Q4 2024 Synopsys Inc Earnings Call
Ladies and gentlemen, welcome to the Synopsis Earnings Conference call for the fourth quarter and fiscal year 2024. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad.
Speaker Change: To remove yourself from the queue, it is star 1 again. If you should require any technical assistance during the call, please press star 0 and an operator will assist you. Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President, Investor Relations. Please go ahead.
Trey Campbell: Good afternoon, everyone. With us today are Sassine Ghazi, President and CEO of Synopsys, and Sheila Glaser, CFO. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results.
Trey Campbell: 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.
Trey Campbell: 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.
Trey Campbell: In addition, we will refer to certain non-GAAP financial measures during the discussion.
Trey Campbell: Reconciliations to their most directly comparable gap financial measures and supplemental financial information can be found in the earnings press release, financial supplement, and 8K that we released earlier today.
Speaker Change: All of these items, plus the most recent investor presentation, are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I'll turn the call over to Sassine.
Speaker Change: Good afternoon. We delivered a strong finish to the year, exceeding the midpoint of our Q4 guidance targets.
which caps another record revenue year for Synopsys.
Speaker Change: A big thank you to our customers, partners, and the entire Synopsys team.
Speaker Change: In FY24, we grew revenue 15% year-over-year and crossed the $6 billion mark.
only three years after crossing the four billion mark.
Speaker Change: This is a big achievement considering it took us 35 years to achieve $4 billion.
Speaker Change: We've also expanded the bottom line, with EPS growing at a 24% CAGR over the last five years.
FY24 was also a transformational year for the company.
Speaker Change: We sharpened our focus on growth segments with the successful sale of our software integrity business, and we doubled down on our silicon-to-system strategy with the pending acquisition of ANSYS.
Speaker Change: Let me take a few minutes to share some business highlights, and then Sheila will discuss the financials in more detail.
Speaker Change: Technology is at a strategic inflection point that presents unprecedented opportunity for synopsis.
from Silicon to Systems.
We are operating in an era of pervasive intelligence.
Speaker Change: which fuels our momentum and is underpinned by multiple secular growth drivers.
The Megatrend of AI
silicon proliferation, and software-defined systems.
Speaker Change: Unlike the broader semiconductor market, which can be cyclical in nature, synopsis success is tied to technology innovation cycles.
Speaker Change: The AI-driven reinvention of compute is accelerating the pace, scale, and systemic complexity of technology R&D, which in turn expands our opportunity.
Speaker Change: AI and HPC chip design starts continue at a relentless pace.
Speaker Change: while end demand in industries like industrial, auto, and consumer electronics are recovering more slowly.
Speaker Change: However, all industries are investing for their AI future, and Synopsys will be a strategic partner in helping them realize their ambitions.
Speaker Change: Our planned acquisition of ANSYS will further our growth into new adjacent areas.
Speaker Change: Together, we can deliver on the engineering need for the new AI-powered design solutions that fuse electronics and physics, giving R&D teams unprecedented insights into products under development.
Speaker Change: The regulatory review process is proceeding as expected. I'm pleased to announce that this week, the HSR waiting period has expired, and we are working cooperatively with the FTC staff to conclude the investigation and the review of our proposed remedies.
This marks an important milestone
Speaker Change: which we continue to expect in the first half of 2025.
Speaker Change: We're also making strong progress with other regulatory agencies and customers remain overwhelmingly supportive of this pro-competitive deal.
Thanks for watching.
Speaker Change: We will remain focused on execution excellence and operating discipline, while balancing our guidance with pragmatism, given we are readying our company for the largest acquisition in our history, and continue to manage macro uncertainties in some geographies.
Sheila will discuss the guidance in
Let's move to segment business highlights, starting with design automation.
Speaker Change: Q4, design automation revenue was up 17% year-over-year, and full-year revenue was up 12% versus 2023.
Speaker Change: Our unparalleled design automation portfolio provides holistic insight across the flow and includes our industry-leading Fusion Compiler.
Speaker Change: Fusion Compiler leadership was evident in Q4 as a leading US HPC customer leveraged Fusion Compiler to deliver their first TSMC N2 production tape-out.
Speaker Change: and a leading hyperscaler taped out a novel new SOC on TSMC N4.
Speaker Change: Since 2020, we've been the pioneers in adding AI optimization engines to our products.
Speaker Change: We now have Synopsys.ai solutions across the design flow that are delivering extraordinary customer results.
Speaker Change: Customers have now used DSO.AI to optimize over 700 cumulative tape-outs and have deployed DSO.AI in up to 90% of SOC blocks on some chips.
Speaker Change: VSO.AI deployments are also accelerating, with one customer seeing up to 4x improvement in hardware utilization and another achieving 2x faster turnaround time.
Speaker Change: We're also augmenting the capability of Synopsys.ai by bringing the power of generative AI to our platform.
Speaker Change: We've now expanded coverage of co-pilot knowledge assistance to 11 EDA products.
Speaker Change: faster time-to-results versus traditional approaches on our flagship products with both hosted commercial LLMs and on-prem deployments with open-source LLMs. We and our customers are reskilling and redefining workflow using AI.
