Synopsys, Inc. (SNPS) Earnings

Management highlights

- Overall Financial and Strategic Position - Synopsys delivered a strong Q2, with revenue, non-GAAP operating margin, and non-GAAP EPS all exceeding guidance, driven by strong execution and growing AI-driven demand for its engineering solutions - The company holds a unique position as an essential provider of EDA, IP, and multi-physics simulation across the AI supply chain, as growing chip and system complexity increases demand for integrated design, simulation, and validation solutions - The Synopsys-Ansys integration is progressing well, with disciplined cost synergy execution on track - The company announced a cooperation agreement with Elliott Management, and Jesse Cohn will join the board as an independent director - Synopsys plans to host an investor day on September 30, 2026 to discuss long-term strategy, value capture, and margin expansion - Product Development and Customer Adoption - EDA: Secured multiple strategic system wins for hardware-assisted verification platforms (ZS5, Xebu, HAPS200); achieved over 30 full-flow technical wins at advanced nodes; a leading HPC provider taped out a complex next-generation AI accelerator using Synopsys' 3DIC unified design solution, marking production-scale adoption - New EDA capabilities: Multi-physics fusion technology is in expanding customer trials, delivering up to 3x faster design closure and 2x faster turnaround for complex analog designs, with commercial ramp planned for H2 FY26; 20 customers are now evaluating agentic AI EDA capabilities across 25+ specialized agents for front-end verification, implementation, and analog flows - ANSYS: Continued strong demand across industries, with AI data center build-out driving chip-to-grid simulation demand, aerospace and defense customers using simulation to generate AI training data, and automotive customers digitizing safety-critical system engineering workflows - Design IP: The segment bottomed in Q1 and has begun a recovery, with sequential growth expected through H2 FY26. PCIe 7.0 IP achieved >90% win rate with 18 new licenses; secured additional UCIe design wins, with total lifetime wins exceeding 150, and achieved a 64-gig tape-out on a 2nm process; delivered the industry's first HBM4 IP test chip. The pending sale of the processor IP solutions business is expected to close shortly, and the company is focusing on higher-value AI-aligned IP opportunities with hyperscalers.

Guidance

- Full year FY26 revenue guidance was raised to a range of $9.625 billion to $9.705 billion. The update reflects a $35 million midpoint increase from underlying business performance, a $60 million gross-up from the ANSYS channel accounting change, and a $40 million reduction from the upcoming processor IP divestiture - Full year non-GAAP operating margin guidance was raised to 41% at the midpoint, a 50 basis point increase from prior guidance, driven by cost discipline and faster-than-expected synergy realization. Half of the total committed ANSYS acquisition cost synergies are expected to be realized by the end of FY26 - Full year non-GAAP EPS guidance was raised to a range of $14.72 to $14.80, a $0.34 midpoint increase from prior guidance - Full year free cash flow guidance was raised to approximately $2 billion, a $100 million increase from prior guidance. CapEx guidance remains unchanged at approximately $300 million - ANSYS full year revenue contribution is expected to be approximately $2.96 billion including the accounting impact, consistent with prior guidance after adjusting for the channel change - Q3 FY26 guidance: Total revenue of $2.41 billion to $2.46 billion; non-GAAP EPS of $3.63 to $3.69

Segment performance

1. Design Automation (includes EDA and ANSYS): Revenue of $1.822 billion, representing approximately 80% of total Q2 FY26 revenue. EDA revenue grew 8% year-over-year, driven by strong demand for hardware-assisted verification from hyperscaler and semiconductor customers for complex AI designs. Adjusted operating margin for the segment was 43.3%. ANSYS contributed $652 million in Q2 revenue, including a $12.5 million gross-up from the updated channel revenue accounting treatment. 2. Design IP: Revenue of $454 million, representing approximately 20% of total Q2 FY26 revenue. Revenue was down 6% year-over-year but up 12% sequentially from Q1. Adjusted operating margin for the segment was 24.4%.

Risks & headwinds

Actual future results may differ materially from management's forward-looking statements and guidance due to a variety of unknown factors, including risks related to customer adoption of new product offerings, integration of the ANSYS acquisition, timing of customer deal closures, regulatory restrictions on operations in key markets such as China, and general macroeconomic and industry demand conditions. These and other additional risk factors are detailed in Synopsys' most recent SEC filings and earnings press release.

Analyst Q&A

• Q: How do higher-value custom hyperscaler IP deals differ from traditional IP, and what drives confidence in continued sequential IP growth? /

  A: Management is highly confident in the long-term IP opportunity, which serves multiple end markets across all major foundries. The company is shifting to a new business model for high-value custom engagements that captures more revenue than traditional fixed NRE or use fee models, as hyperscalers rely entirely on Synopsys IP for their custom silicon strategy, and are willing to accept revised terms. The IP segment bottomed in Q1 and achieved 12% sequential growth in Q2, and management expects this sequential growth trend to continue through the rest of FY26.

• Q: How will agentic AI change EDA contract structures, and will it increase Synopsys' share of customer R&D spend? /

  A: EDA is evolving from tools managed by human engineers to a combined workflow of human engineers and autonomous AI agent tools running Synopsys software. The current expected contract structure will shift from base subscriptions for human users to base subscriptions plus consumption-based pricing for agent usage of tools. This new workflow is an upside opportunity for Synopsys, as increasing complexity and adoption of agentic design will increase customer demand for the company's products.

• Q: What changes to operations or pricing are expected following the new board appointment from Elliott Management? /

  A: Management and Elliott Management are immediately aligned on Synopsys' value creation, core asset quality, and market leadership. Both parties agree on two key priorities: further increasing value capture from the company's differentiated offerings, and improving operational efficiency to expand operating margins. These are already priorities for Synopsys management: the company has already raised FY26 operating margin by more than 300 basis points year-over-year, and is already pursuing new business models to capture more value from AI-driven customer engagements.

• Q: When will joint Synopsys-Ansys multi-physics products start contributing to the targeted $400 million in revenue synergies? /

  A: The combined multi-physics fusion products are still in customer evaluation, with commercial ramp and revenue contribution starting in FY27. The new combined offering is additive to existing standalone Synopsys and Ansys products, so all revenue from this offering will be incremental. Management remains on track to hit the committed $400 million in semiconductor-focused revenue synergies, and confidence is increasing due to strong early customer feedback, with additional long-term upside from physical AI and digital twin opportunities.