Synopsys Inc Q3 2024 Earnings Call Transcript

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

Question: Harlan Sur - JPMorgan - Analyst : Good afternoon. Thank you for taking my question and great execution in the quarter. So seeing as you mentioned, leading edge chip design activity continues to accelerate at the 3-nanometer, 2-nanometer nodes, especially around AI and accelerated compute by both merchant, but also a significant amount of custom ASIC chips that are ramping that are coming to the market. But despite all of this, I mean, we are coming off of a pretty severe semiconductor downturn. And one of your large leading-edge customers has recently announced a significant amount of layoffs across the organization. They did also talk about driving better efficiencies around IP and EDA solutions. I interpreted this as they're going to do less of their own internal IP development, less of their own internal EDA software tool development, and potentially buy more merchant IP and more core EDA tools from Synopsys and maybe some of your other competitors. But I wanted to get your interpretation of this announcement and the near- to mid-term impact with any on your bookings, revenues or market share momentum at this customer.

Question: Harlan Sur - JPMorgan - Analyst : Great. Thank you for that. And just over the past 90 days, we've heard of many challenges your semiconductor customers are facing as they sort of push the boundaries on leading-edge chip designs, right? And these challenges don't revolve around the actual performance of the chip itself. The issue is that once you drop these chips into advanced packaging solutions, for example, the power dissipation of these chips is generating a significant amount of heat, causing thermal, mechanical, stress interactions with the packaging, causing a whole bunch of yields and reliability problems. And then on the flip side, we see more and more of your customers moving into the systems market, like AMD and their recent announcement to acquire ZT Systems, where AMD all of a sudden is going to be doing full-blown board server, rack-scale server design. It still seems like this is exactly -- we're having ANSYS systems analysis solutions as a part of the portfolio becomes a big advantage for the team. But given all of these dynamics, is the support from customers around the ANSYS acquisition continuing to build positive momentum? And then maybe in the interim, what is Synopsys doing to help customers with some of these chip package and systems-level challenges?

Question: Harlan Sur - JPMorgan - Analyst : Thank you.

Question: Vivek Arya - BofA Global Research - Analyst : Thanks for taking my question. Sassine, at the Analyst Day, you had suggested that core EDA, over time, the growth would grow from 12% to 14% from AI monetization. I'm curious, where is Synopsys in that journey? What have been the early signs to drive this kind of acceleration in the business?

Question: Vivek Arya - BofA Global Research - Analyst : Thanks, Sassine. And for my follow-up, kind of more near term. So EDA growth, so far, this fiscal year has been up about 9% or so. I understand last year was a tough year for the semiconductor industry, so you're probably seeing the effects of that. But what do you see going into next year conceptually? Do you think the seeds are being laid to help drive the return back to your trend line growth in EDA? Or is it too early to make that kind of conclusion?

Question: Jason Celino - KeyBanc Capital Markets Inc. - Analyst : Hey, thanks for taking my questions. Maybe my first one, just on the guidance for the year. It looks like you're narrowing the revenue range. As much as I'd like you to raise every quarter, I think we've already seen you raised two to three times this year. So I think we'll give you the pass. But curious if there were any areas that could have outperformed more or any areas downtick that offset some of the strength you did see. Curious there. Thanks.

Question: Jason Celino - KeyBanc Capital Markets Inc. - Analyst : Excellent. And then one quick one on China. It looks like it was down 8% in the quarter but still up 8% for the year. Maybe just compared to last quarter, I guess, how are you feeling about the demand environment in that region? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 9:00PM, SNPS.OQ - Q3 2024 Synopsys Inc Earnings Call

Question: Jason Celino - KeyBanc Capital Markets Inc. - Analyst : Perfect. Thanks, Sassine.

Question: Lee Simpson - Morgan Stanley - Analyst : Great. Thanks for fitting me, and great quarter, guys. Just wanted to ask an R&D question, if I could. So if you look at the numbers, it looks as though R&D was maybe slightly ahead of some people's expectations out there. And I think to be fair, there's been quite a build around new product updates, particularly hardware, but obviously around IP interfaces, maybe foundational IP as well. So I wondered if there was scope as we go through the end of this year and into next for you to maybe flatten some of the R&D. And just to help with that outperformance on the earnings line or maybe the pace of product innovation is unlikely to let you do that. I just wanted to understand the balance between those two positions.