But this is only the beginning.
Speaker Change: AI is evolving from a discrete capability to becoming an essential and ubiquitous part of everything we do. We are also on the cusp of a massive architectural revolution in semiconductors.
Multi-Dye
Speaker Change: Acceleration in multi-die designs opens a new frontier in chip architecture.
Speaker Change: but also ushers the daunting complexities that require the integration of design and multi-physics to solve.
Speaker Change: Today, multi-dye is the domain of a small group of customers.
Speaker Change: But third parties estimate that by 2027, 90% of HPC AI designs and 70% of PC designs will be multi-die.
Speaker Change: Multi-dye adoption is also increasing the use of advanced manufacturing nodes, a positive trend for synopsis.
Speaker Change: We're partnering with ecosystem leaders like TSMC to improve predictability and yield for multi-dye designs.
In Q4,
Speaker Change: end-to-end unified solution comprising of 3D IC compiler, silicon lifecycle management,
Synopsys Test Solutions, UCIE, and Synopsys.ai
Speaker Change: In this case, an AI-driven analysis using 3DSO.AI was deployed to address thermal and power integrity challenges for COAS interposer packaging.
Speaker Change: The real game changer for Multi-DI will be a design environment that fuses design automation and multi-physics simulation in a unified platform.
That's a key part of the value
and why our customers are so supportive of that transaction.
Speaker Change: Closing out on design automation, we had another record year in our hardware business with exceptional momentum on both HAPs and ZBoo product lines.
Speaker Change: During Q4, we had over 50 repeats HAPs customers and more than 10 new customers.
Speaker Change: Notable among those wins, a U.S. hyperscaler deployed a large HAPS implementation for PCIe 6 software bring-up for AI workloads.
Speaker Change: Zebu EP Momentum also continued with customers seeing value in the reconfigurability of our system to enable all emulation and prototyping use cases.
Speaker Change: In the quarter, we saw 7 repeat customers and 8 new customers for ZEBU EP.
Speaker Change: with a key IP customer deploying ZBoo because of the unique reconfigurability of that platform.
The
Speaker Change: On to design IP, which was roughly flat in Q4 against a very strong prior year compare.
Speaker Change: For the full year, Design IP delivered 24% revenue growth with 5 points of adjusted operating margin accretion.
Speaker Change: Design activity continued to be robust for high-performance computing customers with seven PCIe 6 design wins, spanning hyperscalers and semiconductor accounts.
Speaker Change: Protecting data over high-speed interfaces continues to be a critical need and in Q4 we saw another seven wins for security integrity and data encryption over PCIe 6 and CXL 3.
Speaker Change: We also continue to push technology differentiation in our Ethernet products.
Speaker Change: In Q4, we achieved the industry's first multi-vendor 800-gig Ethernet demonstration at ECOC 2024, proving the robustness and interoperability of our IP.
Speaker Change: With the rapid acceleration of multi-die designs, there is significant demand for increased throughput, and this quarter we announced the industry's only complete 40-gig UCIe solution that includes controller, PHY, and our verification IP.
This IP offers 25% higher bandwidth.
then the UCIE SPAC.
Speaker Change: with no impact on energy, efficiency, or area. We secured two.
Speaker Change: 40 gig UCIE design wins in the quarter and ended the year.
with more than 20 die-to-die design wins.
Speaker Change: We also saw strength in automotive in the fourth quarter as electrification, infotainment, and ADAS features continue to drive strong demand for our comprehensive automotive IP portfolio, with wins at multiple leading automotive SOC vendors.
Speaker Change: In an industry first, we achieved the third party certification of 40 gigabit per second USB4 IP.
Speaker Change: An IP title which is vital for automotive and mobile markets.
Speaker Change: Switching to manufacturing, where we take great pride in our role as the IP technology on-ramp to the world's foundries. We were proud to receive TSMC's 2024 Partner of the Year Award for Interface IP.
Speaker Change: Acknowledging our collaborative success for Synopsys Interface IP on TSMC's most advanced processes.
Speaker Change: Before closing out, I want to highlight the power of our technology portfolio with a key company-wide design win.
Speaker Change: This quarter, we strengthened our decades-long partnership with ARM, aligning our roadmaps to the needs of our mutual customers.
Speaker Change: As a key partner in ARM Total Design, we are integrating ARM compute subsystems with our industry-leading IP, AI-driven EDA solutions, and industry-leading hardware-accelerated verification solutions.
together.
Speaker Change: ARM and Synopsys deliver differentiated solutions delivering the next generation of chiplets, SoCs, and systems across AI HPC, automotive, mobile PC, and IoT.
Speaker Change: A few closing comments before we transition to Sheila's remarks. We have strong momentum across the business, supported by multiple secular growth drivers.
Speaker Change: We have a very resilient business model and are mission-critical to our customers' innovation.
Speaker Change: We are aligning our portfolio investment with the greatest return potential and aligning our operations to accelerate our growth.
Speaker Change: Thank you to our employees and partners for a transformative 2024. We look forward to igniting our customers ingenuity in 2025 and beyond. With that, I'll turn it over to Sheila.
