Synopsys - Q1 2026

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the first quarter of fiscal year 2026. 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 star one on your telephone keypad, and to remove yourself from that queue, it is star one again. If you 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, Head of Investor Relations. Please go ahead.

Tushar Jain (Head of 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. 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. We will refer to certain non-GAAP financial measures during the discussion.

Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement, and 8-K 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 (President and CEO)

Good afternoon. We're off to a strong start as we enter our 40th anniversary year with an expanded portfolio, leadership positions across the business, and the most compelling roadmap in our history. In Q1, we achieved revenue at the high end of our guidance, and non-GAAP EPS exceeded guidance. 2025 was a year that transformed the company. 2026 is the year we begin delivering on the technology promise of Synopsys plus Ansys. Let me take a few minutes to address market trends shaping our opportunity and provide some highlights from the quarter. After that, Shelagh will take you through the financials in more detail. First, the market trends. Starting with AI, we continue to see a tale of two markets. On the one hand, the multi-trillion dollar AI infrastructure build-out continues unabated. That's driving system-level and semiconductor R&D with continued robust design start activity for AI compute.

At the same time, design starts in markets like consumer, automotive, and industrial remain subdued despite signals of modest recovery. AI's rapid progress is also prompting healthy debate about whether it will disrupt established software companies. Let me explain why we're different. Our deep tech solutions power the world's most complex engineering efforts. Synopsys' decades of deep domain expertise, proprietary code bases and solvers, and native foundry design technology co-optimizations deliver optimal, deterministic, silicon-proven results that probabilistic AI models do not replicate. While AI will transform engineering software, Synopsys is already leading that transformation. We're pioneering AI-driven design capabilities in our products that deliver orders-of-magnitude productivity gains for our customers and pave the way for agent engineers with increasing levels of autonomy. One highlight among many this quarter was receiving World Economic Forum honors for our work with AMD to advance AI-accelerated chip design.

AI isn't disrupting our business. It's amplifying our strategic advantage. Another market trend and tailwind for Synopsys is the engineering transformation away from physical testing towards digital twins. To build smarter, more connected products at pace and at scale, companies are investing in advanced design automation, simulation, and digital twins as a competitive imperative. There is incredible demand for silicon-to-system solutions that can enable holistic software-hardware co-design to accelerate, de-risk, and reduce the cost of building AI-powered products. Our combined Synopsys plus Ansys portfolio is increasingly mission-critical to the innovation of industries spanning semiconductors, aerospace, mobility, energy, and advanced manufacturing. We'll have a lot more to say about this in a couple of weeks at our Synopsys Converge Conference. Turning to Q1 business highlights. The global Synopsys team executed well against the backdrop of continued geopolitical and macro uncertainty as China headwinds persist.

Let me share some segment highlights from the quarter. First, Design Automation. We saw continued strength in hardware, with major competitive wins at both new and existing customers, including a marquee emulation win versus the incumbent at a leading AI HPC customer. With growing demand for software-defined, configurable systems supporting both emulation and prototyping, as well as a strong 2026 roadmap, we're well positioned to capture the expanding digital twin opportunity across industries. In EDA, we also saw sustained momentum across three trends. First, the application of AI across the stack. Major semi and hyperscale customers using Synopsys.ai have seen up to 50% faster knowledge assistance, up to 70% faster workflow assistance, and up to 5x faster formal test bench generation. Our AgentEngineer technology is advancing rapidly, and we have several customer engagements underway with agents across design and verification. Second, leadership in multi-die.

Multi-die momentum accelerated as leading semiconductor and foundry customers adopted Synopsys's 3DIC Compiler platform, leveraging automation and AI-driven optimization with our industry-leading multiphysics analysis tools to improve signal and power integrity quality of results, enhance thermal efficiency, and speed up design convergence. Third, sustain design win momentum at advanced nodes with our digital flow, including Fusion Compiler and PrimeTime, achieving 100% usage on critical tapeouts at 2 nm and below. Moving to Ansys, which delivered a strong Q1 performance driven by robust demand for system-level digital engineering, multiphysics simulation, and AI-enabled design flows. We won large multi-year agreements across aerospace, hyperscale, industrial, and automotive. With Ansys as part of Synopsys, we now support more than 90% of the top 100 automotive suppliers.

At CES in January, we showcased how AI-driven simulation is helping customers like Audi reduce physical prototyping and shorten development cycles. Our confidence in this business is only increasing as global demand for electrification, autonomy, digital twins, advanced semiconductor design, and mission engineering remains resilient and expanding. Turning to Design IP, which performed in line with expectations. As we've said, 2026 is a transitional year for the IP business, and we're focused on aligning the fastest-growing segments of the silicon market. We're making progress on this front. The planned sale of our processor IP solutions business to GlobalFoundries sharpens our focus on extending our leadership positions in interconnect and foundation IP. As interconnect standards evolve at an unprecedented pace, customers count on Synopsys's one generation ahead approach, and in Q1, we saw continued strong demand for high-speed protocol IP.

