Q1 2025 Synopsys Inc Earnings Call
Speaker Change: Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the first quarter fiscal year 2025.
At this time, all participants are in a listen-only mode.
Speaker Change: 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 again star 1. If you should require 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release.
Speaker Change: In addition, we will refer to certain non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, Financial Supplement and 8K that we released earlier today.
Speaker Change: All of these items, plus the 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.
Sassine Ghazi: Good afternoon. We had a solid start to 2025, exceeding the midpoint of our Q1 revenue guidance and delivering non-GAAP EPS above our guidance range.
Sassine Ghazi: As we outlined in December, Q1 revenue was down 4% year over year, and non-GAAP EPS was down 10% as we had one less work week in Q1'25 versus Q1'24.
Sassine Ghazi: Let me take a few minutes to share some business highlights.
and then Sheila will discuss the financials in more detail.
Sheila Glaser: From an end market perspective, AI and HPC remained robust in the first quarter, while industrial, automotive, and consumer electronics remained challenged.
Sheila Glaser: Despite the scale of two markets, along with headwinds in China, as we anticipated, synopsis opportunity is tied to R&D and underpinned by the megatrends of AI, silicon proliferation, and software-defined systems.
Sheila Glaser: These trends are increasing design complexity and cost, while driving greater compute and energy demands.
Sheila Glaser: New design paradigms are essential to address these challenges, and Synopsys is racing to deliver.
Sheila Glaser: I had the privilege to meet with semi and automotive customers at CES in January, who all expressed their strong belief in the strategy we are driving.
Sheila Glaser: They underscored the pressing need for solutions to design, validate, and optimize intelligent products virtually, from silicon to systems.
Sheila Glaser: Our pending acquisition of ANSYS will pave the way for new AI-powered design solutions that fuse electronics and physics.
Sheila Glaser: giving R&D teams the tools they need to ignite their future innovation. In January, the European Commission approved our pending pro-competitive acquisition of ANSYS.
Sheila Glaser: and the UK CMA provisionally accepted our remedies toward the phase one approval. As previously communicated, the US HSR Act waiting period has expired.
Sheila Glaser: And we're making strong progress with other regulatory agencies, including China. Customers overwhelmingly support this transaction, and we continue to anticipate closing in the first half of 2025. Moving to business highlights.
Sheila Glaser: In Q1, design automation revenue was up 4% year-over-year, with one less week of revenue versus the prior Q1, while design activity remained strong.
Sheila Glaser: Synopsys is the leader in hardware-assisted verification or HAV solutions and this month we strengthened our position.
Sheila Glaser: expanding our industry-leading HAV portfolio to include new HAPS 200 prototyping systems
and new Zebu 200 emulation systems.
with up to 2x better performance versus our prior generation.
Sheila Glaser: AMD, ARM, NVIDIA, and SiFive are among a number of customers who are deploying our new prototyping and emulation technologies, and we were honored by their participation in our recent launch.
Sheila Glaser: Last year, we had our best year ever in hardware, and we expect another year of strong performance.
Sheila Glaser: based on the enthusiasm for our newly expanded Synopsys HAV portfolio.
Sheila Glaser: which provides the unmatched performance and flexibility our customers require to prototype, emulate, and verify ever more integrated, complex, and software-defined systems.
Sheila Glaser: Turning to EDA software, where we are seeing strong design activity at advanced nodes with two nanometer projects accelerating rapidly.
Sheila Glaser: Fusion Compiler is the industry-leading platform for advanced node digital design implementation and this quarter we saw a US hyperscaler tape out a 2 nanometer test chip exclusively using a synopsis design flow.
Sheila Glaser: Additionally, at 2nm, Fusion Compiler was the platform of choice for a US HPC CPU tape-out and an Asian mobile customer's 2nm SoC.
Sheila Glaser: Moving to sign-off technologies, where we offer the industry's essential trusted solutions to close out timing, signal integrity, power, and variation-aware analysis.
Sheila Glaser: Headlining our portfolio is Primetime, which is used by virtually all key advanced node customers.
Sheila Glaser: Customers are reporting significant productivity improvements with the most recent primetime release with one customer achieving 30% faster turnaround time with multi-core scaling.
Sheila Glaser: Our IC Validator product family is delivering tremendous value in physical verification sign-off.
Sheila Glaser: and recent product improvements have unleashed even greater turnaround time improvements for customers.
