Synopsys Inc (SNPS)

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. -

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. -

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. -

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. -

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. -

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. -

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. -

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. -

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. -

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. -

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. -

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. -