We achieved more than 40 PCIe design wins in the quarter with HPC and automotive customers, achieved an industry-first demonstration of PCIe 8.0, and established first-to-market position with our 224G SerDes on advanced nodes and leading foundries with 10 lifetime wins. We continue to expect muted FY 2026 growth in IP with sequential improvement given our roadmap and sales pipeline. Longer term, several industry trends give us conviction in the growth trajectory of the business. This includes the global expansion of foundries and accelerated node transitions, standards advancing at unprecedented pace, and increasing demand for chiplets and subsystems. Our 40th anniversary year is off to a great start with operational excellence, financial discipline, and the most competitive, compelling roadmap ever.

Our priority for FY 2026 remains on driving sustainable growth and margin expansion by advancing our technology leadership with holistic integrated silicon to system engineering solutions by pioneering AI-driven engineering and focusing our IP portfolio for growth, and efficiently scaling to accelerate our strategy. The Ansys integration is well underway. It's great how our teams have come together at pace to solve engineering's biggest challenges. We'll have a lot more to say and show at Synopsys Converge in March. I look forward to seeing many of you there. Now, over to Shelagh.

Shelagh Glaser (CFO)

Thank you, Sassine. As Sassine noted, Q1 2026 marked a strong start to the year, with revenue at the upper end of our guided range, non-GAAP operating margin of 42.1%, and non-GAAP EPS above guidance. These results reflect strong execution and financial discipline across the business. Backlog ended at $11.3 billion, underscoring our strong and resilient business model. We are reiterating our full year revenue, non-GAAP operating margin, and cash flow guidance, while raising our non-GAAP EPS guidance for the full year. I'll now review our first quarter results. All comparisons are year-over-year, unless otherwise stated. Our Q1 2025 compares include the Optical Solutions Group, which was divested in Q4 2025.

We generated total revenue of $2.41 billion, coming in at the high end of our guidance, primarily due to the timing of Ansys deals. Ansys revenue was approximately $886 million, reflecting our leadership, simulation, and analysis portfolio, and exceptional execution in the seasonally strong quarter. Geographically, China grew approximately 21% year-over-year due to the inclusion of Ansys. Excluding Ansys, China revenue declined slightly year-over-year, consistent with our outlook. Total GAAP costs and expenses were $2.2 billion. Total non-GAAP costs and expenses were $1.4 billion at the low end of our guided range due to timing, resulting in non-GAAP operating margin of 42.1%. GAAP earnings per share were $0.34.

Non-GAAP earnings per share were $3.77, coming in ahead of expectations on revenue and expense timing, as well as lower net other and interest expense. On to our segments. Design Automation segment revenue was approximately $2 billion. In addition to strength in Ansys, the segment saw strong growth in hardware-assisted verification, partially offset by the Optical Solutions Group divestiture. Design Automation adjusted operating margin was 47.3%. Design IP segment revenue was $407 million, down approximately 6% year-over-year and flat sequentially. We continue to expect fiscal year 2026 to be a transitional year for the business as our IP roadmap continues to make steady progress. Design IP adjusted operating margin was 16.2%.

Free cash flow was approximately $822 million in Q1. We ended the quarter with cash and short-term investments of $2.2 billion. Total debt at the end of Q1 was $10 billion. We have repaid the entirety of the $4.3 billion term loans, consistent with our commitment last quarter. Now to guidance. Our full year targets are: total revenue of $9.56 billion-$9.66 billion. We continue to expect Ansys revenue contribution of $2.9 billion at the midpoint, growing double digits. Total GAAP costs and expenses between $8.46 billion and $8.60 billion.

Total non-GAAP costs and expenses between $5.69 billion and $5.75 billion, resulting in non-GAAP operating margin of 40.5% at the midpoint. GAAP earnings of $2.21-$2.62 per share. Non-GAAP earnings of $14.38-$14.46 per share, up $0.06 from prior guidance due to lower net other and interest expense in Q1. We still expect cash flow from operations of approximately $2.2 billion and CapEx of approximately $300 million, resulting in free cash flow of approximately $1.9 billion. With the term loans fully paid off and a strong cash position, our board of directors has replenished our existing stock repurchase program with authorization to purchase up to $2 billion of our common stock.

Our capital allocation priority will continue to be investing in the business with flexibility to opportunistically repurchase shares while paying down debt. To targets for the second quarter. Total revenue between $2.225 billion and $2.275 billion. Total GAAP costs and expenses between $2.02 billion and $2.085 billion. Total non-GAAP costs and expenses between $1.38 billion and $1.41 billion. GAAP earnings of $0.23-$0.43 per share, and non-GAAP earnings of $3.11-$3.17 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. In conclusion, 2026 is off to a strong start, and we're executing to the priorities we laid out at the beginning of the year.

