Synopsys, Inc. (NASDAQ:SNPS) released its third-quarter results after Tuesday’s closing bell.
Below are the transcripts from the third quarter earnings call.
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OPERATOR
Ladies and gentlemen, welcome to the Synopsys Earnings Conference call for the third quarter fiscal year 2025. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question at that time, please press star1 on your telephone keypad to remove yourself from that queue. It is again Star one. If you should require assistance during the call, please press Star zero and an operator will assist you. Today’s call will last one hour. As a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to Tushar Jain, Investor Relations. Please go ahead.
Investor Relations
Good afternoon everyone. With us today are Sassine Ghazi, President and CEO of Synopsys, and Shelagh Glaser, CFO. Before we begin, I’d like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets and other forward looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC reports and today’s earnings press release. Pursuant to the close of the Ansys acquisition on July 17, our results include roughly two weeks of Ansys financials. As shown in today’s financial statements, the vast majority of ANSYS revenue appears under the Simulation and Analysis Product Group with the remainder included under EDA. In addition, we will refer to certain non GAAP financial measures during this discussion. Reconciliations to their most directly comparable GAAP financial measures and Supplemental financial information can be found in the Earnings Press Release and financial supplement and 8K that we released earlier today. All of these items plus the most recent investor presentation are available on our website at www.synopsys.com. in addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I’ll turn the call over to Sassine Ghazi.
Sassine Ghazi (CEO)
Good afternoon. Q3 was a transformational milestone quarter for Synopsys. Against an unprecedented and challenging geopolitical backdrop, we closed the ANSYS acquisition expanding our revenue, our customer base and our long term opportunity. We delivered third quarter revenue of $1.74 billion and non GAAP EPS of $3.39. Our results were primarily impacted by by underperformance in the IP business as we had the expectation of deals that did not materialize, driven largely by the following three factors 1 New export restrictions disrupted design starts in China, compounding China weakness. 2. Challenges at a major foundry customer are also having a sizable impact on the year. And finally, we made certain roadmap and resource decisions that did not yield their intended results. We are actively pivoting our IP resources and roadmap towards the highest growth opportunities, which I’ll discuss in more detail. Looking ahead, we believe we have de risked our forecast knowing that transformation takes time and the external headwinds I cited will continue. We are taking a more cautious view of Q4 while still expecting to deliver a record revenue year. Let me provide more color on our Q3 execution and the actions we’re taking to accelerate our strategy before Sheila covers the financials in more detail. Zooming Out AI continues to drive unprecedented investment in infrastructure and R and D Demand for high performance computing and AI applications continues, while semiconductor demand in markets like industrial and automotive remains subdued. Despite the uncertainties and industry dynamics that we must navigate, I remain very optimistic about Synopsys future. The increasing complexity, cost and time to market pressure of designing and delivering AI powered systems is a trend that persists across industries and underpins our opportunity. Now more than ever. We believe Synopsys will be a mission critical partner in addressing these challenges. Adding Ansys gold standard simulation and analysis solutions to our portfolio dramatically expands our long term growth opportunity. We are now not only the EDA leader, we are the global leader in engineering solutions from silicon to systems. This acquisition marks a significant milestone for not only Synopsys but also our customers and the industry. As products evolve into more sophisticated intelligent systems, their designs grow increasingly complex while development cycles continue to accelerate. The rise of physical AI underscores the importance of our combined expertise. R and D teams must not only optimize product design for performance and efficiency, but also consider the real world interactions of these products. That’s why, for example, we’re embedding Nvidia Omniverse technology into our Ansys simulation solutions, making it easier to develop, train, test and validate autonomous systems with greater speed and confidence. Not only can we deliver new innovation with Ensys, now part of Synopsys, we have diversified our portfolio and our global customer base. Together we will maximize the capabilities of engineering teams across industries from semiconductor to automotive, industrial, aerospace and beyond, enabling them all to rapidly innovate AI powered products. Let’s move on to business