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    SNPS
    Earnings call· Jan 2025(Q1 FY25)

    SYNOPSYS INC SNPS

    Feb 26, 2025 Source

    Executive summary

    Synopsys Q1 FY25 — Solid Start with Strong AI/HPC Demand and Reaffirmed Full-Year Guidance

    Synopsys delivered a solid Q1 FY25, surpassing revenue and non-GAAP EPS expectations, driven by robust demand in AI and HPC. The company reaffirmed its full-year guidance, confident in its technology leadership and execution despite ongoing headwinds in China and certain end markets. Strategic initiatives like the Ansys acquisition and advancements in AI-driven EDA are expected to fuel future innovation and productivity gains.

    Highlights

    5

    • Exceeded Q1 revenue midpoint and delivered non-GAAP EPS above guidance range ($3.03 vs. $2.97-$3.02 range).

    • Design Automation segment revenue grew 4% year-over-year to $1.02 billion, despite one less work week.

    • Launched new HAPS-200 prototyping and ZeBu-200 emulation systems, offering up to 2x better performance.

    • Synopsys.ai adoption driving significant productivity gains, including 2x hardware utilization improvement with VSO.ai and 30% average productivity with generative AI co-pilots.

    • Reaffirmed full-year FY25 targets for revenue ($6.745B-$6.805B), non-GAAP operating margin (40%), and non-GAAP EPS growth (approx. 13%).

    Concerns

    5

    • Q1 revenue was down 4% year-over-year to $1.46 billion, and non-GAAP EPS was down 10% due to one less work week.

    • Industrial, automotive, and consumer electronics end markets remained challenged.

    • Design IP segment revenue was down 17% year-over-year to $435.1 million due to timing and a tough prior-year comparison.

    • China revenue is expected to decelerate below the corporate average for FY25 due to cumulative restrictions and slowing local economy, a change from prior expectations of corporate average growth.

    • Free cash flow was an outflow of $108.2 million for the quarter.

    Guidance & targets

    16
    CategoryTargetConfidence
    Full-year FY25 Revenue
    $6.745 billion to $6.805 billion
    high materiality
    High
    Full-year FY25 Total GAAP Costs and Expenses
    $4.97 billion and $5.03 billion
    medium materiality
    High
    Full-year FY25 Total Non-GAAP Costs and Expenses
    $4.05 billion and $4.09 billion
    medium materiality
    High
    Full-year FY25 Non-GAAP Operating Margin
    40%
    high materiality
    High
    Full-year FY25 Non-GAAP Tax Rate
    16%
    low materiality
    High
    Full-year FY25 GAAP Earnings Per Share
    $10.09 to $10.31 per share
    medium materiality
    High
    Full-year FY25 Non-GAAP Earnings Per Share
    $14.88 to $14.96 per share
    high materiality
    High
    Full-year FY25 Cash Flow from Operations
    approximately $1.8 billion
    medium materiality
    High
    Full-year FY25 Free Cash Flow
    approximately $1.6 billion
    high materiality
    High
    Full-year FY25 Revenue Growth
    10.1% to 11.1%
    high materiality
    High
    Full-year FY25 Non-GAAP EPS Growth
    approximately 13%
    high materiality
    High
    Q2 FY25 Revenue
    $1.585 billion and $1.615 billion
    high materiality
    High
    Q2 FY25 Total GAAP Costs and Expenses
    $1.19 billion and $1.21 billion
    medium materiality
    High
    Q2 FY25 Total Non-GAAP Costs and Expenses
    $985 million and $995 million
    medium materiality
    High
    Q2 FY25 GAAP Earnings Per Share
    $2.21 to $2.33 per share
    medium materiality
    High
    Q2 FY25 Non-GAAP Earnings Per Share
    $3.37 to $3.42 per share
    high materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    Design Automation
    Revenue was up 4% year-over-year, partially offset by one less work week in Q1 FY25 compared to Q1 FY24. Broad-based strength was observed, and adjusted operating margin was 39.7%.
    		$1.02 billion4%—39.7%
    Design IP
    Revenue was down 17% year-over-year due to timing and a tough record-setting prior year comparison. Adjusted operating margin was 29.1%.
    		$435.1 million-17%—29.1%

    Operational metrics

    12
    Non-GAAP operating margin
    36.5%
    Q1 FY25

    Reported for the first quarter.

