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.