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Synopsys, inc (SNPS) Q4 2021 Earnings Call Transcript | The Motley Fool

Synopsys, inc (NASDAQ:SNPS)
Q4 2021 Earnings Call
Dec 1, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Synopsys Earnings Conference Call for Fourth Quarter of Fiscal Year 2021. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] Today’s call will last one hour. Five minutes prior to the end of the call, we will announce the amount of time remaining in the conference. As a reminder, today’s call is being recorded.

At this time, I would like to turn the conference over to Lisa Ewbank, Vice President of Investor Relations. Please go ahead.

Lisa EwbankVice President, Investor Relations

Thank you, Carey. Good afternoon, everyone. With us today are Aart de Geus, Chairman and Co-CEO of Synopsys and Trac Pham, Chief Financial Officer.

Before we begin, I’d like to remind everyone that during the course of this 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 the site at the conclusion of the call.

And with that, I’ll turn the call over to Aart de Geus.

Aart de GeusChairman and Co-Chief Executive Officer

Good afternoon. I’m happy to report that Synopsys delivered another record year, substantially exceeding our original goals. We grew revenue 14% to $4.2 billion, with double-digit growth in all product groups and geographies. We substantially expanded our non-GAAP operating margin, with more than 20% earnings growth, and generated record cash flow of $1.49 billion. In addition, disruptive innovation and collaborations accelerated our momentum, as a number of large customers significantly expanded their commitments with Synopsys, as visible in an outstanding orders year.

As a result, we enter fiscal 2022 with momentum. Looking forward, we are raising our long-term financial objectives to strong double-digit revenue growth, anchored in a step-up in EDA and IP targets, ongoing non-GAAP operating margin expansion, and non-GAAP earnings-per-share growth in the mid-teens range, all of which driving very strong cash flow. Trac will discuss the financials in more detail.

Underlying our elevated outlook is not only a vigorous market but, just as importantly, a long-term growing demand for Smart Everything in every vertical segment. The inherent technical challenges powering this new era are well aligned with Synopsys’ strengths. Specifically, the Smart Everything era brings together massive amounts of data with the new wonders of machine learning software. Combined with a metaverse outlook of human-machine interaction, the role of chip-centric electronic systems has enormous potential. This requires highly complex semiconductor chips with massive compute capability; evolving semiconductors from system on a chip to tightly integrated systems of chips and increased need for security and safety across software and hardware that is across the entire system.

From an economic perspective, new entrants are already designing their own specialized chips. Traditional vertical market leaders are taking on a more active role in influencing chip and system architecture and design. At all levels, investments and urgency are increasing. To deliver on this promise, our customers are transforming the way they approach design. Whether it’s processor or mobile teams combining multiple compute, storage and connectivity chips together in 3DIC structures or hyperscalers investing in their own chip architectures to increase their cloud differentiation, or automotive OEMs dictating specific safety protocols, or financial services companies inserting security testing into their development processes, all are driven by the urgency of the economic opportunity and the need for strong partners to master the complexity of the tasks. Synopsys connects with all of these and is uniquely equipped to help catalyze this new era.

The center of gravity of the technical challenges is the intersection of hardware and software. A chip is only as good as its interaction with the software and vice versa. In other words, the system. This system focus has been at the core of Synopsys innovation for many years and is now fueling mounting customer and business momentum.

Nowhere is systemic complexity more visible than in our IP business. The sophistication of our IP blocks requires reaching deep down into the understanding of the advanced Silicon nodes and also high up to the system architecture and software. IP is thus a bellwether of systems leadership as new architectures are increasingly jump-started by selecting the most important IP building blocks and their configuration. Benefiting from this, we achieved another record year in IP, with revenue surpassing $1 billion and growing approximately 20%. This momentum is maintained for two reasons; first, continued strong demand to outsource IP, as customers meet their most skilled resources to focus on the differentiating aspect of their chips. Second, an increasing number of new entrants in segments such as automotive, high-performance compute and AI, accelerate their schedule by, whenever possible, selecting complex IP building blocks that are commercially available from a company they trust.

As the number one provider of interface, foundation and physical IP, Synopsys is in a unique position to provide complete solutions across multiple key segments. For example, we have the broadest IP portfolio for the fast-growing high-performance compute and data center market, including PCI Express, HBM3, 400/800G Ethernet, and many memory interfaces. We also see continued strength in automotive, fueled by the electrification of cars, the push to autonomous driving, and the explicit demand for higher safety, security and reliability. Our IP has been selected by approximately 50 automotive companies, with nearly 500 IP wins to-date. In addition, Synopsys has always driven the leading edge, providing IP and, of course EDA, on the most advanced process nodes. With the mobile and compute companies, we are deeply engaged at 3 nanometer and had over 250 design wins at 5 nanometer this year.

