Synopsys Inc Q3 2025 Earnings Call Transcript

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

Question: Ruben Roy - Stifel - Analyst : Yeah, hi, thank you very much, Sassine, I'm wondering if you could maybe spend a few minutes just walking through the three challenges around the IP business. Just kind of thinking through export restrictions and design starts in China and then the foundry customer versus the road map and the impact of that. It seems like that's potentially a bigger issue that could be a headwind longer term? And maybe you could just kind of describe Q3 and kind of what the impacts were across each of those three issues? And then as you think about next year, and resource reallocation, et cetera. Will this require acceleration in things like M&A? Or are you kind of positioned to address the needs of your customers with what you're working on organically? And how soon can you turn this around on what sounds to be the most important part of those three headwinds? Thank you.

Question: Ruben Roy - Stifel - Analyst : Thank you for that detail, Sassine if I could segue then into question for Shelagh on the operating margin with IP coming down and Ansys sort of coming into the model here. If I've done my math correctly, it looks like Shelagh, the operating margin is going to net out or a little less than 6% for Q4. And just wondering if you can comment on kind of the decline in operating margins and maybe how you bridge to the longer-term target in the mid-40s.

Question: Ruben Roy - Stifel - Analyst : Got it. Thank you, Shelagh.

Question: Lee Simpson - Morgan Stanley - Analyst : Great. Maybe I'll start again with the Design IP. I mean, clearly, the weakness here has come as quite a surprise for everyone. We haven't seen this elsewhere. It does look maybe on the simplistic mathematics that it's around about $120 million that you're weaker versus expectation anyway for Design IP. And I think you've called out the two elements, China and, of course, the foundry customer as primary here. So I'm just trying to understand how much of a heads-up did you have on this weakness, this design IP slowdown. And maybe how much of this is permanent? I mean does the China business come back? Do you think does the foundry business evolve into something else? I really just want to get a color on how permanent this might actually be. Thanks.

Question: Lee Simpson - Morgan Stanley - Analyst : Got you. And maybe just one for the clarification on the road map and resourcing. I'm just trying to understand, is there a specific area that we should be thinking about here. It sounds to my years, and I could be wrong, obviously, that this is mainly foundational IP that you're realigning for, because you did mention interface technology but didn't suggest that was where you're realigning that almost seemed like where you were doubling down. Have I got that the right way, around?

Question: Lee Simpson - Morgan Stanley - Analyst : Great, that's very clear. Thanks so much.

Question: Charles Shi - Needham & Company - Analyst : Yeah, good afternoon. I do want to follow up on the pivoting on the IP side of the business. It does sound like other than the China and maybe the foundry customer challenges, Synopsys is really going through a transition in the IP business model. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 09, 2025 / 9:00PM, SNPS.OQ - Q3 2025 Synopsys Inc Earnings Call I think one thing really caught my attention in your prior remarks as I then was about higher level of customization, maybe more migration into subsystems. It seems like that it's something your IP not necessarily a competitor, but another peer of our in the IT business has been going through over the past couple of years. I wonder how should we rethink about the long-term IT operating profitability from that perspective because we do get the idea why this is moving to that direction, but are you able to maintain the same kind of IP long-term operating profitability targets going forward? Wonder if you can provide some strategic thoughts on that direction. Thanks.

Question: Charles Shi - Needham & Company - Analyst : Maybe a follow up, a short-term question, $10.1 billion backlog for the quarter exiting July. How much of that was Ansys backlog and how much of that was legacy Synopsys backlog?

Question: Charles Shi - Needham & Company - Analyst : Thank you.

Question: Joe Quatrochi - Wells Fargo - Analyst : Yeah, thanks for taking the questions. Maybe just to follow up on that last kind of train of thought on the IP business. I mean, are we to think about you looking at different business models in terms of royalties and things of that nature, similar to some of your competitors? And I guess, can you talk about just your customers, I think you talked about them wanting to move very quickly on the subsystems and IP, I guess, can you talk about just time to market and the competition there?

Question: Joe Quatrochi - Wells Fargo - Analyst : Yeah. Appreciate the detail. And then as a follow-up, for Shelagh. How should we think about just on a go-forward basis? Like what's the right level

Question: Joe Quatrochi - Wells Fargo - Analyst : Thank you.

