Synopsys Inc Q1 2025 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Siti Panigrahi - Mizuho Securities Co., Ltd. - Analyst : Thank you. Congrats on a nice quarter. And, Shelagh, that 200 bps margin (inaudible) is impressive. Sassine, I want to ask about growth trends that you expect to unfold, over the short to long term? 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 DeepSeek going to impact EDA, in general, and Synopsys, in particular? And, then, I have a follow-up. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, SNPS.OQ - Q1 2025 Synopsys Inc Earnings Call

Question: Siti Panigrahi - Mizuho Securities Co., Ltd. - Analyst : Okay. And do you see that, now, in those traditional semi non-AI side, do you think that we already hit the trough? And do you expect -- what trends you're seeing on those, outside of making AI chips?

Question: Siti Panigrahi - Mizuho Securities Co., Ltd. - Analyst : Thank you. That's helpful.

Question: Lee Simpson - Morgan Stanley & Co LLC - Analyst : 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 discussion that you made around hardware -- that hardware, 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 -- see, couldn't help it -- 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? Thank you.

Question: Lee Simpson - Morgan Stanley & Co LLC - Analyst : Great. Thanks so much.

Question: Joe Quatrochi - Wells Fargo & Company - Analyst : Thanks for taking the questions. I was wondering if I could ask, again, on the design activity for non-AI versus AI. For the non-AI customers, have you seen, like, 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?

Question: Joe Quatrochi - Wells Fargo & Company - Analyst : That helpful. I appreciate the detail. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, SNPS.OQ - Q1 2025 Synopsys Inc Earnings Call As a follow-up, 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, I think your inventory increased a decent amount this quarter -- I think it's at a record level.

Question: Charles Shi - Needham & Company, LLC - Analyst : Thanks for taking my questions. Maybe, the first one, a housekeeping item. Shelagh, what's the backlog, exiting fiscal Q125?

Question: Charles Shi - Needham & Company, LLC - Analyst : Okay, got it. Thanks. Maybe, a more of a longer-term question. The question is, like, rooted in last year's number. Last year, fiscal '24, the EDA revenue for Synopsys, by back-half -- the extra week impact in fiscal Q124 -- the growth rate was around 9% year on year. But, when I look at your peer, their core EDA revenue, also, kind of shows some deceleration from double digit to, like, high-single digit, in the last fiscal year. So it feels like you, guys, are probably seeing the same thing, here. But, wonder, what do you think about the long term? You, guys, were thinking about 12%, over the long term. But was last year hitting a cyclical bottom, in terms of EDA revenue growth? Or we still need to wait a little bit of a recovery? Let's say, the non-AI side -- you keep referring to a pair of two markets, right? -- for that to recover to get back to the low-double-digit EDA growth.

Question: Charles Shi - Needham & Company, LLC - Analyst : Thanks. Maybe, a quick follow-up on China. So seeing, I think, last quarter, when you provided the first outlook at the fiscal '25, China -- you adopted that, like the prior fiscal year, you want to be a little bit more cautious. But you actually did not provide a quantitative guidance on where you think the China growth rate or percentage contribution to a total revenues can be, in fiscal '25. But I look at the reported fiscal Q1 number, it's a pretty meaningful step-down from last year's average China revenue run rate. Let's say, $250 million per quarter but fiscal Q1 was, like, $174 million. Even if I think that China is going to be flat year on year, for you, that means a pretty meaningful catch-up for the next three quarters. So are you at a place where, maybe, you can start to call the direction of China? Maybe, even the absolute database or percentage-wise, where the China revenue can go, this year, in fiscal '25. Are you there yet to make a call? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, SNPS.OQ - Q1 2025 Synopsys Inc Earnings Call

Question: Charles Shi - Needham & Company, LLC - Analyst : Thanks.

Question: Joe Vruwink - Robert W. Baird & Co. Inc. - Analyst : Great. Hi, everyone. I see, in the 10-Q, 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. I'm just wondering how you think about the trade-off between annual contract value and total contract value. Is it 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?