With our broad leadership portfolio, expansive market opportunity, and technology trends that play to our strength, we are focused on executing with financial discipline as we solve our customers' biggest engineering challenges from silicon to systems. With that, I'll turn it over to the operator for questions.

Operator (participant)

Thank you. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants. If you have additional questions, please reenter the queue, and we'll take as many as time permits. Our first question today will come from Charles Shi from Needham & Company.

Charles Shi (Senior Analyst)

Hi, thanks for taking my question. The first one, I want to dig a little bit more into the IP segment. Thanks for the commentary on unit growth for the year, a sequential improvement from here for the remainder of the year. It does look to me that the second half IP revenue should see some pickup. I'm not questioning you that you're not going to deliver that, but I think going back a couple of years, you talk about visibility in some development milestone-based IP revenues, probably coming from the some of the foundry customers, but that part of the business is going away. Wondering, what gives the confidence on the second half IP business the pickup? Maybe I can ask a second question after this.

Thank you.

Sassine Ghazi (President and CEO)

Yeah, sure, Charles. The confidence in our IP business is driven by the design starts. As I mentioned in the prepared remarks, for the AI segment, the design starts remain very robust, and that's where we engage the customers early and have the opportunity to sell the IP as a portfolio with the various needs that these customer have. We have an advantage in these situations, given the breadth of the portfolio. That's one aspect. The other aspect that has changed over the last number of years is the pace and time in which these standards are evolving. Where historically, the standard life used to be three to four years, right now it's about half that time, and the reason for that is the increased need for higher bandwidth, lower power, et cetera, standard.

The last point we're seeing and observing is our customers looking for foundry optionality. Given the Synopsys portfolio is across multiple foundries, with all of that is giving us that confidence. Now, as far as the second half, as we have communicated a couple quarters ago, that we have some work to do on some of the schedule on delivering on a few of the titles. We're on track to deliver to that with an expectation that we'll be able to monetize toward the latter part of the year.

Shelagh Glaser (CFO)

Yeah, I would just add on, Charles, that the availability that Sassine talked about is a little bit more Q4 weighted.

Charles Shi (Senior Analyst)

Okay, a little bit Q4 weighted. Thanks. Maybe a follow-up question. Sassine, I think in the past, you talk about, not having the right resources to capture some of the IP opportunity, because of, you know, there was a little bit of focus probably on the foundry side of the customer, but some of the hyperscalers probably needs a little bit more handholding. Wondering if you can give us a little bit update other than, I think you talked about some work will be delivered in the second half of the year, but, any sort of update on that front, that would be great. Thank you.

Sassine Ghazi (President and CEO)

Yes, Charles, to be clear, we absolutely have the right skills, and what we have communicated, it was a prioritization of some of these skills to deliver on the schedule required for some of these hyperscalers. Again, it's not a question of, do we have the right people with the right skill set and understanding and knowing what we want to build? Those are things that we absolutely do have. It was putting the right resources and priority of the resources to deliver on time and schedule for these titles, and that's exactly what we're doing. I feel great, actually, about the progress that we're making on our roadmap and schedule to deliver to these opportunities.

Charles Shi (Senior Analyst)

Thanks.

Sassine Ghazi (President and CEO)

Thank you, Charles.

Operator (participant)

Gary Mobley from Loop Capital Markets has the next question.

Gary Mobley (Managing Director and Senior Equity Analyst)

Good afternoon. Thank you so much for taking my question. Maybe this is a question for Shelagh, but, you know, I noticed the RPOs are down, you know, modestly on a sequential basis, and it's clear that the fourth quarter of last year was a strong bookings quarter. Maybe if you could speak to the seasonality of the bookings as you see it on both for the balance of this fiscal year and in general, talk about the renewal activity on, you know, the EDA side and simulation software sides of the businesses.

Shelagh Glaser (CFO)

Well, as you know, it's an ebb and flow of building and consuming backlog. We feel great. We are sitting at $11.3 billion of backlog, so we've got a strong understanding of what our customer demands are and what we need to deliver to them. As you say, that just kind of ebbs and flows with renewal timing. There's nothing about backlog that does anything other than give us confidence, sitting at $11.3 billion.

Gary Mobley (Managing Director and Senior Equity Analyst)

Okay. If I could just ask a quick follow-up. On the verification and hardware side of the business, how do you see the product cycle of ZeBu and HAPS-200 playing out for the balance of the year in, you know, in comparison to last year? Where are we at in terms of the product cycle strength?