Sheila Glaser: Thank you, Sassine. 2024 was an excellent year, highlighted by record revenue, record non-GAAP operating margin, and record earnings.
Sheila Glaser: Leading technology that is mission-critical to our customers and a resilient and stable business model with non-cancellable backlog of $8.1 billion.
Sheila Glaser: As we look into 2025, I want to highlight a few changes compared to 2024.
Sheila Glaser: In 2024, we had the benefit of an extra week or approximately $70.5 million in revenue.
Sheila Glaser: Also, as mentioned in the 8K file last week, we are changing our fiscal year from a 52-53 week period, ending on the Saturday nearest to October 31st, to end on October 31st of each year.
Sheila Glaser: While design activity remains robust, we are taking a balanced view in 2025 given the impact of fiscal periods, macro uncertainty, and a pragmatic view of China.
Sheila Glaser: For 2025, we expect to grow revenue 10.1% to 11.1% or 11.5% to 12.5%, excluding the impact of the extra week and calendar year change.
Sheila Glaser: expand non-GAAP operating margin by approximately 150 basis points and drive non-GAAP EPS growth of approximately 13 percent.
Sheila Glaser: Let me provide some highlights of our full year 2024 results, which are presented on a continuing operations basis.
Sheila Glaser: We generated total revenue of $6.13 billion, up 15% year-over-year, with double-digit growth across all products and geographies.
Sheila Glaser: Total GAAP costs and expenses were $4.77 billion and total non-GAAP costs and expenses were $3.77 billion resulting in non-GAAP operating margins of 38.5%.
Sheila Glaser: Gap earnings per share were $9.25 and non-gap earnings per share were $13.20, up 25% year-over-year.
Sheila Glaser: Now on to our segments. Design automation segment revenue is 4.22 billion dollars up 12 percent driven by strength and EDA software and hardware. Design automation adjusted operating margin was 38.7 percent.
Sheila Glaser: Design IP segment revenue was $1.91 billion, up 24%, driven by broad-based strength. Design IP adjusted operating margin was 38.3%.
Sheila Glaser: Turning to cash. Operating cash flow for the year was 1.4 billion dollars and free cash flow was 1.28 billion dollars.
The
Sheila Glaser: We ended the year with cash and short-term investments of $4.05 billion and total debt of $15.6 million.
Sheila Glaser: Now to our targets. We expect the first half, second half split of roughly 45%, 55% for revenue, which is more second half weighted versus 2024's 48, 52 mix based on two drivers.
Sheila Glaser: The first driver is 10 fewer days in the first half of 2025 versus 2024 due to the extra week and the fiscal calendar change.
Sheila Glaser: and the second driver is our current assessment of the timing of IP and hardware deliveries.
Sheila Glaser: Similarly, we expect 1st half, 2nd half split of non-GAAP EPS to be 40%, 60% based on our current assumption for expenses.
Sheila Glaser: In 2025, the full year targets are revenue of $6.745 to $6.805 billion, total gap costs and expenses between $4.93 and $4.98 billion,
Sheila Glaser: Total non-GAAP costs and expenses between $4.05 and $4.09 billion, resulting in non-GAAP operating margin of 40% at the midpoint.
Sheila Glaser: Non-GAAP tax rate of 16%, one point higher than the rate in 2024.
Sheila Glaser: Gap earnings of $10.42 to $10.63 per share Non-gap earnings of $14.88 to $14.96 per share Cash flow from operations of approximately $1.8 billion and free cash flow of approximately $1.6 billion
Sheila Glaser: Our guidance for cash flow includes the impact of approximately $100 million for deal-related costs and approximately $130 million of cash taxes from the sale of our software integrity business.
Sheila Glaser: Now to targets for the first quarter. Revenue between $1.435 billion and $1.465 billion.
Sheila Glaser: Total GAAP costs and expenses between $1.14 and $1.16 billion Total non-GAAP costs and expenses between $945 and $955 million
Sheila Glaser: Our press release and financial supplement include additional targets and gap to non-gap reconciliations.
Speaker Change: mission-critical products to enable our customers innovation and a stable and resilient business model. With that I'll turn it over to the operator for questions.
Speaker Change: Thank you. To ask a question please press star 1 on your telephone keypad. Before we begin the question-and-answer session I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants.
Speaker Change: If you have additional questions, please re-enter the queue and we'll take as many as time permits.
We'll take our first question today from Joe Ruink-Baird.
Thank you.
Great. Hi, everyone. Thanks for taking my questions.
Speaker Change: the starting ranges you've been using over recent history. Is it maybe possible to reconcile just the change that went into your planning assumptions for FY25? And then I know you mentioned that, you know, the ANSYS deal may potentially close.
Speaker Change: How much is maybe your updated budgeting approach related to specifically the transaction and just wanting to be prudent around any disruption that creates?
Speaker Change: Hi Joe, thank you for the question. Really the way we looked at it is a balanced view for FY25 taking into account few factors.
Speaker Change: The first one is the market we're in and serving. I like to think of it as we are in a tale of two markets. The one that our customers are serving.