Let me talk a bit about system verification. Under our Synopsys logo, our tag line states Silicon to Software. Our unique strength is to sit at the intersection of validating hardware and software or simply put, verifying that the chips and system do what was intended. Building on our market-leading VCS chip simulation solution, we were at the forefront of delivering software and hardware-based prototyping more than a decade ago. Since then, our offering has rapidly gained technical and market leadership. 2021 was a record hardware year, with strength in both emulation and prototyping. Our solutions sit at the sweet spot of hardware-software co-verification and our emulators are the fastest machines with the highest

Capacity and lowest cost of ownership. This year, we increased our differentiation. We introduced application-specific emulation products, ZeBu Empower and ZeBu EP1, that are significantly faster and higher-capacity than any competitive solution in the market. Meanwhile, our new HAPS-100 prototyping system now delivers 2 times faster performance and 4 times better debug, driving accelerated growth. During the year, we achieved multiple competitive wins and significantly broadened our customer base, as we added more than 50 new logos and 200 repeat orders.

Obviously, at the center of enabling the Smart Everything era sits the promise of AI, which begs the question, what about applying AI to chip design? Today, machine learning enables significant capabilities and runtime advances in all of our key products. About two years ago, we delivered a

Fundamental disruptive technology at a very different magnitude, using AI to automate not just tools but entire design flows. The outcome is remarkable.

Our award-winning DSO.ai solution is getting great results on production designs with a rapidly growing number of customer-partners. DSO.ai, which stands for design space optimization using AI, does exactly what the name says. It explores many, many design options, learns from them using design and tool data, and finds design configurations that a human is unlikely to ever find. Moreover, since design variables such as performance, power, size, yield, reliability [Indecipherable] all trade-off against each other, DSO.ai can optimize well beyond what a design team can easily fathom.

Through this year, results got better and better. Run by our customers on real production designs, DSO.ai has reduced design times from months to weeks, with superior performance and power results. One notable example is Samsung, which relied on DSO.ai for multiple complex projects, the most recent being an advanced production design for a new mobile product. Applied at every stage of design implementation, DSO.ai delivered performance well beyond their speed target and substantially reduced power consumption, all while saving weeks of manual effort.

Central to DSO.ai’s results are the powerful engines underneath it, our Fusion Design Platform. The platform is centered around our Fusion Compiler product, the only solution today to seamlessly integrate market-leading synthesis and place and route, cross-checked and optimized by timing, power and physical signoff, all in a single tool. Fusion Compiler’s full flow proliferation and competitive wins increased through the year, including major expansions and competitive displacements. Revenue more than doubled this year. Seminal to our sustainable differentiation is native integration of our golden signoff products. As recognized by multiple awards from our foundry partners, our deep collaborations ensure that our mutual customers have well-honed and trusted design flows at the most advanced technologies.

In addition to a continued push for smaller geometries, the Smart Everything hunger for much more compute, storage and data management is so high, that the economics of physically abutting and stacking multiple chips or chiplets is driving a push toward so-called 3DIC design. This brings about many challenges, including architecting how to partition into multiple chiplets, making the connections between the chiplets blindingly fast, and predicting and dissipating the heat of so much computation. Synopsys is at the forefront of this emerging wave. In 2020, we introduced 3DIC Compiler, which offers a modern, differentiated approach to this complex design challenge. Our solution is being deployed in production and

Cutting-edge 3DIC designs in the industry.

Another new area showing great promise is our Silicon Lifecycle Management platform, which monitors, analyzes, and optimizes chips throughout their lifespan. The adoption of key sensor IP accelerated during the year, with 25 new logos, and we recently added AI-powered real-time system optimization for in-field applications with the acquisition of Concertio.

With the increase in systemic complexity to deliver Smart Everything, security and safety is a rapidly growing theme from chips to application software. About seven years ago, we invested in Software Integrity, to provide security and quality testing for the massive amounts of software in today’s world. Synopsys has since built the broadest portfolio of products and consulting services in the market. This year we were recognized for the fifth year in a row as a leader in the Gartner Magic Quadrant for application security testing. Benefiting from the operational enhancements we’ve made, our Software Integrity business achieved 10% growth for the full year, with particularly strong orders flow, exceeding our original expectations. We expect to return to our 15-20% revenue growth objective in 2022.

During the year, our focus has been to scale our go-to-market strategy and execution. We launched a new partner program this year, adding dozens of channel partners and systems integrators. They are already expanding our reach into customer groups and geographies that we hadn’t reached in the past. We successfully refined our sales structure and tuned our market priorities. One proof point is the substantial growth of multi-year, multi-million-dollar agreements. This notably includes our largest-ever Software Integrity order with a US hyperscaler, as well as significant renewals in the networking, airline and enterprise software segments.

We also made considerable progress with our Polaris Software Integrity Platform. We delivered Intelligent Orchestration, which automates security testing within a company’s specific protocols. This makes it easier and more efficient to integrate directly into their development pipeline. We enhanced our Black Duck software composition analysis solution, which positions us very well for software supply chain risk cases. Finally, the addition of risk management products that automate and accelerate discovery and remediation of software vulnerabilities through Code Dx rounds out our solution well beyond what competitors provide.

