Synopsys Inc at Needham Growth Conference Transcript

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

Question: Charles Shi - Needham & Company Inc. - Analyst : Shelagh, the past month has obviously been tough for Synopsys stock, but there seems to be some confusion around the fiscal 2025 guidance you issued at the fiscal fourth quarter conference call. On a continuing basis, let me just quickly recap some of the key metrics. You guys guided 10.1% to 11.1% top-line growth for the upcoming fiscal year and as well as it's a more second-half weighted, let's say, 45 to 55 profile, when we look at the revenue split between the first half and the second half. Do you mind if we start there? And I'll give you a chance to really recap and hopefully clarify some of the misunderstandings around that guidance.

Question: Charles Shi - Needham & Company Inc. - Analyst : That's a great overview. And obviously, there are several things. We're going to touch upon later in the fireside chat. But I want to -- I want to follow up on the '25 outlook, starting some of the product segment details. We know Synopsys runs industry-leading profile portfolio in IP and hardware. Well, I don't mean that the rest of the business is not industry leading, but these are the two businesses that we have seen that have been lumpy in terms of how the revenue progresses through the year, and not quite easy for us I mean, as analysts, as investors, to really do a good forecast, but you guys seem to suggest within that fiscal '25 profile, a very strong pickup of IP and hardware potentially in the second fiscal half of the year. What gives you the confidence that the profile is going to play out as what you see today and why this -- you guys feel like it's just a timing difference in terms of revenue recognition, and it's not anything that investors should be concerned about? Well, quite frankly, right, Shelagh, as you know, like investors in general, a little bit worried about the hockey stick type of guidance, but mind if you put people's mind at ease, would provide a little bit more color around why you are seeing it is like that.

Question: Charles Shi - Needham & Company Inc. - Analyst : Thanks, Shelagh. And maybe let me talk a little bit more about the China, right? I think you mentioned about China. You have a cautious view this year, but you have been cautious. I think this is for the second consecutive year, you have that cautious view on China. But what's your view on the impact from the export controls, well that was announced in early December. I think that was right in front of your earnings, right? You did provide some color, the HBM-related restrictions, you do expect some impact. But just last night, yesterday to today, the news is that there seems to be more restrictions around the foundries outside of China, that will restrict their ability to supply to the Chinese customers. And basically that kind of means that some of the access to leading-edge manufacturing, but China is going to be further restricted. There will be all these kind of restrictions, like you said, it's cumulative, but how should investors think about what that means to your China business. Can you kind of walk us through in a more comprehensive way.

Question: Charles Shi - Needham & Company Inc. - Analyst : Got it. All right. I want to switch gears towards the longer-term picture. So one of the worries that the investors have is EDA growth deceleration. Of course, one should not expect a company to really set a new growth record every year. That's a little bit unrealistic. There will be ups and downs, but the long-term trend, we think it's still quite positive. But we also did see that the Synopsys growth rate on a continuing basis, right, has come down from, let's say, 20%-plus in 2022 to, let's say, closer to 12% in 2025 if we really factor in the calendar differences between fiscal '25, '24, but 12% is what we see, right? So what do you say to those investors who may be worried about deceleration of EDA? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 16, 2025 / 4:00PM, SNPS.OQ - Synopsys Inc at Needham Growth Conference

Question: Charles Shi - Needham & Company Inc. - Analyst : Got it. So maybe switching gears more into the more the P&L side of the business, and Shelagh, I think since Sassine and you're part of the -- now part of the Sassine team, since you guys took over the leadership of Synopsys, I think you both have done a fantastic job improving the profit margin for Synopsys. Well, you just guided, let's say, 40% operating margin for fiscal '25, but going back just a couple of years, and I think the number was in low-30s, right? So you're now -- and now you're targeting mid-40% operating margin over the long term. Obviously, divesting software integrity business is one factor there. But when we look at IP, right, making 37% operating margin, in some quarters, even over 47%, something seems to have changed structurally for Synopsys, because I think you've told us, all right, that the IP is structurally -- you should expect a lower operating margin. But looking at all these IP margin numbers, it feels different. So mind if you walk us through what you have done and maybe more importantly, what you plan to do going forward to get to that mid-40s operating margin. And where is the confidence from to make -- to convince you that mid-40s is really achievable?

