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Synopsis, Inc. (NASDAQ:SNPS)
Q4 2017 Earnings Conference Call
Nov. 29th, 2017, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter of Fiscal Year 2017. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. If you should require assistance during today's call, please press * followed by 0. 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 Ewbank -- Vice President of Investor Relations

Thank you, Reta. 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 conference call, Synopsys will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results and performance are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release.

The company will also, refer to the planned acquisition of Black Duck Software. Please note that the acquisition is not yet closed and is subject to closing conditions and regulatory review.

Finally, 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 8-K, earnings press release, and financial supplement that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on the site at the conclusion of the call.

With that, I'll turn the call over to Aart de Geus.

Aart de Geus -- Chairman and Co-Chief Executive Officer

Good afternoon. I'm happy to report another excellent quarter and, with it, another outstanding year for Synopsys. In Fiscal 2017, we delivered revenue of $2.725 billion, an increase of 12.5% non-GAAP earnings per share of $3.42, 13% growth, we generated $635 million in operating cash flow, our three-year backlog grew by approximately $150 million to $3.7 billion, and we bought back $400 million of our stock.

These results extended our multi-year track record of strong growth with three-year CAGRs of 10% for both revenue and non-GAAP earnings. Accentuated by upside from hardware and IP, our business became stronger and stronger as we moved through the year, resulting in good revenue growth across all product groups and all geographies. The Fiscal '17 double digit non-GAAP EPS growth was achieved through both revenue growth and increasing operating margin, even with acquisition-related dilution.

Simultaneously, we further scaled our Software Integrity solutions with good organic growth, the Cigital acquisition in Q1, and the planned Black Duck transaction announced earlier this month. Trac will discuss the financials in more detail.

As we assess the business we've built over the past 30+ years and look forward to the next 5 to 10 years, we're enthusiastic about our prospects. The market opportunity is vast and increasing, as we enter the age of "Smart Everything." Synopsys is well aligned to benefit from the emerging market dynamics.

And, lastly, our financial position and priorities amply support our aspirations. Let me expand on these three elements of our value proposition. First, the age of Smart Everything, or Digital Intelligence, is here. Following the decades driven by Computation and then Mobility, Digital Intelligence is the third major wave of an electronics impact. Week by week, we can see its reach growing, be it through the internet of things, automotive, virtual reality, medical devices, or industrial.

The need to manipulate massive amounts of data, apply AI through machine learning, while guaranteeing security, is unstoppable. All of this is made possible by an insatiable hunger for next generation advanced chips and complex software developed by our customers.

Secondly, Synopsys is uniquely positioned at the very intersection of silicon hardware and software. Our design and verification tools are essential for the next generation of advanced chips and systems. Our growing, silicon-proven IP offering reduces risk and speeds time-to-market. In addition, our Software Integrity portfolio prevents code flaws from becoming security disasters.

And third, we have maintained strong financial solidity while broadening our company TAM precisely for the opportunity at hand. Our recurring revenue model lets us consistently invest in advanced product development and support. We've managed our strong balance sheet and cash flow to enable both consistent stock buy-backs and TAM-broadening acquisitions, and we're driving shareholder value through long-term, high single-digit, non-GAAP earnings growth.

Elaborating on our market and technical position, let me provide some highlights, beginning with EDA. With continued silicon and architectural sophistication, the success of next-generation chips is paramount in bringing about big data and machine-learning opportunities. Synopsys EDA continues to enable astounding levels of complexity, resulting in strong demand for state-of-the-art solutions across our product lines. Even with strong competition and continued customer consolidation, we've fared well, with growth outpacing the others over the past several years.

We continue to strongly invest in our market-leading digital design platform. Our solution has been instrumental in enabling many firsts -- the first-ever 10 nanometer production design, the first 7 nanometer tapeout, and now significant activity on early 5 nanometer designs. The largest-ever FinFET design was implemented with the Synopsys platform, as was the largest networking processor in the world. Our digital platform is consistently trusted on the most advanced projects, and is relied on for more than 95% of all FinFET designs.

Our success is particularly evident in applications such as mobile, automotive, CPUs, graphics, and AI-specific processors. And while we're seeing share gains with customers across industries ranging from networking to storage to sensors, automotive has been particularly strong with 9 of the top 10 automotive IC suppliers enabled through the Synopsys platform. Notably, at a leading automotive IC supplier, we're growing and displacing the competition.

Meanwhile, the move to smaller geometries continues. New manufacturing approaches, new materials, and new innovative transistor structures require our 3D TCAD expertise to develop them.

In Q4, we announced the acquisition of QuantumWise, whose amazing atomic-level simulation tools enhance our ability to model the most advanced next-generation devices. In custom and analog mixed-signal design, our Custom Compiler and Circuit Simulation not only demonstrated excellent technical results, but saw good revenue growth during the year. Customers such as MediaTek, Renesas, Panasonic, ST and TDK/Micronas have reported very successful deployments and tapeouts using our Custom Compiler solution, which is targeted specifically at FinFET designs.