Sheila Glaser: Leading-edge customers are achieving greater than 2x turnaround time for full-chip physical verification sign-off at 3 nanometer and below.
Sheila Glaser: enabling design teams to finish more sign-off runs within the budget cycle time to improve the quality of results.
Before moving out of sign-off, a few points on StartRT.
Sheila Glaser: which is the industry-leading tool for extraction on advanced process nodes.
to date.
Sheila Glaser: We've seen all of our major CPU and GPU customers on TSMC N3.
and Intel 18A using StarRC for sign-off extraction.
Sheila Glaser: with the key differentiation being the accuracy of results and tool performance relative to competition.
Speaker Change: The massive AI infrastructure build-out that's currently underway paves the way for AI transformation across all industries, including our own.
Speaker Change: AI is fueling chip innovation, and the AI-driven EDA capabilities we pioneered, from reinforcement learning to generative AI capabilities, are delivering significant productivity gains and cementing our leadership position.
Speaker Change: But we're only at the beginning. While customers are realizing compelling value from our initial AI-driven optimization engines,
Speaker Change: These enhanced capabilities have not yet dramatically altered the underlying design flow for a chip. We see a paradigm shift coming with agentic AI.
Speaker Change: where engineers can task autonomous agents with executing complex workflows. We believe this will be massive value and productivity unlock for our industry.
Speaker Change: which we'll talk more about at our Synopsys user group conference in March. But first, AI business highlights from this quarter.
Speaker Change: In Verification, or VSO.AI, we saw a large U.S. memory company begin deployment of VSO.AI to find corner case bugs.
Speaker Change: realize a 2x improvement in hardware utilization while an Asian hyperscale customer achieved a 4x turnaround time improvement with VSO.AI on its HPC design.
significantly improving hardware utilization and outperforming the competition.
Speaker Change: Our analog migration tool, ASO.AI, continues to build a strong pipeline of customer opportunities and in Q1, delivered a significant competitive displacement at a leading aerospace company.
Speaker Change: We also continue to expand our generative AI offerings for customers.
Speaker Change: We recently added script generation capabilities to the co-pilots for Fusion Compiler and Primetime, and early customer results are demonstrating 30% average productivity improvements for designers.
Speaker Change: Additionally, Synopsys.ai generative formal verification capability in Verdi is delivering up to a 35% productivity boost in early engagements with key partners.
Speaker Change: On to design IP. In line with our expectations, revenue was down 17% year over year versus a record-setting prior year compared.
Speaker Change: While IP revenue can fluctuate quarter to quarter, the opportunity set for IP continues to expand.
Speaker Change: particularly as AI customers accelerate protocol transitions and look for creative ways to drive enhanced performance per watt.
This quarter,
Speaker Change: We launched the industry's first ultra-accelerator link, or UAL, and ultra-ethernet IP solutions to connect massive AI accelerator clusters, addressing the industry need for open standard solutions.
to scale AI Accelerator Infrastructure.
Speaker Change: We also continue to optimize our foundation IP libraries to deliver unparalleled AI performance.
Speaker Change: One high-performance AI customer used our memory and logic libraries to deliver breakthrough LLM performance at 5 nanometer.
Speaker Change: Across our interface IP portfolio, AI continues to push protocols forward at breakneck pace as customers drive for additional performance per watt.
This quarter,
We captured several key design wins, including a cutting edge
PCIe 7.0 design
with an AI infrastructure chip.
Speaker Change: provider, and we secured a 224 gig Ethernet win with a major ecosystem player.
Speaker Change: We also secured a 112G SIRDIS and PCIe 6.0 agreement with a leading European telecommunications equipment provider and an interface IP development deal for a leading Otto OEM's advanced 2nm design.
Speaker Change: Our IP development for the Foundry ecosystem is a mission-critical ingredient.
Speaker Change: We announce silicon success for PCIe 4.0 PHY IP on Samsung's FS8 process used in auto, mobile, networking, and storage applications.
Speaker Change: Also in Q1, we demonstrated silicon success for our one-time programmable non-volatile memory IP.
This technology enables secure storage for encryption keys.
Speaker Change: product configuration, and SRAM repair information, and is now available in TSMC N4P, N5, N6, and N7 processes.
Speaker Change: Moving to mobile and consumer markets, where end market demand is challenging, but design activity continues as customers ready a next wave of innovative products.
