarter with 20% year-over-year growth, exceeding our internal plan. Internationally, we had our best quarter ever, reaching 10 new countries that we’ve never sold to before through our channel partners. We also continue to make good progress in improving our renewal rates and new logo engagement metrics. From a product perspective, our broad portfolio is unique in the market, as our three-pronged approach provides differentiated value for all stakeholders: the developers, the DevOps group, and the corporate security team. Over the past year, we’ve launched significant new products in each of these areas, and customer response has been excellent. Industry analysts continue to recognize Synopsys’ strength. For the fifth year in a row, we were named a leader in the Gartner Magic Quadrant for application security testing, and for the fourth straight year, we were rated the farthest up and to the right. Finally, a few weeks ago, we announced a definitive agreement to acquire WhiteHat Security, a leading provider of SaaS-based dynamic application security testing, or DAST technology. This acquisition will further expand our portfolio and accelerate the build-out of our SaaS solutions. We look forward to welcoming the WhiteHat team after the close, which we currently expect to occur in our third fiscal quarter. In summary, we delivered a high momentum quarter and are substantially raising our outlook for fiscal ‘22. Building on a wave of technology innovations, fueling growth, strong and resilient markets, and excellent operational and financial execution, we’re poised to cross the $5 billion revenue milestone this fiscal year. These results are not possible without the unwavering commitment and diligence of our employee teams. We thank you all. With that, I’ll turn it over to Trac.

Trac Pham, Chief Financial Officer

Thanks, Aart. Good afternoon, everyone. In Q2, we delivered record revenue, operating margin, non-GAAP EPS, and cash flow. We continue to execute exceptionally well despite uncertainties in the macro environment. This is a testament to our robust portfolio, healthy markets, and financial discipline. Our strong execution is also enhanced by the stability and resiliency of our time-based business model and $7.3 billion of non-cancelable backlog. Our results and growing confidence in our business lead us to again raise our full year 2022 targets. After surpassing $4 billion in revenue in 2021, we expect to grow 20% and cross $5 billion in 2022 as our growth accelerates for the third straight year. I’ll now review our second quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.28 billion, up 25% over the prior year, with strength across all product groups and geographies. Total GAAP costs and expenses were $916 million. Total non-GAAP costs and expenses were $809 million, resulting in a non-GAAP operating margin of 36.8%. GAAP earnings per share were $1.89. Non-GAAP earnings per share were $2.50, up 47% over the prior year. The Semiconductor & System Design segment revenue was $1.17 billion, up 25%, with robust demand for EDA software and IP. The Semiconductor & System Design adjusted operating margin was 39.2%. The Software Integrity segment revenue was $113 million, up 20%, and the adjusted operating margin was 11.5%. Turning to cash, we generated a record $750 million in operating cash flow. We used $250 million of our cash for buybacks and have repurchased $890 million of stock in the trailing 12 months. Our balance sheet remains very strong. We ended the quarter with cash and short-term investments of $1.72 billion and debt of $24 million. Before providing guidance, let me briefly comment on the WhiteHat acquisition, which is subject to regulatory review and customary closing conditions. We will pay approximately $330 million in cash when the transaction closes, which we expect to occur this quarter. Based on our preliminary review, we expect the acquisition to be roughly neutral to non-GAAP earnings this year. Now to the guidance, which excludes any impact from the WhiteHat acquisition. We are raising our full-year outlook for revenue, operating margins, earnings, and cash flow. For fiscal year 2022, the full year targets are revenue of $5 billion to $5.05 billion; this represents 19% to 20% growth and a $225 million increase versus our prior outlook. Total GAAP costs and expenses will be between $3.928 billion and $3.975 billion. Total non-GAAP costs and expenses will be between $3.35 billion and $3.38 billion, resulting in non-GAAP operating margin improvement of approximately 250 basis points. The non-GAAP tax rate is set at 18%. GAAP earnings will be between $6.22 and $6.40 per share. Non-GAAP earnings will be between $8.63 and $8.70 per share, representing 26% to 27% growth. Cash flow from operations will be from $1.55 billion to $1.6 billion. Capital expenditures are approximately $145 million, up from our prior guidance as we consolidate our campus at headquarters to create a more efficient and economical footprint. Now to the targets for the third quarter. Revenue will be between $1.21 billion and $1.24 billion. Total GAAP costs and expenses will be between $981 million and $1.0 billion. Total non-GAAP costs and expenses will be between $830 and $840 million. GAAP earnings will be between $1.32 and $1.44 per share, and non-GAAP earnings will be between $2.01 and $2.06 per share. In conclusion, we continue to execute exceptionally well. And based on our strong momentum, we expect to deliver 20% revenue growth, 250 basis points of non-GAAP operating margin improvement, more than 25% non-GAAP earnings growth, and $1.6 billion of operating cash flow in fiscal 2022. With that, I’ll turn it over to the operator for questions.