Now to verification, which continues to be an area of strength and growth for Synopsys. We realized a number of years ago that, as chips and systems became more and more complex, verification would increasingly be required at the intersection of hardware and software. Over the last years, while collaborating with market leading customers, we developed a comprehensive verification platform that excels at exactly that. In Fiscal 2017, our investments have resulted in another outstanding year of growth and share gains.

One example is Samsung SARC, which chose our Verification Continuum -- including simulation, formal, emulation, debug and verification IP -- as the primary solution for their advanced mobile processor designs. Strong customer adoption of our hardware verification products drove another record year as well.

Among high-profile customers presenting at the Design Automation Conference in June, AMD highlighted its use of our ZeBu emulation for early software development and bring-up. For software, emulation speed is critical, and ZeBu is the fastest solution in the market. In Q4, we saw another example of the huge potential for our emulation. A mobile giant, faced with verification challenges inherent in software-rich mobile platforms, adopted ZeBu, citing its performance superiority.

Turning to semiconductor IP, we had another excellent year of double-digit growth. Over the past 15 plus years, we've built the broadest portfolio of IP titles and subsystems, and have become a trusted partner and market leader. Our foundry relationships and active drive in standards groups ensure that customers can buy leading-edge products in key technology processes at the earliest stages.

 During 2017, we further expanded our portfolio, with continued focus on automotive, IoT, and security. We expanded our IoT offering with our new ARC Secure IP subsystem for endpoint security, and our IoT Development Kit to accelerate software development for sensor fusion, voice recognition, and face detection designs. We announced a collaboration with Morpho, a leader in digital security and identity solutions, to accelerate deep learning processing for embedded vision applications.

In Q4, we acquired Sidense, adding one-time programmable non-volatile memory IP, which is used in automotive and IoT, among other markets. Our IP group has been a beneficiary of customer consolidation, providing outsourcing options to companies who want to target their limited engineering resources more toward differentiating their projects.

Let me next move to our Software Integrity Group, which provides products and services to build security and quality into the software development lifecycle and across the entire cyber supply chain. Customers for these solutions span semiconductor and systems companies, who are embedding considerable software content into their chips and devices, all the way to developers of software in industries such as financial services, medical, automotive, and high-impact industrial.

Over the past three-and-a-half years, we've become a clear leader in this emerging, high-growth industry. Since our initial entry with the acquisition of Coverity, we've invested both organically and through key acquisitions to develop a product platform and services to better serve companies deal with daunting "software security problems."

As we gain scale and credibility, our brand recognition continues to strengthen. Gartner ranks Synopsys now as a Leader in its Magic Quadrant for Application Security Testing. During the year, we made good progress integrating the Cigital and Codiscope acquisitions, and are now seeing a positive impact on demand. Earlier this month, we announced the acquisition of Black Duck Software, the leader in testing open source software for known security vulnerabilities and license compliance.

With open source making up 60% or more of all applications, this capability is critical to deliver a robust platform. Initial customer reaction has been great, as they recognize the benefits of combining Black Duck's highly respected capabilities with the broader Synopsys offering. The acquisition is scheduled to close shortly, subject to regulatory review and customary closing conditions. Our vision and investments are resonating well with customers, and we're excited about the long-term potential of this product group.

Lastly, I've mentioned a number of vertical markets this afternoon. One key vertical that is going through momentous change, and is directly impacted by our end-to-end solutions, is automotive. Let me provide some highlights resulting from our multi-year automotive strategy. Because safety is So, critical, the automotive industry requires certification of products up and down their value chain.

We've significantly expanded our portfolio of products certified for standards such as ISO, 26262, including our functional safety test solution, which was certified in Q4. During this year, we've massively expanded our industry-leading automotive grade IP offering, including a broad portfolio of Interface blocks that meet stringent automotive temperature requirements for the 16-nanometer FinFET process.

In Q4, we extended a multi-year Automotive Center of Excellence collaboration with NXP, enabling early software development for next-generation electronic systems. We're also, well-recognized in the industry, serving as a leader on the Society of Automotive Engineers' Cyber Security Task Force, focused on driving new standards for software security.

In summary, for Synopsys, Fiscal 2017 was an excellent year, positioning us well going forward. We achieved outstanding financial results, with revenue strength across the board. Our EDA and IP products are delivering top-notch results for customers building chips to bring about the Digital Intelligence, "Smart Everything" age, and we're making significant progress in scaling our software security platform and market leadership position. Let me now turn the call over to Trac.