Speaker Change: A leading Asian automotive supplier adopted Synopsys interface, processor, and foundation IP due to our long track record of delivering high-quality IP.
Speaker Change: Also in Q1, we closed the design win including PCIe 4.0, MIPI, and USB with a leading mobile provider for an ARM-based application processor.
Speaker Change: UFS or Universal Flash Storage is a key technology in these verticals and we closed a UFS design with a key company driving a IPC this quarter.
Speaker Change: We also continue to see strong demand for the advanced UFS protocol in mobile to support LLM storage for Gen-AI use cases.
Speaker Change: A few closing comments before we transition to Sheila's remarks. We have a very resilient business model and our solutions are mission-critical to our customers' innovation.
Speaker Change: We have strong momentum across the business, bolstered by secular growth tailwinds, including AI.
Sheila Glaser: The application of AI for EDA and engineering more broadly is just beginning, which we'll discuss in more detail at SNUG in March.
Finally...
Sheila Glaser: Thank you to our employees, customers, and partners for a strong start to 2025. We are excited to continue our partnership journey with you through the year. With that, I'll turn it over to Sheila.
Sheila Glaser: Thank you, Sassine. We delivered a solid start to the year with revenue in the upper end of our guided range, non-gap operating margin of 36.5%, and non-gap earnings above the high end of our guidance range.
Sheila Glaser: leading technology that is mission critical to our customers and a resilient and stable business model. As a result, we are reaffirming our full year 2025 targets for revenue, non-GAAP operating margin, and non-GAAP EPS.
Speaker Change: I'll now review our first quarter results. All comparisons are year-over-year, unless otherwise stated.
We generated total revenue of $1.46 billion.
Speaker Change: Total GAAP costs and expenses were $1.2 billion and total non-GAAP costs and expenses were $924 million, resulting in a non-GAAP operating margin of 36.5%.
Speaker Change: GAP earnings per share were $1.89 and NOMGAP earnings per share were $3.03.
Now on to our segment.
Speaker Change: Design automation segment revenue was $1.02 billion, up 4%, as broad-based strength was partially offset by one last week in Q1'25 compared to Q1'24.
Design Automation Adjusted Operating Margin was 39.7%.
Speaker Change: Design IP segment revenue was $435.1 million, down 17% due to timing and a tough record setting prior year compare. Design IP adjusted operating margin was 29.1%.
Speaker Change: Free cash flow was $108.2 million outflow for the quarter, and we ended the quarter with cash and short-term investments of $3.81 billion.
Speaker Change: Now to guidance. For fiscal year 2025, the full-year targets are revenue of $6.745 to $6.805 billion,
Total GAAP costs and expenses between $4.97 and $5.03 billion.
Speaker Change: Total non-GAAP costs and expenses between $4.05 and $4.09 billion, resulting in a non-GAAP operating margin of 40% at the midpoint.
Speaker Change: 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.
Speaker Change: Now to targets for the second quarter. Revenue between $1.585 and $1.615 billion.
Speaker Change: Total Gap Costs and Expenses between $1.19 and $1.21 billion Total Non-Gap Costs and Expenses between $985 and $995 million
Speaker Change: Gap earnings of $2.21 to $2.33 per share and non-gap earnings of $3.37 to $3.42 per share.
Speaker Change: Our press release and financial supplement include additional targets and gap to non-gap reconciliations.
In conclusion, we delivered a solid start to the year.
Speaker Change: We continue to execute and for 2025 are reiterating 10.1 to 11.1% revenue growth, non-GAAP operating margin of 40% and approximately 13% non-GAAP EPS growth.
Speaker Change: Our confidence reflects a relentless execution and leadership position across our segments, 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. If you would like to ask a question, please press star 1 on your telephone keypad. Please ensure you are not on speakerphone or mute when called upon. Before we begin the Q&A 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. Again, it is star 1 to ask a question.
Speaker Change: Your first question comes from C.T. Penegrahi with Mizuho. Your line is open.
C.T. Penegrahi: Thank you and congrats on a nice quarter and Sheila that 200 bps margin bait is impressive.
Speaker Change: Sassine, I want to ask about growth trends that you expect to unfold over this short to long term.
Speaker Change: and when you segment your growth into AI and non-AI sites, you talked about the strong AI-driven design activities. So how do you see DeepSeq going to impact EDA in general and Synopsys in particular? And then I have a follow-up.