    Non-GAAP EPS
    $3.03-10% YoY
    Q1 FY25

    Reported for the first quarter, above guidance range. Down 10% year-over-year due to one less work week.

    Cash and investments balance
    $3.81 billion
    Q1 FY25

    Cash and short-term investments at the end of the quarter.

    China revenue
    $174 million
    Q1 FY25

    Reported Q1 revenue for China, noted as a meaningful step down from prior average.

    China revenue run rate
    $250 million
    prior average

    Prior average quarterly revenue run rate for China, used for comparison in Q&A.

    Inventory
    record levelincreased a decent amount this quarter
    Q1 FY25

    Inventory increased to a record level, driven by investment in hardware to meet demand for new products.

    VSO.ai hardware utilization improvement
    2x
    Q1 FY25

    A large U.S. memory company achieved 2x improvement in hardware utilization by deploying VSO.ai.

    VSO.ai turnaround time improvement
    4x
    Q1 FY25

    An Asian hyperscale customer achieved 4x turnaround time improvement with VSO.ai on its HPC design.

    Generative AI co-pilots productivity improvement
    30%
    Q1 FY25

    Early customer results demonstrating 30% average productivity improvements for designers using script generation capabilities in co-pilots for Fusion Compiler and PrimeTime.

    Generative formal verification productivity boost
    35%
    Q1 FY25

    Synopsys.ai generative formal verification capability in Verdi is delivering up to a 35% productivity boost in early engagements.

    PrimeTime turnaround time improvement
    30%
    Q1 FY25

    One customer achieved 30% faster turnaround time with the most recent PrimeTime release.

    IC Validator turnaround time improvement
    greater than 2x
    Q1 FY25

    Leading edge customers are achieving greater than 2x turnaround time for full chip physical verification signoff with IC Validator.

    Industry KPIs

    4
    MetricValueDetails
    Revenue growth$1.46 billionUSD
    Rpo current rpo$7.7 billionUSD
    Operating FCF margin rule of 4036.5%%
    Ai product adoption monetization2x

    Orderbook & backlog

    1
    Backlog$7.7 billionQ1 FY25

    Represents total backlog exiting fiscal Q1 2025.

    Product announcements

    6
    ProductTypeDetails
    HAPS-200 prototyping systemslaunch
    ZeBu-200 emulation systemslaunch
    Ultra Accelerator Link (UAL) IP solutionslaunch
    Ultra Ethernet IP solutionslaunch
    PCIe 4.0 PHY IP on Samsung's SS8 processmilestone
    Onetime programmable nonvolatile memory IPmilestone

    Deals & partnerships

    1
    AnsysAcquisition to combine electronics and physics for AI-powered design solutions.

    European Commission approved the acquisition, U.K. CMA provisionally accepted remedies, and U.S. HSR Act waiting period expired. Strong progress with other regulatory agencies, including China. Customers overwhelmingly support the transaction.

    Risks & headwinds

    4
    Deceleration in China marketFY25

    Expected to grow below corporate average for FY25

    Mitigation: Offset by strengths in technology and other regions; overall company guidance reaffirmed.

    Challenged end marketsQ1 FY25

    Industrial, automotive, and consumer electronics remained challenged

    Mitigation: AI and HPC markets remained robust, partially offsetting these challenges.

    Hardware supply constraintsH2 FY25, Q4 FY25

    Demand exceeds supply right now

    Mitigation: Racing to build and deliver new HAPS-200 and ZeBu-200 units; expect a back-half loaded hardware year for deliveries.

    Design IP revenue fluctuationQ1 FY25

    Down 17% year-over-year

    Mitigation: Due to timing and a tough record-setting prior year compare; opportunity set for IP continues to expand, particularly with AI customers.

