Q1 2025 Earnings Summary
- Strong Demand in AI and HPC Markets: Synopsys is experiencing robust demand in the AI and HPC sectors, with customers accelerating R&D investment and design activity, particularly at advanced nodes like 2-nanometer. This leads to increased sales of EDA tools and hardware solutions. , ,
- Successful Launch of New Hardware Solutions: The launch of the new HAPS 200 prototyping systems and ZeBu 200 emulation systems has generated strong customer interest, with demand exceeding supply. Synopsys expects hardware revenue to be back-half loaded, particularly in Q4, supporting growth in the second half of the year. ,
- Resilient Business Model and Positive Outlook: Despite headwinds in China, Synopsys reaffirms its full-year guidance, citing confidence due to strengths in other regions and robust demand in technology sectors. The company benefits from increased global semiconductor R&D investment, expected to grow from 6% to 9%, which is positive for Synopsys as they sell to R&D teams. , ,
- China Revenue Growth is Decelerating Below Corporate Average Due to Stronger Headwinds, Including Export Restrictions and Slowing Economy: Synopsys expects China revenue growth to be below corporate average, with the company stating that "the deceleration and the headwinds in China are getting stronger" and that they "believe that China by itself will be decelerating below the corporate average". This is attributed to "the cumulative effect of restrictions" and a "slowing local economy and the money that's flowing into start-ups and the overall economy in China". Given that China revenue was $174 million in Q1, a significant step down from previous quarters , this decline may negatively impact overall revenue growth.
- Growth is Concentrated Among Fewer Semiconductor Customers, Posing a Concentration Risk: There is concern that Synopsys' growth is increasingly driven by a smaller number of semiconductor companies focused on AI and HPC, while other sectors like automotive, industrial, and consumer electronics are experiencing flat or shifting demand . An analyst noted that "we do seem to have seen over the last number of quarters, more concentration of those semiconductor companies that are continuing to show good or even very good growth" and questioned if this is a concern. This concentration could pose a risk if demand from these key customers slows down.
- Increasing Costs and Capital Expenditures May Pressure Margins: Synopsys anticipates higher cost growth in Q2, with total non-GAAP costs and expenses expected to increase by 8.5% at the midpoint. This is due to "timing of hiring and timing of some big ticket expense items" and the annual merit increases. Additionally, the company is "putting so much more investment in hardware" to meet customer demand, leading to higher inventory levels and capital expenditures . If revenue growth does not keep pace with these increasing costs, margins may be pressured.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | Declined ≈11.7% (from $1,649.2M to $1,455.3M) | Total revenue fell due to reduced sales in several key product lines, notably upfront products (–17.8%), Design IP (–17.1%), and Time-Based Products (–8.4%). This decline is further compounded by the absence of an extra week in Q1 FY2025 that boosted Q1 FY2024 numbers. |
Design Automation | Increased ≈3.6% (from $985.3M to $1,020.2M) | Despite overall revenue headwinds, Design Automation showed modest growth driven by continued customer adoption of advanced tools and solutions; however, growth was partially offset by timing differences compared to the prior period when additional revenue factors (like an extra week) contributed to higher results. |
Design IP | Decreased ≈17.1% (from $525.7M to $435.1M) | Design IP revenue declined significantly due to the timing of customer spending, which resulted in lower IP product sales compared to Q1 FY2024. The previous period benefited from more favorable timing, while FY2025 saw a pullback in IP license recognitions. |
Time-Based Products | Decreased ≈8.4% (from $904.4M to $828.2M) | The decline in Time-Based Products is attributed to a drop in TSL license revenue and the absence of an extra week that had previously boosted revenue figures in Q1 FY2024, leading to an 8.4% reduction in recognized revenue. |
Upfront Products | Fell ≈17.8% (from $447.9M to $368.1M) | Upfront Products revenue dropped sharply as the prior period experienced higher IP and hardware product sales driven by a favorable timing of customer spend, which did not recur in Q1 FY2025. |
Maintenance & Service | Decreased ≈12.8% (from $297.0M to $259.0M) | Maintenance & Service revenue declined primarily because of lower professional service income, due to the timing of IP customization projects, despite a slight uptick in maintenance arrangements. |
