SNPS - NASDAQ

Ladies and gentlemen, welcome to Synopsys Earnings Conference Call for the First Quarter Fiscal Year 2024. At this time all participants’ are in listen-only mode. [Operator Instructions]. Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. With us today are Sassine Ghazi, President and CEO; 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, including statements regarding our pending acquisition of Ansys. However, we will not be commenting on Ansys' financial results. While these forward-looking 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 such statements 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 Sassine.

Good afternoon. In Q1, we continued our strong momentum with revenue in the upper end of our guidance range and non-GAAP EPS surpassing the upper end of our guidance range. Revenue was $1.65 billion, up 21% year-over-year. Non-GAAP operating margin was 38.7% up approximately 3.5 points year-over-year. Non-GAAP EPS was $3.56, up 36% year-over-year. While maintaining our laser focus on meeting our quarterly financial commitments, we strategically drive the business for long-term financial success. Over the last three years, we have delivered a 17% of revenue CAGR, non-GAAP operating margin improvement of 7 points and non-GAAP EPS growth at a 26% CAGR. Shelagh will discuss our financials and guidance in more detail. Let's turn to market trends. We've entered an era of pervasive intelligence, driven by the rise of artificial intelligence, silicon proliferation and software-defined systems. These trends demand more compute, new architectures and new design methodologies who are requiring us to address the significant challenges of complexity, cost, energy consumption and security. Despite the mounting challenges, design starts continue to rise as the semiconductor industry scales to $1 trillion in revenue or more by the end of the decade. As the leading silicon to system design solution company with best-in-class EDA tools and the broadest portfolio of semiconductor IP, Synopsys growth opportunity is truly incredible and already underway. Across industries, a paradigm shift is underway as companies race to deliver on this era of pervasive intelligence where AI and smart technologies are omnipresent and interconnected. To capitalize on this shift, the technology is overcoming is converging on a silicon to systems approach to innovation. As the company at the heart of silicon and systems, Synopsys was made for this moment. There is no one more capable of helping companies innovate for this era of pervasive intelligence. Semiconductor companies are now designing with a system approach in mind, while system companies are unlocking additional value through purpose-built chips and software-defined systems. At the same time, customers see the fusion of electronics design and physics simulation as critical to delivering high-performing and high-yielding solutions for their business. Building on our seven-year partnership with Ansys, the industry leader in simulation and a bit multiyear strategy to reshape our business to support system-level design. Last month, we announced our intent to acquire Ansys. This transaction will grow our TAM by 1.5 times to $28 billion and further enhance our silicon to system strategy. Both across our core EDA segment and a highly attractive adjacent growth areas where Ansys has an established presence and successful go-to-market expertise. Customer feedback on the proposed transaction has been incredibly supportive, and we look forward to closing this transaction in the first half of 2024. Now I'll share some segment highlights starting with Design Automation, where we saw strong design win activity across the business. We continue to enhance our leadership in digital EDA as our capabilities become increasingly critical for the leading chips at advanced nodes. We are proud to have partnered with our customers to achieve a number of industry firsts in Q1. The world's first GAA-based next generation arm, Cortex-X mobile core tape-out at a leading Asian mobile SoC provider. The first completed tape-out for a server SoC on 18A. And Asia's first N5 arm flagship automotive core tape-out for a leading EV OEM. In addition, we had multiple competitive wins anchored by 2-nanometer and 3-nanometer projects at a leading Asian mobile semiconductor company. We are also gaining momentum with analog mixed-signal customers. We won several competitive full flow displacements at analog mixed signal companies including networking OEMs in Europe and Japan. A key differentiator in these competitive wins was the breadth and leadership of our EDA platform, from digital to analog and from architecture to sign off. All turbo charged with the industry's leading full-flow AI platform, synopsys.ai. Synopsys.ai focuses on three distinct pillars of value for our customers, optimization, XSO.ai beat analytics, and generative AI, including our copilot. Starting with our XSO.ai family, which includes design, verification, test and analog space optimization. We continue to expand our footprint and drive set in our core EDA tools. DSO.ai was key in several major wins and continues to drive a 20% plus uplift to Fusion Compiler revenue at multiple accounts. Increasing share of usage of DSO.ai were competition was driven by superior PPA results on our platform versus alternatives. We saw a very strong pull for VSO.ai with multiple production deployments that are seeing excellent improvements in test coverage and turnaround time. A large North American HPC semiconductor company made a significant investment in VSO.ai technology with plans to immediately deploy on four projects and eventually deploy corporate-wide. Another large North American GPU company saw 2 times faster turnaround time and a 20% improvement in coverage and is planning a large-scale deployment of the technology. Our analog tool, ASO.ai now has multiple deployments moving to production with reference flows at TSMC, Samsung and Intel for analog migration. We also brought in the capability of TSO.ai, adding a design for test feature to the proven ability for advanced pattern generation. At the International Test Conference this quarter, we demonstrated a 20% reduction in total pattern count using TSO.ai. Our data analytics AI products also saw significant logo engagement growth. A great example is Silicon.da production analytics, which is part of the silicon lifecycle management family and spans design through product manufacturing phases. Silicon.da automatically highlights silicon data outliers, enabling engineering teams to quickly identify and correct underlying issues in design and manufacturing and boost productivity. Last quarter, we had a groundbreaking generative AI announcement with Microsoft for accelerating chip design, Synopsys.ai copilot. The integration of Gen AI across Synopsys.ai provides chip designers with collaborative capabilities that offer expert tool guidance, generative capabilities to enable RTL and collateral creation from natural language. Following positive feedback from initial pilot participants, AMD, Intel and Microsoft will be adding a number of other companies with our beta rollout. In Q1, we also won significant multi-die package designs. Our 3DIC Compiler platform gained substantial momentum in multi-die packaging. Multi-die implementations continue to increase in the HPC market with an expectation that by 2028, 40% of HPC designs will be multi-die architectures. Like the transition to AI this new design paradigm will create significant opportunity for both our EDA and IP businesses. Moving to our systems business. Hardware-assisted verification had a strong quarter with excellent booking on