In summary, we delivered excellent results in 2021, substantially greater than our original plan, with strength in all product groups and all geographies. We are entering 2022 with strong technical and market momentum. We are seeing significantly expanded customer commitments and collaborations, as our wave of innovations will be crucial to help capitalize the era of Smart Everything. And as a result, we are raising our long-term financial objectives.

Let me say thank you to our entire Synopsys staff for another great year. I’m looking forward to an exciting journey into our next phase of growth.

Finally, I’m sure you all saw our other news earlier today that our CFO, Trac Pham has decided to retire in fiscal 2022. Trac has been a wonderful partner and excellent leader, and while we understand and support his desire to prioritize time with his family, we will miss him. He will of course remain a good friend to the company and to all of us personally. Trac will stay with Synopsys until a successor is in place to ensure a seamless transition. Trac, to you and your family, we wish the very best.

And with that, I’ll turn it over to Trac.

Trac PhamChief Financial Officer

Thanks, Aart. Good afternoon everyone. While I’m looking forward to retirement, I will certainly miss the Synopsys team and also the relationships I have developed over the years with investors and analysts. Synopsys is in a great position, so this is a good time for me to step away from a long, fulfilling career to prioritize time with my family. I’m confident in the leadership team, and that I’ll manage the transition well. I’ll be here for a while still, and I look forward to talking to many of you.

Turning to our results, FY21 was an excellent year and featured record results in all key metrics, including revenue, non-GAAP earnings, and operating cash flow. Looking to FY22 and beyond, we are seeing a step-up in revenue growth, due to the following; first, strong execution and compelling new innovations; second, expanding customer commitments and third, a new market era and opportunity that Aart referred to earlier. Additionally, because of the essential nature of our customers’ R&D priorities and our business model, which results in nearly 90% recurring revenue and significant non-cancellable backlog, we are in the position to have a high level of stability as well. Ending backlog for Q4 was $6.9 billion. These dynamics give us the confidence to raise our long-term financial objectives, which I’ll describe in greater detail momentarily.

First, some highlights of our full-year 2021 results. We generated total revenue of $4.2 billion, up 14% from the prior year, with double-digit growth across all products and geographies. Total GAAP costs and expenses were $3.5 billion, and total non-GAAP costs and expenses were $2.9 billion, resulting in a non-GAAP operating margin of 30.5%. GAAP earnings per share were $4.81, and non-GAAP earnings per share were $6.84, up 23% over the prior year.

Semiconductor & System Design segment revenue was $3.8 billion, driven by broad-based strength across all product groups and geographies. Software Integrity segment revenue was $394 million, up 10% over the prior year, and exceeded our original plan. We expect to return to our 15% to 20% growth objective in 2022. In addition, following the investments and operational adjustments we made this past year, we expect to expand adjusted operating margin in 2022.

Turning to cash. Operating cash flow for the year was a record $1.49 billion, reflecting our strong results and robust collections. We ended the year with cash and short-term investments of $1.58 billion and total debt of $100 million. During the year, we completed buybacks of $788 million or 56% of free cash flow.

Now to our targets. Based on our current assessment of the timing of hardware and IP deliveries, we expect Q1 to be our highest revenue quarter, then roughly evenly split for the balance of the year. We expect an expense profile similar to that of revenue for Q2 through Q4. For fiscal year 2022, the full year targets are revenue of $4.725 billion to $4.775 billion; total GAAP costs and expenses between $3.778 billion and $3.835 billion; total non-GAAP costs and expenses between $3.225 billion and $3.255 billion, resulting in non-GAAP operating margin improvement of more than 100 basis points; non-GAAP tax rate of 18%; GAAP earnings of $5.39 per share to $5.65 per share; non-GAAP earnings of $7.73 per share to $7.80 per share, representing mid-teens growth despite a higher tax rate; cash flow from operations of $1.4 billion to $1.5 billion.

I’d like to offer some additional thoughts regarding the long-term tax rate assumption. Based on preliminary modeling, we believe our non-GAAP tax rate of 18% is potentially sustainable beyond 2022. However, given the uncertain outcome of tax reform, it is premature for us to confirm a longer-term tax rate at this time.

Now to the targets for the first quarter; revenue between $1.25 billion and $1.28 billion; total GAAP costs and expenses between $934 million and $964 million; total non-GAAP costs and expenses between $802 million and $812 million; GAAP earnings of $1.75 per share to $1.92 per share and

Non-GAAP earnings of $2.35 per share to $2.40 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations.

Finally, we are raising our long-term financial objectives, all of which are on a multi-year basis, with the expectation that particular years will vary depending on the timing of deliverables and other commitments. Our goal is to deliver annual double-digit revenue growth and non-GAAP EPS growth in the mid-teens range, reflecting our continued focus on non-GAAP operating margin expansion of more than 100 basis points per year. In terms of product groups, our objective is to grow EDA revenue in the double digits, IP in the mid-teens, and Software Integrity between 15% to 20%.