Sassine Ghazi (President and CEO)

Yes. Exactly what you pointed out. We have two parts of our hardware portfolio. We have ZeBu and HAPS, and we introduced the EP family, which is an emulation prototyping, which is a hybrid that provide our customer the flexibility to achieve the highest performance that is needed for software development, as well as the ability to verify the function of the chip. We had a record year last year, and it was following a number of other record years, and we have an expectation for that business to continue on delivering to such expectations, given the demand and complexity that our customers are driving. That requires both a ZeBu, HAPS, EP system, and we have number of use cases today that we're leading the market in terms of technology differentiation there.

Gary Mobley (Managing Director and Senior Equity Analyst)

Thank you both.

Sassine Ghazi (President and CEO)

Thank you, Gary.

Operator (participant)

The next question is Jay Vleeschhouwer, Griffin Securities.

Jay Vleeschhouwer (Managing Director of Software Research)

Thank you. Good evening. Seeing the first question for you and perhaps somewhat technical, you began your remarks by noting how AI could be variously constructive to your business rather than disruptive, and I'm happy to agree with that. I'd like to ask about three ingredients that you might have to execute upon to make sure that continues to be the case. We hear a lot, for example, about orchestration requirements across agentic AI. I think that's probably going to be pertinent to EDA as well, or engineering software broadly. Secondly, data repository across a broad apps portfolio that you now have. Finally, traceability, particularly for simulation, but also more broadly.

I know it's a little technical, but for a call like this, but perhaps in, insofar as those are, I think, critical ingredients, maybe talk about your capabilities there, and then the follow-up, Shelagh.

Sassine Ghazi (President and CEO)

Yeah, Jay, thank you for the question. If you recall, last year at Converge, we put our roadmap for agent engineers, and in that roadmap, we mapped out L1 through L5, where L1, think of it as a reinforcement learning applied to every aspect of the technology that we offer. In L2, where we have what we call a task agent, in L3 into orchestration of these agents, and L5, and then L4 into the planning, et cetera, into a full autonomy of orchestration, where the human engineer will be dramatically augmented and the workflow will change on how to design the chip. Now, what stitches all of that together is a visibility and continuum of data, exactly the second point that you're mentioning, and then, of course, the traceability, visibility, into the accuracy of the verification.

At the end of the day, what we do, our agents cannot hallucinate. They have to be 100% accurate as you move to the next phase and the following phase of the workflow. We have number of the tasks agents, and we have multiple orchestration layer, and we talked about these through some of our partnerships we have with NVIDIA, with Microsoft, et cetera, to leverage some of that orchestration layer and the cognitive layer that they offer. It's a combination of what we're building and what we're partnering with the ecosystem in order to accelerate our roadmap on the vision of an AgentEngineer, which we believe strongly that we have pioneered, and we continue on engaging the customers there.

I want to make sure that it's clear as well, in order to deliver to that vision, you need the data, and you need the verification ability of every step of the flow.

Jay Vleeschhouwer (Managing Director of Software Research)

Okay. Shelagh, for you, with regard to Ansys, two things stand out in the results and outlook. The question is really about the forecastability of the Ansys business. It remains clear that their results are still heavily influenced by pronounced 606 effects, which was certainly the case for them before the acquisition. Maybe you could talk about how forecastable the Ansys business is, given that variability in that particular accounting. If we think about the renewals cohort from 2023, it was heavily reliant upon automotive. That's where they had their growth three years ago, presumably, that's where you're going to have to rely upon the renewals cohort growth for this year as compared to A and B and high tech.

Maybe talk about some of the end market assumptions behind your forecast for Ansys for this year?

Shelagh Glaser (CFO)

Yeah, I'll start with the back end of the question, Jay. As we have, you know, the capability in Ansys really to service multiple market segments, that's what gives us a lot of confidence. You know, simulation and analysis is still very lightly penetrated in the TAM, so there's ample place, ample opportunity not only to grow within customers, but to actually grow new customers. That opportunity set is quite broad for us. In terms of how we think about the business, as you know, the December was always very big for them. That happens to have fall into our Q1. They were a fiscal year. Obviously, we're a 10/31 year. What you saw in Q1 was, you know, the combination of what would have been their typical year-end.

That's a real standout in terms of our Q1 results. We anticipate that over time, that probably changes as, you know, the sales team realigns with sort of, you know, our fiscal year. Nonetheless, what we're seeing is broad opportunity really across all those segments. As we build the forecast, it incorporates what we're seeing in existing customers, what we think the new opportunity is. Then in terms of the 606, as I talked about last time, as we're bringing Ansys in, we're building combined products, where a portion of Ansys will be in what we call SCBU, which will be with EDA. We're harmonizing those accounting policies really aligned with how we're supporting the products and how we're giving further updates on the product. Over time, that's a more muted impact.

I would say, really what you're seeing here is there's just a really broad opportunity in terms of ability to service multiple markets with the leadership products in Ansys.

Jay Vleeschhouwer (Managing Director of Software Research)

Thank you.

Operator (participant)

Jason Celino.