Thank you, Sassine. We delivered a solid start to the year with revenue in the upper end of our guided range, non-GAAP operating margin of 38.7% and non-GAAP earnings above the high end of our guidance range. Our Q1 results are driven by our execution and leadership position across our segments, robust design activity across semiconductor and systems customers and the stability and resilience of our time-based business model. We remain confident in our business, and as a result, we are reaffirming our full-year 2024 targets for revenue and non-GAAP operating margin and raising our non-GAAP EPS guidance. I'll now review our first quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.65 billion. Total GAAP costs and expenses were $1.29 billion. Total non-GAAP costs and expenses were $1.01 billion, resulting in a non-GAAP operating margin of 38.7%. GAAP earnings per share were $2.89, and non-GAAP earnings per share were $3.56. Q1 included an extra fiscal week, which contributed $70.5 million in revenue and $0.11 in non-GAAP EPS. Now on to our segment. Design Automation segment revenue was $985.3 million, up 11%. Design Automation adjusted operation was 37%. Design IP segment revenue was $525.7 million, up 53%, driven by broad-based strength. Design IP adjusted operating margin was 47.5%. Software Integrity revenue was $138.2 million, up 8%, and adjusted operating margin was 17.3%. Operating cash outflow was $88 million for the quarter and we ended the quarter with cash and short-term investments of $1.27 billion. Now to guidance. For fiscal year 2024, the full-year targets are: revenue of $6.57 billion to $6.63 billion. Total GAAP costs and expenses between $5.02 billion and $5.08 billion, total non-GAAP costs and expenses between $4.14 billion and $4.18 billion, resulting in non-GAAP operating margin improvement of roughly 2 percentage points. Non-GAAP tax rate of 15% and GAAP earnings of $9.56 to $9.74 per share. Non-GAAP earnings of $13.47 to $13.55 per share. Cash from operations of approximately $1.4 billion. Now to targets for the second quarter. Revenue between $1.56 billion and $1.59 billion, total GAAP costs and expenses between $1.21 billion and $1.23 billion. Total non-GAAP costs and expenses between $1.01 billion and $1.02 billion, GAAP earnings of $2.05 to $2.16 per share and non-GAAP earnings of $3.09 to $3.14 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliation. In conclusion, we delivered a solid start to the year. We continue to execute and for the full year expect 12.4% to 13.5% revenue growth, non-GAAP operating margin improvement of roughly 2 percentage points and 20% to 21% non-GAAP EPS growth. Our confidence reflects our leadership position across our segments, robust design activity by our customers and the stability and resiliency of our time-based business model. With that, I'll turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Gary with Wells Fargo Securities. Gary, the floor is yours.

