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    Synopsys Inc (SNPS)

    Business Description

    Synopsys, Inc. is a global leader in electronic design automation (EDA) software, providing products and services that enable the design and testing of integrated circuits (ICs) and electronic systems . The company offers a comprehensive portfolio of semiconductor intellectual property (IP) products, as well as software tools and services aimed at improving software security and quality . Synopsys' business is organized into three main segments: Design Automation, Design IP, and Software Integrity, each contributing to its record revenue of $5.8 billion in fiscal 2023 .

    1. Design Automation - Provides EDA solutions including digital, custom, and FPGA IC design software, verification software and hardware products, and system integration products and services .
    2. Design IP - Offers a broad portfolio of pre-designed circuits used as components in larger chip designs, significantly contributing to the company's revenue .
    3. Software Integrity - Focuses on solutions that test software code for security vulnerabilities and quality defects, along with professional and managed services .

    Q4 2024 Summary

    Initial Price$552.99July 31, 2024
    Final Price$513.61October 31, 2024
    Price Change$-39.38
    % Change-7.12%

    What went well

    • Strong momentum in AI infrastructure investments: Synopsys is benefiting from increased investments by customers serving the AI infrastructure market, with these customers needing advanced IP for complex multi-die designs and first adopting Synopsys's AI-driven solutions.
    • Operational efficiency driving margin expansion: The company has a multiyear focus on driving leverage and improving operating margins, expecting a 150 basis points improvement to 40% in fiscal year 2025, achieved through efficiency initiatives including AI and software modernization.
    • Healthy backlog providing revenue visibility: Synopsys has an $8.1 billion non-cancelable backlog, flat year-over-year despite delivering 15% growth, indicating strong business health and high revenue visibility for the future.

    What went wrong

    • Synopsys is experiencing deceleration in China due to economic slowdown and expanded restrictions, which could impact growth in that region. They anticipate China growth to be in line with corporate average rather than above it. ,
    • The company provided a more conservative revenue growth guidance for FY 2025 at 11.5% to 12.5%, which is below previous starting ranges, due to macroeconomic uncertainties, slower recovery in certain markets like mobile, PC, automotive, and preparation for the pending Ansys acquisition.
    • Revenue guidance is more second-half weighted than usual, with 55% of revenue expected in the second half, leading to skepticism about their ability to achieve these targets if there are delays in customer pull-downs for IP and hardware.

    Q&A Summary

    1. FY'25 Growth Guidance
      Q: Why is FY'25 growth guidance lower at 11.5%-12.5%?
      A: Management provided a balanced view for FY'25, considering several factors. They observe a "tale of two markets": customers serving the AI infrastructure build-out are doing incredibly well and benefiting Synopsys across EDA, hardware, and IP. However, the rest of the semiconductor market (mobile, PC, automotive, industrial) is not delivering similar growth levels. Additionally, macro uncertainties, particularly in China where the economy continues to decelerate and restrictions are expanding, are impacting their outlook. Lastly, they are preparing for the closing of the Ansys acquisition, the largest in the engineering software industry, and need to be prudent around any potential disruption. Therefore, after delivering a 15% growth last year, they are guiding 11.5% to 12.5% growth for FY'25 with pragmatism.

    2. Impact of China's Slowdown
      Q: How is China's slowdown impacting Synopsys' outlook?
      A: Revenue and growth in China have decelerated over the past 3-5 years due to a shrinking pool of customers caused by restrictions. The Chinese economy continues to decelerate, and the proliferation of start-ups has diminished. Synopsys anticipates China will not be above the corporate growth but in line with the corporate average performance. They are taking these factors into account and continue to be pragmatic in their FY'25 guidance.

    3. Large Customer Restructuring
      Q: How does restructuring at your largest customer affect Synopsys?
      A: Large customers have multiyear committed EDA contracts that are ratable over 3+ years. They also have contracts for IP and hardware, with pull-downs and timing depending on their roadmap. If a customer pauses or shifts projects, IP pull-downs and hardware consumption shift to the right, impacting revenue timing. Synopsys will see lumpiness on a customer-by-customer basis, and they have incorporated these dynamics into the FY'25 guidance and the 45%-55% revenue split, accounting for the timing of pull-downs.