In summary, our record results this year are a testament to our strong execution, to our focus on investing for long-term scalability and shareholder value and to our commitment and ability to innovate to meet growing customer needs. This combination is driving a step-up to a new level of growth for us, and our raised long-term financial objectives reflect confidence in our ability to succeed.

With that, I’ll turn it over to the operator for questions.

Questions and Answers:

Operator

All right. Thank you. [Operator Instructions] And our first question comes from Gal Munda. Please go ahead.

Gal MundaBerenberg Capital Markets — Analyst

Hello. Hi, and thank you for taking my questions. The first one is just for you Aart. When you look at the new long-term guidance that you’ve materially kind of upgrading, I was wondering if you can help us understand in comparison to the previous guidance that you had out there, what is making you confident to make those changes in terms of the long-term trends that you were talking about between the demands of the leading edge customers versus kind of the systems and maybe specifically on a trends that you’re talking about the electrification and hyperscalers demand, and which one stand out for you as the biggest changes and what you expected previously? Thank you.

Lisa EwbankVice President, Investor Relations

Aart, unmute.

Aart de GeusChairman and Co-Chief Executive Officer

Amazing. I’m still learning. Sorry about that. Thank you. The question is very broad. And let me start from the inside to the outside. On the inside, we have a high degree of confidence because many of the investments that we’ve put in place over a number of years are really coming together well because the vision of where our field was heading toward is actually moving along. So this notion of transforming the world toward smart capabilities in every vertical market requires a whole set of technologies that we’ve been investing in. And so be it in the area of design implementation, including the AI capabilities, be it in the verification validation of entire systems, including the intersection of hardware and software, but also in the deep investments and advanced technologies in the overarching investments in quality of software and security, all of these trends are really manifesting themselves very actively. And we see it manifests itself in many collaborations and increased commitments of customers to us has also witnessed in a strong backlog. And so right there that gives us a sense for the coming year.

From the outside, it is very clearly visible that the semiconductor industry itself is doing well, not only because visible through some shortages that maybe painful, but illustrate how important semiconductors are. But because so many companies, including the ones you mentioned, hyperscalers, automotive companies, industrial companies are all starting to invest and be it either architecture that contemplate the semiconductors or semiconductor development themselves. And so it is time where the alignment between our capabilities and the need of the market are very active.

Trac PhamChief Financial Officer

Gal, can I also add to that. Operationally, in over the last few years, as we’ve increased operating margins by over 800 basis points, we have also been very active in investing in the business across all areas. And what you’re seeing this year and certainly the overachievement really is a reflection of the momentum that we’re seeing in the business, and that’s what’s giving us a lot of confidence operationally. And while we’re raising our long-term growth objectives, we are simultaneously committing to driving margin expansion as well. So we really do believe there is going to be significant opportunities to create value over the long-term.

Gal MundaBerenberg Capital Markets — Analyst

Awesome. And maybe just carrying on from that comment on the margin. If I kind of look at margins for the last few years, you are being very, very close to 50% incremental margins going forward to kind of more toward the low-40%s implied. Does that imply potentially a bit of conservatism or is it just continued reinvestment in the business in order to achieve that growth that you are basically now guiding for?

Trac PhamChief Financial Officer

Yeah. I would characterize it more as not providing a cap on margins. We do see opportunities for us to expand margins over-time. And with this long-term financial model, we’re giving you the more clarity and specific details about how we’re going to deliver mid-teens earnings growth over time. There’s no change in terms of how we’re approaching margins, we will continue to drive it very actively.

Operator

Thank you. And now to Ashley McEvoy from Wells Fargo. Please go ahead.

Ashley McEvoyWells Fargo — Analyst

Hi, this is Ashley McEvoy on for Gary Mobley. In terms of that $6.9 billion of ending backlog for Q4 metric that you guys called out, is there anything else you — any additional color you can give as far as the average license duration or any other color on that backlog metric in terms of mix?

Trac PhamChief Financial Officer

Sure. The $6.9 billion, I would characterize it as two-fold. One, is really strong business momentum and very good growth in annual run rates for the business that we renewed this year. In addition, we also saw several large customers expand their commitments to us and it’s just really a reflection of their confidence in our product and the technology that we’re delivering. So I think very good confidence in terms of establishing the growth rates for the next several years.

Ashley McEvoyWells Fargo — Analyst

Thank you.

Trac PhamChief Financial Officer

You’re welcome.

Operator

Thank you. And now to Joe Vruwink from Baird. Please go ahead.

Joe VruwinkRobert W. Baird & Co. — Analyst

Great. Hi, everyone. Maybe I’ll just pick-up on the last point with these renewals that are obviously seeing quite a bit of upsizing on renewal. What are customers typically engaging you on as they engage with you on the direction they want to take in product development? What are the key themes? And I guess, how are they investing specifically in your product portfolio?