Trac Pham -- Chief Financial Officer

Thanks, Aart. Good afternoon everyone. To echo what Aart said, our strong finish in Q4 capped an outstanding 2017. This year's success reflects our commitment to deliver solid financial results in the near-term, while simultaneously creating sustainable growth and profitability over the long-term.

Over the last three years, we have continued to expand our leadership in EDA and IP, while also, broadening our portfolio with our Software Integrity solutions. We are executing very well on our strategy, which is reflected not only in the broad-based strength of our financial results, but also, in the expansion of our Software Integrity business group with the announced planned acquisition of Black Duck. Based on our recent performance, the strength of our portfolio, and the backlog coverage heading into Fiscal '18, we are optimistic about our ability to drive sustainable success in the coming years.

As I discuss the financial highlights, all comparisons will be year-over-year unless I specify otherwise. We delivered total revenue of $697 million in Q4 and $2.725 billion for the year, an annual growth rate of 12.5%. Business was strong across all product groups, particularly hardware and IP. In addition to another record year for hardware, our Q4 results included approximately $30 million in revenue from a large hardware shipment that was planned for 2018, but shifted into Q4.

Our three-year backlog grew approximately $150 million to $3.7 billion, reflecting very good business growth and the timing of large contract renewals. We again have a large proportion of 2018 revenue, approximately 75% already in hand, providing stability and predictability not often seen in enterprise software companies.

Total GAAP costs and expenses were $605 million for the quarter and $2.4 billion for the year. Total non-GAAP costs and expenses were $566 million for the quarter and $2.1 billion for the year. 2017 expenses increased due primarily to higher costs associated with acquisitions, employee compensation, and cost of goods sold for hardware sales. Non-GAAP operating margin increased to 23.8% for the year, even with the modest dilution from our Cigital and Codiscope acquisitions.

We posted GAAP earnings for the year of $0.88 per share, including a loss of $0.80 in the quarter, reflecting the one-time impact of our repatriation of offshore cash, which I'll talk more about in a moment.

Non-GAAP earnings per share were $0.69 for the quarter and $3.42 for the year, an annual growth rate of 13%. As I mentioned earlier, Q4 had the benefit of a hardware-related shift, which was the primary driver of the $0.11 overachievement versus expectations. Even excluding this upside, we delivered annual EPS growth of 10%, exceeding our original target.

We generated $185 million of operating cash flow in the quarter, and $635 million for the year. We significantly exceeded our original 2017 target due to strong collections and business levels throughout the year, as well as $30 million received from A Top Tech for litigation damages.

During the quarter, we initiated the repatriation of $825 million of offshore cash, taking advantage of our R&D tax credits and resulting in a cash tax rate of approximately 6%. This resulted in a GAAP-only tax expense of $166 million in Q4, and will drive a one-time cash tax payment of approximately $40 million in early 2018.

Also, affecting 2018 operating cash flow is a $65 million one-time payment to the Hungarian tax authority, in connection with an ongoing tax dispute. While we expect to prevail, we were required to make this payment as a condition for continuing our appeal. We ended the year with cash and cash equivalents of $1 billion, with 53% onshore, and total debt of $144 million.

In 2017, we used about 70% of our free cash flow for stock buybacks. We repurchased $400 million this year, and over the past three years have repurchased close to $1.1 billion of our stock. We have $400 million remaining on our current authorization. Our current plan for 2018 is to use buybacks to keep share count roughly flat.

Before providing 2018 guidance, let me briefly comment on the Black Duck acquisition, which is subject to regulatory approval and closing conditions, but we expect will close in December. When closed, we will pay approximately $548 million net of cash. Due to a purchase-accounting deferred revenue haircut of about $25 to $30 million, Black Duck is expected to contribute roughly $55 to $60 million in revenue in 2018. We expect it to be approximately $0.12 dilutive to 2018 non-GAAP EPS, reach breakeven on a non-GAAP basis by the second half of 2019, and be accretive thereafter.

Now to guidance: due primarily to an extra week in Fiscal Q1 and the profile of expenses, we expect first half revenue and earnings to be greater than the second half. Q1 targets are: revenue between $740 and $765 million -- which includes approximately $40 million from the extra week -- total GAAP costs and expenses between $625 and $641 million, total non-GAAP costs and expenses between $560 and $570 million, other income & expense between minus $1 and $1 million, a non-GAAP normalized tax rate of 19%, outstanding shares between 153 and 156 million, GAAP earnings of $0.62 to $0.70 per share, and non-GAAP earnings of $0.98 to $1.02 per share, including approximately $0.05 from the extra week.