Yeah, hi, CT.
Thank you for the question.
Speaker Change: We started talking about the tale of two markets maybe about a year ago, and the reason for that is if you look at the semiconductor market in particular
Speaker Change: You have the grouping of customers that they're developing semiconductor chips for AI, HPC, and they've had a very strong demand and a very healthy roadmap that we are engaged with and supporting and selling to.
Opportunity to leverage AI has been shifting to the right.
Now...
You look at the consumer electronics, in particular the PC.
Speaker Change: and mobile, it has picked up recently due to applications like AI on PC, AI on phone.
Speaker Change: And this is where DeepSeek will provide an opportunity to expand the adoption of AI on devices given the affordability, the effectiveness, you don't have to go back to cloud in order to retrieve information, etc, etc.
Now you look at the whole semiconductor R&D.
Speaker Change: It's expected to grow from a 6% of sales per year to about 9%. For us, that's fantastic because, remember, we sell to R&D inside our customers. Now, you zoom out completely to the synopsis opportunity.
Speaker Change: We don't only sell to semiconductor, we sell to system companies, which are developing chips.
Speaker Change: not to be sold but developing chips for them to consume and that opportunity as well has been great for Synopsys given they are consuming IP hardware, software to design some of the most sophisticated chips.
Speaker Change: So that's how we see the landscape. I hope that that gave you a sense of how we see the monetization.
Speaker Change: Okay, and do you see that now in the traditional semi-non-AI side, do you think that we already hit the trough and do you expect, what kind of trends you are seeing on those outside of making AI chips?
Speaker Change: On the consumer electronics side, PC, mobile, yes, we have seen over the last two to three quarters an acceleration in our customers' roadmap in building these chips.
Speaker Change: In automotive, industrial, I want to say it's still about the same.
Thank you. That's helpful.
Thank you.
Speaker Change: The next question comes from Lee Simpson of Merkin Stanley. Your line is open.
Lee Simpson: Great, thanks for fitting me in and great quarter guys. Maybe just the first question just on China. It does seem like Chinese growth is flattening off I think 12% of sales in this last quarter and I assume herein given the the discussion that you made around hardware that hardware at least is shipping quite nicely to China.
Lee Simpson: but probably not much else. So I wonder if you can maybe give us a sense for the moving parts.
Lee Simpson: If we leave aside export controls and the changes there, what is driving that flattening of sales in China and how should we think of that as we go through the year? And maybe as a follow-on, Sassine, I couldn't help it, you did tease us with the agentic AI and the productivity gains.
Speaker Change: And so I'm just trying to understand the viewpoint that Synopsys would have here, utilizing our student deep research and like. Are you looking at this as an operating margin driver? Or are you looking at this as a product development acceleration? Thank you.
Speaker Change: The first one is the cumulative effect of restrictions and the second one that cannot be ignored, which is the slowing local economy and the money that's flowing into start-ups and the overall economy in China.
Speaker Change: As we wrapped up FY24, China finished roughly at corporate average.
Speaker Change: As we started looking at FY25 and all these, I won't call them stress points, in China, we have assumed in our guidance that China will continue on decelerating.
and below the corporate average.
due to the two factors I just mentioned.
Speaker Change: Now, you pointed out hardware in particular, and that really has nothing to do with one part of the portfolio or the other.
Speaker Change: Because customers, when they're buying from us, they're still buying the software, the IP, and the hardware.
Speaker Change: but it has all this impact of road map shifting and customers we cannot sell to due to the restrictions of either technology or entity lists. So that's China.
In terms of agentic AI, it's...
Speaker Change: It's such an exciting opportunity and the reason it's so exciting is truly the evolution of AI to get to a point of maturity that will truly change the workflow for engineering workflow for our customers.
Speaker Change: And we're well on our way to partner with key leading AI partners to bring in that transformation from generative AI to agentic AI to the engineering world.
Speaker Change: In terms of us leveraging AI inside our company, absolutely, we are taking advantage of every opportunity for every function, not only the engineering functions, the various functions inside the company.
to modernize and capture the productivity of AI.
Great, thanks so much. Thank you.
Speaker Change: The next question comes from Joe Kwadwocki with Wells Fargo. Your line is open.
Joe Kwadwocki: Thanks for taking the questions. I was wondering if I could ask again on just kind of the design activity for non-AI versus AI. For the non-AI, you know, customers, have you seen like, you know, the rate of change over the past few quarters in terms of design activity? Is that stabilized and improved maybe outside of the PC smartphone AI dynamic?
