SYNOPSYS INC Q2 FY2025 earnings call

• Had a strong second quarter with revenue up 10% year over year, exceeding guidance midpoint. Non-GAAP EPS above guided range. Reiterating full-year revenue guidance. • Macro level: AI and HPC sectors robust, industrial and automotive showing signs of stabilization. Slowdown in China offset by other regions. • Business highlights: Design automation revenue up 6%, new hardware products HAPS 200 and ZeBu 200 off to strong start; multi-die architecture adoption; enabled first 2-nanometer-based HPC design. Design IP revenue up 21%, strong demand for high-speed SerDes IP, wins in PCIe 7.0 and UCIe Link. • Pending acquisition of ANSYS to address AI-powered silicon-to-systems design needs, with regulatory clearances in all jurisdictions except China. • Gen AI capabilities driving efficiency, with examples like Synopsys.ai Copilot assisting in design workflows.

Design automation segment revenue was $1.12 billion, up 6% year over year, with an adjusted operating margin of 40.9%. Design IP segment revenue was $482 million, up 21% year over year, with an adjusted operating margin of 31.2%.

• Reiterated full-year revenue guidance. • Updated non-GAAP EPS targets increased due to Q2 outperformance, partly offset by bond issuance net interest expenses. • Cash flow from operations expected to be approximately $1.5 billion, free cash flow approximately $1.3 billion. • Third-quarter revenue guidance: between $1.755 and $1.785 billion, with corresponding GAAP and non-GAAP earnings targets.

• Pending acquisition of ANSYS is subject to regulatory clearance in China, with ongoing negotiations with SAMR. • Potential impact of BIS export restrictions on China sales, with no current notice received but acknowledging the need to consider various scenarios.

Q: Lee Simpson from Morgan Stanley asked about China sales mix, decline in China revenue, and impact on margin.

A: Sassine Ghazi responded that China revenue is expected to decline year over year, but full-year guidance is reiterated due to strong execution in other regions. Cannot speculate on impact of potential BIS restrictions as no notice has been received.

Q: Jason Celino from KeyBanc Capital Markets asked about China revenue mix and expense base.

A: Sassine Ghazi stated that China revenue mix is declining, but it's difficult to specify expense base impact as operations are global.

Q: Vivek Arya from Bank of America asked about largest customer R&D spend and ANSYS deal.

A: Sassine Ghazi mentioned multiyear committed agreements with largest customer, and focus on completing ANSYS acquisition as it's crucial for industry innovation.

Q: Sitikantha Panigrahi from Mizuho asked about non-AI customer design activity and AI chip design opportunities.

A: Sassine Ghazi noted stabilization in industrial and automotive, and significant opportunities in AI chip design across different customer categories.

Q: Jay Vleeschhouwer from Griffin Securities asked about engineering workflow changes and agentic AI.

A: Sassine Ghazi discussed reengineering engineering and agent engineer technology, highlighting opportunities in multi-die systems and AI optimization.

Q: Nay Soe Naing from Berenberg asked about China performance and recurring revenue.

A: Sassine Ghazi explained China revenue decline is due to cumulative headwinds, and recurring revenue fluctuations are normal with strong IP growth.

Q: Joe Vruwink from Baird asked about China BIS restrictions foresight and R&D landscape.

A: Sassine Ghazi stated no notice received from BIS, and non-AI semiconductor R&D is stabilizing with new chip designs.

Q: Gary Mobley from Loop Capital asked about GPU-based compute pricing and supply chain for hardware products.

A: Sassine Ghazi discussed GPU-based compute pricing benefits, and Shelagh Glaser noted no supply chain constraints for current demand.

Q: Joshua Tilton from Wolfe Research asked about China revenue guidance and long-term growth.

A: Sassine Ghazi explained China revenue guidance accounts for first half headwinds, and confident in industry-leading double-digit growth.

Q: Blair Abernethy from Rosenblatt asked about AI portfolio adoption and agentic EDA timeline.

A: Sassine Ghazi discussed AI portfolio adoption and agentic EDA in L2-L3 phases, with progress ongoing.