For 2018: total revenue of $2.88 to $2.91 billion, a growth rate of 6 to 7% -- excluding Black Duck, the total revenue target range is $2.82 to $2.855 billion -- other income & expense between minus $6 and minus $2 million, a non-GAAP normalized tax rate of 19%, outstanding shares between 153 and 156 million, GAAP earnings of $2.24 to $2.38 per share, or $2.68 to $2.80 excluding Black Duck, non-GAAP earnings of $3.46 to $3.53 per share, or $3.58 to $3.65 excluding Black Duck, capital expenditures of approximately $110 million, and cash flow from operations of $500 to $550 million. As I mentioned earlier, this reflects one-time cash payments totaling approximately $105 million.

In summary, we are executing very well on our goal to drive long-term shareholder value. We reported outstanding results across-the-board in 2017 while delivering a high level of predictability with $3.7 billion of backlog and scaling our Software Integrity products with the acquisition of Black Duck.

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

Lisa Ewbank -- Vice President of Investor Relations

Reta, are you there?

Operator

Yes, ma'am, I am.

Lisa Ewbank -- Vice President of Investor Relations

We're ready for Q&A.

Questions and Answers:

Operator

So, if you would like to ask a question, I do have... I'm sorry, Gary Mobley, your line is open. Please go ahead, sir.

Gary Mobley -- The Benchmark Company -- Senior Research Analyst

Hi, can you hear me OK?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Yes, thank you.

Gary Mobley -- The Benchmark Company -- Senior Research Analyst

Thanks for taking my question. Congrats on a strong finish to the year. Trac, can you confirm whether or not the Software Integrity Group finished Fiscal Year 2017 and they're about $170 million and, with the contribution from Black Duck as you outlined in your guidance, can you give us a sense of where Software Integrity will be for Fiscal Year '18? And is there any quantifiable impact to ASC 606 implied in your Q1 and Fiscal Year '18 guide?

Trac Pham -- Chief Financial Officer

Well, let me start with your first question on SIG. The numbers that you just describe for SIG is pretty consistent with what we had guided at the beginning of the year and, yes, we did achieve the goals that we outlined at the start of the year. Second part is we're not calling out the numbers for Software Integrity, specifically, for next year, but it is consistent with about 20% growth on an ongoing basis. And Black Duck, separately from that, as we mentioned, is in the range of $55 to $60 million in revenues for 2018. With regards to 606, we will be implementing 606 starting in Fiscal '19 So, that is not factored into the '18 guidance.

Gary Mobley -- The Benchmark Company -- Senior Research Analyst

Got you. Okay. And, Aart, this is somewhat topical, just given that we've seen that -- or we had -- the risk of the gathering, CIMEO gathering, this past week and So, I'm curious to get your perspective on the impact of this OpenRISC-V processor IP as it relates to your business and then, as well, does it drive away the, say for example, Compiler EDA sales? For you looking forward, is it a significant impact on that front, as well?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, RISC-V is in its beginnings, but it is also, one processor among many being built right now but this is investing cap, being more general-purpose processor, and may be of high interest to some parties. But many people are focusing right now on the development of AI-specific processors and so, from our perspective as an EDA and IP provider, it's a little bit like, "the more the merrier" because we can support many people doing designs.

And we expect many processes to be optimized, specifically, for the applications because the hunger for more speed will be So, high that just going to smaller geometries will not be sufficient and, therefore, people will say, "Hey, if I can build processors that are narrower and just aimed at some application, I can make them faster." And we're seeing, really, a plethora of companies investing in that.

Gary Mobley -- The Benchmark Company -- Senior Research Analyst

Thank you, guys -- appreciate it.

Aart de Geus -- Chairman and Co-Chief Executive Officer

You're welcome.

Operator

Next on the line, we have Rich Valera, Needham and Company. Please go ahead, sir.

Richard Valera -- Needham & Company -- Financial Analyst

Thank you. Aart, you mentioned in your prepared remarks that the business got stronger as the year went on -- sounds like maybe each quarter got stronger. I'm wondering how much of that you would attribute to just general macro strength -- just global economy improving -- versus some underlying secular trends going on that are affecting the EDA industry, whether it's new areas you mentioned, all of the smart areas...? But do you think there's some things going on that are actually expanding the TAM of the traditional EDA market that are helping the business grow or do you mainly attribute it to just better macro?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, I think the answer is yes, yes, yes, because there's no question that the overall global economy has done well, mostly, because all regions are reasonably solid and So, having those in unison tends to help things. Secondly, there's no question that semi-conductors have had a very, very strong year and, in all fairness, this is after a few years of not being particular strong, and So, these things tend to go up and down, but up feels better than down -- no question about that.

And then, lastly -- and I think that that is actually the factor that will matter most in the long-term -- is that this move into this next wave of electronics, enabling the very notion that was poo-pooed in the '90s of artificial intelligence, and now it comes other a set of other names -- big data, machine-learning, digital intelligence, I like to call it Smart Everything -- that will drive a very broad consumption of semi-conductors because the amounts of data generated by IOTs and various forms of sensors are growing by leaps and bounds, and just think of any camera being billions of pixels being generated.