Shelagh Glaser (CFO)

Thanks, Jay.

Operator (participant)

Jason Celino from KeyBanc Capital Markets is up next.

Jason Celino (Managing Director and Equity Research Analyst)

Great. Thank you. Sassine, I wanted to ask about the ARC processor business that you're divesting. I understand, you know, portfolio review and you're sharpening your focus in other areas, but presumably, you know, this was a core part of your portfolio before and should be well-positioned for physical AI. If physical AI is such a big opportunity on the come, you know, maybe it's not a growth driver today, but could be, I guess, why the rationale on the divesture?

Sassine Ghazi (President and CEO)

Sure, Jason. The ARC business went through a couple of transformation from the ARC itself, architecture to the RISC-V ISA architecture. What we are seeing is many of our customers are developing their own processor IP, using, for the most part, our software, EDA software, to design and verify using the EDA software, our hardware portfolio, et cetera, to develop their own processor for all kind of embedded applications, which is still a great opportunity for Synopsys. We will continue on enabling, enhancing, leading, supporting our product and our customers for their own development.

From an IP point of view, we believe when we look at our broad IP business and the portfolio we have, there's a much bigger opportunity and a growth opportunity for the interface IP, and this is where we want to capture this opportunity and put our investments at. GF will be a great partner to, as they enable, that part of their business on both the interface IP side and the EDA side in their engagement with our joint customers.

Jason Celino (Managing Director and Equity Research Analyst)

Okay. Just for clarification, kind of on the IP messaging, I assume that because the divesture hasn't closed yet, the ARC revenues are included in the sequential improvement that was discussed, or is that not included? Thanks.

Shelagh Glaser (CFO)

Jason, that's correct. Until we close, the ARC is a part of our financials.

Jason Celino (Managing Director and Equity Research Analyst)

Okay. Any sense on how big it is? Just so we, like, are able to anticipate.

Shelagh Glaser (CFO)

No, we haven't provided that.

Jason Celino (Managing Director and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

The next question.

Shelagh Glaser (CFO)

Thanks, Jason.

Operator (participant)

From Vivek Arya from Bank of America.

Liam Pharr (Equity Research Analyst)

Hi, this is Liam Pharr on for Vivek. Thank you so much for taking our question. You closed Ansys in July last year. What have you noticed by way of cost or revenue synergies thus far for fiscal 2026, as you've been speaking with customers on joint Synopsys-Ansys products?

Sassine Ghazi (President and CEO)

Yes, Liam, what we communicated was the first half of 2026 will be when we deliver the first wave of the joint solutions, and I'm looking really forward to communicating at Converge, which is our conference, in few weeks, the rollout of number of the joint solutions with clear visibility to which market, which customer, and then, of course, once you release a product, you focus on the customer adoption and monetization. We are anticipating the monetization of the joint solution to start in FY 2027, with quite a bit of excitement from our customers to solve real problems that they have been looking forward for that integrated solution to come.

Shelagh Glaser (CFO)

I would just comment that the teams are already trained on cross-selling, so existing products. Synopsys sales team being able to sell Ansys products, Ansys sales team being able to sell Synopsys products. We're well underway in that, and we do have revenue this year. We haven't given specific amounts. Our commit is $400 million in revenue synergies run rate by year four, obviously incorporating those joint solution that Sassine talked about. In terms of cost synergies, our commit was $400 million run rate by year three. We're well underway accelerating that, and as you as we've worked through, we're working on accelerating that into year one and year two, which is 2026, [audio distortion]. We're well on way on those. Thank you.

Liam Pharr (Equity Research Analyst)

Thank you so much. For a follow-up, I want to go a little deeper on China. I understand it remains challenging, but what are the puts and takes around it being flat or even growing year-over-year this year? Have you seen any change in the competitive landscape against a peer who continues to see a healthy design activity environment there? Any insight behind that would be very helpful. Thank you.

Sassine Ghazi (President and CEO)

Yeah, sure, Liam. China, for the quarter for Q1, performed in line with expectations. As we mentioned as well in the prepared remarks, the classic Synopsys was down slightly, whereas, Ansys portfolio performed fairly well. The reason you're seeing that mix, per se, in the performance, is the cumulative impact of the restrictions, both in entity list and technology, are truly having an impact on our customer commitment and demand. The reason it impacts Synopsys in a, in a greater way, I want to say, is the mix in our portfolio. We have a leadership position in our IP business. That part of the business in China, customers may decide not to go for an external foundry and look at a domestic foundry, for an example, and therefore, that will impact the IP business.

It may not impact as much the hardware business or the EDA business. That's from a macro standpoint, the way we're seeing the landscape in China. As far as the domestic competitors, yes, we're seeing them, because obviously, if customers cannot use our technology, they're looking for alternatives, and the customers who can use the technology, they absolutely still prefer to use our technology versus domestic.