Good afternoon, everybody. Thanks for taking my question. I think when you started or you initially fiscal year '24 guidance you were expecting China to -- I guess a drag on the overall revenue growth. But in the first quarter results, it looks like sales into China were modestly accretive to the overall growth. And so my question is, do you still anticipate some headwinds specific to China? And anything specific you wanted to call out there with respect dilution to the overall revenue trends?

Thank you, Gary, for the question. You are correct. When we guided FY ‘24, we called out two possible headwinds. One, the continued enterprise software slowness and the one was around China, both the macro and the impact of the export control. That will continue in terms of our balanced view as we're looking at the year. And as we communicated well, we believe that being pragmatic around the China growth as we look at FY '24 was important. Now as you saw in Q1, as you're calling out, strong Q1 that is due to some timing of our pull down of our business, be it in EDA or IP that can vary quarter-over-quarter but the remainder of the year is pretty much what we communicated when we guided the year.

Okay. Just a follow-up housekeeping question. What was the RPO balance at the end of the quarter and it looks like the other income is coming in stronger than the original projection, including some upside in the first quarter, Shelagh, can you give some clarity on the source of that.

Yes. The backlog is $8.2 billion for the quarter. So we had obviously a record backlog in Q4 of $8.6 billion and that's sort of the natural lumpiness of timing of big orders, so that was a pretty normal expectation. And then some of the goodness we saw in some of our other with some improvement in some ForEx. And so obviously, that can ebb and flow, but that's what we saw in Q1.

Thank you.

Thanks, Gary.

Thanks, Gary.

Our next question comes from the line of KeyBanc. The floor is yours.

This is Jason. Can you guys hear me?

Yes, Jason.

Perfect. Maybe building off of Gary's question, the backlog, 8.2%, really nice to see in the high teens year-over-year growth again. I get it lumpy coming off a record, but it was down a little more sequentially than what we've seen typically from Q4s to Q1s. Is there any way to think about the linearity through the year, first-half, second-half or renewal timing? Just trying to understand the shape. Thanks.

Yes. I wouldn't say there's anything unusual about it. I mean, year-over-year, we're up about 19%. So we kind of think about managing these things on a yearly increment because you think about timing of renewals and things like that, which usually we think about over the course of 12 months. So there's nothing really specific about the Q4 to Q1 other than I would point out that Q4 was an all-time high. So in some senses, that all-time high. We'll go through sort of the natural pull down and then replenishment of the backlog as we drive renewals and expansion.

Okay, perfect. And then on the IP side, again, really strong quarter, 50% growth. I know you mentioned a lot of new IP titles that are coming out or have come out. I guess, what was the main driver of the strength in IP? And then how should we think about that trend through the rest of the year on IP? Thanks.

Yes. Thanks, Jason. As far as IP goes, the beauty of what we have in our IP business, given it's an interface, more silicon proliferation, more chip starts, they need IP to connect the chip, inside the chip, the different blocks to each other and connect the chip to the outside world, and this is where we lead with our IP business. Now that being said, there are constant new standards that are being delivered in order to support the complexity and the performance requirements for be it an AI chip or any chip that goes into data center, et cetera. Multi-die is another factor. The moment you start stacking dice together in a package you need more and more interface IP to connect that multi-die package together. So those were the factors that were driving the IP opportunity and we are very confident that this secular trend with IP demand will continue as long as there is more demand for silicon and more sophisticated silicon.

Yes. And Jason, I would just add the shape of the year is a bit opposite from last year. Last year, we were very back-end loaded, as you recall. And this year, we're a little bit more towards the front of the year. And that's really driven, as we always talk about lumpy in IP because we're building those new standards that Sassine talked about every day. But then when the customers need it to ingest into their design, that's when we get those big pull downs.

Okay. Appreciate that. Thank you both.

Thank you, Jason.