    4. Operating Margin Expansion
      Q: How are you achieving operating margin improvement despite slowing revenue growth?
      A: Synopsys is driving leverage across the company through a multiyear focus on efficiency. They improved operating margin by 2 points last year and are targeting another 150 basis points improvement in FY'25. This is achieved by enhancing efficiency in R&D, modernizing software development, and driving digital transformation. As they bring Ansys in, they will work towards synergies.

    5. Seasonality and Second Half Weighting
      Q: Why is there significant second-half weighting in FY'25, and should investors be skeptical?
      A: Two main effects drive the 45%-55% split. First is a mechanical effect: there are 10 fewer days in the first half of FY'25 compared to FY'24 due to the fiscal year change, leading to a $100 million headwind in the ratable business. Second, upfront businesses (IP and hardware) are more second-half weighted based on customer pull-downs. IP is lumpy, and hardware customers need time to secure space and power for installations, leading to more second-half activity. Synopsys is building out ZeBu Cloud to assist customers in the meantime. Management emphasizes their track record of delivering on commitments and notes that lumpiness is due to their successes and shifting revenue profiles.

    6. Growth in AI Design Starts
      Q: What is the outlook for growth in AI design starts?
      A: Investments from hyperscalers and semiconductor companies serving them have been accelerating over the last 3-5 years. Hyperscalers are increasing their silicon investments to differentiate and optimize their workloads. Semiconductor companies are delivering AI accelerators with increasing roadmaps, greatly contributing to Synopsys' revenue growth. Management does not see this momentum slowing down in FY'25 with that cohort of customers.

    7. Impact of Department of Commerce Rules
      Q: Do new U.S. semiconductor rules impact FY'25 outlook?
      A: Yes, some customers were added to the entity list, and new technology restrictions were introduced. However, these most recent restrictions are fully incorporated into Synopsys' FY'25 guidance.

    8. Alignment for Growth and AI Strategy
      Q: How are you preparing operations for growth and AI opportunities?
      A: Crossing $6 billion in revenue requires evolving how they drive product development and deliver solutions. Synopsys is focusing on scaling the company, restructuring to support market-leading innovation, and modernizing engineering workflows. They are investing in technologies to improve R&D efficiency and productivity.

    9. Customer-Specific AI Use Cases
      Q: How do customer-specific AI use cases affect your offerings?
      A: Synopsys first embedded AI into their products, such as the XSO.ai family, which has seen good customer adoption. For knowledge assistant AI applications, customers prefer to train AI models based on their own data and workflows. The next phase involves agentic generative AI, which will change how they deliver and monetize solutions, potentially leading to new business models.

    10. Potential Royalty Models for IP
      Q: Are you considering royalty models for IP deliverables?
      A: For traditional interface IP, Synopsys does not plan to introduce royalties and will continue with base monetization. Some parts of their IP business already involve royalties, which will continue. The next inflection point is delivering beyond interface IP, such as subsystems or chiplets, where new business models, including royalties, could be explored.

    11. Clarification on Backlog
      Q: Is the $8.1 billion backlog adjusted for Software Integrity?
      A: Yes, the FY'23 ending backlog of $8.1 billion is adjusted for Software Integrity.

    12. Impact of Optical Solutions Divestiture
      Q: Is there any revenue impact from the Optical Solutions divestiture?
      A: No, the Optical Solutions Group will remain part of their continuing business until the Ansys transaction closes and is still included in their forecast.