Question: Siti Panigrahi - Mizuho Securities - Analyst : Thank you. I want to switch to the Ansys acquisition. So it's been now Ansys 1.5 -- more than 1.5 months with -- after the close. So what are the puts and takes in terms of what you expected the beginning last year, when talked about versus after you having? What are the surprises that you have seen? And specifically, I think you talked about the revenue synergy you still reiterated. But going back to the Ansys growth, if we look at S4 filing there, they are talking about low to mid-teens over the next few years. So what are the potential drivers for that Ansys to grow above that 10% market growth? Any color would be helpful.

Question: Siti Panigrahi - Mizuho Securities - Analyst : And Shelagh, just a follow-up to that. Ansys revenue, $78 million in Q3. But what's your adjuntion of Ansys revenue embedded into the Q4 guidance. Q4 historically a strong quarter for Ansys, but again, it will only include October. So is there any linearity in the quarter that we should consider? Any color would be helpful.

Question: Siti Panigrahi - Mizuho Securities - Analyst : Thank you.

Question: Joe Vruwink - Baird Equity Research - Analyst : Great, thanks for taking my questions. EDA and IP as industries have fairly diversified opportunities, and that's true across customer accounts and end markets. But Synopsys has always been fairly unique in that traditionally. You have one outsized account exposure and some of the things you're saying seem to consider a need to diversify further. You made a remark, Sassine, earlier about two years. two years from now, we'll look back and I think about contract lengths being two to three years. Is that the appropriate time frame to fully enact the changes you're focused on and getting the business back on the track you believe is right?

Question: Joe Vruwink - Baird Equity Research - Analyst : Okay. That's helpful. Shelagh, maybe you answered this already, but I think it would be helpful just to get a baseline around what's changing in this guidance versus the guidance that was previously on the table. How much is IP coming down, how much does Ansys China is a factor, just anything there that can help get us all on the right baseline going forward?

Question: Joe Vruwink - Baird Equity Research - Analyst : Okay, thank you.

Question: Harlan Sur - JP Morgan - Analyst : Good afternoon. Thanks for taking my question. I assume that the Q3 foundry revenue weakness in IP was due to your largest customer, as they pivot from their prior focus on [18 8] to now [14 8] foundry manufacturing technology. Is that the right assessment? And given the challenges of this customer, I mean, there's still question marks on their ability to be successful in foundry. Is this Synopsys team still going to support this customer under future foundry road maps?

Question: Harlan Sur - JP Morgan - Analyst : Thank you for that, Sassine. And then, Shelagh, it looks like your total expense guidance for Q4, it's coming in about $5 million higher, about 3.5% higher -- and if I just combine your total expense structure and Ansys' total expense structure prior to the close of the acquisition. So what's driving the higher expense outlook for Q4? And then more importantly, from the Q4 base,-- how do we -- how should we think about the potential cost synergies looking out over the next few quarters? In other words, how should we think about the fiscal '26 4Q exit run rate on total expenses?

Question: Harlan Sur - JP Morgan - Analyst : Okay. Thank you.

Question: Jay Vleeschhouwer - Griffin Securities - Analyst : Thank you. Good evening. Sassine, for you first. is the 10% targeted reduction of headcount, something that you would have done irrespective of the current and anticipated unpleasantness in IP. And in other words, you would have done that anyway. It looks as though your organic head count ex Ansys was up over 2,000 heads year-over-year, up over 600 sequentially. So perhaps you got a bit ahead of yourselves in terms of the organic expansion. And in the meantime, can you talk about the integration or consolidation that you've done of Ansys already. Our understanding is that very soon after the close, you consolidated around the named accounts direct business. And perhaps you can also talk about your intentions on their very large indirect business. And then my follow-up for Shelagh.

Question: Jay Vleeschhouwer - Griffin Securities - Analyst : Okay. For Shelagh, you made the interesting comment that you've already coordinated Ansys' fiscal period with yours, and you noted the Q1 concentration. Following up on that, historically, Ansys was indeed highly seasonal, particularly in their Q4, but not only in their Q4 because of 606 effects. So the question is, do you think that over time, you could perhaps smooth out the seasonality and/or 606 effects that they had, so pronounced in their numbers. In other words, do you think you might change their lease and upfront model to more of your prevailing subscription model?

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Hey, no, I appreciate you fitting me in, I'll just ask one in the essence of time. I think, you've mentioned multiple times that you've tried to derisk the Q4 guide to adjust for some of the headwinds you've been seeing without knowing how much Ansys is contributing, it's hard to measure how conservative or derisked it is. So maybe I'll ask it a different way and say, IP historically has been up sequentially for the past two years in Q4. Maybe it's regular seasonality or maybe it was something more specific. But given the headwinds you've seen directionally, could we see the same trend again with seasonality in IP for the last couple of years?