Thank you, Jason.

Our next question comes from the line of Jay with Griffin Securities. The floor is yours.

Thank you, good evening. So I've seen with the Ansys acquisition, you are, of course, pursuing the largest convergence event in the industry. But the question is, in the meantime, could you talk about the kind of internal resources or investments you were making anyway as you await the transaction in terms of new technologies, new methodologies to effectuate conversions even before the Ansys transaction closes, particularly for the target markets that is motivating the acquisition, such as aero, auto and industrial?

Yes. Excellent question, Jay. So I want to break it into two areas of investment. One in the core EDA, not only with multi-die 3DIC but even if you have a single die in a package, a homogeneous chip, when we started the collaboration with Ansys in 2017, the intention of that collaboration was to bring an industry leader sign-off technology to our design implementation portfolio. That did not mean we stopped investing in our own organic implementation portfolio because you need to integrate some key engines in order to correlate with the industry sign off. As the complexity since 2017 grew, our investments organically expanded in order to have engines sitting inside our Fusion design platform to correlate with the broadened touch points we created with Ansys from a simulation and sign-off standpoint. So that will continue in order to serve our customers deliver to a solution that they are looking in order to design and develop their products. So that's one bucket of investment. The second one, as we started expanding into new markets, automotive, driving our systems aspiration, the investment there was not only from the product side, was go-to-market investment as well in order to expand and call into a new set of customers like the automotive OEMs and other. And this is where we called out a month or so ago when we announced the Ansys acquisition that Ansys will bring in an acceleration of knowledge into that new market segments that they have an experience and brand selling into those markets. So those are the investments, both on the R&D side and the go-to-market side that we will continue on making until we closed the agreement and we start talking integration at the time.

Okay. For the follow-up, one of the things that distinguishes your current business is the customer concentration. That is at least with one customer, Shelagh's former company. Over time, as AI becomes increasingly pervasive and all the other phenomena that you've talked about and that Aart talked about this morning at the IFS event, called, how do you foresee your customer concentration perhaps evolving in core EDA, IP and/or hardware over the next number of years. When you think about all the various trends, technology trends that you've been speaking about for some time, do you think the concentration gets more? Or do you think that you will have less customer concentration over time and set aside Ansys for the moment?

So Jay, just a correction, both Shelagh and I were alumina of Intel. I felt left out, so I had to correct you here. So I believe the market will go through phases of both verticalization and horizontalization. And the reason for that is when there's a new opportunity, you see many customers either are trying to build a complete stack of the platform. And you hear many of our traditional semiconductor chip companies talking about building a -- or delivering a system to their customers, delivering a platform to their customers. And when you see system companies are trying to go deeper into silicon to drive their own differentiation for their specific workload, specific application, et cetera. Regardless which direction it goes, for us, we benefit both ways because if the silicon customers are delivering more silicon and specialized silicon for these different market verticals, we sell them IP and EDA to deliver to those products. Same thing with the system companies, you know our concentration correct, that is focused on the chip companies that are working on the most complex SoCs because both are the guys that they spend at the end, most money to absorb the latest technology that we offer in order to deliver on these complicated chips. So I don't see it changing in the near term. Now if you fast forward five-plus years from now and many system companies have a very solid, broad semiconductor arm inside them will be an expanded opportunity for us to serve.

Okay, very good. Thank you.

Thank you, Jay.

Our next question comes from the line of Lee Simpson with Morgan Stanley. Lee, the floor is yours.

Great. Good evening, everyone. And thanks for fitting me in. Just really rolling back to a couple of things you mentioned on the product summary. I think you mentioned a gate all around work with a mobile SoC player and then went on to talk about 2-nanometer products with leading semis companies out of Asia. Great progress clearly there. And I guess I want to understand, how does this come through as we get closer to things like LTA 1, 2 nanometers or 2 more generally at TSMC, all of which seem to be standing up in the 2025 time frame. So that feels to me as though that could and should be a pretty decent secular driver into the back half of the year. Is that the right way to be looking at this? Or does this come further into '25?

