Synopsys Inc Q4 2024 Earnings Call Transcript

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

Question: Joseph Vruwink - Robert W. Baird & Co Inc - Analyst : Thanks for taking my questions. I wanted to start just the underlying growth of 11.5% to 12.5%. I think that's maybe a point below the starting ranges you've been using over recent history. Is it may be possible to reconcile just the change that went into your planning assumptions for FY25. And I know you mentioned that the ANSYS deal may potentially close. How much is maybe your updated budgeting approach related to specifically the transaction and just wanting to be prudent around any disruption that creates?

Question: Joseph Vruwink - Robert W. Baird & Co Inc - Analyst : Okay. That's great detail. Second question just on the outlook period next year. Based on the $8.1 billion in backlog, another really strong quarter of bookings, it would seem like very high visibility on what the next 12 months may bring. I guess any changes in your views given all the current events that have been swirling around. You touched on some of them. But in terms of like various foundry investments, you mentioned briefly geopolitics. It doesn't seem to have come up just based on your 4Q bookings performance. But what might you anticipate in quarters ahead and how backlog may progress?

Question: Joseph Vruwink - Robert W. Baird & Co Inc - Analyst : Thank you.

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Hey. Thanks for taking my question. Maybe just a clarification on the Q1 guide. So I understand the year-over-year dynamics with like the one less week and then maybe an extra one last or two less couple of days based on the fiscal year change. But still, it's coming in sequentially down from Q4. It sounds like you had a pretty strong hardware quarter for Q4, but maybe can you just explain the seasonality that you're seeing for that first quarter? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 10:00PM, SNPS.OQ - Q4 2024 Synopsys Inc Earnings Call

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Okay. Great. Thank you. And then maybe just a quick follow-up for Shelagh. The divestiture of that optical solutions group, was there any divested revenue impact there? Just trying to think about the guide here and then what could have been taken out. Thanks.

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

Question: Harlan Sur - JPMorgan - Analyst : Good afternoon and thanks for taking my question. Two days ago, the Department of Commerce, BIS, Bureau put out an update on U.S. semiconductor and value chain rules and restrictions. There were some updates on the rules on EDA software. Is there any impact of these new rules to your fiscal '25 outlook?

Question: Harlan Sur - JPMorgan - Analyst : Correct -- yes. No, I appreciate that. And then for my follow-up, it's good to see the strong, double-digit growth in your IP businesses and your design automation businesses in fiscal '24. Sassine, as you mentioned, design activity as measured by chip design starts, IoT adoption appears to all be increasing quite a bit. We continue to see new entrants into the chip design sector, open AI being one of the more recent, like, so within your full-year guide, like how would you qualitatively describe the growth profile of your design automation and IT businesses relative to the full-year growth outlook?

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

Question: Vivek Arya - BofA Global Research - Analyst : Thanks for taking my question. Sassine, you mentioned you've seen very strong overall design starts, especially in AI. I'm curious, what was the growth in design starts that you saw last year? And what is your assumption? I imagine this is one of the more important metrics that you look at in forecasting the business? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 10:00PM, SNPS.OQ - Q4 2024 Synopsys Inc Earnings Call

Question: Vivek Arya - BofA Global Research - Analyst : And I appreciate that you don't want to be specific to a customer. But when we look at your largest customer, how big were they in fiscal '24? And they are going through some level of restructuring and turmoil. How are you trying to deal with that? And how much are you assuming that becomes a headwind or Synopsys next year. I assume you have contemplated that in your outlook, but how much of a headwind is that restructuring activity at your largest customer?

Question: Vivek Arya - BofA Global Research - Analyst : Thank you.

Question: Gary Mobley - Loop Capital Markets - Analyst : Hey, guys. Thanks for taking my question. Based on the fiscal year '25 operating margin guidance, 40%, it looks like you're bringing a lot more down to the operating income line than you did last year for each incremental revenue dollar despite the slowdown in projected revenue. And so Shelagh, my question is, is that largely a function of a slower pace of M&A activity or annualizing some of the deals that were done last year in anticipation of the ANSYS acquisition. Is that the proper read through?

Question: Gary Mobley - Loop Capital Markets - Analyst : Got it. Okay. Just a quick clarification. Sassine, you mentioned fiscal year ending backlog for -- sorry, fiscal year '23 ending backlog of $8.1 billion. Is that adjusted for software integrity? Or was it lower excluding the software integrity.

Question: Gary Mobley - Loop Capital Markets - Analyst : Yes. Great. Thank you.

Question: Jay Vleeschhouwer - Griffin Securities Inc - Analyst : Thank you. Good evening. So Sassine, you mentioned that you were aligning operations to prepare for growth for '25 and beyond. Could you be more specific about some of the steps that you've taken? And how much of that are things you would have done anyway irrespective of ANSYS. You just grew our headcount for the year by 10%. You also have the largest number of R&D openings you've had in two years. So maybe just talk about some of your -- those internal initiatives that you're putting in place to prepare for more growth and AI follow-up.