Speaker Change: The AI Infrastructure Buildout, they're doing incredibly well and we're benefiting beautifully out of it. These are the companies that they're delivering memory chips, advanced logic, be it CPU, accelerator, GPU, etc.
Speaker Change: and that's helping across the board the Synopsys portfolio, the EDA, hardware, IP, etc.
Speaker Change: But let's not forget there's another cohort which is the rest of the semiconductor market
Speaker Change: The one that they're serving, mobile, PC, automotive, industrial, they're still in many ways trying to have a refresh cycle for their products and leverage AI on devices.
for us, for that cohort.
Speaker Change: given we're tied to their R&D, we're still doing fine, but it's not delivering to similar level of growth as the first cohort. So that's from a market point of view.
Speaker Change: The second factor we took into account is the macro uncertainties, and in here if you double-click on China in particular,
Speaker Change: The economy continues to decelerate. You layer on top of it the expansion of restrictions.
that we needed to take into account.
Speaker Change: Lastly, we're absolutely taking into account and so excited about closing ENCIS in the first half of 2025.
Speaker Change: that we need to prepare our company for this massive acquisition.
Speaker Change: not only the largest for synopsis, but the largest for engineering software industry. So you take all these factors into account. We decided to guide FY25 with pragmatism and they're still guiding, as you mentioned, 11 1⁄2 to 12 1⁄2% growth on the tail of a 15% growth.
that we just delivered last year.
Speaker Change: Okay, that's great detail. Thank you. Second question, just on the outlook for next year, based on the $8.1 billion in backlog, another really strong quarter of bookings. It would seem like very high visibility on what the next 12 months may bring.
Speaker Change: I guess any changes in your views given all the current events that have been swirling around, you touched on some of them, but in terms of like various foundry investments, you mentioned briefly geopolitics.
Speaker Change: It doesn't seem to have come up just based on your 4Q bookings performance, but what might you anticipate in quarters ahead and how backlog may progress?
Speaker Change: Yeah, thank you Joe for pointing out the backlog because that's another factor of the health of the business because it's a flat...
Speaker Change: year over year, when we entered FY23-24, sorry, it was roughly at 8.1, so that tells you
Speaker Change: that our ability to deliver 15% without I want to call it burning from the backlog is another sign of the health
of the business we executed on in FY24.
Speaker Change: Now, to your comments regarding foundries, etc., you know, I don't want to speculate regarding the various build-out that we're doing for the various foundries.
Speaker Change: of our IP business comes from TSMC. Customers designing on TSMC.
Speaker Change: But of course, given we are the on-ramp of every foundry, including Intel, Samsung, GF, Rapidus, etc.
Speaker Change: The uncertainty around some of them, how fast do they go and bring in customers in 2025 and beyond, it's a speculation at this stage, but we continue on investing and building out our IP across the board for these foundries.
The End
Thank you.
Speaker Change: The next question will come from Jason Salino, KeyBank Capital Markets.
Speaker Change: Hey, thanks for taking my question. Maybe just a clarification on the Q1 guide.
Speaker Change: So, I understand the year-over-year dynamics with like the one less week and then maybe an extra one less or two less couple days based on the fiscal year change. But still, it's coming in sequentially down from Q4. It sounds like you had a pretty strong hardware quarter for Q4, but maybe can you just explain kind of the seasonality that you're seeing for that first quarter?
Speaker Change: Sure. So Jason, you got it right. The fiscal year change and the
impact in Q1 is eight days.
Speaker Change: That's about $80 million. So with our writable business, obviously we have
Speaker Change: eight fewer days to count in Q1 of 24. Then the other thing I would say is actually just looking back to Q1 of
Speaker Change: 24, it's a really tough compare because IP was actually at 53%. If you think about, we always talk about that business as lumpy and the lumpy of course means you have
Speaker Change: quarters where customers pull down a lot of IP and then quarters where we're building IP but we have lower pull down and Q1 is going to be a quarter where we're building IP but we have lower pull down.
Speaker Change: So Q1 is going to be a low quarter for us, and then we're building, and we have a much stronger second half for IP. So it's really those two effects happening in Q1.
Speaker Change: Okay, great, thank you. And then maybe just a quick follow-up for Sheila.
the divestiture of that Optical Solutions Group, was there any...
Speaker Change: divested revenue impact there? Just trying to think about the guide here and then what could have been taken out. Thanks. So that doesn't have any effect on this. As we announced, that will be a part of our continuing business until we close the ANSYS transaction. So that's still included in our forecast.
Gotcha. Okay. Thank you. Thanks, Jason.
And next up is Harlan Sir from J.P. Morgan.
Harlan Sir: Good afternoon. Thanks for taking my question. Two days ago, the Department of Commerce BIS Bureau put out an update on U.S. semiconductor and value chain rules and restrictions. There were some updates on the rules on EDA software. Is there any impact of these new rules to your fiscal 25 outlook?
Speaker Change: Hey Harlan, the quick answer is yes. There are some customers got added to the entity list in that latest ruling and some technology restrictions as well.