Operator, Operator

Our first question comes from Gary Mobley from Wells Fargo Securities.

Gary Mobley, Analyst

Let me extend my congratulations on good execution, to say the least. I want to ask a multipart question on the backlog, up, I believe, roughly 50% year-over-year and mid-single-digit percent or high single-digit percent sequentially. So, to what extent is that backlog number growing as a result of longer duration? Excuse me. Maybe we can start there.

Trac Pham, Chief Financial Officer

Gary, the backlog is up due to overall run rate growth. Duration remains within the model we communicated in the past, which is 2.5 to 3 years.

Gary Mobley, Analyst

Okay. Here we are today with the potential for your company to grow 20% this year, which aligns with your long-term goal of double-digit growth. However, interpretations of that can vary. Therefore, I would like to know if you can provide an updated perspective on your long-term revenue growth target.

Aart de Geus, Chairman and CEO

Well, right now, we’re not changing any targets for the long term, but clearly, we’re at the right end of the double-digit answer. And in general, I would say that we feel that we’re in a strong position that has a potential to continue for quite a while by virtue of not only building up the backlog, but more importantly so, by the conjunction of the demand in the market and what we have to offer being particularly well aligned. So, I think the company is very strong right now, and you saw that we changed the objective for the year considerably from where we started the year.

Operator, Operator

Our next question comes from the line of Jason Celino with KeyBanc.

Jason Celino, Analyst

Really impressive guidance raise here. I think as we kind of cross into the second half, maybe if we take a step back six months coming into the year versus now, what exactly in your visibility or confidence level has improved so much? Or I guess, what has surprised you to this point?

Aart de Geus, Chairman and CEO

Well, I wouldn’t say it’s a surprise. It’s been hard work that has worked really well. I think we’re executing extremely well at this point in time. And having the products that are needed at the right time, including some that have truly breakthrough innovations that are very valuable for the future serves us well. Obviously, the markets around us have a lot of noise up and down and sideways, but we cater to a part of the market that is highly competitive where there is a renewed understanding of how important chips are for differentiation in literally every field you can think of. And so, that is an area where the customers want to move faster with better tools, with faster solutions, and I think we’re well positioned in that.

Trac Pham, Chief Financial Officer

Jason, at the beginning of the year, we were very optimistic about the business due to several years of strong growth and margin improvement. Because of this, we had already increased our long-term outlook. However, six months in, we have secured half a year’s worth of business and continue to see strong and consistent momentum in line with our previous communications. Currently, we feel that we are executing effectively on the opportunities in front of us, and the outlook is very positive.

Jason Celino, Analyst

Okay. And then, maybe just a quick one on margins. If we kind of back into the Q4 implied framework, and I know Q4 is typically one of the lower points on margins, but this year, it seems a little bit lower than on a sequential basis. Maybe can you speak to some of your hiring plans or timing of investments, which may impact that?

Trac Pham, Chief Financial Officer

Well, I’ll start with the fact that we are raising the overall margins for the year by 250 basis points versus ‘21. So, it’s a really strong improvement. With regards to the Q4 profile, we continue to invest in the business in the second half. Good hiring, and frankly, the other part that’s contributing to it is the fact that the outlook is so strong that we are increasing our variable compensation accrual in the back half of the year.

Operator, Operator

And our next question comes from the line of Ruben Roy from WestPark Capital.

Ruben Roy, Analyst

I’d like to extend my congratulations to you on solid execution. First question, Trac, just kind of around something that you mentioned last quarter and just thinking about durations haven’t changed, but backlog orders well ahead of plan, etc. You had talked about being able to extract more value in negotiations. And I’m just wondering if you could comment a little bit about the pricing environment as you’re seeing expansion of tools across large customers, etc. Have the pricing dynamics across the business or product areas changed much between last year and this year?

Trac Pham, Chief Financial Officer

The pricing environment is currently favorable for us. This is primarily because our products are highly competitive. As noted in Aart’s comments, they are delivering significant value to our customers. When we engage with customers using products that effectively address their challenges in a more efficient, effective, and scalable manner, it leads to more positive discussions about pricing.