Aart de GeusChairman and Co-Chief Executive Officer

Well, it’s actually a quite broad because as an earlier question related to the people that in the past were not necessarily big customers, such as hyperscalers and automotive. These are people that fundamentally think down from the system, meaning they have big objectives to run big complex software, and now they need more compute, more capacity, better throughput and all that. And all of that spells the same thing, which is advanced chips or combination of chips. And so they intersect with us mostly in two areas. One is how can you predict how fast the system will run by actually running software on emulators or prototypes.

And secondly, how can you actually make the actual chips then even faster by really implementing the latest state-of-the-art technology and optimizing your architecture for just the tasks that they want to do. And this is where the use of AI to the design flow becomes particularly interesting because very often people start with chips that they already have and then they move to a new technology node and simultaneously, they say, let me optimize for a specific set of staff. And that optimization can largely be automated with our tools. And so you see an acceleration everywhere and acceleration has always been the name of the game in our field. And I would say those are sort of the two biggest drivers of our business.

Joe VruwinkRobert W. Baird & Co. — Analyst

And then since you brought up the verification hardware, I appreciate kind of the timing dynamic within guidance here in 1Q. I would imagine this investment cycle for the new generation of hardware that’s not going to be a one quarter phenomenon. The fact that kind of the guidance as it stands today just implies similar revenue 2Q through 4Q. What sort of delivery assumptions? Is there any maybe a bit of hedging on perhaps the ability to procure what you need to actually deliver the finished equipment and could that potentially be a driver of upside as we get into the back half of the year?

Aart de GeusChairman and Co-Chief Executive Officer

I’ll let Trac answer the financial side of your question. I think in general, our business is fairly regular, the exception of that being lumpiness in hardware as you highlighted, but also sometimes in IP. And so these things come in clumps and whereas right now, we’re not looking at any major delivery issues. We are obviously very sensitive to all the supply chains and we continue to check those as well. And so you can call it caution at this point in time where we’re planning on the basis of the numbers that we already have in hand.

Trac, do you want to add to that?

Trac PhamChief Financial Officer

Certainly. Hey, Joe. Two things I will add. One is we had visibility to the profile of hardware and IP, and just given the timing of deliveries. And this is just really the first time for us to give you specific guidance on that. And it just happens to be — we’ve been seeing the momentum for IP and hardware build up as well as the rest of the business build up and Q1 reflects the time of when they’re actually pulling down the IP and when they want their hardware deliveries.

To your broader question, I would just say that the results in 2021 and the outlook that we have for 2022 really reflects a strong momentum in both hardware and IP. We had record revenues for hardware in 2021. And keep in mind that is compared to a year in 2020, where it was pretty significantly backend loaded. And so for us to grow on top of that is pretty significant. And then IP, as Aart mentioned earlier, it’s a $1 billion business growing at 20%. So it’s really showing really good momentum.

Operator

All right. Thank you. And now to Jackson Ader from JPMorgan. Please go ahead.

Jackson AderJPMorgan — Analyst

Great. Thanks for taking my questions, guys. And Trac, I don’t know if anybody has offered congratulations yet from my side. So yeah, congratulations on your retirement. You’ll be missed, but at least you’re sticking around for a little while.

Trac PhamChief Financial Officer

Thanks, Jackson.

Jackson AderJPMorgan — Analyst

I am actually going to do my best Jay Vleeschhouwer impersonation here with a multi-part question. So on the double-digit growth in EDA, I’m just curious what EDA market growth is assumed in that double-digit and are you planning on taking share? And second, what particular facets of the core EDA, whether you want to break it out of front-end versus back-end or fusion or hardware, software, however you want to break it out, like what facets of core EDA do you expect to maybe outgrow others? Thanks.

Aart de GeusChairman and Co-Chief Executive Officer

Okay. Well let’s start with the overall question. It’s hard to predict how well others will do, and in many ways, we do well when the entire industry does well. But we do have so many position where many of our technologies are extremely competitive at this point in time. And it is a point in time where a number of customers are looking to line-up with suppliers that they trust over a longer haul because they clearly see that the advances that are happening right now and coming demand a lot of technology and a lot of support.

Now you mentioned fusion, and I’m glad you did because as you well know, this is an area that we have invested in for many, many years with the concept being that instead of running succession of independent tools, having multiple tools essentially collaborate if I can use that term to get to a better result with the essence of fusion, and fusion is working very well. And as we mentioned in the preamble, growing very well. But it’s doubly meaningful because fusion is also a key ingredient in now layering on top of that, this notion of artificially driving autonomous design flows. And the fact that we can access many, many different technologies inside a fusion to have an AI algorithm learn and get better results has been just astoundingly exciting to see. And in many ways to me feels like literally the early days of Synopsys, where at that time, synthesis was almost like a miracle. Well, it was not a miracle, it was a lot of hard work, but it was capabilities the computer had that exceeded what a human can do. And we see exactly the same here. So I expect that this will be an area that brings many of the things that we have together to drive things forward.

