Q3 2024 Earnings Summary
- Synopsys reported an exceptionally strong IP quarter, contributing to strong hardware momentum, driven by increased customer adoption of their hardware-assisted verification solutions and IP products.
- The company’s backlog increased to $7.9 billion, up from $6.5 billion in the prior year, demonstrating robust commercial momentum and strong customer commitments.
- Synopsys is successfully monetizing AI products, with their DSO.ai capturing on average about 20% uplift from the baseline of that portion of the contract, indicating strong revenue growth potential from AI-driven solutions.
- Synopsys' monetization of AI products is uncertain, with key offerings like VSO.ai and ASO.ai still in early stages and lacking sufficient data on their revenue potential, which could delay the expected growth acceleration from AI (planned increase from 12% to 14% growth) .
- The integration of generative AI into Synopsys' products presents challenges, including increased complexity in development and customer-specific customization, potentially leading to higher R&D costs and affecting profit margins .
- Customers may begin to expect AI capabilities as standard within EDA tools rather than premium add-ons, which could limit Synopsys' ability to monetize these features and impact revenue growth .
-
Guidance and Margin Outlook
Q: Any areas that could have outperformed or offset strengths in guidance?
A: We've raised guidance several times this year, narrowing revenue range to a 15% midpoint growth. We see strength across our product lines and raised non-GAAP operating margin and non-GAAP EPS. We're being deliberate with our investments and expenses, improving both metrics. -
EDA Growth Outlook
Q: Is EDA growth returning to trend, and what do you see going into next year?
A: We see double-digit growth in Design Automation. On a trailing 12 months basis, our TTM growth is 10%. Quarter-over-quarter comparisons can be misleading due to fluctuations, but we feel strongly about sustained double-digit growth. -
AI Monetization Impact
Q: Where is Synopsys in the journey to 12%-14% EDA growth from AI monetization?
A: The growth from 12% to 14% is due to system complexity and new technology like AI. With DSO.ai sold for 4 years, we're capturing about 20% uplift from the baseline contracts. VSO.ai is in early monetization, and ASO.ai is in evaluation phase. While we haven't specified a timeframe, the value we're delivering will justify the additional 2% growth. -
China Demand Environment
Q: How is the demand environment in China?
A: We remain pragmatic on China due to technology restrictions and macro environment. Despite this, we're executing well and growing in China, but we continue a balanced approach. We're not seeing unusual pull-ins or changes in customer engagement. -
Backlog Growth
Q: Is commercial momentum evident in backlog developments?
A: Yes, our backlog for the quarter was $7.9 billion, up from $6.5 billion in last year's Q3. This significant year-on-year increase reflects robust customer engagement and support of their complexities. -
R&D Investment Outlook
Q: Is there scope to flatten R&D expenses to boost earnings?
A: The industry's pace requires us to invest heavily in innovation. We must stay ahead of customers, investing in hardware roadmaps and evolving EDA capabilities. We don't see R&D investment as an area for savings anytime soon. -
Hardware-assisted Verification Growth
Q: Is hardware-assisted verification contributing to growth?
A: Yes, we're seeing strong hardware momentum due to our competitive systems. The EP system, sitting between prototyping and emulation, is gaining adoption. We've had wins in simulation acceleration, an area we needed to strengthen. -
Impact of Intel's Changes
Q: Any changes in growth expectations due to Intel's layoffs and efficiency moves?
A: No changes in forward growth expectations due to Intel's actions. Our engagements are multi-quarter investments, and we don't expect positive or negative impact in the short to midterm. Agreements are committed for the long term. -
Automotive Market Growth
Q: What growth is expected from the automotive market?
A: Automotive is an exciting, growing segment over the last 3–4 years. Push towards smarter, connected cars requires sophisticated silicon. Our virtualization solutions help OEMs design electronic systems, and we anticipate continued market growth. -
Contracting Design Cycles
Q: How do contracting design cycles impact your business?
A: Design cycles are shrinking from 3 years to possibly 1 year, even as complexity increases. This trend requires the latest technology and is positive for our industry. However, not many customers can adopt this pace due to resource constraints. -
Integration of AI in Products
Q: Will AI products remain separately branded or become part of core products?
A: AI capabilities are becoming an expected part of solutions. Customers don't differentiate between AI and non-AI tools; they expect integrated AI to achieve targets. As we move forward, AI will be fully integrated into our core products. -
Expense Management
Q: What is driving the slightly lower OpEx expectation?
A: We're continuing to invest in product innovation while driving efficiencies. Implementing AI and digital transformation allows us to be prudent with expenses. Good news on interest and other also contributes to upside. -
Analog Mixed Signal Market Opportunity
Q: What's your ambition for the analog mixed signal business?
A: We see an opportunity to grow in the analog design environment, currently a smaller portion of the TAM. Customers face increased complexity and faster design cycles, adopting tools like ASO.ai. We aspire to grow into this TAM and are excited about customer interest.