Aart de Geus, Chairman and CEO

Yes. In general, I would add, there is just a lot of demand. People are designing much more complex, not just chips, but systems of chips. The intersection between those chips and the software is more important, meaning that they want to optimize the chips for certain software and optimize certain software for the chips or vice versa. And so, these are all relatively difficult problems that require a lot of our tools and a lot of our IP. And I think the semiconductor market overall is heading towards continued growth by the sheer need of all these parts.

Ruben Roy, Analyst

All right. Thanks, Aart. I have a quick follow-up regarding the IP itself. As IP continues to grow for you and your competitors, many companies are discussing or utilizing IP moving forward as the existing complexities increase. How should we view IP as a driver for your tool sales? Or is it the other way around?

Aart de Geus, Chairman and CEO

You’re right with both, meaning that in decades ago, clearly, EDA was driving things, and then you would sell some IP in some of the regions that have come online, let’s say, in the last 10 years. IP has often been the first decision-making point and then the EDA followed. And in the system world, it’s a little bit of both. But very often when people decide about what architecture they’re going to build, they make big decisions on the building blocks and then they immediately look in the catalog from Synopsys, okay, which building blocks can I have, ready to go, or which ones can I get with some modifications. And that is, of course, a dramatic shortcut in design and effort. So, I think they’re sort of, in my perspective, two sides of the same coin. You need both, and both need to be working very well.

Operator, Operator

Our next question comes from the line of Charles Shi from Needham & Company.

Charles Shi, Analyst

Congratulations on the strong results. I want to start with another question on IP. Thanks, Aart, for your answer on the synergy between EDA and IP. When I look at your numbers, it looks like your IP growth so far in this fiscal year has been far above your long-term target, like mid-teens. Really just wonder, do you still hold the view that IP is mid-teens kind of growth long term? Or do you think it may grow faster than that given how strong the results are so far in the year?

Aart de Geus, Chairman and CEO

Well, as you know, so far, we want to hold on to the general directives that we’ve given for the long term. At the same time, there’s no doubt whatsoever that IP was particularly strong this quarter and actually has been strong for quite a while. And so, IP tends to be a little lumpy because you often sell IP over a period of time and then the customers pick it up as they need it, or some of the things that are subject to milestones if they want to have IP that’s modified for their purpose. So, it’s not always as easy to predict as some of the other things that are more time-based. But overall, they reflect very well the new designs, the new chips, but also the new types of chips. And we’re particularly strong already in those interconnectivity blocks that will be used when you put chips in very, very tight proximity, sometimes also referred to as chiplets. And so, that’s a whole new wave of opportunity for us.

Charles Shi, Analyst

Maybe a second question. I know during the quarter there was a press article about the administrative subpoena you received probably like last year, by the end of last year. Can you give us an update as this is kind of an overhang in terms of what investors think about Synopsys? And any update on whether it’s closed or when you expect it to close?

Aart de Geus, Chairman and CEO

Well, there’s not really an update. We received this, if I’m not mistaken, in November ‘21. And so, typically, you get a number of questions, and then there’s some follow-up on those questions. And by the way, a lot of these are being given out to a number of companies. And so, we have diligently followed up. It’s not for us to know actually when these things finish. So, it’s wait and see, but we’re following up, and no issues from our perspective so far.

Operator, Operator

And our next question comes from the line of Joe Vruwink from Baird.

Joe Vruwink, Analyst

I’m wondering if it is possible to maybe compare the new product cycle we seem to be in at the moment and thinking of DSO.ai fusion verification, hardware, 3DIC? How does kind of this cycle compare to, I think, 2019 was a big one, I think 2015 with IC Compiler was a big one? I mean, do you get the sense that there is greater traction or that this era of product is different and better than some of the prior recent experience?

Aart de Geus, Chairman and CEO

That’s actually a fun question because you seem to know some of our better birthdays here. In ‘15 and ‘19, we had absolutely great products that hit markets that substantially advanced the existing state-of-the-art. I think when you talk about things like DSO or some of the hardware-software interaction, you’re essentially talking about a new state of the art. And having had the privilege to be here for a long time, I strongly feel that the early days of synthesis felt very similar to what we’re doing right now with AI applied to our own design flows, because it is so revolutionary from a computer science point of view as AI has essentially brought a whole new way to look at problems through the lens of can you recognize patterns versus can you do deductive calculations. And we have already demonstrated literally, month after month, new results that are getting better and better, and also broadening the applicability beyond just design but also in verification. And so, I think there’s a long runway with that. But it is also literally fun to watch how excited our own teams are every time they get some better results.