So any time there is a new technology, in this case, the GA, the N2, 18A and maybe you heard Intel earlier today talking about 14A, fantastic opportunity for 2 reasons. In order for the customer to be able to explore that process technology innovation, even if they want to get a feel, do they want to move in the direction or not? Does it add value in terms of performance, power, et cetera? That technology, that process technology needs to be enabled. In order to be enabled, it means Synopsys needs to design its IP on that process technology and make sure that our EDA products are comprehending that new technology in order to deliver to the target performance power area of this pathology. So our work starts at least two years before we start talking about the GAA tape-out that I mentioned in the script in order to deliver the IP and e Design IP and making sure that our EDA products are available and ready. So you can think of it in the time frame that whenever you hear a new technology being introduced, process technology, there is an early, early effort to provide what is called the entitlement of that technology from a design point of view, and then you start seeing IP coming in, design start coming in around three, four months from announcement of technology from the leading foundries.

Great. That's pretty clear, at. And maybe just as a follow-up, when going back to the Ansys announcement that you made and some of the verticals that they play into Clearly, one of the main drivers that are happening around the automotive industry is this transition or migration to software-defined vehicles. And it does feel as software hardware decouples, there's a scope here for someone to drive standards, particularly in automotive testing -- sorry, particularly in software, having that fully tested before sent over-the-air. Could that be one of the ambitions for a deal like this? And does that behoove scale to drive standards through? I'm just trying to get my head around what the opportunity might be there in new standards.

Yes. Lee, good question. We're actually at -- if you think at the software over-the-air update that is being pushed out to, say, a car. What is needed in order for that software to be implemented is for the hardware to be adaptable to the software changes that got pushed down. How do you know? Now let's assume you're an automotive OEM? How do you know the response or the reaction of that software update to the function of that system, the cost. And this is where we come in, where you look at tire electronic system of a car, we can model every chip. We can test every chip. So as the software is adaptable and changing, the automotive OEM will get a feel and validation to every change they make without having to change, of course, the chips and the actual silicon that is in the car. So that's really where we come in, is that's what we're referring to electronics digital twin, where we have the ability to model every aspect of the electronics, the chips and the car. So those automotive OEMs can do exactly what you described.

That's excellent. Thanks so much.

Thank you.

Our next question comes from the line of Joe with Baird. Joe, the floor is yours.

Great. Thanks for taking my questions. I wanted to go back to IP performance. Sassine, in your prepared remarks, you mentioned how AI is starting to lift growth around some of the core EDA software lines. I'm wondering if you can maybe do that but for IP and how AI development that customers are maybe starting to lift growth in your IP portfolio. And then related to that, I would imagine these are a lot of advanced IP applications. Is this starting to show up? And what could maybe be favorable price mix, I think it's interesting, if you look at margins over the last four quarters now is actually higher than the Design Automation segment. So there seems to be something going on there that's quite impressive.

Yes. So maybe first, a comment because we did not get to that point where we are in overnight. We have built that business 25-years ago. Actually, if I'm not mistaken, this month, is our 25th year anniversary for that business with a scale that is truly serving our customers in an amazing way. And the reason I'm emphasizing on scale, the number of these standards that are required in order to keep up with the complexity of a chip, let's say, when you're talking about an AI chip, the bandwidth requirement to connect the chip to the memory to the networking part of it to the compute aspect of it is changing at a rapid, rapid pace. For us, that's a great opportunity because what it means any time you're going to the next version of that interface IP is a new opportunity to monetize because it's a new IP with an uplift in our pricing in order for our customer to get access to the latest and the greatest. So that's from our ability to execute and deliver high-quality IP to the customer when the customer needs it. Now the other part of your question, please look at the trailing 12 months. the IP, by its nature, it's pulled down where the customer consumes the IP out of typically what we call an FSA, a committed multiyear agreement that we have with the customer that they pull it down when they pulled the IP down when they need it. So naturally, you're going to see very, very strong quarter from either an operating margin or a revenue with a lumpiness where the next quarter may be significantly lower. But as you measure over trailing 12 months, you will absolutely see it up and to the right consistently.

Okay. That's great. And then second question, just looking at your inventory balances, a pretty nice jump there, which I imagine relates just to your expectations on the hardware business looking forward. Any changes in those expectations here at the start of the year? And then I guess related to this, how do you think about the concept of hardware cycles at this point? In the past, there was an all-new platform generation and then upgrading along the way. So you would kind of get ebbs and flows, but we're now several years into a strong hardware environment. How do you see that progressing going forward?