Thanks, Joe, for the question.
Joe Kwadwocki: The way Synopsys engage with semiconductor companies, we engage on pretty much every single chip they have on their roadmap. So our observation and insights is based on the following.
Joe Kwadwocki: When a customer is designing a chip, say, within a window of about 14 to 16 months tape out, meaning before they hand it over to the foundry to manufacture,
Joe Kwadwocki: Are we seeing a shift to the right of that roadmap? And that's what we classified as the tale of two markets, where if you are an AI HPC, they're going from 16-18 months development down to 12 months, so it's a significant acceleration.
Joe Kwadwocki: For the consumer electronic market as well as auto industrial, for a period of time, the roadmap was not being fueled by the opportunity to accelerate.
Joe Kwadwocki: So that had, we observe it through our IP pull down and the pace in which they move to the next.
Joe Kwadwocki: But it does not mean they're not investing in their roadmap and they're not building chips, but the pace in which they're developing and releasing, it's not with the same pace and acceleration.
Speaker Change: That's helpful. I appreciate the detail. As a follow-up, you know, you talked about the new hardware solutions that you launched this month. How should we think about just the growth trajectory there, the pipeline, and then in the context of, you know, I think your inventory increased a decent amount this quarter. I think it's at a record level.
Sheila Glaser: Let me make a comment in general on the market, then I would like to turn it to Sheila. In terms of the new hardware system, we're so excited about our launch because we focused
Sheila Glaser: of a hybrid emulation prototyping use case where customers are looking for every.
Speaker Change: bit of performance they can achieve in order to validate their software.
before the chip is available.
Speaker Change: And this has been the use case that Synopsys has led for many years, and with this new launch, we continue on expanding that leadership.
Sheila
Speaker Change: Yeah, and we've been investing in hardware. As you note, we're up about 15% quarter-on-quarter, about 9% year-on-year. That's not all finished goods. So obviously, as Sassine mentioned, we just launched a few weeks ago the exciting new platforms. We're racing to build those products, finish those products out. Demand exceeds supply right now. We see much more back half loaded, in fact, a Q4 loaded hardware year just because availability of those new units.
Speaker Change: So, we're racing as quickly as we can to fulfill that customer demand, but that's why we're putting so much more investment in hardware to be able to service those important workloads for our customers.
Thank you.
Speaker Change: The next question comes from Charles Shih of Needham & Company. Your line is open.
Charles Shih: Thanks for taking my questions. Maybe the first one, a housekeeping item. Sheila, what's the backlog exiting fiscal Q1 2025?
The backlog exiting Q1 is $7.7 billion.
Okay, got it. Thanks.
So maybe a more of a longer-term question.
but
Charles Shih: The question is like rooted in last year's number last year fiscal 24 the EDA revenue for synopsis by back out the extra week impact in fiscal q1 24
The growth rate was around 9% year-on-year.
Charles Shih: But when I look at your peer, they are poor EDA revenue also kind of.
Charles Shih: show some sort of a deceleration from double digit to like high single digit in the last fiscal year.
Charles Shih: So, it feels like you guys are probably seeing the same thing here, but I wonder, what do you think about the long term? You guys were thinking about 12% over the long term, but was last year kind of hitting a cyclical bottom in terms of EDA revenue growth?
Charles Shih: We still need to wait a little bit of recovery. Let's say the non-AI side, you keep referring to a payoff to markets, right? For that to recover, to get back to the low double-digit EDA growth.
for Design Automation.
Charles Shih: That was based on the next five-year CAGR and we do believe that that will continue and we have no signals at this stage to believe that that will be any different.
Charles Shih: Remember, we sell to a grouping of customers. There are the system companies and there are the semiconductor companies. The semiconductor R&D investment
has been going up.
Charles Shih: which is very good for synopsis because it's as I said earlier from 6% to 9% We benefit from that growth because they're investing more in Hardware in an IP in EDA etc. And then you have the system companies, which is growing at a higher rate
Charles Shih: than the 9%, and that's why we believe the 12% is appropriate for us to commit to and deliver towards the 12%.
Thank you.
Speaker Change: Thanks. Maybe a quick follow-up on China. Sassine, I think last quarter when you provided the first look at Fiscal 25 on China
Speaker Change: You adopted that like the prior fiscal year. You want to be a little bit more cautious.