Speaker Change: But I would say, Harlan, that's all incorporated in our guidance, so all of those most recent restrictions are fully incorporated in the guidance. Correct.
Speaker Change: Yeah, I appreciate that. And then for my follow-up, you know, it's good to see the strong double-digit growth in your IP businesses and your design automation businesses in Fiscal 24.
Speaker Change: Sassine, as you mentioned, design activity as measured by chip design starts.
Speaker Change: IP adoption appears to all be increasing quite a bit. We continue to see new entrants into the chip design sector, open AI being one of the more recent. So within your full year guide, how would you qualitatively describe
Speaker Change: the growth profile of your design automation and IT businesses sort of relative to the full year growth outlook.
Speaker Change: The excitement that we have across our customer base that are serving that AI infrastructure is actually the roadmap they're delivering, the investments they're making, is at a pace that continues on accelerating.
Speaker Change: That's part of our confidence when we look at what helped us achieve over the last five years.
Speaker Change: a 15% revenue growth CAGR and as we look at FY25 and where we're guiding that growth, a lot of it
Speaker Change: is coming from that increased investment and those customers are needing the most advanced IP to do those multi-die designs because almost every one of them is designing either at a two and a half or with a roadmap to 3D.
Speaker Change: the increased need that they have for hardware-assisted verification to deal with that complexity.
Speaker Change: And anything we offer today with our design automation EDA software, be it with AI, with the Fusion Compiler, etc., they're the customers that they're first to adopt in order to tame that complexity they're dealing with. So it's across the board, Harlan, we're seeing the adoption with that cohort of customers.
Perfect, thank you.
Thank you.
Vivek Arya from Bank of America has the next question.
The End of the World
Speaker Change: Thanks for taking my question. Sassine, you mentioned you've seen very strong overall design starts, especially in AI. I'm curious, what was the growth in design starts that you saw last year and what is your assumption? I imagine this is one of the more important metrics that you look at in forecasting the business.
Speaker Change: Yeah, so if I look at the, not only the last year, if we look at the last three to five years and let's zoom in with hyperscalers and semiconductors serving hyperscalers.
Speaker Change: With the hyperscalers, initially there was a lot of question marks around how much can they continue on investing organically with building chips to differentiate and optimize their workload with their own silicon.
Speaker Change: And I'm sure as you listen to almost every one of these hyperscalers, they're so proud.
Speaker Change: that they are increasing their silicon investments. And as they're making these investments, we are in the middle of each one of these increased and broadening of these investments by hyperscalers.
Speaker Change: Now you look at companies, semi-conductor companies, that they are trying to serve that market.
be it if you're doing ASIC custom
Speaker Change: or delivering directly AI accelerators to that group of customers. Again, that growth in roadmap from our customers is increasing year over year from, as I mentioned, the last three to five years and contributed.
Speaker Change: greatly to our revenue growth that we have witnessed. I don't see it slowing down going into FY25 with that cohort of customers.
Speaker Change: I appreciate that you don't want to be specific to a customer, but when we look at your largest customer, how...
Speaker Change: big were they in fiscal 24? And, you know, they are going through some level of restructuring and turmoil. How are you, you know, trying to deal with that? And how much are you assuming that, you know, becomes a headwind or a synopsis next year? I assume you have kind of contemplated that in your outlook, but how much of a headwind is that, you know, restructuring activity at your largest customer?
Speaker Change: The profile in which our large customers, they buy from Synopsys is very similar, meaning they buy across the board. They have a multi-year committed EDA contracts.
Speaker Change: And that, as you know, is rateable and it's over three plus years, depending on the customer agreements that we have. Then with each one of those customers, there are two other layers of contracts and commitments. One related to IP.
Speaker Change: and the other one hardware. And I'm generalizing, but that applies to the top customers that we have. When it comes to IP and hardware...
Speaker Change: The pull-down and the timing depends on their roadmap. So if they're pausing, shifting to the right...
Speaker Change: some of their projects, their IP pulldown, their hardware consumption from a revenue point of view impact for Synopsys does shift to the right. So you you will see lumpiness on a customer by customer basis.
Speaker Change: And when you look at our FY25 guide and the 45%, 55% shape of the year, is taking into account some of these dynamics across the board and the timing of that pulldown.
Thank you, Sassine.
You're welcome.
The next question is from Gary Mobley, Loop Capital.
The End.
Hey guys, thanks for taking my question.
Speaker Change: Based on the fiscal year 25 operating margin guide of 40% it looks like you're bringing a lot more down to the operating income line than you did last year for each incremental revenue dollar despite the slowdown in projected revenue.
Speaker Change: And so, Sheila, my question is, is that largely a function of a slower pace than the activity or annualizing some of the deals that were done last year in anticipation of the answers acquisition? Is that the proper readthrough?
Speaker Change: Well, I think it's a multi-year focus on driving, leveraging the company.