Secondly, this data needs to be manipulated to machine-learning, which is extremely computer-intense and then machine-learning in terms gets interpreted in the utilization, let's say, inside of a car, for example. And then, on top of that, you need to add one more aspect, which is security. And security, there's a very, very big component of that in the software part of our business, but it also will impact hardware as a variety of security modules will get added. So, I think that that semi-conductor is really at the heart of enabling a whole new wave of impact and, therefore, would stay reasonably healthy just on that basis only.

Richard Valera -- Needham & Company -- Financial Analyst

Great. Thank you for that. And a couple questions on Black Duck: can you say roughly what that was growing and if you think you can, perhaps, accelerate that growth rate? And, also, Trac, I'm not sure if you're willing to share how much revenue you expect to lose from the deferred revenue purchase accounting? Thanks.

Aart de Geus -- Chairman and Co-Chief Executive Officer

Oh, Trac can comment on some of the financials. Normally, we don't give out specific growth rates on the acquisitions. And, frankly, our first job is to always make sure that the company really lands well and that we can look at what are the upsides with them with Synopsys or for Synopsys with them -- that goes in both directions.

Having said that, though, I think what is exciting about Black Duck is that they really have grown up and have impact to the whole aspect of software referred to as open source. And one of the biggest productivity increasers -- and this is true on chips with IT, I think it is true on software by virtue of reuse of software in open source software -- it is, of course, the fact that you can use software from many sources and assemble it quickly.

There are quite a number of lurking dangers in that and there's a large catalog of known volatilities. And, when people integrate this open source code material and they don't pay attention to at least the vulnerabilities that are already known, I think that's grossly delinquent when thinking about building secure software and So, it is just a natural for us, as an extension of our focus on quality and security of software.

Trac Pham -- Chief Financial Officer

Rich, the guidance for revenue for Black Duck is about $55 to $60 million for 2018 and then the deferred haircut is about $25 to $30 million. As for, Aart described the market, SIG, Software Integrity, we're expecting to grow in the 20% range and Black Duck has been doing very well. And then the market demand for the trends in that space would drive growth sub-lowly in that range.

Richard Valera -- Needham & Company -- Financial Analyst

Got it. That's helpful. Thank you, gentlemen.

Operator

Next on the line, we have Farhan Ahmad, Credit Suisse. Please go ahead.

Farhan Ahmad -- Credit Suisse -- Vice President, Equity Research

Hey, thanks for taking my question. My first question is on autos. You talked about the growing opportunity in autos and, particularly, as it relates to ISO, 26262 and your role in IP there, So, could you just talk about how much exposure that you have to the auto market and what is your portion in both EDA and IP?

Aart de Geus -- Chairman and Co-Chief Executive Officer

It's actually a quite difficult question because, yeah, we touch many, many companies that are in the automotive space and we, ourselves, find it a bit challenging to know exactly what is in the automotive part and what is in the regular semi-conductor deliveries.

Having said that, though, the reason I like to highlight automotive is because it is such a poster child for what big changes are happening in an industry that, traditionally, was very slow in the adoption of any super advanced technology and, certainly, semi-conductor technology. I highlighted, specifically, the fact that we had invested substantially in automotive -- certified IP in FinFet 16 -- because, three years ago, nobody in their right mind would have ever associated the words "FinFET" and "automotive" and, today, all of the big providers in the value chain are focusing on that because they need more computation inside of the car.

And so, the investments that we've made are not only to provide the tools that are suited for designing and modeling what goes into a car, but, as you mentioned, that also, fulfill the existing standards that, initially, were all built up, really, for safety and only now are gradually being evolved toward security. And those are words that we can certainly deal with very well So, I think we're well-equipped to be a good provider in that value chain.

Farhan Ahmad -- Credit Suisse -- Vice President, Equity Research

Got it. And then the second question is on the Software Integrity side. Once you integrate Black Duck, the total Software Integrity part of the business will be larger than 10%. Do you think, at some point, you will start giving disclosures separately for the Software Integrity Business?

Trac Pham -- Chief Financial Officer

Farhan, that's a very good question. That's something we will actively consider as we progress throughout the year. Our focus in the near-term, clearly, is to integrate that business and make sure that we can drive the growth that we've got planned for the year but, as we progress, we will look very closely at the amount of disclosure we want to provide, balancing between providing information, avoiding competitive issues, as well as, on the flip side, making sure that investors get enough insight into the business to evaluate the opportunities.