Speaker Change: But you actually did not provide a quantitative guidance on where you think of China.
Speaker Change: growth rate or percentage contribution to a total revenues can be in fiscal 25. But I look at the report, it's the first fiscal Q1 number. It's a pretty meaningful step down from.
Speaker Change: Last year's average China revenue run rate, let's say $215 million per quarter, but fiscal Q1 was like $174.
Speaker Change: Even if I think of China going to be a flat young year for you, that means a pretty meaningful catch-up for the next three quarters.
Speaker Change: Are you at a place where maybe you can start to call the direction of the China, maybe even the absolute dollar base or percentage wise, where the China revenue can go this year in fiscal 25? Are you there yet to make a call?
Speaker Change: So, Charles, what I can say at this point, last year we finished at corporate average.
Speaker Change: the deceleration and the headwinds in China are getting stronger that we don't believe it will be at corporate average. We will finish below corporate average in terms of China growth and that has been accounted for in our guide.
Thanks.
Speaker Change: The next question comes from Joe Reuink with Baird. Your line is open.
Thank you.
Great. Hi everyone.
Speaker Change: I see in the 10Q that backlog composition actually swung a bit more to current balances this quarter, where I think over recent history you've had strong backlog developments, but it's been particularly notable in long-term RPO and those multi-year engagements.
Speaker Change: It's true that there's a maybe shifting in duration that you generally don't mind as it provides an opportunity to re-engage with customers over that contract, or are some of the changes we've seen in backlog composition, is that at all reflecting how customers are preferring to engage with you?
Speaker Change: The EDA type of contracts, they're still on the same average duration, so we have not seen a big customer behavior change at all.
Speaker Change: On IP and hardware, as I mentioned in the Tale of Two Markets remarks,
Speaker Change: that it even though the contract may be committed the by when the customer pulls it down varies based on
Speaker Change: the FSA so if you if you look at it that way
that's not necessarily changing design methodology.
Speaker Change: Would you say that impacts your view at all that you expressed a year ago about how AI could lift industry growth rates for EDA by about 200 basis points, or...
Speaker Change: I guess a different way to ask, have you actually seen that type of benefit?
Speaker Change: and it's either because of your product demand or the markets you serve but that 200 basis points of benefit is maybe being a bit masked by the more tepid results from the analog markets you've been discussing.
Speaker Change: Excellent question, Joe. When we talked a year ago, we talked about two things, if you remember. We talked about Synopsys.ai having two offerings from Synopsys.
the AI optimization and the generative AI.
Speaker Change: We were not talking at the time about agentic AI because we thought it was further down the road and we kind of teased autonomous design at the time, but it did not, from a technology point of view, feel that it's coming as fast as it's coming right now.
Speaker Change: From a monetization point of view, the AI optimization, we are monetizing it.
Speaker Change: But is that monetization in aggregate will result on the 200 basis point? Not by itself, no. But when you add generative and agentic, are we still seeing an opportunity?
Speaker Change: When we change the workflow for our customers and and give them a different approach
Speaker Change: to design a chip cheaper faster for us to monetize given the business model for agentic will be very different? The answer is yes and that's why if you recall during our investor day
Speaker Change: when we talked about AI optimization and generative, we did not put necessarily a timeline for that 200 basis point for that specific reason.
Speaker Change: Adoption from customers, excitement about the technology, penetration of the optimization across BSO, VSO, et cetera, is something actually we're very positive about and exactly where we thought we will be in the cycle.
Okay, that's great, Keller. Thank you very much. Thank you.
Speaker Change: The next question comes from Jason Salino with KeyBank Capital Markets. Your line is open.
Jason Salino: Hi, thanks for taking my questions. I just wanted to follow up on some of Charles's questions on China. So, compared to 90 days ago when you initially set guidance, have your assumptions changed at all? You know, I understand, you know, below corporate average, you know, it makes sense.
Jason Salino: but if this is a change you know the implication if it's true since you're holding the full year guidance the same is that something may be in your EDA or IP business might have improved since 90 days ago.
Jason Salino: So I wanted to clarify that and see if that's the case on those segments.
Yeah, Jason, the assumptions...
Jason Salino: In our planning, and therefore guiding the year, has not changed. We've always believed that there will be headwind.