Liam Pharr (Equity Research Analyst)

Thank you very much.

Sassine Ghazi (President and CEO)

Thank you, Liam.

Operator (participant)

The next question is Kelsey Chia, Citi.

Kelsey Chia (VP and Equity Analyst)

Hi, thanks for taking my question. My question is on IP. I understand that Synopsys is a leader in interconnect IP with PCIe 8.0 to 224G SerDes. The company is also late in terms of IP delivery. Is there a risk that Synopsys may miss customer design starts or customers may shift away from using the IP that Synopsys has developed?

Sassine Ghazi (President and CEO)

Hi, Kelsey. It depends. Let me explain why it depends. What we sell to is a customer schedule. Customers' engagement start with aligning what we have to when do they need the IP and their tapeout. A number of the one that you mentioned, the PCIe or the 224, I'll expand it into an HBM, LPDDR, UCIe, which are all titles that customer need in order to design a high-end HPC chip. For a number of those customers, we are engaged, we're selling that whole portfolio based on aligning the schedule.

The comment I made earlier, where we do have the expertise, we do have the capacity, is the prioritization for specific customers to deliver, and we're putting a lot of focus on that, and that's why the point Shelagh made earlier, that our confidence in the second half waiting is coming through the roadmap alignment and by when do we deliver, on these titles.

Kelsey Chia (VP and Equity Analyst)

Got it. A short follow-up. IP operating margins are depressed today. Is there, can we use the Rule of 50 to think about the operating margins at a normalized level? Also, you did talk about eventually moving to a royalty business model. Is there a framework to think about a normalized operating margins for IP?

Shelagh Glaser (CFO)

Let me take the operating margin. I'll have Sassine comment on evolving the business model. As we've talked about IP growth this year is muted. We're still investing to build out the titles that Sassine was talking through. We've got, you know, the engineering team working very diligently, making lots of progress on the titles, but with muted growth, we get muted operating margin. For this year, we're going to see more muted operating margin. Over time, though, once we get, you know, to the back to having the titles on time, my expectation is that's a very good business. The operating margin will always be below the corporate average because it's more people-intensive, but that's my expectation. That's how we've run that business over time.

You will see muted, compressed operating margin this year, just driven by the muted, revenue, and we're not changing our investment profile there because we're still building out those titles.

Sassine Ghazi (President and CEO)

Yeah. I, in terms of the business model, the. I'll start with the market. The great news is there's such a high demand for customization as well as acceleration of delivering on the IP titles, in particular for hyperscalers. Because they don't have their own IP team, they are counting on us to be able to deliver on time and what we call one generation ahead for various of the titles I just mentioned earlier. It's an inflection point. It's a great opportunity to focus on the quality of the deals and capturing the right monetization for that value. We're in active conversations with a number of these partners, and I do expect that we will close a number of these conversations will move into an actual business in FY 2026.

Of course, you won't see it in terms of that upside until we deliver and the customer tape out and start delivering product for it. We're very excited about this opportunity to improve the monetization.

Kelsey Chia (VP and Equity Analyst)

Thank you.

Sassine Ghazi (President and CEO)

Thank you, Kelsey.

Operator (participant)

Your next question is from Lee Simpson, Morgan Stanley.

Lee Simpson (Senior Technology Analyst)

Great. Thanks for fitting me in. Maybe just two quick ones from me, actually. We did hear from a peer last week that the monetization perhaps on agentic play would come on a value-based basis, perhaps even on a token-based basis. I wonder if you guys had looked at doing things on that similar format and whether or not this business could, and I'm talking about AgentEngineer here, whether or not that could be margin accretive from day one. Maybe as follow on, you know, if we look at Ansys, clearly a market leader in its product range, but quite broad-based in its customer range. Does that maybe carry some extra risk? Because, you know, value isn't even across all those customers.

There are some areas where there's clearly higher value, for instance, 3DICs, the emulation thereof. Could that maybe perhaps slow some of the growth through this year and into next on Ansys, or at least have some risk of it? Thanks.

Sassine Ghazi (President and CEO)

Thank you, Lee. On the agentic, as we communicated about a year ago when we introduced the AgentEngineer, is that the workflow will change. The moment the workflow will change, it's an opportunity for us to adjust the monetization based on value. Yes, what you commented on, will value-based be in consideration? Absolutely. That's what we've been communicating for about a year now, that the workflow will change and there will be a monetization adjustment. And the customers, by the way, they're very receptive for that conversation because they understand that they have to change as the workflow changes, and how will that value equation from a time-based license to a different type of license as we're accelerating their ability to deal with complexity and schedule.