Joe Vruwink, Analyst

Okay. That’s great. And then, you went through a period of time thinking about fiscal ‘19, ‘20 and actually a lot of 2021 where your backlog, it was solid but sequentially stable. And now we’ve had one big step up, and actually this quarter is another big sequential step-up. How much of that would be renewal-driven and within the scope of a renewal getting uptake behind some of these more advanced solutions versus what might be new logo growth?

Aart de Geus, Chairman and CEO

It’s a little bit of all of that. We have always wanted to say that backlog goes up and down because if you do, let’s say, a large transaction over multiple years, you get your backlog to go up, and then it gradually decreases as the revenue is recognized, and then it gets renewed. Now, of course, we have many renewals, so it’s not that spiky in aggregate. But that’s the one flag I want to raise for backlog. On the other hand, there’s no question that our business is strong and that we have many growing renewals and are broadening the portfolio of what we offer as a company. And so, we are very purposefully building the company for growth at this point in time. And so we’re watching to make sure that the backlog is in sync with the guidance that we give you going forward.

Trac Pham, Chief Financial Officer

Yes. I’ll add to Aart’s comments about the backlog. That is noisy, and it will vary from quarter to quarter. It’s great to have $7.3 billion of backlog. It’s even better that the backlog is increasing because of run rate growth, as Aart described. And that momentum in terms of run rate growth in the first half is really what’s driving the confidence in the outlook for the full year.

Operator, Operator

And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

Jay Vleeschhouwer, Analyst

Aart, you mentioned that there's a lot of new development in EDA with accelerated growth, new customers, and evolving requirements. However, EDA has a history of repeating itself. For example, let's consider the AI aspect you started discussing. There’s an interesting presentation from Synopsys at the ANSYS conference on AI. My question relates to the historical context of new tools. In the past, issues arose with tool capacity during the early days of synthesis and implementation, particularly regarding synthesis blocks and methodologies. You might recall the debates about flat versus hierarchical designs and the adaptability of tools to new device types or applications. Therefore, regarding AI, how confident are you that your platform will be viable for the next 5 to 10 years in terms of capacity, performance, and accommodating a growing variety of device types, avoiding the limitations that previous tools faced? Now, Trac, you mentioned increasing your non-GAAP expense expectation for the year by $95 million. Can you elaborate on that in relation to headcount-driven growth and your operational expenses? If you were to fill all of the over 2,000 open positions, would you still be able to achieve your margin goals for the year?

Aart de Geus, Chairman and CEO

Well, let me start with your first part of the question. All the things that you mentioned, I hope we have exactly those problems because we licked them in our history. The fact is that we have the good fortune of starting with synthesis that revolutionized digital design, made it possible, in all fairness, together with simulation, later place and route. And those automations kept growing with every success the customer who wants to do more. It’s like race car drivers; you give them a faster car, they drive fast and they say, 'Can you give me something that’s faster?' And the good news is Synopsys, for its entire history, has always stayed at the state of the art. So, in that sense, this is normal evolution. Secondly, I think the AI capabilities that we have right now and that we’re building are actually quite broad in terms of applicability. And if you add the very fact that, on the side here, we have just announced that we also have a SaaS model for cloud, that’s theoretically saying, 'Oh, there’s infinite compute waiting for you if you want to pay the price.' And I don’t want to be light-hearted about this, but the fact is that compute is not a limitation for us right now. I think what will be the challenging part is that all the problems that we’re addressing are highly systemically complex, meaning there are so many different things that play together, and you have to nail every single one of them; otherwise, the system doesn’t work. And that plays absolutely to Synopsys’ strength because we are deep in every area that we touch, and we’ve put a high degree of emphasis now for a number of years for Synopsys to migrate its thinking from scale complexity to systemic complexity. And so, I actually have no fear in this direction. Trepidation on the execution is always there, but I think we’re on a roll here.

Trac Pham, Chief Financial Officer

Jay, regarding your questions about operating expenses, there are two main factors contributing to the increase. Firstly, we're investing in the business to support strong growth in the coming years. Secondly, we want to ensure we can scale the business effectively to improve margins over time in line with that growth. Additionally, with the positive outlook for the year, we are able to accrue more for variable compensation to acknowledge our overachievement. Our projection for the year includes a 250 basis points improvement in operating margin, which takes into account our hiring plans and our ongoing investment in the business. Everything is interconnected and incorporated into our forecasts.

Operator, Operator

Our next question comes from the line of Vivek Arya from Bank of America Securities.

Vivek Arya, Analyst

I actually had two kind of more conceptual questions. So for the first one, I’m curious; why is there such a large gap between the growth rates of your EDA and the IP business? Conceptually, they should be levered to the same underlying trend. So, why is one outgrowing the other so much? And when I look at your EDA growth, like 9% kind of full year, more like 11%, last year was 10%. So, I don’t see the same acceleration that you are describing. And when I compare it to your peer who is growing in the mid-teens, there also appears to be a difference in growth. So, I just want to make sure I’m looking at things apples-to-apples. So, that’s the first question that I have.