Jason Salino: ongoing deceleration in China. What we, I want to say in our communication, have are clarifying and changing is
Jason Salino: Will it end similar to last year, a deceleration towards corporate average, or do we believe it will go further below corporate average? And that's really the nuance in clarifying where do we believe China will be.
Jason Salino: But the assumptions we made in our guidance, in our internal forecasting based on regions, the portfolio, EDA software, IP hardware, none of that changed.
Okay.
Jason Salino: And then the HAPS 200, the ZBOO 200 announcements, you know, you upgrade your products more frequently than your two competitors.
Jason Salino: How should we view these versus the prior iterations? I'm just trying to wonder if we could see an air pocket in demand as customers, you know, wait for their orders in the second half. Thank you.
Jason Salino: That's the advantage we have with an FPGA versus a custom chip, that you have a much faster refresh.
cycle and ability.
Jason Salino: So, with the HAPS 200 and the Xebu 200, actually no air pocket, and the reason for that is
Jason Salino: The same customers that they were buying from us, the EP, remember we talked about the EP before, now with the next generation, they have already are purchasing.
The prior generation EP plus
Sheila Glaser: the new capacity that we can provide with the 200. And as Sheila mentioned, right now the demand is absolutely there. It's our ability to deliver to that demand, which we're building the capacity and our ability to expand it.
Speaker Change: amazing thank you thank you yeah and Jason my comment was more about availability not about air pocket and demand so that's much more Q4 weighted yeah yep thank you
Thank you.
Thank you.
Speaker Change: The next question comes from Jave Leishauer with Griffin Securities. Your line is open.
Speaker Change: Thank you. Good evening. Sassine, I'd like to ask your tale of two markets.
Speaker Change: point from a different perspective, and that is strictly with respect to semi-R&D.
Speaker Change: and that is we do seem to have seen over the last number of quarters
Speaker Change: more concentration of those semiconductor companies that are continuing to show
Speaker Change: as compared to what we might have seen previously where the growth was broader among the population of semi-companies.
Speaker Change: Is there something that you've seen or might be concerned about that in an already concentrated market, in the semis, that the sources of really good growth are becoming fewer and fewer? Then I have a follow-up.
If you look at it in aggregate,
The
bi-yet
Speaker Change: very advanced chips, N2, N3, multi-die, advanced package, or even actually earlier this week, discussions with automotive and industrial customers looking for the next opportunity.
Speaker Change: to deal with more integration on their chip and move to the next node, albeit it's not an N3 or an N2, but going to FinFET, for example, in order to provide a cheaper, more competitive chip.
Speaker Change: That's a great opportunity for us because they are investing more in R&D and they're doing a refresh per se on...
Speaker Change: the IP that they want to pull down, using more hardware, using the latest EDA software, etc.
Speaker Change: So, in aggregate, when we see the growth from 6% to 9% in the semiconductor R&D, we are seeing how it's matching with our growth. It's not like they're growing from 6% to 9% and we're staying flat. We are growing with their growth of R&D investment.
Thank you. Thank you. Thank you.
in aggregate, that's as a whole, yeah.
Speaker Change: Right, understood. So your point about changes in productivity and workflow and the like is historically, I think, really interesting. And over the last
Speaker Change: for decades that commercial EDA has existed. It has probably always been the case that there are differences in how customers employ EDA and get a return on investment. EDA has never been equally distributed.
productivity.
Speaker Change: let's say, and you look at a current example where the largest spender on EDA
Speaker Change: spent a higher percentage of R&D on commercial EDA, probably more than double the next largest company, and yet we can look at differences in return on the employment of EDA.
Speaker Change: So, the question is, as you infuse, you and your peers infuse more AI capabilities,
Speaker Change: across the design process. Do you think that that historical differentiation of capability changes and customers become perhaps more and more alike in their capabilities because of the availability of this whole new class of technology?
Speaker Change: You know, the leading customers, I want to say they worry about, as they invest a bigger amount of their budget towards R&D.
Will AI democratize?
Speaker Change: across and will make the number 2 catch up faster to the number 1 because of the AI and improving productivity.
The answer is the following.
Speaker Change: If you look at the workflow, so far AI has not changed the workflow. The steps that you go through from the first phase until tape out of a chip has been the same.
Speaker Change: from a workflow point of view, even though there has been a tremendous amount of automation and innovation to deal with the increased complexity.