    What to watch in Q2 FY25

    4

    China revenue growth

    next quarter
    CurrentDecelerating below corporate average
    TargetStabilization or further deceleration

    Why it matters

    China is a significant market, and its continued deceleration could impact overall revenue growth if not fully offset by other segments.

    The deceleration and the headwinds in China are getting stronger, that we don't believe it will be at corporate average. We will finish below corporate average in terms of China growth and that has been accounted for in our guide.

    Q&A highlights

    6

    How do you segment growth into AI and non-AI, and how will DeepSeek impact EDA and Synopsys?

    AI/HPC demand is strong, while industrial/automotive/consumer electronics are challenged, though PC/mobile are picking up due to AI-on-device. DeepSeek could expand AI adoption on devices. Semiconductor R&D is expected to grow from 6% to 9% of sales, benefiting Synopsys as it sells to R&D. System companies are also a growing opportunity.

    “The semiconductor R&D, it's expected to grow from a 6% of sales per year to about 9%. For us, that's fantastic. Because remember, we sell to R&D inside our customers.”

    asked by Sitikantha Panigrahi · answered by Sassine Ghazi

    2 min read7 chapters

    Detailed Narrative

    01

    AI and HPC Driving Design Activity

    AI and High-Performance Computing (HPC) continue to be robust end markets, driving strong demand and healthy roadmaps for Synopsys. Customers are accelerating development, with some projects moving from 16-18 months down to 12 months. This contrasts with industrial, automotive, and consumer electronics, which remain challenged, though PC and mobile segments have shown recent pickup due to AI-on-device applications.

    02

    Ansys Acquisition Progress

    The pending acquisition of Ansys is progressing, with European Commission approval and provisional acceptance of remedies by the U.K. CMA. The U.S. HSR Act waiting period has expired, and the company anticipates closing the transaction in the first half of 2025. This acquisition is expected to enable new AI-powered design solutions combining electronics and physics.

    03

    Hardware-Assisted Verification (HAV) Leadership

    Synopsys expanded its HAV portfolio with new HAPS-200 prototyping systems and ZeBu-200 emulation systems, offering up to 2x better performance. Key customers like AMD, ARM, NVIDIA, and SiFive are deploying these new technologies. The company expects another strong year for hardware, with demand currently exceeding supply, leading to a back-half, particularly Q4, loaded hardware year for deliveries.

    04

    Advanced Node EDA Software Momentum

    Strong design activity is observed at advanced nodes, with 2-nanometer projects accelerating. Fusion Compiler was used for a U.S. hyperscaler's 2-nanometer test chip tape-out and a U.S. HPC CPU tape-out. PrimeTime and IC Validator are delivering significant productivity improvements, with customers achieving 30% faster turnaround time and over 2x turnaround time for full-chip physical verification at 3-nanometer and below.

    05

    AI-Driven EDA Capabilities

    Synopsys continues to drive Synopsys.ai adoption across its tools. VSO.ai enabled a U.S. memory company to achieve 2x hardware utilization and an Asian hyperscaler to achieve 4x turnaround time improvement. Generative AI offerings, such as script generation for co-pilots, are demonstrating 30% average productivity improvements, and generative formal verification in Verdi is boosting productivity by up to 35%.

    06

    IP Portfolio Expansion and AI Impact

    The company launched the industry's first Ultra Accelerator Link (UAL) and Ultra Ethernet IP solutions to connect massive AI accelerator clusters. AI continues to push protocol transitions, leading to design wins like PCIe 7.0 with an AI infrastructure chip provider and 224-gig ethernet with a major ecosystem player. Silicon success was demonstrated for PCIe 4.0 PHY IP on Samsung's SS8 process and OTP nonvolatile memory IP on TSMC N4P, N5, N6, and N7 processes.

    07

    China Market Dynamics

    China's growth is flattening and expected to decelerate below the corporate average for FY25, a shift from prior expectations. This is attributed to the cumulative effect of export restrictions and a slowing local economy. Despite this, the company's overall FY25 guidance remains unchanged, offset by strengths in other regions and technologies.

    AI-generated summary of the company’s earnings call. Not investment advice.