United States Revenue | Down ≈24.4% (from $807.6M to $610.71M) | US revenue fell sharply reflecting a mix of timing effects (such as the impact of an extra week in the comparison period) and a slowdown in customer spending in the US market. |
China Revenue | Down ≈30.4% (from $250.0M to $173.95M) | China revenue experienced a steep decline primarily due to ongoing macroeconomic headwinds and restrictions that reduced the customer base, a contrast from the relatively stronger performance in Q1 FY2024. |
Korea Revenue | Increased ≈35.6% (from $184.6M to $250.39M) | Korea revenue surged as a result of robust organic growth and increased market demand in the region, contrasting with declines in other geographies. |
Operating Income | Decreased ≈30% (from $359,620K to $251,839K) | Operating income contracted because lower overall revenue—especially from high-margin segments like Design IP and Upfront Products—coupled with relatively higher operating expenses, reduced profitability compared to the prior period. |
Net Income | Fell ≈33.8% (from $446,207K to $295,683K) | Net income declined substantially driven by the revenue drop, lower interest and other income (including non-recurring gains present in Q1 FY2024), and increased operating costs. |
Basic EPS | Dropped ≈35% (from $2.95 to $1.91) | The basic EPS decrease mirrors the drop in net income and is influenced by lower top-line performance and rising costs that compressed margins, contrasting with the higher EPS seen in Q1 FY2024. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2025 | $6.745B to $6.805B | $6.745B to $6.05B | lowered |
Total GAAP Costs and Expenses | FY 2025 | $4.93B to $4.98B | $4.97B to $5.03B | raised |
Total Non-GAAP Costs and Expenses | FY 2025 | $4.05B to $4.09B | $4.05B to $4.09B | no change |
Non-GAAP Operating Margin | FY 2025 | 40% at the midpoint | 40% at the midpoint | no change |
Non-GAAP Tax Rate | FY 2025 | 16% (1 point higher than 2024) | 16% | no change |
GAAP EPS | FY 2025 | $10.42 to $10.63 | $10.09 to $10.31 | lowered |
Non-GAAP EPS | FY 2025 | $14.88 to $14.96 | $14.88 to $14.96 | no change |
Cash Flow from Operations | FY 2025 | Approximately $1.8B | Approximately $1.8B | no change |
Free Cash Flow | FY 2025 | Approximately $1.6B | Approximately $1.6B | no change |
Revenue Growth | FY 2025 | no prior guidance | 10.1% to 11.1% | no prior guidance |
Non-GAAP EPS Growth | FY 2025 | no prior guidance | Approximately 13% | no prior guidance |
Revenue | Q2 2025 | no prior guidance | $1.585B to $1.615B | no prior guidance |
Total GAAP Costs and Expenses | Q2 2025 | no prior guidance | $1.19B to $1.21B | no prior guidance |
Total Non-GAAP Costs and Expenses | Q2 2025 | no prior guidance | $985M to $995M | no prior guidance |
GAAP EPS | Q2 2025 | no prior guidance | $2.21 to $2.33 | no prior guidance |
Non-GAAP EPS | Q2 2025 | no prior guidance | $3.37 to $3.42 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q1 2025 | $1.435B – $1.465B | $1.455B | Met |
GAAP EPS (Diluted) | Q1 2025 | $1.81 – $1.95 | $1.89 | Met |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI and HPC Market Demand, Monetization, Integration Challenges | In Q4 2024, Q3 2024, and Q2 2024, Synopsys described consistently robust AI and HPC demand, rapid chip design starts, evolving monetization models (e.g., integration of XSO.ai, DSO.ai, VSO.ai, and early-stage generative AI evaluations), and integration challenges mainly related to multi-die designs and traditional workflows. | Q1 2025 discussions continue to highlight strong market demand with accelerated development cycles (shortened chip development timelines), active monetization of AI optimization solutions—and an emphasis on coupling them with generative AI and future workflow‐changing technologies—while noting that design workflows have not yet fundamentally changed. | Steady robust demand with evolving monetization approaches. The focus is shifting toward leveraging generative AI for future productivity gains while integration challenges remain persistent. |
New Hardware Solutions and Advanced Node Technologies | In Q4 2024, Q3 2024, and Q2 2024, Synopsys reported record wins in hardware (HAPS, ZeBu, EP systems) and strong momentum in advanced node pursuits (Fusion Compiler wins, multi-die integration, advanced node tape-outs). | Q1 2025 saw the launch of HAPS 200 and ZeBu 200 systems with up to 2x performance improvements and highlighted strong advanced node design activity—such as 2‑nanometer tape‐outs by leading customers. | Continued strength and high demand. Q1 2025 emphasizes performance enhancements and supply constraints, suggesting accelerated adoption and further momentum in advanced node technologies. |