Sure. So let me start, and then I'll hop on Sassine in, we did grow inventory about 17% quarter-on-quarter, and that's to align with -- we had a record hardware last year, we're anticipating another record hardware, hardware year and so we're building to ensure that we have proper supply to support our customers. And the reason that it's so important in our customer design is they're designing more and more complex chips, this allows them to help infuse into their design environment, the ability to model the software before they actually have the chips, so they can find issues and improve their essentially time to market. So it's an incredibly valuable capability for our customers. We want to make sure that we have sufficient hardware available to be able to support this next record year. And I would say the capability that we're delivering to our customers through hardware is something they value greatly was why we've been able to have record year after record year. In terms of the cycles, maybe, Sassine, do you want to comment on that?

Yes, sure. Joe, if you go back eight, 10 years ago, selling hardware to customers. The customers view viewed it at the time as an option. They could have gotten the job done without it, but they used it because it accelerated their efforts. You fast forward to now, there is no way a chip can go to tape-out, meaning to manufacturing without having many, many cycles of emulation and prototyping to make sure that you cover as much as possible in terms of verifying the chip before you committed to manufacturing. So it's no longer a ebbs and flows of demands around hardware. There's a constant need by our customers to expand their investment and support the latest and greatest systems in order to take advantage of ensuring that the silicon they get back from manufacturing is going to be functioning and working.

Great, thank you very much.

Thank you, Joe.

Thanks, Joe.

Our next question comes from the line of Harlan with JPMorgan. Harlan, the floor is yours.

Hi, good afternoon. Great start to the fiscal year. On the AI front, much of the focus has been on demand, data center, right, data center GPU, networking, custom ASICs focus there continue strong, but now we're seeing sort of this broadening of AI moving into edges and endpoints, right? So allow many of your semiconductor customers focused on smartphones, automotive, PCs, home assistance appliances like they're all humbling to add AI capabilities to their future trip road maps? I think it's resulting in more complex ship designs, more demand for high-performance IP, more systems-level analysis. Like is the team already seeing this in terms of any activity momentum, IP licensing engagements, maybe more potential opportunities for Ansys. I mean any color here would be helpful.

Thank you, Harlan, for the question. Actually, that's exactly what we refer to as pervasive intelligence. Exactly what we -- when we talk about, we're entering and we are in the era of pervasive intelligence, it's more and more devices are interconnected and smart devices. So that exactly means the reference you made AI on the edge, et cetera, which requires more sophisticated silicon and a broader silicon proliferation of those advanced chips. And for our industry, for us, when you think about EDA and IP, that's a fantastic opportunity. And this is where when we make commentary that despite the ebbs and flows of the semiconductor market, the cyclical market, we don't see it because the design starts is tied to those R&D investments that customers are expanding for all these different applications. So absolutely, we're seeing it. We're engaged with those customers and when we start describing our company as silicon to systems in that era of pervasive intelligence is exactly the opportunity that we're talking about here.

Great insights there. And then on Ansys, looks like your -- looks like your customers' feedback has been, quite positive. We cover 20-something-odd semiconductor companies, and we've asked them about this, and they also seem to be positively inclined on the deal as well. And maybe you can tell me, as a further endorsement on the strategy, I mean, you did see, I think it was last week, right, Renesas, which is a major semiconductor company. They announced that they're going to acquire Altium, a PCB design and analysis company for $6 billion, right? Looks like the systems opportunity is so important that they decided to bring the design and analysis capability directly in-house. But maybe more importantly, I just wanted to know like what you're hearing from accesses large customers about the potential combination?