Question: Jay Vleeschhouwer - Griffin Securities Inc - Analyst : Thank you. Okay. As a follow-up on the third quarter call, you made some interesting comments about customer-specific AI use cases that with EDA models and the like that you might see more and more specificity on a customer-by-customer basis for AI. on the other hand, you and Cadence and the other EDA vendors have for the last number of years, also talked about more and more domain-specific design. So maybe you could talk about how those two play together, the long trend towards domain specificity and now apparently there is newer phenomenon of customer specificity, how do those come together or might it have any effect in terms of your product packaging, your development, the services you need to provide to customers and so forth.

Question: Jay Vleeschhouwer - Griffin Securities Inc - Analyst : Thank you, Sassine.

Question: Ruben Roy - Stifel Nicolaus & Co Inc - Analyst : Sassine, I had a couple of longer-term questions. I wanted to talk a little bit about the tail of the two markets in the half, I guess, versus the half not. One of the recurring themes that's been coming up more in recent times is the concept of acceleration of AI silicon designs and was wondering how you're thinking about that over the next couple of years in the context of one of the leading providers of IP for ASIC talked about leveraging cloud-based EDA tools just this week. And I'm wondering, I know you've been working on cloud-based tools for quite some time now. But is that something that changes your business model in any direction or in flexion and some way, I just's would love to hear your thoughts on that.

Question: Ruben Roy - Stifel Nicolaus & Co Inc - Analyst : Very good. That's very helpful. Thanks, Sassine. And then a quick follow-up on some of the comments you made on IP. The design activity remaining robust and you're specific around some of the interfaces that you're working or interface technologies, I should say, that you're working on and with. I read an interview recently where you talked about potentially looking at royalty models for your IP deliverables? Is that something that you think can play out sooner rather than later? And would it be specific to some of these areas like PCI Express 6 or CXL and whatnot?

Question: Ruben Roy - Stifel Nicolaus & Co Inc - Analyst : Got it. Thank you, Sassine.

Question: Charles Shi - Needham & Company Inc - Analyst : Hello, Sassine and Shelagh, thanks for letting me ask a couple of questions. Maybe the first one, I want to go back to the China question. The thing you said the export control does have an impact, but I wonder if the impact -- how do you characterize the amount of impact? Is it the material? Or is it -- maybe there is some impact, but it's not quite material for the FY25 outlook. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 10:00PM, SNPS.OQ - Q4 2024 Synopsys Inc Earnings Call But maybe one more related question. So I think you said you want to take a more cautious stance on China. But in fiscal '22 looks like China still grew in line with the corporate despite at the beginning of fiscal '24, you said something very similar. Wondering what's the current expectation as well for next year. Is China going to grow below, the corporate average? Or is it in line? Or -- and dollar-wise, do you think it's still going to be higher year to year in fiscal '25. Thank you.

Question: Charles Shi - Needham & Company Inc - Analyst : Got it. Maybe a question, maybe this is for Shelagh. In terms of that 45 to 55 split, because I was under the impression maybe it was more like 47-53. It looks like first half was slightly incrementally a little bit weaker, but the second half is a little bit stronger. Synopsys haven't had this much second half loaded. You've had the second half loaded year, but this loaded. I don't think it has been like this at least in recent years, but you tend to lead to a little bit more scrappiness among investors because you appear in '24, they have the profile exactly like this. There was a lot of skepticism about whether they can deliver the second half. So what do you say to those investors, how do we put a little more trust into that second half, that artistic uptick? I think you guys are pretty dependable, but I do want to hear from you guys, what would you say to folks who may be a little bit of skeptical.

Question: Charles Shi - Needham & Company Inc - Analyst : Thanks so much for the additional colors, Shelagh, Sassine. I really appreciate that.

Question: Joshua Tilton - Wolfe Research LLC - Analyst : Hey, guys. Can you hear me?

Question: Joshua Tilton - Wolfe Research LLC - Analyst : Thank you for sneaking me in at the end. I really appreciate it. My first question, I'm going to preface with, I apologize for beating a dead horse. But it feels just the message is that the guidance is a little bit more conservative than usual, especially around your assumptions for China. Can you maybe just take that one step further and just tell us how it's more conservative because for China? Is it lower revenue contribution, lower growth? Just walk us through how you embedded some conservatism around the China business for next year?

Question: Joshua Tilton - Wolfe Research LLC - Analyst : Okay. Very helpful. And then maybe just a follow-up for Shelagh really quick. I thought it was interesting, unless I misheard it, but at the end of your prepared remarks, you talked about some of the confidence you have heading into next year is around the mission-critical nature of the software. And I guess my question is, how next year are you translating how mission-critical your software is into better pricing for Synopsys and its customers?

Question: Joshua Tilton - Wolfe Research LLC - Analyst : Thank you, guys. Appreciate it.