China Revenue Slowdown and Macroeconomic Headwinds | Earlier calls (Q4 2024, Q3 2024, Q2 2024) noted a cautious but managed slowdown in China with modest deceleration and balanced execution amid broader macro uncertainties. | In Q1 2025, China revenue dropped significantly (to $174 million from a prior quarterly average around $250M) due to export restrictions and a slowing local economy, prompting expectations of growth below the corporate average. | Increasingly negative sentiment. The slowdown in China has become more pronounced in Q1 2025, reflecting heightened macroeconomic and geopolitical headwinds compared to previous periods. |
Customer Concentration Risk in Semiconductor Markets | Q4 2024 provided detailed commentary on risk mitigation via long-term, multi-year contracts, while Q3 2024 and Q2 2024 did not focus on this risk explicitly. | Q1 2025 acknowledged an emerging trend of greater customer concentration among high-growth semiconductor companies, but noted that rising R&D investments among these customers help offset related risks. | A nascent concern in Q1 2025. While risk remains managed through contract structure and R&D alignment, there is increased focus on customer concentration compared to earlier periods. |
Rising Costs, Capital Expenditures, and Margin Pressures | In Q4 2024 and Q3 2024, the focus was on margin expansion through operational efficiencies with improved non‐GAAP margins, and Q2 2024 emphasized scaling efficiency with modest cost increases. | Q1 2025 indicated that while Q1 costs were lighter than expected, a structural cost increase is anticipated in Q2 due to merit adjustments, alongside significant capital investments (e.g., a 15% QoQ inventory increase for hardware). | A shift toward caution. Although margins remain strong in Q1 2025, expectations of rising costs and heightened capital expenditure signal a more cautious outlook compared to previous periods. |
Revenue Backlog and Visibility Trends | Previous periods reported stable, high visibility backlog figures: Q4 2024: $8.1B, Q3 2024: $7.9B, and Q2 2024: $7.9B, reflecting consistent future revenue outlook. | Q1 2025 reported a slightly lower backlog of $7.7B, with typical burn and no significant change in customer behavior or contract duration patterns. | Overall stability with normal cycle dynamics. A slight reduction in the backlog in Q1 2025 likely reflects routine burn and seasonal dynamics rather than a fundamental shift. |
Operational Efficiency and Margin Expansion Strategies | In Q4 2024, Q3 2024, and Q2 2024, Synopsys consistently reported improving non‐GAAP operating margins (up to 38.5–40%), driven by disciplined cost management, AI/digital transformation, and efficiency improvements. | Q1 2025 achieved a non‐GAAP operating margin of 36.5% with guidance to reach 40% for the full year, maintaining focus on disciplined cost control despite anticipating higher costs in Q2. | Consistent positive momentum. Operational efficiency remains a priority with disciplined expense management, though Q1 2025 shows cautious notes ahead of expected cost increases. |
Decline of Analog Segment Momentum and ASO.ai Adoption | Q3 2024 featured solid analog wins and early-stage ASO.ai evaluations (with 15 customers in evaluation) and Q2 2024 highlighted strong analog momentum with notable displacement wins and productivity benefits. | Q1 2025 noted a tepid performance in analog markets—a decline in momentum—while ASO.ai demonstrated promising adoption through a significant competitive win at a leading aerospace company. | Mixed sentiment. There is a contained decline in analog momentum in Q1 2025, but encouraging ASO.ai adoption signals potential recovery and innovation in the analog segment. |
Shifts in Revenue Guidance and Second-Half Weighting | Q4 2024 provided clear guidance shifts with a 45%-55% expected revenue split (second-half weighted) and Q2 2024 mentioned lumpiness in IP revenue with strong Q4 expectations, while Q3 2024 did not address it directly. | Q1 2025 did not explicitly discuss revenue weighting or shifts, implying a steady guidance framework without notable timing adjustments being highlighted. | Reduced emphasis. Q1 2025 shifts focus away from detailed revenue timing adjustments, suggesting either stabilization in guidance or a strategic pivot in discussion focus. |
Increased Semiconductor R&D Investment Growth | Throughout Q2 2024, Q3 2024, and Q4 2024, Synopsys highlighted the sustained growth in semiconductor R&D—with contributions from hyperscalers and AI infrastructure investments driving design automation opportunities. | Q1 2025 reaffirmed the theme by noting that semiconductor R&D investment is growing from 6% to 9% of sales, further supported by strong contributions from system companies, aligning with a long-term 12% CAGR target for design automation. | Strong and consistent bullish sentiment. The focus on increased R&D investments remains robust across periods, reinforcing Synopsys' long-term growth narrative. |
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China Sales and Guidance Impact
Q: What is causing the flattening of China sales, and how will it affect guidance?