Now, on Ansys, we see Ansys as a force multiplier for our business. As Shelagh mentioned, when you look at the various markets that are doing engineering R&D, the penetration of sophisticated simulation analysis, CAD environment, et cetera, has a significant opportunity, very different than semiconductor, that the Moore's law pushed and accelerated the adoption of EDA. Now, with physical AI, if you are in industrial or automotive or robotics, you cannot build those products without investing more in R&D, and therefore investing more in system-level design, simulation, and analysis. As the results speak to themselves for Q1, this is not a one-time phenomena. We see that opportunity for the long term as I mentioned, as a force multiplier and an expansion in customer base for Synopsys that we're very excited about.

Lee Simpson (Senior Technology Analyst)

Great. Thanks.

Sassine Ghazi (President and CEO)

Thank you, Lee.

Operator (participant)

Next, we'll go to Siti Panigrahi from Mizuho.

Siti Panigrahi (Managing Director)

Thanks for taking my question. Can you hear me?

Sassine Ghazi (President and CEO)

Yes, Siti.

Siti Panigrahi (Managing Director)

Yeah. Thanks for taking my question. I don't know if this question may I answer. A question is about your NVIDIA partnership that you announced recently. There was a big investment from NVIDIA. I'm wondering how that partnership coming along, and how should we see about the product or priorities evolve, and how you think about the monetization there?

Sassine Ghazi (President and CEO)

Yeah, Siti, the way I explain this partnership, at least internally, this is not a press release partnership. It's a deep commitment from both companies that we both saw a market opportunity that we wanna accelerate and capture, and it comes in two forms. The first form is a roadmap we communicated on bringing number of our products, EDA, as well as the legacy Ansys products, into GPU acceleration, and delivering the multiples of acceleration that is, that we set as a target and a goal between the two companies.

We have a joint R&D working on these products with an expectation to deliver a number of them in 2026. That will come with an upside in a business model, meaning if you're using a product A from Synopsys running on a CPU, that will continue, that roadmap will continue, and we'll have a parallel product of that product A running on a GPU, and if it's delivering 15x, 20x, then there's an uplift for that value we're delivering to the customer. That's one layer. The second layer is Omniverse. The ability to create a digital twin for the physical AI opportunity. Physical AI is not possible by having an old method physical prototype. You need to create a digital twin.

A digital twin is useless without an accurate simulation and analysis, and that's where we come in, that's where the Ansys portfolio comes in, and where we wanna lead the opportunity to monetize on both the GPU acceleration as well as the digital twin opportunity for physical AI.

Siti Panigrahi (Managing Director)

That's great. Thanks, Sassine, for the color.

Sassine Ghazi (President and CEO)

Thank you, Siti.

Operator (participant)

The next question will come from Gianmarco Conti, Deutsche Bank.

Gianmarco Conti (Director of Technology Equity Research)

Yeah, hi. Thank you for taking my questions. Maybe you just want to go back on agentic. Could you perhaps give us some color on where do you currently sit with customers using it for both front end versus back end? Whether you have a sort of like an idea of customer penetration into the next 12 months, how are customers using it right now, will they require higher computational needs as their designs are scaling faster with more agents? I'm just kind of curious as to how is the delivery method being addressed in these customers ask, for example.

Sassine Ghazi (President and CEO)

Yes. I'll talk more about it, and Shankar will talk more about it at Converge. At the high level, what we have right now is number of tasks agents. For example, I mentioned in my prepared remarks some value we're seeing with the formal advisor. That's an area where the test coverage has always been a very time and compute consuming task for our customers. This is a great opportunity on how to leverage both an agent to be able to look at a specific task and series of agents to orchestrate and accelerate the, both the coverage and the whole verification opportunity.

Your question about front end and the back end, we're working absolutely on both, where the early opportunity that we're seeing, and we're tackling it because of the bottleneck that our customers, they do see in terms of time and number of engineers they put, is in the front end area. We have a roadmap on both. This is something stay tuned. We'll communicate more at Converge, but we're seeing great progress based on the number of customers we're engaged with in early with early engagements.

Gianmarco Conti (Director of Technology Equity Research)

Got it. Shelagh, maybe just like, one last one for me would be, what's driving, the lowest GAAP EPS guide, despite GAAP expenses being lower?

Shelagh Glaser (CFO)

I think the real delta this year between GAAP and non-GAAP is, if you look at it's really the amortization schedule, and there's more detail in our quarterly filing on that. We've got the restructuring, which is one time only, it's 2026 and 2027, but there'll be an amortization schedule that will be rolling through over the next several years.

Gianmarco Conti (Director of Technology Equity Research)

Got it. Thank you.

Sassine Ghazi (President and CEO)

Thank you.

Shelagh Glaser (CFO)

Thanks for the question.

Operator (participant)

Next up is Joshua Tilton, Wolfe Research.