Now not to repeat too much what I said earlier. The other half of that equation is what are the chips for. And the chips are fundamentally for executing task given by a system that runs software. And so the desire to make that software run faster is unstoppable. Well, one way to do that is to say, well, what if we designed the system, the hardware system just for certain types of software. And that is what is everybody is doing right now. They’re essentially creating new architectures for specific applications that then can run blindingly fast. And so the intersection between the application and the hardware is therefore a place where one need to be able to predict how good the results will be. And that is what all these effort have been in the prototyping, the emulation and so on.

Now, the third area I want to mention, and I understand it’s slightly adjacent to EDA. Although I would look at it as EDA surrounded is IP. And one of the great accelerators in the history of design has been to have more and more accomplished IP blocks that have enormous functionality in the most advanced silicon technologies, which are difficult to build. And so the combination of those things is what gives us a sense that for the coming years, we’re in a very strong position. And by the way, we are applying that same AI that I mentioned before also to IP block. So there’s an integration of the whole solutions space.

Operator

Thank you. And now to the line of Jason Celino of KeyBanc. Please go ahead.

Jason CelinoKeyBanc Capital Markets, Inc. — Analyst

Great. Thanks for taking my questions. And Trac, looking forward to working with you for maybe a couple more quarters. So my first question, this is more a clarification because double-digits can mean a lot of things. But just calculating it out here, if EDA is growing at least double-digits IP in the mid-teens, and at least mid-teens SIG growth this implies really low double-digit kind of growth framework. Is that a fair assessment?

Trac PhamChief Financial Officer

It depends on how you’re looking at IP, Jason. Just keep in mind that in our supplement, the IP systems line includes other businesses as well.

Jason CelinoKeyBanc Capital Markets, Inc. — Analyst

Okay.

Trac PhamChief Financial Officer

But overall, I think the segments you’re spot on with regards to segment growth.

Jason CelinoKeyBanc Capital Markets, Inc. — Analyst

Okay, perfect. And then maybe just a clarification on Joe’s earlier question on Q1. Q1 is typically the lowest revenue quarter on an absolute basis for EDA across a lot of industries and software. As it relates to the hardware deliveries and the IP deliveries concentrated in this quarter, is it these customers pushing out or maybe possibly pulling forward some of their deliveries? Thank you.

Trac PhamChief Financial Officer

Yeah. Certainly, there weren’t really anything unusual about it either from our ability to fulfill or the customer pushing or pulling it in. It’s really just the timing of how things match up. And from a seasonality perspective, we typically don’t see much seasonality. Over the last couple of years, Q4 and the back half has been — the business has been more backend loaded, particularly in Q4. This year other than the unusually strong Q1, the first half, second half profile is pretty even, it’s like a 51-49 split in line with what we’ve seen in the past in terms of the balance. So other than the Q1, which is a reflection of normal standard timing of demand, it’s actually a pretty good profile for the year. I think it’s certainly a better risk profile than we’ve seen in the last couple of years.

Operator

Thank you. And now to Jay Vleeschhouwer from Griffin Securities. Please go ahead.

Jay VleeschhouwerGriffin Securities — Analyst

Thank you. Good evening. Aart, with respect to the end track with respect to the enlarged growth expectations, you referred to a number of the internal investments that you’ve made over the last number of years that have gotten you to this point. The question is how are you thinking incrementally about investment priorities or initiatives, for example, when we look at some of the things you appear to have been investing in, there’s been a substantial increase in your AE investments and supported your customers’ deployment requirements, new SIG software consulting seems to be increasing. And at the purely technical level, you appear to have an increase in substantially in areas like synthesis and custom. So perhaps you could comment on those or any other priorities that you feel that you need to invest incrementally to sustain the growth that you are speaking of or expecting for the next number of years?

Aart de GeusChairman and Co-Chief Executive Officer

Well, excellent question. And your question had some of the answers in it. You mentioned essentially support and consulting, and I would put those together, which is that no matter what’s the business or how do business grow, some of that grows with it. But on top of that, there’s an additional benefit of using our consulting, which is that we bring skills that a number of our customers have a difficulty getting themselves or growing themselves. And if these skills can be used to actually help them reduce their time delay until the chips are done, that is of extremely high value. So that will continue.

You mentioned synthesis and custom, and of course, synthesis was our very first product. So after 34 years, we’re still investing in that because they’re still upside, except that synthesize is now more and more called the super AI, right. That’s the new version of this. Custom is an area that we have invested in for quite a while and actually has done well this year and continues to grow in an excellent fashion, so good area. There is two that you didn’t mention. One is 3DIC, which is the ability to bring together very, very tightly, extremely complex chips and that will grow as the hunger for more transistors will be unavailable.