Highlights Design Automation Revenue inclusive of Ansys products was up 23% year over year led by strength in hardware as the complexity of designing silicon for AI workloads drives demand for synopsis, powerful emulation and prototyping solutions. In Q3 we achieved multiple competitive wins with leading hyperscalers and shipped Record Zebu Server 5 and HAPS 200 Zebu 200 units. EDA continues to demonstrate resiliency. Our Q3 results reinforce our leadership in next generation chip design. Synopsys continues to win competitive bids for full flow digital implementations including a multi year commitment with a leading AI customer. Synopsys sign off and extraction platforms also continue to set the industry standard. With broader customer deployments and successful tape outs on advanced designs, Synopsys leading AI capabilities are a key differentiator. Today roughly 20 customers are broadly piloting Synopsys AI gen AI powered capabilities. These capabilities pave the way for agent engineer technology. We believe the evolution of AI from a helper to a doer will truly transform engineering workflows. Multi die momentum Also continued in Q3 we enabled multiple successful multi die tape outs for leading AI semi companies. Customers are enthusiastic about the promise of integrating our semiconductor timing and power sign off capabilities with Ansys gold standard of thermal sign off and we expect to deliver our first fully integrated solution in the first half of next year. I’ll turn now to simulation and analysis products which empower users to build and test products virtually. These solutions represent the largest portion of our Ansys acquisition and performed in line with our expectations for the quarter. As is typically the case, the largest contributors were in the high tech, aerospace and automotive verticals. In Q3 we released ANSYS 2025 R2, providing customers access to groundbreaking advancements in AI driven simulation, GPU acceleration, system level modeling and cloud computing. These newly released products extend Synopsys AI leadership into simulation and analysis to help customers more efficiently develop and deliver their innovations. Turning to design IP which was down 8% year over year due to the headwinds I previously mentioned, again we need to pivot our IP resources and roadmap to the highest growth opportunities. These changes are already underway. Let me give some context. Zooming out Evolving data center architectures, particularly those focused on AI, are accelerating the demand for faster data movement. This trend is driving strong demand for high speed protocol IP and solutions that enable both scaling up and scaling out of large scale systems. At the same time, the semiconductor and IP landscape is undergoing profound change. What was once a business rooted in individual IP licensing is rapidly evolving. The industry is increasingly requiring more sophisticated subsystems and chiplet based solutions to combat complexity and accelerate Time to market. In summary, our high performance silicon proven IP portfolio positions us as the leader in the fast growing interface IP market. We support a broad spectrum of applications including HPC, Edge, AI, automotive, mobile and consumer. By retargeting our resources and portfolio toward higher value solutions, we are further strengthening our leadership in advanced interface and foundation ip. Before handing over to Sheila, I want to address the company wide steps we’re taking to achieve greater scale and efficiency to accelerate our Silicon to systems strategy and drive long term growth. Synopsys transformation, which began with the divestiture of the Software Integrity Group followed by our strategic acquisition of Ansys, continues. Specifically, we are conducting a strategic portfolio review and will be taking actions to focus our investments and our execution on the highest growth opportunities. We look forward to delivering with Ansys a differentiated design solutions roadmap and remain firmly committed to realizing the projected synergies of the merger. In addition, our enterprise wide initiative to develop and deploy custom gen AI is boosting productivity. We will continue harnessing AI efficiencies to optimize our cost structure. Taken together, we expect to undertake related actions starting soon that will reduce our global headcount roughly 10% by the end of fiscal year 2026. A few closing thoughts Synopsys is Transforming With Ansys, we are now the leader in engineering solutions from silicon to systems. We’ve expanded our opportunity, broadened our portfolio and increased the resiliency of our business. We remain focused on maintaining our leadership position while pioneering new solutions that will shape the next wave of innovation near term. We are deeply committed to prioritizing our IP execution and improving our efficiency to scale the business, accelerate our strategy and capitalize on the highest growth opportunities. Thank you to our employees, customers and partners for your continued commitment. Engineering is undergoing unprecedented transformation and Synopsys is seizing the opportunity to re engineer engineering. Now over to Sheila.