Farhan Ahmad -- Credit Suisse -- Vice President, Equity Research

Got it. And just one last question on the market share: you are growing significantly higher than some of your industry peers this year. Some of the strength, obviously, throughout the year, you've talked about hardware has been a big portion of the growth but, when you look at your quarter product portfolio and the Core EDA manufacturing, what are some of the areas that you're getting market share of in this year?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, I'm always careful answering questions like that because, often, the claims get out of hand quickly. We have extremely competent competitors like Cadence and Mentor, obviously, out there the largest ones. In some areas, Cadence has been growing a bit stronger in digital design, we have been growing faster in verification -- things ebb and flow and go back and forth. But, in aggregate, as an industry, we're quite competitive because we have constantly developed technology that's at the leading edge. And so, I think I have nothing negative to say about any of the other companies. We are all striving to be good providers in a market that, right now, is doing very well and we've had the benefits of making a number of investments over the years that are paying off particularly well right now.

Farhan Ahmad -- Credit Suisse -- Vice President, Equity Research

Thank you. That's all I have.

Operator

And, next on the line, we have Sterling Auty with JP Morgan. Go ahead, sir.

Sterling Auty -- JPMorgan -- Managing Director

Hey, thank you. Hey, guys, this is Jackson from the Adiron for Sterling tonight. One question from our side: looks like the time-based licenses had a pretty significant spike up and you mentioned, Trac, the $30 million in revenue from a hardware shipment that was pulled forward in the quarter -- does that explain...? I don't think that that would necessarily explain all the shifts in time-based licenses, So, we're just trying to triangulate the two.

Trac Pham -- Chief Financial Officer

Well, Jackson, actually, it doesn't drive -- the hardware would not drive -- the time-based products. And keep in mind that we do look at that over time and it could vary from quarter-to-quarter, depending on the nature of the contracts -- royalties can also, fall into that, as well. So, there's really no issues within the quarter and that's not related to hardware at all.

Sterling Auty -- JPMorgan -- Managing Director

Okay. So, what was it, then, that drove the sequential increase?

Trac Pham -- Chief Financial Officer

Overall, the business was very strong. You look at the growth across -- the geographies are crisscrossed -- different products across the number of top customers. We have very solid growth So, there's any number of things that can drive it. We did end the year with very strong run-rate growth So, the business is very healthy.

Sterling Auty -- JPMorgan -- Managing Director

Okay. And then one quick follow-up: the expected 2018 revenue that is expected to come from the backlog, dip down to 75%, is that mostly because of Black Duck or is there something else we should be reading into?

Trac Pham -- Chief Financial Officer

No, it's really a function of hardware. As hardware gets to be a larger part of our business, it changes that mix a little bit. Excluding hardware, we're running generally in the same percentage as we have, historically, So, there's been no change to the business model with that regard.

Sterling Auty -- JPMorgan -- Managing Director

Okay. Alright. Thank you.

Operator

And, next on the line, we have Jay Vleeschhouwer, Griffin Securities. Your line is open.

Jay Vleeschhouwer -- Griffin Securities -- Managing Director

Thank you. Good evening. Aart, in the perspective of strengthening of the business over the course of the year, would you say that was correlate, more or less, in real-time to the positive inflection that we've been seeing for the last three or four quarters in semi-conductor R&D spending? That's your principal source of revenue and it's clearly been trending higher for the industry over the last number of quarters and, perhaps, that's what you saw over the course of the year in real-time in terms of unscheduled business, or for software or IT or, as you pointed out, accelerated hardware or might there still be a lagging effect from semi R&D that we'll begin to see more in 2018?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, a little bit... Everything that you said is true, meaning that there's no question that, when your customers do really well, they are a little less hesitant in spending money and semi-conductors have been doing extremely well and are expected, right now, to continue for a bit.

At the same time, our solution in the verification space -- overall verification platform, which includes the emulation and the FPGA prototyping boards -- has done very, very well. And this is not completely a surprise, but somewhat difficult to predict in timing because it follows what we had said, which is the center of gravity between hardware and software is going to increase in importance as more complex software people want to run the software before they have the hardware and, therefore, they model the hardware and that's the basis that we're in.

The third aspect I would mention is that our IT business has been very strong and that is definitely partially the result of continual investment in the most advanced nodes, which is difficult IP to do and, as you probably know, the advanced nodes keep rolling out at a rapid pace because the providers are very competitive with each other.

And, last but not least, the Software Integrity platform, So, far, I think is living up to our hope and expectations to be a good pillar for the company that is, on one hand, completely adjacent to what we already do -- both in terms of technology, and complexity, and, in many cases, in embedded situations -- on the other hand is clearly a fresh stamp for us as we're talking to customers that, in the past, we would never have dreamed of interacting with. Jokingly, I sometimes say, "We now have customers from Samsung to Starbucks," and the fact is it's actually true. And So, that is a very big opportunity space.