And lastly, SLM, Silicon Lifecycle Management. This is a new area for us. We have invested in it both organically and through some acquisitions and it’s particularly interesting because the notion of putting inside of chips the sensors that then can essentially diagnose if the chip is still healthy, grows in importance as systems become more complex and as systems go into applications, that could be human endangering such as a autonomous driving car, for example. And so this is an area that’s finding a lot of interest where we are making very rapid advances and with the sensors that we put inside of the chips, we’ve also put some AI inside of the chip and some AI outside so that one can learn from chips over their lifecycle. So this will take a little bit of time until it’s really embedded in broad adoption, but it is extremely powerful capability that we’re very excited about.

Trac PhamChief Financial Officer

Hey Jay, another way that you might look at the investments are, we are doing really well across the board. We’re not looking at areas of the business that is problematic or that requires massive investments. So we’re in a situation over the next few years, we’re able to thoughtfully and very targetedly across the broad portfolio does and you’re going to see continued improvements across all of the business as a result of that.

Operator

All right. Thank you. And now to line of Vivek Arya from the Bank of America Securities. Please go ahead.

Vivek AryaBank of America Securities — Analyst

Thank you for taking my question and congratulations and best wishes to Trac from my side as well. For my first question, you mentioned acceleration of trends, but when you look at the outlook for EDA growth of double-digits, it’s about the same as what you did last year. So my question is why shouldn’t EDA also accelerate? And if that’s going to stay at the 10%, then more incremental growth comes from IP and SIG. Are they more or less predictable segments than your EDA business? So yes, the overall business is accelerating, but is the growth coming from perhaps less predictable segments?

Trac PhamChief Financial Officer

Well, let me start with the numbers and then Aart can provide some color on the context. Vivek, just for a broader view of it, historically, we’ve talked about EDA growth in the high single-digits and that actually was an increase in our model from several years ago when we described it as a medium — mid to high single-digit growth business for us. When we described it as double digits, we really do see it as a multiyear, not just one-year effort, but we do see it as a multiyear opportunity to grow the double-digit. So that’s a pretty substantial and substantive increase for us to describe that growing from high single-digit to double-digit over an extended period of time. And really it reflects the confidence in the portfolio, the various pieces of the portfolio that contributes to EDA growth.

Aart de GeusChairman and Co-Chief Executive Officer

Yeah, I would second that. I think it is a gradual increase of the importance of what we do, but also of the breadth of the capabilities that we offer. And so we do see this as a multiyear opportunity, and I’m certainly on record. Having said many times that the moments that AI starts would have impact in verticals, the hunger from the vertical down for more silicon will be unstoppable. And so from that perspective, we are at the right place at the right time with a lot of the very capabilities that will help our customers differentiate themselves. So our expectations are high. We know that delivering is always hard work. But as Trac said, our overall direction has continued to improve over the last years in terms of the guidance we’re giving you.

Vivek AryaBank of America Securities — Analyst

Got it. And for my follow-up, we have seen ASP expansion, price appreciation in other parts of the semiconductor market. So foundries are raising prices across the board for example. I’m curious, is that a positive or negative or neutral for your business? So first, are you also able to raise prices, right or the other extreme is, if let’s say, your customers are having to pay higher prices for more advanced nodes, does it make them more careful about the adoption of more advanced nodes across their product base? I’m just curious to get your perspective that what does cost inflation of the other parts of the semiconductor ecosystem does to your pricing and growth opportunity, if any?

Aart de GeusChairman and Co-Chief Executive Officer

Sure. Well, for sure, I believe that as the semiconductor industry is doing better and better, we certainly are close to them and that is a positive for us. When you say, well, some of the new technologies become more expensive, that is true, they also deliver a lot more capabilities and because they’re more expensive, you need to be really careful how you design with these and this is exactly where I think our role increases and importance doesn’t decrease. And so while we have multi-year contracts with our customers, that is certainly an opportunity to gradually feather up as we deliver more value to this entire industry that in itself is so seminal in what all the verticals we’ll be able to do over the years to come. So I see it as a positive. I know that some of the point increases in pricing are just have to do with shortages. These will go over way over-time. That’s not what builds value. What builds value is that semiconductors are clearly and visibly, so more important to the future that they were perceived in the path, and that is a good thing.

Operator

All right. Thank you. And now to Pradeep Ramani from UBS. Please go ahead.

Pradeep RamaniUBS — Analyst

Hi, thanks for taking the question and congratulations on the guide. I had two questions. So the first one was on the magnitude of shift or the timing impact, if you would call it on IP and hardware. I mean, how much did it shift from what would’ve been a normalized view of the quarter?

And then as a follow-up, I guess when I look at such a big pop in the backlog, would you — and then superimpose it against your commentary, I mean, it feels like that the year is going to be very strong, but would you characterize the backlog as being potentially higher or lower at the end of 2022? I mean, how should we think about the trajectory of the backlog during the course of the year as well?