Shelagh Glaser (CFO)
Thank you Sassine. Q3 revenue came in at $1.74 billion, non GAAP operating margin at 38.5% and non GAAP EPS at $3. Backlog came in at $10.1 billion including ANSYS. Underscoring the resilience of our business. Our results were impacted by the underperformance in the IP business due to the headwinds. Cecile outlined tailwinds from a strong quarter in our design automation segment and the close of the Ansys acquisition partially offset these headwinds. In light of these headwinds and tailwinds, we are taking a Conservative view on Q4 and updating our full year 2025 targets for revenue, Operating Margin, EPS and free Cash flow I’ll now review our third quarter results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1.74 billion, up 14% with strong growth in design automation. Regionally we saw strength in Europe and North America and despite sequential improvement in China, headwinds persist. Total GAAP costs and expenses were $1.57 billion and total non GAAP costs and expenses were $1.07 billion, resulting in non GAAP operating margin of 38.5%. GAAP earnings per share were $1.50 and non GAAP earnings per share were $3.39. Earnings included the impact of lower cash on our balance sheet and the additional $4.3 billion term loan used to fund a portion of the cash consideration and expenses associated with the ANSYS acquisition. Now onto our segments Design Automation Segment revenue was $1.31 billion, up 23% with strong performance from our hardware business. Design Automation adjusted operating margin was 44.5%. Design IP segment revenue was $428 million, down 8%. As mentioned before, our IP business faced several headwinds. In response, we are taking a more conservative view of Q4 and we are realigning our IP resources to the highest growth opportunities and improving our execution. Third quarter design IP adjusted operating margin was 20.1% due to the lower than expected revenue and the investments we are making in the IP roadmap. Moving to cash free cash flow was approximately $632 million. We ended the quarter with cash and short term investments of $2.6 billion and debt of $14.3 billion. Now to guidance which has been updated to include ANSYS as well as factoring the continuation of the headwinds previously discussed for fiscal year 2025. The full year targets are revenue of 7.03 to $7.06 billion, total GAAP costs and expenses between 6.08 and $6.10 billion, total non GAAP costs and expenses between 4.43 and $4.44 billion, non GAAP tax rate of 16%, GAAP earnings of $5.03 to $5.16 per share, non GAAP earnings of $12.76 to $12.80 per share, cash flow from operations of approximately $1.13 billion and free cash flow of approximately $950 million lower than prior expectations due to lower revenue and the interest impact of cash utilization and additional debt for the ANSYS acquisition. Now to targets for the fourth quarter revenue between 2.23 and $2.26 billion total GAAP costs and expenses between 2.12 and $2.14 billion total non GAAP costs and expenses between 1.44 and $1.45 billion GAAP earnings of negative $0.27 to negative $0.16 per share and non GAAP earnings of $2.76 to $2.80 per share. Our press release and financial supplement include additional targets and GAAP to non GAAP reconciliations With the ANSYS acquisition now closed, we remain confident in achieving the committed synergies of the merger. This is despite the delay in completing the follow on divestitures of the Optical Solutions Group and Power Artist business which is elongating the full integration of ANSYS as we work to obtain a final regulatory approval of the buyer. In conclusion, this was a milestone quarter for Synopsys. We are clear eyed about the challenges we face and the actions we must take to align our portfolio to the highest growth opportunities, optimize our cost structure to drive greater scale and efficiency which will include reducing our global headcount roughly 10% by the end of fiscal 2026 and importantly, to extend our leadership position in engineering solutions from silicon to systems Delivering a differentiated design solutions roadmap with ansys, the team is laser focused on executing a strong finish to the year and delivering resilient long term growth for our shareholders. With that, I’ll turn it over to the operator …