    Revenue by Segment - in Millions of USDQ1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024Q4 2024FY 2024
    Design Automation1,004.2953.73,775.3985.31,054.91,062.61,118.34,221.1
    Design IP350.2513.61,542.7525.7399.8463.1517.71,906.3
    Software Integrity132.9131.8524.6138.2----
    Semiconductor & System Design Segment--------
    Software Integrity Segment--524.6-----
    Time-Based Products922.9870.23,383.6904.4781.7803.1735.13,224.3
    Upfront Products298.0449.11,429.3447.9396.4442.5515.41,802.2
    Maintenance and Service266.4279.81,029.7297.0276.6280.1247.21,100.9
    - Maintenance Revenue--------
    - Professional Services and Other Revenue--------
    EDA (Electronic Design Automation)--------
    IP & System Integration--------
    Software Integrity Products & Services--------
    Total Revenue1,487.31,599.15,842.61,649.21,454.71,525.71,497.86,127.4
    Revenue by Geography - in Millions of USDQ1 2014Q2 2014Q3 2014Q4 2014FY 2014Q1 2015Q2 2015Q3 2015Q4 2015FY 2015Q1 2016Q2 2016Q3 2016Q4 2016FY 2016Q1 2017Q2 2017Q3 2017Q4 2017FY 2017Q1 2018Q2 2018Q3 2018Q4 2018FY 2018Q1 2019Q2 2019Q3 2019Q4 2019FY 2019Q1 2020Q2 2020Q3 2020Q4 2020FY 2020Q1 2021Q2 2021Q3 2021Q4 2021FY 2021Q1 2022Q2 2022Q3 2022Q4 2022FY 2022Q1 2023Q2 2023Q3 2023Q4 2023FY 2023Q1 2024Q2 2024Q3 2024Q4 2024FY 2024
    United States640.147812.722,786.064807.6630.8660.479640.922,739.8
    Europe145.626158.01595.634159.1147.5144.631163.37614.6
    China304.025188.03886.256250.0221.8266.699251989.5
    Korea163.938168.26634.802184.6192.7194.817200.88773.0
    Japan--------
    Asia Pacific and Other--------
    Other233.552272.01939.863247.9262.0259.123241.581,010.6
    Total Revenue1,487.2881,599.135,842.6191,649.21,454.71,525.7491,497.756,127.4

    Executive Team

    NamePositionStart DateShort Bio
    Aart J. de GeusExecutive Chair of the Board of DirectorsJanuary 1, 2024Aart J. de Geus co-founded Synopsys in December 1986 and has been a member of the Board of Directors since its inception. He served as Chair of the Board from 1986 to 1992 and again from 1998 until his transition to Executive Chair .
    Sassine GhaziPresident and Chief Executive OfficerJanuary 1, 2024Sassine Ghazi joined Synopsys in March 1998 as an applications engineer and has held various positions, including Chief Operating Officer from August 2020 to January 2024 and President since November 2021 .
    Shelagh GlaserChief Financial OfficerDecember 2022Shelagh Glaser has served as the Chief Financial Officer of Synopsys since December 2022. Before joining Synopsys, she was the CFO at Zendesk, Inc. from May 2021 to November 2022 and held senior finance roles at Intel Corporation .
    Richard MahoneyChief Revenue OfficerNovember 2022Richard Mahoney has served as the Chief Revenue Officer of Synopsys since November 2022. He initially joined Synopsys as a Special Projects Advisor in May 2022 and held senior management positions at Ansys, Inc. from 2016 to 2022 .
    John F. Runkel, Jr.General Counsel and Corporate SecretaryMay 2014John F. Runkel, Jr. has served as the General Counsel and Corporate Secretary of Synopsys since May 2014. Prior to this role, he was the EVP, General Counsel, and Corporate Secretary of Affymetrix, Inc. from 2008 to 2013 .

    Questions to Ask Management

    1. Given the significant second-half weighting in your fiscal '25 revenue guidance, what specific factors give you confidence in achieving these targets, especially considering potential customer delays in hardware installations and IP pull-downs?
    2. How might the recent updates from the Department of Commerce on U.S. semiconductor and EDA software export restrictions impact your fiscal '25 outlook, particularly with customers added to the entity list, and what measures are you taking to mitigate potential revenue risks?
    3. Your operating margin guidance of 40% for fiscal '25 suggests higher profitability despite a slowdown in projected revenue growth; is this primarily driven by cost-cutting measures, reduced M&A activity, or other factors, and how sustainable are these margin improvements long term?
    4. With an ending backlog of $8.1 billion, flat year-over-year, and considering geopolitical uncertainties and potential delays in foundry investments, how do you plan to drive revenue growth in fiscal '25 without significantly drawing down backlog, and what risks do you foresee to backlog progression?
    5. Given the rapid expansion of AI and hyperscaler investments as growth drivers, how might capacity constraints like space and power limitations for hardware installations affect your hardware business growth in fiscal '25, and what strategies are you employing to address these challenges?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateFiscal 2022
    End Date/DurationN/A
    Total additional amount$1.5 billion
    Remaining authorization$194.3 million
    DetailsProgram suspended due to pending Ansys Merger until debt levels are reduced