Speaker Change: So you saw us, you know, improve by two points last year. We're giving 150 basis points improvement And it's really across the board Thinking about how we do things more efficiently inside our four walls Just like we're servicing our customers to allow them to do their R&D development more efficiently. So we see it across R&D. We've invested heavily in making sure that we are
Speaker Change: getting benefit of things like AI. We're getting benefit on, you know, modernizing how we're building our software and then also things that we're driving in terms of digital transformation. So, modernizing how we run the core of the business. So, this is a multi-year journey that we've been on in terms of driving leverage across the business.
Speaker Change: and so I think it's a strong commit that we have. And then as you mentioned, as we then bring ANSYS in, that'll be some of the work that we'll jointly then do as we work towards synergy.
Speaker Change: Got it, okay. Just a quick clarification, Sassine, you mentioned fiscal year ending backlog for, I'm sorry, fiscal year 23 ending backlog of $8.1 billion. Is that adjusted for software integrity or was it lower than software integrity? Yes, that's adjusted.
God, thank you.
Speaker Change: You're welcome. Thanks, Gary. Well, we'll go next to Jay Fleishauer, Griffin Securities.
Speaker Change: Thank you, good evening. Sassine, you mentioned that you were, quote, aligning operations to prepare for growth for 25 and beyond.
Speaker Change: Could you be more specific about some of the steps that you've taken and how much of that
Speaker Change: are things you would have done anyway, irrespective of ANSYS. You just grew your headcount for the year by 10%. You also have the largest number of R&D openings you've had in two years. So maybe just talk about some of those internal initiatives that you're putting in place to prepare for more growth and AI follow-up.
Speaker Change: Thank you, Jay, for the question. You know, when a company crosses $6 billion, which we just did in FY24, a huge milestone.
Speaker Change: The way we drive our product development and driving solutions to our customers need to scale and evolve as well.
Speaker Change: We've been talking about scaling for a while as it comes to our IP business, as it comes to EDA and how to deliver solutions to our customers.
Speaker Change: And that's part of the effort that we have put in place around structure of the company in order to scale in continuing our pace to deliver market-leading solutions and innovation, etc.
So we put some effort around structure.
Speaker Change: And the second part that we have been investing for about two years.
Speaker Change: is how do we evolve our engineering workflow inside the company.
Speaker Change: There are some amazing technologies out there that we're seeing some early benefits of efficiency, productivity for our R&D and we continue on putting that emphasis and focus on how do we leverage technology and modernize the way we build both IP as well as the EDA software.
Speaker Change: Okay, thank you. As follow-up on the third quarter call, you made some interesting comments about
Speaker Change: customer-specific AI use cases that with EDA models and the like that you might see more and more specificity on a customer-by-customer basis for AI. On the other hand, you and Cadence and the other EDA vendors have for the last number of years
also talked about more and more domain-specific design.
Speaker Change: So maybe you could talk about how those two play together, the long trend towards domain specificity and now apparently this newer phenomenon of customer specificity, you know, how do those come together and might it have any effect in terms of your product packaging, your development, you know, the services you need to provide to customers and so forth.
Speaker Change: Yes, with AI, it's not only unique to Synopsys, I want to say for every software company that is delivering AI as part of their product.
Speaker Change: is rapidly learning of how to engage customers in adopting that technology and the monetization of that technology.
Speaker Change: As you know, the first step that Synopsys took was looking at our complete portfolio and asking ourselves, where can we insert AI inside the products?
Speaker Change: and deliver a new product to the customers where they can leverage AI to achieve better time-to-results, better quality of results, et cetera.
Speaker Change: And I believe we've done a great job there. This is where the XSO.AI family comes in, and the adoption by customers, the acceptance by customers, it's going very well.
Speaker Change: The AI use cases you mentioned, once you start moving to knowledge-assistant type of AI application,
Speaker Change: The customers they have their own workflow. They have their own data. They're not expecting that you come in and say use the following models for AI or something that pre-trained they want to train based on their data and therefore what is our flexibility in delivering a
customer
Speaker Change: specific AI capability that sits inside their workflow. So that's not the XSO.AI. XSO.AI is going to come in with all the products. So that's the next level of a workflow optimization that our customers.
Speaker Change: are investing in and, of course, investing with and around our technology.
The third one...
Speaker Change: which we're starting to talk about in some of our conferences, etc.
Speaker Change: where when you look at the generative, agentic AI which is absolutely going to drive a completely different approach to what is it that we sell
Speaker Change: to our customers in that context. And that's going to drive, in our view, an opportunity to what is it we deliver and the business model we deliver to.
Speaker Change: in that disruptive wave of AI. But think back about two years ago. I don't think we were talking in that time window about agentic AI and EDA or any software company for that matter.
Speaker Change: with knowledge assistance based on customer use cases and the workflow. And the third one is the agentic generative AI.
Thank you.
Thank you, Sassine. Thank you, Jake.
We'll go next to Ruben Roy Stiefel.
Speaker Change: Thank you for taking my questions. Sassine, I had a couple of longer term questions.
Speaker Change: I wanted to talk a little bit about the tale of the two markets and the haves, I guess, versus the have-nots. One of the recurring themes that's been coming up more in recent times is the concept of acceleration of AI silicon designs.
Speaker Change: I was wondering how you're thinking about that over the next couple of years.