Speaker Change: Where we believe the agentic AI will have an opportunity is to change the workflow.
Speaker Change: And the moment, and by the way, this is no different than other leading enterprise software companies, the way they're talking about agentic, the moment it changes the workflow, then you have an opportunity to monetize. So, so far, EDA for the last
Speaker Change: X number of years or a couple decades has provided amazing amount of technology and innovation but the workflow has remained the same. So that's the nuance, Jay, that we're highlighting in terms of opportunity with Egentic.
I understood. Thanks, Sassine. Thank you.
Speaker Change: The next question comes from Nei Tse Nung with Barenburg. Your line is open.
Speaker Change: Hi, thank you for the question. I've just got one please on your cost control in the quarter and then how you're guiding for next quarter as well. If I've got my maps right, I think for the Q1,
Speaker Change: You were guiding towards the midpoint about 5% year-on-year total expenses growth. I think the quarter came in around 2% so you know really nice performance there.
Speaker Change: But for Q2, you were guiding for a cost growth of about 8.5% at the midpoint, so in light of, you know, how you performed in Q1, how should we think about the Q2 guide? And also, if you could maybe
Speaker Change: Just some thoughts on the cost element H2 as well, please.
Speaker Change: Sure. So, we were a little bit lighter on cost in Q1 than we had originally anticipated. And that really came down to just timing of hiring and timing of some big ticket expense items. We expect no change for the year.
Speaker Change: Structurally Q2 always steps up because that's when our merit, our annual performance budget kicks in and so that's the structural change that you see between Q1 and Q2 but no change for the full year even though Q1 we are a little bit later just due to some timing elements.
Speaker Change: Got it. Thank you. That's helpful. Thank you. Thanks for the question.
Speaker Change: We have time for one more question. It will come from the line of Joshua Tilton of Wolf Research. Your line is open.
Joshua Tilton: Hey guys, I really appreciate you sneaking me in here. Can you hear me?
Yes.
Great. Sassine, maybe this one is for you.
Sassine Ghazi: First a clarification and then try and maybe a point of understanding.
Joshua Tilton: If I remember correctly, the talk track around the guidance for this year coming out of Q4, was it you guys expected?
trying to grow in line with the corporate average.
Joshua Tilton: And I feel, correct me if I'm wrong, but I feel like now the message is that the expectation is that China...
is actually going to grow below.
Joshua Tilton: The corporate average for the year. So my first part of my question is just to clarify if that's correct. And I guess my follow up part to that question is
Speaker Change: You know, I guess, what gives you guys the confidence to reiterate the guide given is now that you feel like China will be growing below the corporate average for the year? Thank you.
Speaker Change: Yes, Joshua, you got it correctly. When we guided FY25, given we just came out of FY24, where China decelerated
Speaker Change: to corporate average, we did say that based on our guide of FY25, it will be around the corporate average growth.
Speaker Change: Now, given the headwinds that we are seeing, and I want to say they're getting stronger, even after we announced or guided number of customers got added to the entity list, etc.
Speaker Change: We believe that China by itself will be decelerating below the corporate average. However, the guide in itself...
Speaker Change: is not changing. We see a number of strengths in technology and other regions, customers, that we feel very good about the guide that we provided for the year.
Speaker Change: super helpful maybe is there any way you just take that one step further and just maybe you know unpack one layer deeper into some of the strengths that you're seeing that is offsetting the China weakness
Speaker Change: Yes, for example, the one that we just talked about, the HAPS 200 and ZIBU 200 family, that's a great opportunity for us to monetize.
Speaker Change: IP in the strong demand and requirement from system companies and AI HPC grouping of semiconductor given our scale for IP.
That's another opportunity. Today with
a challenge and an opportunity around scaling it's not
Speaker Change: The lack of opportunities. We have plenty of opportunities and given our position and leadership position in the market, that's a great opportunity.
These chips require very advanced EDA.
Speaker Change: and to re-emphasize what I said earlier about AI optimization, the latest fusion design platform, the ICV, the IC validator.
Speaker Change: competitive displacement, ASO. I mean, those are all things that are giving us great confidence that both growing share and being able to monetize that share and therefore sticking to the guide that we provided.
Super helpful, Sassine. Thank you so much.
You're welcome, Joshua. Thanks, Josh.
Yes.
Speaker Change: Thank you, this concludes today's conference call. We thank you for joining. You may now disconnect.
Thank you.