SYNOPSYS INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Solid start to 2025, exceeding Q1 revenue guidance midpoint and non-GAAP EPS above guidance range.
• AI and HPC markets robust; industrial, automotive, consumer electronics challenged. Synopsys opportunity tied to R&D and mega trends of AI and silicon proliferation.
• Pending acquisition of ANSYS approved by European Commission, U.K. CMA provisionally accepted remedies, U.S. HSR Act waiting period expired, progress with other regulators, expected closing in first half of 2025.
• Design Automation: Expanded HAV portfolio with new prototyping and emulation systems, strong design activity.
• EDA Software: Strong design activity at advanced nodes, Fusion Compiler used in 2-nanometer projects.
• AI initiatives: Generative AI in tools like Fusion Compiler and prime time delivering productivity improvements, generative formal verification in Verde boosting productivity.
• Design IP: Launched new IP solutions, captured design wins, silicon success for key IPs.

Segment Performance

• Design Automation: Revenue up 4% year-over-year with 1 less week of revenue versus prior Q1, design activity remained strong. Synopsys is leader in hardware-assisted verification (HAV) solutions. Launched new HAPS 200 prototyping systems and ZeBu 200 emulation systems with up to 2x better performance. AMD, ARM, NVIDIA, etc., deploying new technologies.
• EDA Software: Strong design activity at advanced nodes; 2-nanometer projects accelerating. Fusion Compiler is industry-leading platform for advanced node digital design implementation. A U.S. hyperscaler taped out a 2-nanometer test chip using Synopsys design flow.
• Design IP: Revenue down 17% year-over-year vs prior record year. Opportunity set for IP expanding, especially with AI customers. Launched Ultra Accelerator Link and Ultra Ethernet IP. Captured design wins, silicon success for PCIe 4.05 IP and onetime programmable nonvolatile memory IP.

Guidance

• Full year 2025 targets: Revenue $6.745 billion to $6.05 billion, non-GAAP operating margin 40% midpoint, GAAP EPS $10.09 to $10.31, non-GAAP EPS $14.88 to $14.96, cash flow from operations ~$1.8 billion, free cash flow ~$1.6 billion.
• Q2 2025 guidance: Revenue $1.585 billion to $1.615 billion, total GAAP costs and expenses $1.19 billion to $1.21 billion, total non-GAAP costs and expenses $985 million to $995 million, GAAP EPS $2.21 to $2.33, non-GAAP EPS $3.37 to $3.42.
• Reiterates 10.1% to 11.1% revenue growth, 3% non-GAAP operating margin expansion, ~13% non-GAAP EPS growth for 2025.

Risks

• China Deceleration: Slowing local economy and headwinds from export controls and entity list restrictions leading to deceleration in China below corporate average.
• Market Volatility: Challenges in industrial, automotive, and consumer electronics markets with shifting AI adoption timelines.

Question and Answer

Q: Congrats on a nice quarter, and Shelagh that 200 bps margin date is impressive. Sassine, I want to ask about growth trends that you expect to unfold over this short to long term. And when you segment your growth into AI and non-AI side, you talked about the strong AI-driven design activity. So how do you see DeepSeek going to impact EDA in general and Synopsys in particular?

A: Yes. Thank you for the question. 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, you have the grouping of customers that they're developing semiconductor chips for AI, HPC and they've had a very strong demand and and a very healthy road map that we are engaged with and supporting and selling to. Then you have the other grouping of customers, which is primarily the consumer electronics, automotive, industrial, that their opportunity to leverage AI has been shifting to the right. Now you look at the consumer electronics, in particular, the PC and mobile, it has picked up recently due to applications like AI on PC, AI on phone. 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, et cetera, et cetera. Now you look at the whole semiconductor R&D, 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 Synopsys opportunity. we don't only sell to semiconductor, we sell to system companies, which are developing chips 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 IT hardware, software to design some of the more sophisticated chips. So that's how we see the landscape. I hope that gave you a sense of how we see the monetization.

Q: Great. Great quarter, guys. Maybe just a 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 here in, given the discussion that you made around hardware, that hardwood at least is shipping quite nicely to China. But probably not much else. So I wonder if you can maybe give us a sense for the moving parts. 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 but you did tease us with the Agentic AI and the productivity gains. And so I'm just trying to understand the viewpoint that Synopsys would have here utilizing, I assume 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?

A: Regarding China, if you recall, when we reported Q4 '23 and guided FY '24, we said that we're going to be pragmatic and regarding China. And we saw absolutely a trend of deceleration driven by two factors. 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. As we wrapped up FY '24, China finished roughly at corporate average. As we started looking at FY '25 and all these, I want to 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. Now you pointed out hardware in particular, and that really has nothing to do with one part of the portfolio or the other. Because customers, when they're buying from us, they're still buying the software, the IP and the hardware 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 list. So that's China. In terms of genic AI, it's such an exciting opportunity. And the reason is 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. And we're well on our way to partner with key leading AI partners to bring in that transformation from generative AI to genetic AI to the engineering world. In terms of us 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.