    Past Guidance

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: FY 2025 and Q1 2025
      • Revenue: $6.745 billion to $6.805 billion .
      • Total GAAP Costs and Expenses: $4.93 billion to $4.98 billion .
      • Total Non-GAAP Costs and Expenses: $4.05 billion to $4.09 billion .
      • Non-GAAP Operating Margin: 40% at the midpoint .
      • Non-GAAP Tax Rate: 16% .
      • GAAP EPS: $10.42 to $10.63 .
      • Non-GAAP EPS: $14.88 to $14.96 .
      • Cash Flow from Operations: Approximately $1.8 billion .
      • Free Cash Flow: Approximately $1.6 billion .
      • First Quarter Revenue: $1.435 billion to $1.465 billion .
      • First Quarter Total GAAP Costs and Expenses: $1.14 billion to $1.16 billion .
      • First Quarter Total Non-GAAP Costs and Expenses: $945 million to $955 million .
      • First Quarter GAAP EPS: $1.81 to $1.95 .
      • First Quarter Non-GAAP EPS: $2.77 to $2.82 .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024 and Q4 2024
      • Full Year 2024 Guidance:
        • Revenue: $6.105 billion to $6.135 billion .
        • Total GAAP Costs and Expenses: $4.58 billion to $4.60 billion .
        • Total Non-GAAP Costs and Expenses: $3.76 billion to $3.77 billion .
        • Non-GAAP Operating Margin Improvement: More than 2 points at the midpoint .
        • Non-GAAP Tax Rate: 15% .
        • GAAP EPS: $9.71 to $9.85 .
        • Non-GAAP EPS: $13.07 to $13.12 .
        • Cash Flow from Operations: Approximately $1.3 billion .
        • Free Cash Flow: Approximately $1.1 billion .
      • Fourth Quarter 2024 Guidance:
        • Revenue: $1.614 billion to $1.644 billion .
        • Total GAAP Costs and Expenses: $1.21 billion to $1.23 billion .
        • Total Non-GAAP Costs and Expenses: $1.03 billion to $1.04 billion .
        • GAAP EPS: $2.25 to $2.39 .
        • Non-GAAP EPS: $3.27 to $3.32 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024 and Q3 2024
      • Fiscal Year 2024 Guidance:
        • Revenue: $6.09 billion to $6.15 billion .
        • Total GAAP Costs and Expenses: $4.56 billion to $4.61 billion .
        • Total Non-GAAP Costs and Expenses: $3.77 billion to $3.81 billion .
        • Non-GAAP Operating Margin Improvement: Approximately 2 percentage points at the midpoint .
        • Non-GAAP Tax Rate: 15% .
        • GAAP EPS: $9.14 to $9.36 .
        • Non-GAAP EPS: $12.90 to $12.98 .
        • Cash Flow from Operations: Approximately $1.3 billion .
        • Free Cash Flow: Approximately $1.1 billion .
      • Third Quarter 2024 Guidance:
        • Revenue: $1.505 billion to $1.535 billion .
        • Total GAAP Costs and Expenses: $1.10 billion to $1.12 billion .
        • Total Non-GAAP Costs and Expenses: $920 million to $930 million .
        • GAAP EPS: $2.22 to $2.35 .
        • Non-GAAP EPS: $3.25 to $3.30 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024 and Q2 2024
      • Fiscal Year 2024 Guidance:
        • Revenue: $6.57 billion to $6.63 billion .
        • Total GAAP Costs and Expenses: $5.02 billion to $5.08 billion .
        • Total Non-GAAP Costs and Expenses: $4.14 billion to $4.18 billion .
        • Non-GAAP Operating Margin Improvement: Roughly 2 percentage points .
        • Non-GAAP Tax Rate: 15% .
        • GAAP EPS: $9.56 to $9.74 .
        • Non-GAAP EPS: $13.47 to $13.55 .
        • Cash Flow from Operations: Approximately $1.4 billion .
      • Second Quarter 2024 Guidance:
        • Revenue: $1.56 billion to $1.59 billion .
        • Total GAAP Costs and Expenses: $1.21 billion to $1.23 billion .
        • Total Non-GAAP Costs and Expenses: $1.01 billion to $1.02 billion .
        • GAAP EPS: $2.05 to $2.16 .
        • Non-GAAP EPS: $3.09 to $3.14 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Cadence Design Systems, Inc. - Competitor in both the Design Automation and Design IP segments .
    • Siemens EDA - Competitor in the Design Automation segment .
    • Checkmarx Ltd. - Competitor in the Software Integrity segment, named in the Gartner Magic Quadrant for Application Security Testing .
    • Veracode, Inc. - Competitor in the Software Integrity segment, named in the Gartner Magic Quadrant for Application Security Testing .
    • Open Text Corporation - Competitor in the Software Integrity segment, named in the Gartner Magic Quadrant for Application Security Testing .
    • GitHub, Inc. - Competitor in the Software Integrity segment, named in the Gartner Magic Quadrant for Application Security Testing .
    • Snyk Ltd. - Competitor in the Software Integrity segment, named in the Gartner Magic Quadrant for Application Security Testing .