Jay Vleeschhouwer -- Griffin Securities -- Managing Director

When you think about the Black Duck acquisition, can you talk about how you're thinking about integrating it in terms of technology with the other parts of the same portfolio and/or, perhaps, your thoughts on integrating the Software Integrity portfolio, in any case, with, let's say, your hardware-based prototyping to expand your overall concept of system verification and So, forth?

Aart de Geus -- Chairman and Co-Chief Executive Officer

This makes for a very long discussion because we are now very, very rich in technologies in this domain. And this is a domain that has been extremely fractured in the past and we're already starting to get, I would say, very strong positive feedback from a number of CIOs or people that are responsible for the security of software that being able to interact with a company that has a longevity and some mass gives them better feeling of security that we're going to be around.

That's just another way of saying there's a lot of work ahead and we are continually integrating capabilities, but it is after we really understand them well. And So, an integration is really a two or three-year process at many different levels. Having said that, Black Duck resonates very well with many of our customers and they understand immediately that doing some automatic checks on software that comes in from, right off, not always understood sources is a good defense mechanism that they need. And So, I think that we will be well equipped with them to drive this area forward.

Jay Vleeschhouwer -- Griffin Securities -- Managing Director

Alright. Fair. Last one, for Trac, with respect to the $30 million accelerated hardware revenue into Q4, could you comment on the relative contribution from either Zebu or Halves in that? Was it more one than the other? And then, similarly, it looks like you also, had some quite good upside in the IT business -- was that more from services than IT product?

Trac Pham -- Chief Financial Officer

Okay. So, let's start with the first one which is easy. We won't give more detail on the hardware. We'll leave it at hardware for now. But for the year, we actually did very well on both Halves and Emulations so, as I said, it was very broadly... this is broadly strong.

As for IT, it was a combination of services and products.

Jay Vleeschhouwer -- Griffin Securities -- Managing Director

Great. Thank you.

Operator

Next on the line, we have Monika Garg with KeyBanc, Pacific Crest. Please go ahead.

Monika Garg -- KeyBanc Pacific Crest -- Equity Research Analyst

Hi. Thanks for taking my question. My first question is, if I take out the $40 million revenue, extra week, and $55 million from Black Duck, it seems you are guiding to organic growth -- without those two companies, you're about 3% to 4% -- in spite of the fact that you just talked 20% growth in your software security business. So, why such a low growth if I take out these extra two stuff from 2018 guidance?

Trac Pham -- Chief Financial Officer

Well, actually, if you actually did the full numberization, taking into account that we had $30 million that was planned for 2018 that shifted to Q4, you do the math that you just did on Black Duck and we've got mid single-digit growth on revenues and we're actually growing earnings per share on a high single-digit basis. So, I think, as we continue to describe, we're really running this business over a multi-year period and, in this particular quarter, you're getting a very high sense of that because, in one month, you're seeing a very significant shift in revenues. And So, it's best to look at our business on a multi-year basis and, if you go back and look at the charts for revenue growth and earnings growth, we've done a pretty good job executing against that.

Monika Garg -- KeyBanc Pacific Crest -- Equity Research Analyst

Alright. So, if I look at the MLD on the software securities side last week or what you have done, you've spent almost $1.2 billion. Could you walk through how you look at the ROI from these investments? What are the free metrics you're looking to generate over the next three to four years? Thank you.

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, for starters, we always start to look at this via a multi-year perspective because, acquisitions like that, they take some time to integrate, they have haircuts, they have a number of complexities on the financial side that need to be understood on the longer-term perspective. We have, actually, a longer-term well-honed process of trying to understand the value of the acquisition based on the cash flow that comes out of it over many years. We don't disclose the exact metrics, but we have a fairly good discipline for that.

We review this for many years after the acquisition with our board, always with some up and some down surprises, which is another way of saying it's always difficult exactly to predict, but, in aggregate, it has been part of how we continue to create value for the company. And, in that context, Black Duck is not an exception.

Our own sense is that this is a particularly valuable acquisition because of the strategic position it fills, technically, in the portfolio, but also, because of the very acute value it can create by reducing the risk profile for customers. So, that is the process that we follow. Nothing is perfect and I'm sure we can always do better, but we do have a long-term experience that has worked out pretty well for us.

Monika Garg -- KeyBanc Pacific Crest -- Equity Research Analyst

Alright. Just last one on the software security side again, most of the customers of software security are still are still in financial industry software so, maybe, talk more about your seal strategy, especially given the Black Duck acquisitions -- would you need ramp seal them up something more or would you look to develop channel for this segment?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, that's an excellent question because there's So, many opportunities. And your commentary is partially correct in that, when we did the Cigital acquisition, Cigital was particularly focused on the financial sector. At the same time, my mentioning earlier of the automotive sector was interesting because those people are just as interested in the issues of security and software as anything else.