So the customer feedback has been truly overwhelmingly positive around 2 points they make. One, the challenges they're dealing with, they're looking for a deeper collaboration in order to solve the problems they're running into today. And as importantly, they're going to face into the future. So from a -- anticipated solution the way the customers are looking at current product and future products, they are looking forward to this combination. Now the second feedback that is consistent is what where you were touching on, which is the system level perspective which is, if you look at the various market verticals, you can argue each one of them is going to go through an inflection point at various points in time. If you fast forward seven, eight, 10-years from now and you pick an industry, let's say, industrial health, et cetera. They will go through that inflection point of transfer and digitizing their applications in order to be connected in order to be smarter devices in their application, et cetera. And this, again, where Ansys has a very strong presence. Because Synopsys for -- since its existence, we serve the chip design customer base. And of course, we extended into our system companies where today, about 45% of our business is with system companies, but those are system companies around hyperscalers and mobile primarily, many, many opportunities to expand with other system companies. And that's where Ansys will bring in more than just the silicon aspect that is needed for 3DIC, but that whole silicon to system modernization for the rest of the market verticals.

Great thanks, Sassine.

Thanks, Harlan.

Your next question comes from the line of Joshua of Wolfe Research. Joshua, the floor is yours.

Hey guys, can you hear me?

Yes.

Great. Actually, I really want to follow up on that last question about the customer feedback on the Ansys acquisition. Is the positive feedback that you're hearing from customers that currently don't leverage the benefits of the existing Ansys analysis partnership? Or are these existing customers of both Synopsys and Ansys?

They're both Synopsys and Ansys customers. Actually, I want to go back to give you the journey of the customer feedback. In 2017, when we announced the partnership, there was a lot of customer excitement, because the way we structured the platform is an open platform, meaning you can use the Ansys sign-off product that can plug

Makes total sense. I guess my follow-up to that then is just are you seeing any signs from your existing Synopsys customers of excitement around customers who didn't leverage this partnership previously and now because of these integrations to come are like reaching out to you asking about the potential, the opportunities? And basically, is there any early signs that you're going to see incremental synopsis plus Ansys users and payers because of this partnership or this acquisition that will quite first point out.

Yes. So Josh, what today, any advanced chip. And when I'm talking about advanced chip, I'm talking about 5-nanometer and below, AI, chip, et cetera, is already using Synopsys and Ansys. I cannot think of customers that are designing most advanced chip with the complexity I described that they are not leveraging Synopsys Fusion platform and Ansys. So they're already there. But given the complexity is going to be further increasing that deeper integration and addressing the challenges beyond the electronics is going to provide the opportunity where one plus one is more than two. That's from the core current chip semiconductor business perspective. Now the other part of your question, are there Ansys customers that today, they're not a synopsis customer? The answer is yes. There are many, many Ansys customers that we don't see them, by the way, becoming a Synopsys customer in the next one or two years, but there are going to be many other, that they will be a Synopsys customer regardless if they are designing a chip or not. I'll give you an example. If you are an industrial OEM and today, you are an Ansys customer because you're using Ansys to design the mechanical aspect, et cetera, of your product. And you want to move to the next level of product delivery where you have more chip content in order to support connected robot, let's say, and a connected and smarter device. Even if you're not developing the chip, you're going to need an ability to model that chip to verify that chip back to the example of automotive and over-the-air software updates. Those industries are going to move in that direction. And this is where Ansys has a very broad presence that presence, that market knowledge, that brand that they have will absolutely expand the Synopsys market in the future, where it's an Ansys customer, but not a Synopsys customer.

So just to be clear, the opportunity is more about making Ansys customers that aren't Synopsys customers, Ansys plus Synopsys customers and less about making Synopsys, Synopsys for a customer.

It's both. And there are Synopsys customers that today, they're using part of the Ansys portfolio and more you integrate the Ansys portfolio into a current Synopsys platform, you're going to expand it. For example, the fluid dynamics inside the chip or a mechanical stress challenge that you need to deeper integrate into a Synopsys platform that will expand the one plus one will be greater than two.

Yes. And Josh, what we shared in the announced that by year four, we'll have a run rate of $400 million in synergies. It was cross-sell both ways is a big part of that. And then as Sassine's talking about that multi-die that is further monetization inside an existing customer because that's a more integrated solution than they're currently able to for either one of us individually.

Thanks, Josh. I just want to thank everybody for coming on the call today. And again, I remind you that we're less than a month from our investor meeting, and we look forward to seeing a bunch of you here in the Bay Area or if you can, at least join our webcast. So we look forward to talking with you then. So thanks for coming to the call, and we'll talk to you soon.

Yes. Thank you, everyone.

Thank you.