    Latest news

    Recent developments and announcements about SNPS.

    Financial Reporting

      Earnings Call

      ·
      Dec 5, 2024, 3:36 AM

      Synopsys recently released its earnings call transcript, highlighting several key points about its financial performance and strategic initiatives. The company reported a record revenue of $6.13 billion for fiscal year 2024, marking a 15% year-over-year increase. This growth was driven by strong performance across all product segments and geographies, with notable strength in the Design Automation and Design IP segments .

      For fiscal year 2025, Synopsys expects to achieve double-digit revenue growth between 10.1% and 11.1%, or 11.5% to 12.5% when excluding the impact of an extra week in 2024. The company also anticipates expanding its non-GAAP operating margin by approximately 150 basis points and achieving non-GAAP EPS growth of about 13% .

      Management provided forward guidance, expecting revenue between $6.745 billion and $6.805 billion for 2025, with a non-GAAP operating margin of 40% at the midpoint. The company is also preparing for its largest acquisition in history, the pending acquisition of Ansys, which is expected to close in the first half of 2025 .

      During the earnings call, Synopsys executives discussed the company's strategic focus on AI and high-performance computing (HPC) chip design, which are seen as significant growth drivers. The company is also investing in its silicon-to-systems strategy and expanding into new areas through the acquisition of Ansys .

      Analysts raised questions about the company's revenue split between the first and second halves of 2025, expressing skepticism about the heavier second-half weighting. Management attributed this to fewer days in the first half due to a fiscal calendar change and the timing of customer pull-downs for IP and hardware .

      Regarding market conditions, Synopsys acknowledged macroeconomic uncertainties, particularly in China, where growth is expected to align with the corporate average due to ongoing restrictions and economic deceleration .

      Overall, Synopsys remains confident in its business model and growth prospects, supported by a strong backlog and continued investment in technology innovation .

      Earnings Report

      ·
      Dec 4, 2024, 10:07 PM

      Synopsys, Inc. has released its financial results for the fourth quarter and fiscal year 2024, ending October 31, 2024. Key highlights include:

      • Record quarterly revenue of $1.636 billion, marking an 11% increase year-over-year (YoY), which exceeded the mid-point of their guidance .
      • Quarterly GAAP earnings per diluted share (EPS) were $1.79, while non-GAAP EPS was $3.40, reflecting a 13% YoY increase and surpassing guidance .
      • Full-year 2024 revenue reached a record $6.127 billion, up approximately 15% from the previous year, with a 25% growth in non-GAAP EPS .
      • Synopsys anticipates double-digit revenue growth in 2025 and is preparing for the acquisition of Ansys, expected to close in the first half of 2025 .

      The company has also completed the sale of its Software Integrity business, which is now presented as a discontinued operation in their financial statements . The strong performance in Q4 and throughout 2024 is attributed to strategic moves such as the sale of the Software Integrity business and the pending acquisition of Ansys, which aligns with their focus on AI-driven technology advancements .

      Looking forward, Synopsys expects continued growth despite macroeconomic uncertainties, supported by their robust technology offerings and strategic acquisitions .