Aart de Geus, Chairman and CEO

Well, in all areas, we’re outgrowing our competition. And that includes EDA and IP and the other areas that we’re in. At the same time, all of those have historical precedents of how the business is set up. And if you recall, it’s not that many quarters ago that we were referring to IP as in the mid-single-digits growth rate. And today, we’re clearly in the double digits. So, that has moved up. The IP has moved up very fast. And part of the explanation I tried to give a little bit earlier is that, in a number of situations, IP is leading as IP is, in many ways, the shortcut of EDA, right, which is you have design that’s already done. And so, the combination of IP and EDA actually works really well together, and one should take them in aggregate. And in aggregate, the company is essentially predicting for this year what is a 19% to 20% growth. And so, you can split the numbers any way you want.

Vivek Arya, Analyst

I see. So, you don’t agree with the market share gains or shifts that your competitor was describing in their last call?

Aart de Geus, Chairman and CEO

I cannot fully critique what others say about their business. We are doing well. I think the semiconductor industry is growing rapidly. There’s no question that most advanced nations in the world have all understood that chips are at the heart of all the software that’s needed to be competitive. And so, that is a very fundamental change. And we are, I think, playing very well in this with the technologies we have. And some of the areas that we have highlighted, such as DSO.ai, but I could have also highlighted SLM or a few other areas that are relatively new, we’re doing really well.

Vivek Arya, Analyst

Right. And just a quick follow-up. The math suggests Q4 earnings could actually be down year-on-year. I imagine it’s more to do with just the pace of hiring because you still have pretty strong sales growth. But it will still suggest Q4 earnings based on your implied guidance would be down year-on-year. Did I get that math right? Is it just conservatism? Is it just kind of the timing of how OpEx and hiring is flowing? Is that the right way to understand why are...

Trac Pham, Chief Financial Officer

I would focus on the profiling. The past two years have very different profiles. As a result, comparisons of any particular quarter this year to the same quarter last year will appear distinctive and unusual. However, if you take a step back and look at the full year, we are achieving over 25% EPS growth, driven by substantial revenue growth and improved margins.

Operator, Operator

Our next question comes from the line of Pradeep Ramani from UBS.

Pradeep Ramani, Analyst

I have a question about the sustainability of this 20% revenue growth. It seems that everything mentioned on the call suggests there are structural factors driving your business growth, yet you haven't revised the financial model. How should we interpret this? Should we expect 2022 to see 20% growth and then revert to a lower level, or should we consider that EDA and IP growth is structurally higher than it has been in the past?

Trac Pham, Chief Financial Officer

Let me try to put it in this context, Pradeep. We are executing incredibly well. And we’re showing 20% growth off of a record year last year. The momentum of the business is really strong. We are feeling very confident about the business, not only for this year but over a multiyear period. Where the questions are coming from with regards to changing our multiyear model, we literally just are six months into this, and we updated you all on a raise in the model back in December. It’s premature to be talking about changing our model midyear, while we still have six months left in the business to go. But I would just say that we are feeling very bullish and confident in the business over a multiyear period. So, I would not read anything in terms of the results and are concerned about our ability to sustain very strong results over the long term.

Pradeep Ramani, Analyst

Great. And as a follow-up, maybe, I mean, this has sort of been asked, but let me ask it in a different way. If you grow, especially in the back half of the year, is it being driven by maybe one big customer who’s pursuing foundry plans or is it broad-based? Both in terms of customer mix and maybe even in terms of just product mix with respect to hardware or EDA or IP and so on?

Trac Pham, Chief Financial Officer

We are experiencing significant growth across all regions and product lines, which highlights the diverse sources of this growth. While we do not provide specific customer details, the growth is being fueled by strong performance across our entire customer base. Therefore, we are not linking the changes in our model or the outlook for the year to any single area, as that would not be a sustainable approach to managing a business.

Operator, Operator

Our next question comes from Gary Mobley at Wells Fargo Securities. Your line is open. Please go ahead.

Aart de Geus, Chairman and CEO

Okay. Well, I guess we can finish on a timely fashion. Thank you very much for your interest. We had not only a very strong quarter, but more importantly, saw momentum in our entire business. It will go forward for, as Trac said, a number of quarters. And so, on that basis, we appreciate your support, and we’ll be talking to you shortly in the one-on-ones.