Question: Charles Shi - Needham & Company Inc. - Analyst : Yes, that's a very good segue to talk about Ansys and overall picture on M&A. And so Synopsys has made I mean quite a few announcements over the last, I would say, one or two months related to the regulatory approval of the Ansys acquisition -- there's a -- you guys talk about the US, the latest on the US. And obviously, we've seen press release on the UK and the EU review process, you've made progress. Mind if you recap to us a little bit because there's a lot there? And more importantly, what do those milestones mean, mind, if you kind of unpack a little bit for us towards the eventual closure of the Ansys acquisition?

Question: Charles Shi - Needham & Company Inc. - Analyst : Thanks, Shelagh. So it sounds to me, right -- I am no legal expert, but that sounds to me that the approval process with the US, UK or EC looks like it's more -- a more advanced -- at a more advanced stage at this point, but China looks like still relatively early. Do you have any thoughts on the China side, especially given that the China SAMR has -- well, the track record of approving the US semiconductor deals in the past few years hasn't been really great. But what's your thought there? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 16, 2025 / 4:00PM, SNPS.OQ - Synopsys Inc at Needham Growth Conference

Question: Charles Shi - Needham & Company Inc. - Analyst : Got it. So let's discuss some post-close financial questions. Well, it's been a year, right, since you guys announced the deal, still looking at first half '25 close. I recall, well, we did have some differences in things like EPS accretion, deleveraging, I mean, my view versus your goals. So I think fair disclosure, right? I mean, we did think that the first year post-close, you guys probably are going to see a little bit of a EPS dilution. And I think that -- we also did think that the deleveraging target is quite challenging. I mean it doesn't mean that they're not achievable, but I think it looks pretty challenging to us. So any updated thoughts since it's been a year, right, you announced those post-close financial targets. Maybe just let me be a little bit more direct. Where do you think we might have missed when we published our view on those post-close financial targets about a year ago?

Question: Charles Shi - Needham & Company Inc. - Analyst : Thanks, Shelagh, and well, lots of exciting things ahead in '25 for Synopsys. So I guess this is the first time probably I host fireside just with you. Obviously, there was another time with Sassine and you are -- both of you there. But this time, just you, so I'm going to have one question for you, dedicated for you, as the CFO, what are your top priorities for fiscal '25?

Question: Charles Shi - Needham & Company Inc. - Analyst : Thank you, Shelagh. Maybe this is time for questions from the audience. Just as a reminder, if you are on the webcast, there's a box, a Q&A box. You can type your question there, submit, and then I will be able to see the questions. I won't announce your name, but I will ask the question on your behalf, well, take advantage of the opportunity to ask a question directly to Shelagh, live and in real time, please. So the first question I have here. Maybe, Shelagh, you talked about the HSR exploration, right? You guys talked about that on earnings call. So mind if you educate us a little bit more what does that mean? HSR exploration.

Question: Charles Shi - Needham & Company Inc. - Analyst : Got it. The second question from the audience is about your -- the embedded IP revenue growth in 2025. The question is this, is the IP growth target for fiscal '25 already in your backlog or not?

Question: Charles Shi - Needham & Company Inc. - Analyst : Okay. So the next question from audience. So Shelagh, can you share some details on the individual verticals that you have seen under pressure from your business perspective because you did mention it's a tale of two markets, right? AI and non-AI, the AI haves and AI have not's. But can you give a little more granularity in the non-AI side, maybe, it sounds like? And what do you think, any bright spots, any weak spots in those different verticals?

Question: Charles Shi - Needham & Company Inc. - Analyst : Got it. The next question, well, I have a good number of questions. I do want to get them addressed. So next question, are there any contingency plans of how to deal with the situation where China just take a very long time to approve the Ansys acquisition and is not making a decision, we've seen this in the past.

Question: Charles Shi - Needham & Company Inc. - Analyst : Okay. So next question, this may be a little bit more technical. The question is this, how will the migration to 2-nanometer gate-all-around and maybe the -- what TSMC calls A16, right, the backside power addition to 2-nanometer be beneficial to Synopsys?

Question: Charles Shi - Needham & Company Inc. - Analyst : Thank you. We still have time for, I would say, maybe two more questions. Anything from the audience? If you're not comfortable using the Q&A box, you can send the questions directly to me at cshi@needhamco.com. I can read the e-mail and ask the question on your behalf. Let's give it a few more seconds and see if more questions coming over. All right. Looks like no more questions. I think we probably can wrap it up and give a few minutes back to everybody. Shelagh thank you so much for carving out a few minutes with us and spending time with me and talk through all the top issues that people were discussing about Synopsys, I'm sure investors appreciate the transparency and appreciate all the color you provided on this call. Once again, thank you so much.