Speaker Change: in the context of one of the leading providers of IP for ASICs talked about leveraging cloud-based EDA tools just this week. And I'm wondering, I know you've been working on cloud-based tools for quite some time now, but is that something that changes your business model in any direction or inflects in some sort of way? Just would love to hear your thoughts on that.
Yes.
Speaker Change: to deliver a more effective, efficient EDA, that's something we've been talking about and delivering to, not only talking about for a while. If you remember at GTC, one of Jensen's slides was
Speaker Change: the various areas of synopsis delivering accelerated EDA for, in that case, GPU from NVIDIA, and it applies to many other accelerated computes that our customers may prefer or have their own flavor.
There, it's a two-step. You port your software.
Speaker Change: So, you can use it for their preferred compute, and then you go into the next phase, which is optimization, and that's where you can deliver factors of performance. We're not talking percentages, it can be 3, 5, 10x performance benefits.
Speaker Change: Now, some of our customers, they want that capability to be available on cloud, not everything available on-prem, to be able to burst for that capability.
Speaker Change: That customer you're referring to does use our EDA for cloud.
Speaker Change: So the way we sell to that customer, they have a contractual flexibility to use our software on-prem.
Speaker Change: And when they decide to burst on their preferred CSP, they have that flexibility to burst which gives us a good burn rate on our software because if they're bursting, they use more software and we monetize it.
Sassine Ghazi: Very good. That's very helpful. Thank you, Sassine. And then a quick follow-up on...
Speaker Change: some of the comments you made on IP, the design activity remaining robust and you're specific around some of the interfaces that you're working or interface technologies, I should say, that you're working on and with. I read an interview recently where you talked about potentially
Speaker Change: looking at royalty models for your IP deliverables. Is that something that you think you know can play out sooner rather than later and you know would it be specific to some of these areas like PCI Express 6 or CXL and whatnot?
Speaker Change: Yeah, we always look at inflection point in order to really change the way we monetize on the traditional interface IP.
Speaker Change: I don't see a change where we show up at the customer and say right now we're going to change the business model and introduce royalty. It's been since its existence to use a base
Speaker Change: The delivery beyond the interface IP, meaning as you start going to a subsystem or a chiplet and beyond the standard delivery.
Speaker Change: Our customers are very receptive to it, but I want to bring it back to scaling.
Speaker Change: For us today we have a significant investment in our interface IP as I just described and as we look toward the future trends that's something we're absolutely looking at investing in and testing with our customers.
the opportunities and the business model.
Got it. Thank you, Sidney.
Thank you, Ruben.
Speaker Change: Thank you, Sassine and Sheila. Thanks for letting me ask a couple of questions. Maybe the first one, I want to go back to the China question. The thing is that export control does have an impact, but I wonder if the impact, how do you characterize the amount of impact? Is it the material or is it maybe there's some impact, but it's not quite material for the FY25 outlook? But maybe I'll have more related the question.
Speaker Change: So I think you kind of said you want to take a more cautious stance on China.
Speaker Change: But in Fiscal 24, it looks like China still grows in line with the corporate, despite at the beginning of Fiscal 24, you said something very similar.
Speaker Change: I'm wondering what's the current expectation as well for next year? Is China going to grow below the corporate average, or is it in line, and dollar-wise, do you think it's still going to be higher year-to-year in fiscal 25? Thank you. Yeah. Thank you, Charles.
Speaker Change: One, our revenue and growth in China has absolutely decelerated if you look at the the last three, four, five years.
And the reason it has decelerated is due to...
Speaker Change: The pool of customers we can serve and sell to continue on shrinking due to the restrictions.
Speaker Change: So that's a factor. So there is no way to ignore that the pool of customers and opportunities is shrinking due to restrictions.
Speaker Change: There's another factor, which is the overall economy in China continues on decelerating as well. So, the days of...
dozens of
Speaker Change: startups popping up every quarter in China, that's changed, that's not there anymore.
Speaker Change: So last year we wrapped up China around the corporate average. I don't want to say where it will be in 2025 because honestly it's something that one, we don't provide ahead of ourselves, but two,
Speaker Change: We are taking into account those factors as we are guiding the year and that's why we're saying we continue on being pragmatic on our approach when it comes to China.
Speaker Change: Got it. Maybe a question, maybe this is for Sheila. In terms of that 45 to 55 split, because I was under the impression maybe it was more like 47, 53, looks like the first half is slightly incrementally a little bit weaker, but the second half is a little bit stronger. Synopsis haven't had this much second half loaded. You've had second half loaded years,
Speaker Change: loaded. I don't think it has been like this, at least in recent years, but that...
Speaker Change: It tends to lead to a little bit more skepticism among investors, because your peer in 2004, they had the profile exactly like this, there was a lot of skepticism about whether they can deliver the second half.
Speaker Change: So what do you say to those kind of investors? How do we put a little bit more trust into that second half, that hockey stick optic? I think you guys are pretty dependable, but I do want to hear from you guys. What would you say to folks who may be a little bit skeptical? Thanks.