Trac PhamChief Financial Officer

Okay. Let me start with your first question. Pradeep, there really was no shift in IP or hardware. And keep in mind that this is the third year that we’re operating under the new 606 rules for revenue. And IP gets recognized as revenue when our customers draw down that IP from our website. The timing of IP and hardware really reflects when they want those shipments and when they want that IP. And that hasn’t shifted from one quarter to another, that just happens to be what it matches up their development schedules. And so there’s really no normalized profile of that. And that’s why we often refer to it as being very lumpy.

With regards to backlog, the $6.9 billion of backlog, we don’t guide on what the projections are going forward. But as we said that quarter-to-quarter, it will vary. In Q4, we saw strong growth in run rate on the deals that we booked and we also saw several large significant renewals. The duration during the quarter was a little bit longer than three years. But overall — our overall model is about three years. The $6.9 billion just reflects a convergence of strong bookings and then several large renewals.

Operator

All right. Thank you. And now to Charles Shi from Needham. Please go ahead.

Charles ShiNeedham & Company — Analyst

Hi. Good afternoon, Aart, and Trac, and Lisa, and thank you for taking my question. I really want to go back to the backlog and the renewable contract duration. I noticed you did take down the number, I mean, the year of average contract length up around your supplement. But you just said that the duration seems to be a little bit longer than three years. Obviously I understand maybe a few large — very large contracts could skew that number. However, I want to ask you, because since you mentioned your customers are expanding commitment with you which partly resulted in the high backlog number. I wonder, is that like a long-term trend that the contract duration is going to be north of three years going forward or this is just maybe a one quarter phenomenon and they will maybe go back to somewhere between two to three years?

Trac PhamChief Financial Officer

Yes. Let me start with — our business continues to be a three-year duration-type business and that hasn’t changed and any given quarter might run a little lower or higher depending on what the specific customer requirements are. But as we’ve seen, if you look at our history, it tends to trend around that three-year range.

With regards to the expanded commitment, it is dollar size, it is the breadth of the products that they are purchasing. And in this case in Q4, some of these deals that linked with the deal, but they are — that’s not typically the norm and we don’t necessarily see our business growing in terms of duration.

Charles ShiNeedham & Company — Analyst

Thank you. So maybe the next question, I want to ask a little bit of longer-term. In terms of EDA and with regard to DSO.ai, what you guys mentioned that DSO.ai can deliver results faster than human beings. I am trying to understand EDA, you guys said it largely tracks the industry R&D spend, but if you say the use of AI can get results faster than human beings, I could imagine maybe you can go ask your customers, hey, my product can really do things faster than human beings, maybe to fix R&D budget, you should allocate more to EDA tools, maybe that will change the trajectory of EDA growth, maybe the higher percentage can go — R&D expense can go into EDA. Is that the right way to think about, I mean, in terms of the impact of a DSO.ai going a little bit longer term? Thank you.

Aart de GeusChairman and Co-Chief Executive Officer

It’s absolutely a good way to think about it because for every major advance, we will make exactly the argument that you make, which is, use our tools, you will be better off. At the same time, many of our customers say, yeah, that’s great because now I’m going to use the engineering time that I save to become even more competitive against my competition and this is a normal phenomenon in our field, which is a constant acceleration of how quick the race is run and these accelerations invariably happen when there are great opportunities. And so we saw that definitely in the early days of computation and the networking, the mobility wave, the race was on for faster chip, lower power chips. And now I think the race is absolutely on for share of computation, share of AI and so on. And so our customers see a very positive future, but they understand perfectly well that their competitors see it too and therefore, the race is on again.

Be it as it may the fact that we have sometimes discontinuous advances, these are great opportunity moments from a competitive point of view for us, for a differentiation point of view for our customers. And so we will absolutely try to do as much as possible what you suggest. And this is one of the reasons why we have a positive confidence also in the coming not just year, but years.

Operator

All right. Thank you. And that does conclude our portion of the Q&A with the time. Would you like to have any closing remarks?

Aart de GeusChairman and Co-Chief Executive Officer

Sure. First, I would like to thank all of you for having supported and interacting with us during this past year. The interaction of course is very COVID limited. But at the same time, we hope that you had all the information that you needed from us and the access. Secondly, we also thank you because this was a very strong year for us and we all know that at a time like this, this is important and our outlook is solid as well. And lastly, I hope for all of you that you remain healthy with your families and your friends. We all know that this story is unfortunately not over yet, and so we’ll do our best to deliver against your expectations. Be well.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Lisa EwbankVice President, Investor Relations

Aart de GeusChairman and Co-Chief Executive Officer

Trac PhamChief Financial Officer

Gal MundaBerenberg Capital Markets — Analyst

Ashley McEvoyWells Fargo — Analyst

Joe VruwinkRobert W. Baird & Co. — Analyst

Jackson AderJPMorgan — Analyst

Jason CelinoKeyBanc Capital Markets, Inc. — Analyst

Jay VleeschhouwerGriffin Securities — Analyst

Vivek AryaBank of America Securities — Analyst

Pradeep RamaniUBS — Analyst

Charles ShiNeedham & Company — Analyst

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