Question: Lee Simpson - Morgan Stanley - Analyst : Great. Very clear. Maybe just to follow-up, I wanted to ask an end-market question maybe on automotive. I think in the past, you've noted a growing focus in automotive, and Sassine, some of your comments seem to call that out. We are seeing a pivot to software-defined vehicles. We are seeing custom silicon come coming into view. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 9:00PM, SNPS.OQ - Q3 2024 Synopsys Inc Earnings Call So just trying to understand what proportion of growth would you say is sensible for us to assume over the next couple of years coming out of automotive, given all the work, including some big microprocessors going into the car. Thanks.

Question: Lee Simpson - Morgan Stanley - Analyst : Understood. Thanks for the color.

Question: Ruben Roy - Stifel Nicolaus and Company, Incorporated - Analyst : Thank you. Sassine, hi. I wanted to go back to something you mentioned in your prepared remarks regarding design cycles contracting. And you mentioned that that's in the face of increasing chip complexity. And I think some of that, at least to me, seems like it's a relatively new development. And wondering how we should think about that as a maybe longer-term impact to your business. I'm thinking about this. Obviously, there's AI and your tools helping with those design cycle accelerations. But are there other sort of areas that your customers are asking you for -- as they try to accelerate their designs? And really, I guess the longer-term question here is, it's happening at the leading edge, it's happening with the most complex design, but do you think that that is a trend that could sort of move across the systems in IT industry as you continue to develop on your end? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 9:00PM, SNPS.OQ - Q3 2024 Synopsys Inc Earnings Call

Question: Charles Shi - Needham & Company Inc. - Analyst : Hi. Good afternoon. I have a question about China. I think at the beginning of the year, I think for two reasons, restrictions and the macro, you were sort of expecting maybe China doesn't grow as fast as the corporate, which kind of implies maybe the percentage of China revenue probably going to be lower, but you also said that dollar-wise, it's probably still going to be higher year on year for the full year. But the first three quarters of the fiscal year looks like you may be ahead of that plan, meaning that contribution-wise, it may actually get ahead of last year's 16% contribution from China, which would also imply, actually, China may grow faster than the corporate. There's a chance you actually can grow that faster than the corporate. Wonder what has changed. And specifically, the Q3 number from China is particularly strong. And related to that, did you see any of the pull-forward revenue from your Chinese customers for whatever reason, maybe for the fear of some getting banned by any of the new export controls? Mind if you could provide some color there.

Question: Charles Shi - Needham & Company Inc. - Analyst : Oh, yes. I do have a follow-up, yes. The other question, maybe for Shelagh, I think the non-GAAP expense looks like you are doing better. You're actually also ahead based on the numbers I can see that the July quarter, you did a $10 million better compared with what you planned as the total non-GAAP expense and for the full year $25 million less than what you expected. But wonder what's the change compared with the three months ago. Is there anything like the timing of the hiring, et cetera? Because I did remember some of the OpEx growth into the year-end was for you to invest in some new opportunities like in IP, like [PCIe], EDA, et cetera. So what's driving the slightly lower OpEx expectation here? Thanks.

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : Hey, guys. Thanks for sneaking me in here. I actually kind of want to follow up on few questions that are already -- asked already. The first one is the question about Intel's comments. But I just want to ask you very straightforward and very clear. And the question is, are there any changes in your forward growth of expectations because of Intel's comments about laying people off, using IP more efficiently, using EDA vendors more efficiently? And if not, what gives you the confidence that there is no change going forward? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 21, 2024 / 9:00PM, SNPS.OQ - Q3 2024 Synopsys Inc Earnings Call

Question: Jay Vleeschhouwer - Griffin Securities, Inc. - Analyst : Thank you. Sassine, with respect to your own product development of AI/ML branded products, one question I have is, how does the development process, or let's call it, the intensity of development for AI products differ, if at all, from your conventional product developments? In other words, how do you measure your own AI development productivity or your readiness for GA of those products versus conventional EDA products? Relatedly, at DAC two months ago, there was an interesting panel discussion in which Shankar participated regarding the evolution of EDA, AI/ML products and whether they remain separately branded products indefinitely or whether inevitably they become subsumed as features within the core product. So maybe you can address all of that. And then my follow-up will be about custom.

Question: Jay Vleeschhouwer - Griffin Securities, Inc. - Analyst : Okay. For my follow-up on custom, which you've now referred to the last several conference calls, what is your ambition for how large a business that can be? When we look at the industry data, things having to do with analog mixed signal, layout, and analysis are roughly a mid-teens percent of EDA, excluding IPs, in other words, mid-teens percent of design automation. A lot of that obviously is skewed towards Cadence and Ansys, but would it be your ambition that your analog mix signal business could ultimately be about a mid-teens percent of your design automation business, if not more?