Speaker Change: Hi Charles, thanks for the question. So I'd say there's really two effects that are driving this. The one is that mechanical effect that we talked about, which really there's 10 less days in the first half of 2025 versus the first half of 2024.
Speaker Change: And so that's, you know, right off the bat for a routable business, a hundred million dollar headwind that we have with the ten last days. And then as Sassine talked about, we're seeing for our upfront businesses, more second half weighted. And it's really based on when the customer pulldowns are. And you can think about our two upfront businesses, the IP, we talk about IP being lumpy. I think now that we've got our segment reporting, you can really see what we mean by lumpy, which is we can have, you know, double digit growth in a quarter and then the next quarter can actually be a decline. And we can manage that very well. We're, if you will, I always think about IP, we're building titles every day.
Speaker Change: but the customers are going to ingest those titles when they're ready to put it into their design. And so we need to be ready. And in this case, as we think about 2025, a lot of the customer pull-downs are more second-half weighted. And then, similarly, hardware is an up-front business for us, and that's more second-half weighted. And we haven't talked much about this, but, you know, we've had a record hardware year again in 2024. We anticipate another record hardware year in 2025. But one of the things, as we work with our customers, is their ability to get space,
Speaker Change: and Power for Hardware, it's the same problem you're finding that people are talking about with their data centers.
Speaker Change: So we need to be able to plan with our customers so that not only is the hardware available for them but they've got space and power to be able to
Speaker Change: power that. And so that's leading to some second half waiting. What we're doing for customers in the meantime is we are building out a ZEBU cloud so that they can actually tap into our ZEBU
Speaker Change: servers so that they can actually be able to run some of their designs. But of course that only has limited capability. It won't give them the scale of design. It won't give them the very real-time feedback that they're going to look for for an on-prem install.
Speaker Change: But I would say those are sort of the two effects, really that one very mechanical puzzle piece, which is just that $100 million, and then the other one is really timing of hardware and IP.
and I appreciate the question, Charles.
Speaker Change: Charles, I would like to add, I cannot help myself, one point to Sheila's comments. You're saying that we are dependable and there are there might be some skepticism from some.
Speaker Change: We are a company that has proved that we commit and deliver, and we do what we say. If you look at the successes we've had in our IP and hardware...
Speaker Change: that have shifted the profile of upfront versus rateable. If you look at FY23, 26% of our revenue was upfront. FY24, 29% was upfront. FY25, that will continue on increasing.
Speaker Change: So we need to get used to the fact that there are going to be some lumpiness quarter over quarter but that's due to the successes we're having across the portfolio. . .
Speaker Change: Thanks so much for all the additional colors, Sheila, Sassine. I really appreciate it. Thank you, Charles. Thank you, Charles. Operator, let's do one more question.
Understood, and that will come from Joshua Tilton, Wolf Research.
Hey guys, can you hear me? Yes, Josh.
The End of the World
Speaker Change: Thank you for sneaking me in at the end. I really appreciate it. My first question, I'm going to preface with, I apologize for beating a dead horse, but it feels as if the message is that the guidance is a little bit more conservative than usual, especially around your assumptions for China. Can you maybe just take that one step further and just tell us how it's more conservative for China? Is it lower revenue contribution, lower growth? Just walk us through how you embedded some conservatism around the China business for next year.
Speaker Change: We really, you know, Josh, we really are looking at it from a balanced way. There is the China
Speaker Change: deceleration that I mentioned earlier, this is real and we're seeing it in terms of the engagements we have locally. Then there is the other factor which is difficult to predict, is the constant expansion of restrictions on China. So there is the China factor.
Speaker Change: and we do anticipate China to not be above the corporate growth
Speaker Change: but in line with the corporate average performance. But there are other factors besides China that I mentioned earlier that we are taking into account as we're looking at FY25.
Speaker Change: Okay, very helpful. And maybe just a follow-up for Sheila really quick.
Speaker Change: I thought it was interesting, unless I misheard it, but at the end of your prepared remarks, you talked about some of the confidence you have heading into next year is around the mission-critical nature of the software. And I guess my question is, how next year are you translating how mission-critical your software is into better pricing for Synopsys and its customers?
Speaker Change: Well, I mean as Sassine talked about, we've got long-term contracts in EDA and when we go to renewals with customers, we always sit down with all the
Speaker Change: all the improvements that we've made and align with them on what the benefits are to them. And so that's a, I would call it a regular kind of renewal conversation that we have with customers. We haven't talked too much about AI, but obviously a big part of that engagement is on the AI and the benefits for having an AI. And then obviously with IP, that's an ongoing conversation as people pull titles.
Speaker Change: and, I would say, hardware we've talked about too, the overall commitment that you see us driving is the improved operating margin.
Speaker Change: So that's where you really see that coming through, and we've been driving operating margin improvement year after year after year, and you see us doing, again, 150 basis points in 2025.
Thank you guys. Thank you, Josh. Thank you. Thanks, everyone.
Speaker Change: Operator, you can close out. Thank you. So, ladies and gentlemen, that does conclude our conference for today. We would like to thank you all for your participation. You may now disconnect.
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