Question: Joe Vruwink - Robert W. Baird & Co. Inc. - Analyst : Yeah. Okay. That makes sense, Shelagh. I wanted to go back to your comments, Sassine, at the current generation of AI you have available, the optimization products -- that's not necessarily changing design methodology. 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, a different way to ask, have you actually seen that type of benefits? And it's either because of your product demand or the market 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.

Question: Joe Vruwink - Robert W. Baird & Co. Inc. - Analyst : Okay. That's great color. Thank you very much.

Question: Jason Celino - KeyBanc Capital Markets, Inc. - Analyst : Hi. Thanks for taking my questions. I just wanted to follow-up on some of Charles's questions on China. Compared to 90 days ago, when you initially set guidance, have your assumptions changed, at all? I understand, below corporate average. It makes sense. But, if this is a change -- the implication, if it's true, since you're holding the full-year guidance the same, is that something, maybe, in your EDA or IP business, might have improved, since 90 days ago? Wanted to clarify that and see if that's the case, on those segments.

Question: Jason Celino - KeyBanc Capital Markets, Inc. - Analyst : Okay. And, then, the HAPS-200, the ZeBu-200 announcements -- you upgrade your products, more frequently, than your two competitors. 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 wait for their orders in the second half. Thank you.

Question: Jason Celino - KeyBanc Capital Markets, Inc. - Analyst : Amazing. Thank you.

Question: Jason Celino - KeyBanc Capital Markets, Inc. - Analyst : Yes. Thank you.

Question: Jay Vleeschhouwer - Griffin Securities, Inc. - Analyst : Thank you. Good evening. Sassine, I'd like to ask your tale-of-two-markets point, from a different perspective. And that is strictly with respect to semi R&D. And that is we do seem to have seen, over the last number of quarters, more concentration of those semiconductor companies that are continuing to show good or even very good growth, as compared to what we might have seen, previously, where the growth was broader among the population of semi companies. Is this 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, SNPS.OQ - Q1 2025 Synopsys Inc Earnings Call

Question: Jay Vleeschhouwer - Griffin Securities, Inc. - Analyst : Right. Understood. So your point about changes in productivity and workflow and the like is, historically, I think, really interesting. And over the last four 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 in EDA. It's never been equally-distributed productivity. Let's say, you look at a current example where the largest spender on EDA 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 the EDA. So the question is, as you infuse -- you and your peers -- more AI capabilities, 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?

Question: Jay Vleeschhouwer - Griffin Securities, Inc. - Analyst : I understood. Thanks.

Question: Nay Soe Naing - Joh. Berenberg, Gossler & Co. KG - Analyst : Hi. Thank you for the question. Just got one, please, on your cost control, in the quarter. And, then, how you got (inaudible) next quarter, as well. If I've got my math right, I think, for the Q1, you were guiding towards at the midpoint, about 5% year-on-year total expense growth. I think the quarter came in around 2%. So a really nice performance, there. But, for Q2, you were guiding for cost growth, about 8.5%, at the midpoint. So in light of how you performed in Q1, how should we think about the Q2 guide? And, also, if you could maybe -- just some thoughts on the cost-element H2, as well, please?

Question: Nay Soe Naing - Joh. Berenberg, Gossler & Co. KG - Analyst : Got it. Thank you. That's helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, SNPS.OQ - Q1 2025 Synopsys Inc Earnings Call

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : Hey, guys. I really appreciate you sneaking me in here. Can you hear me?

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : Great. Sasine, maybe this one is for you. It's more of a, first, a clarification and, then, find, maybe, a point of understanding. But, if I remember correctly, the talk track around the guidance for this year, coming out of Q4, was that you, guys, expected China to grow, in line with the corporate average. And I feel, I correct me if I'm wrong, like now, the message is that the expectation is that China is actually going to grow below the corporate average, for the year. So my first part of my question is just to clarify if that's correct. And my follow-up part to that question is what gives you guys the confidence to reiterate the guide, given, as now, that you feel like China will be growing below the corporate average, for the year? Thank you.

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : Super helpful. Maybe, is there any way you could just take that one step further and just, maybe, unpack one layer deeper into some of the strengths that you're seeing that is offsetting the China weakness?

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : Super helpful, Sassine. Thank you so much.

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : Will you close this out, operator?