Joshua Tilton (Director)

Hey, guys. Thanks for sneaking me in, and congrats on a solid start to the year. I have two. My first one is more of a longer-term question. I guess the question is, Sassine, I think the words you used were 2026 is the year that you begin to deliver on the technology promise of Synopsys plus Ansys. What I'm trying to understand is, and I'm assuming you will, but when you guys do deliver on this technology promise in 2026, what does it mean for the direction of growth for your business in 2027 and beyond? I think a lot of investors see the growth that Cadence is putting up, and they're kind of excited for, you know, your organic growth sort of trend in that direction. Any help or any color would be greatly appreciated.

Sassine Ghazi (President and CEO)

Yeah, sure, Josh. On as far as the long-term growth view, it has not changed. On EDA, double digits, on IP, mid-teens, as well as on the simulation and analysis, it's a double-digit growth. That puts the company as a whole in a double-digit growth opportunity driven by the demand and the leadership we have in our portfolio. When I say that 2026 is the year where we begin delivering on the on technology and the value promises, there are today, problems are not being solved with the current offering that the industry is providing the customers.

When we talk about the joint solutions, how to bring in physics analysis into the design phase when you're designing a multi-die system, a lot of the challenges our customers are dealing with is they design, they go to sign-off, they discover an issue, say, a thermal or a structure issue, then they have to iterate and iterate in order to solve. That takes time and risk, and this is what we're so excited about with the joint solution. Given what Ansys has is a leadership sign-off for physics, and what Synopsys has is a leadership position in the design platform. Thus, where the joint solution come together, that our customers are anxiously waiting to see innovation and bringing these two platforms together. That's where we're seeing the opportunity of growth. Now, as we compare to the market or our closest peer, our commitment is on what I just mentioned in terms of double-digit growth.

In IP, in particular, we have communicated, we repeated that it's a transitional year for us for 2026, the market opportunity is there. We have the scale, we have the skills, we have no doubt that we will deliver to our long-term view for IP.

Joshua Tilton (Director)

Makes sense. Maybe just a quick follow-up for Shelagh. More of a clarification question. Did I hear correctly that relative to your guys' expectation, that it was Ansys that drove most of the outperformance of the revenue guide? If that is the case, when we think about the potential for upside throughout the rest of the year, are we playing for that upside coming from the Ansys business and more of an inline year for the organic business? How do I think about that?

Shelagh Glaser (CFO)

We saw significant strength in Q1 in Ansys. As reflected in what we shared, the $866 million for Ansys. The strength we saw was really across the industries that Ansys sells into. For the full year, obviously, we don't guide by segments, but we're looking for strong performance across all the lines.

Joshua Tilton (Director)

Makes sense. Thank you, guys.

Shelagh Glaser (CFO)

Thanks, Joshua.

Sassine Ghazi (President and CEO)

Thank you.

Operator (participant)

Next up is Joe Vruwink, Baird.

Joe Vruwink (Senior Research Analyst)

Hi, great. Thanks for taking my questions. I wanted to ask about EDA software, specifically within Design Automation. If hardware was a big contributor to strength for the overall segment, I'm assuming the software piece is still growing in the single digits. Maybe can you walk through some of the biggest items in your mind that start to lift the growth profile in the EDA software business higher? Are you seeing any evidence of that yet in bookings or renewal opportunities that are on the horizon?

Sassine Ghazi (President and CEO)

Thank you, Joe. On the EDA software, given this is a ratable, fairly predictable type of business, we know when the renewals are coming up. We engage with customers early to deploy new technology. It depends on the customer. When I talk about a tale of two markets, the first tale that are serving AI build-out, those are the customers that they are racing to deploy the Synopsys.ai, racing to deploy the 3DIC Compiler, Fusion Compiler, PrimeTime, VCS, etcetera. We have, as you know, a leadership position in the EDA software, and we continue on collaborating, engaging early, and finding an opportunity to upsell during or between renewal cycles.

On the second tail of customers, where the R&D investment and the push for acceleration has not been as strong as the first tail, typically, our renewals are timed with the monetization is timed with the renewal expiration. Net-net, the EDA software, for us, we are excited about all the opportunities the classic Synopsys has been building. The next opportunity, of course, is the joint solution that will leverage the Ansys portfolio to create the new product and a new opportunity to monetize.

Operator (participant)

Everyone, that does conclude our question and answer session. I would like to hand the conference back to Sassine Ghazi for any additional or closing remarks.

Sassine Ghazi (President and CEO)

Thank you. It's such an exciting time to execute as one company and Ansys, now part of Synopsys. With that, we have extended our technology leadership into simulation and analysis, and we expanded our customer base into new market opportunities. The other point is on AI. AI is absolutely a mega trend that is fueling system-level and semiconductor R&D investment, and our AI products are capable and are mission-critical for our customers' success. We are focused on executing with financial discipline as we solve our customers' biggest engineering challenges from silicon to systems. Big thank you to the global Synopsys team for a strong start to 2026. Thank you all for joining us today.

Operator (participant)

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.