There are other areas that are also, highly paranoid about what can happen -- medical is a good example and you've seen some really horrific hacks happening there -- and So, I think, over time, no area, no vertical is immune to the damages that can be done, essentially leaving the software doors wide open for hackers. And so, this is going to become more and more a must-do everywhere but, clearly, the sectors that are most sensitive are also, the ones that have been most attacked. And the financial sector, it quickly goes to the bottom line because the attack means trying to steal money and that brings a very rapid reaction.

So, we are prudent in investing in verticals because each vertical requires skills, it requires understanding the vocabularies, it requires understanding who to interact with, but I think our opportunity space will continue to grow. And, with this part of our company broadening, we will put some more effort into understanding what are the best channels to do that but, So, far, I think we've been executing reasonably well.

Monika Garg -- KeyBanc Pacific Crest -- Equity Research Analyst

Thank you So, much.

Operator

Ladies and gentlemen, once again, if you do wish to ask a question, it's * then 1 on your touchtone phone. If you hear a tone indicating you're in queue, if you want to remove yourself, just hit the # key again. Once again, * then 1. And here comes our next question from the line of Mitch Steves, RBC Capital Markets.

Mitch Steves -- RBC Capital Markets -- Wall Street Analyst

Sorry I had two for Aart and I have one for Trac. So, I'll start with Aart: from a higher perspective, I believe the Black Duck have talk publicly about $5.6 billion TAM and then you guys have talked about a $2.4 or so billion TAM with your original acquisition. So, maybe you could give us a broad update of that? And then, secondly, is this the last transaction you need to get all the full capabilities in the Software Integrity business?

Aart de Geus -- Chairman and Co-Chief Executive Officer

Well, let me go backwards. We continue, of course, to always look at opportunities. At the same time, it's also, important to make sure that we execute well on the integrations of the acquisitions that we've done So, far and, while we have a number of teams that are extremely skilled at this, every case is different and So, they take some time. And what is also, interesting is that, as we bring new members to our team, they bring fresh perspective -- I like to call it "fresh DNA" -- that allows us to sharpen how we think about the field.

 To be honest, on your TAM question, I read the same reports that most people do and I'm equally skeptical if the number reflects any reality because, when you have a very rapidly developing market where there are many, many different very fractured companies, that typically indicates that there's a high need and that the need is still not satisfied or still in development. And those are actually all positive words because that's just coming opportunity, but it also, says that adding up whatever these companies have been able to do and then extrapolating is mostly a spreadsheet effort.

And I don't want to be negative when people are trying to forecast it -- because it's important, of course -- but, from our perspective, right now, the size of the TAM is the least of our issues. I think we have open space to run with and our challenge is how quickly can we execute on this, not are there more customers to call on. There are many more.

Mitch Steves -- RBC Capital Markets -- Wall Street Analyst

Got it. And, particularly, for Trac, a financial question: So, the small one is the Coverity and digital piece combined for Trac and that combined business, excluding Black Duck, being profitable on the back half? And then, secondly, is there any sort of way to track the health of the business, besides the quarterly update calls we get from you guys?

Trac Pham -- Chief Financial Officer

So, yes, the numbers that we had discussed for the Software Integrity business was tracking to both revenue and profitability for this year. And then, as far as getting more updates on the Software Integrity business and progress there, I think we'll start with the quarterly calls -- that's a good start -- and then, throughout this year, as I said earlier, we'll evaluate how best to provide more insights to the analysts as well as to our investors on that business.

Mitch Steves -- RBC Capital Markets -- Wall Street Analyst

Got it. Thank you. Great quarter.

Operator

There are no additional questions in queue. Please go ahead.

Aart de Geus -- Chairman and Co-Chief Executive Officer

So, at this point in time, first a big thank you for having reported on us and supporting us during the year. Fiscal '17 turned out to be a very good year, not only from a results point of view but, most importantly, from the perspective of preparing us for the next few years. And, by now, it already feels a little old and So, we are fully proceeding on working on 2018 and hope to talk to you soon. As usual, we'll be available for individual calls in a few minutes. Thank you very much.

Operator

Ladies and gentlemen, that does conclude our conference for today. We do thank you for your participation and for using AT&T. You may --

Duration: 53 minutes

Call participants:

Lisa Ewbank -- Vice President of Investor Relations

Aart de Geus -- Chairman and Co-Chief Executive Officer

Trac Pham -- Chief Financial Officer

Gary Mobley -- The Benchmark Company -- Senior Research Analyst

Richard Valera -- Needham & Company -- Financial Analyst

Farhan Ahmad -- Credit Suisse -- Vice President, Equity Research

Sterling Auty -- JPMorgan -- Managing Director

Jay Vleeschhouwer -- Griffin Securities -- Managing Director

Monika Garg -- KeyBanc Pacific Crest -- Equity Research Analyst

Mitch Steves -- RBC Capital Markets -- Wall Street Analyst

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