A: Management explained that China's growth is decelerating due to cumulative restrictions and a slowing local economy affecting startups and overall spending. They expect China to continue decelerating below corporate average, but this has been accounted for in their guidance. They remain confident in maintaining full-year guidance due to strengths in other regions and technologies. -
Maintaining Guidance Amid China Headwinds
Q: How can you maintain guidance despite weaker China growth?
A: Despite increased headwinds in China, management is confident in their guidance due to strong demand in other regions, particularly for new hardware products like HAPS 200 and ZeBu 200. They see significant opportunities to monetize IP and expand market share in AI, HPC, and system companies, offsetting the China weakness. -
AI's Impact on Growth
Q: Is AI contributing to growth as expected, and what's the outlook?
A: Management is optimistic about AI's potential to change workflows and monetize opportunities, especially with generative AI and Agentic AI. While AI optimization alone may not deliver the expected 200 basis points of growth, combining it with generative AI and new business models will. Adoption is positive, and they are on track with expectations. -
New Hardware Products and Demand
Q: How will new hardware products like HAPS 200 and ZeBu 200 impact growth?
A: The new hardware platforms are expected to drive growth, with demand exceeding supply. They are investing heavily to build and deliver these products, anticipating a back-half loaded year due to availability. Management sees no air pockets in demand, and the upgrades offer customers faster refresh cycles. -
Cost Control and Expense Guidance
Q: How should we think about expense growth given Q1 outperformance?
A: Costs were lighter in Q1 due to timing of hiring and expenses. There's no change to the full-year guidance. Expenses will increase in Q2 due to annual merit increases, but overall expense growth remains as planned. -
Backlog Composition and Customer Behavior
Q: Is there any change in backlog composition or customer engagement preferences?
A: Management sees no change in customer behavior or contract durations. The shift in backlog composition is due to normal variations in how customers pull down committed contracts, not due to preference changes. -
Long-Term EDA Growth Expectations
Q: Is EDA revenue growth hitting a cyclical bottom, or can it return to 12%?
A: Management believes the 12% growth target for design automation over the next five years remains appropriate. They see no signals to suggest otherwise, benefiting from increased semiconductor R&D investment growing from 6% to 9%. -
AI Equalizing Customer Capabilities
Q: Will AI make customer capabilities more alike, changing the competitive landscape?
A: While AI hasn't changed the workflow yet, future developments like Agentic AI may alter it, creating monetization opportunities. Leading customers are concerned about AI democratizing capabilities, but management sees this as a chance to innovate and provide value. -
Design Activity in Non-AI Segments
Q: Has design activity in non-AI segments stabilized or improved?
A: In consumer electronics like PC and mobile, there has been an acceleration over the last 2–3 quarters. Automotive and industrial sectors remain about the same, with no significant changes in pace. -
Inventory Increase and Hardware Growth
Q: How should we view the increase in inventory and the hardware growth trajectory?
A: The inventory increase is due to investments in building new hardware products to meet high demand. They expect a more back-half loaded hardware year, racing to fulfill customer demand for the new platforms. -
Backlog at End of Q1 FY25
Q: What was the backlog at the end of fiscal Q1 '25?
A: The backlog at the end of Q1 was $7.7 billion. -
Changes in China Revenue Assumptions
Q: Have assumptions about China revenue changed since initial guidance?
A: Assumptions have not changed; they anticipated headwinds and deceleration in China. The clarification is expecting China to grow below corporate average, which was already accounted for in guidance. -
Customer Concentration in Semiconductor R&D
Q: Are you concerned about growth being concentrated among fewer semiconductor companies?
A: Management tracks customer investments closely and sees broad opportunities as customers invest more in R&D across advanced chips, automotive, and industrial sectors. They are growing with the increased R&D investments overall. -
Backlog Duration and Contract Preferences
Q: Is there a trade-off between annual and total contract value affecting backlog?
A: There is no significant change in contract durations or customer preferences. Variations are due to normal business operations, and customers pull down committed contracts based on their needs. -
Expense Growth in Q2 and H2
Q: How should we think about expense growth in Q2 and the second half?
A: Expenses will increase in Q2 due to annual merit increases but remain on track for the full year. The lighter expenses in Q1 were due to timing, and there is no change to the full-year expense plan.