Synopsys Q3 2025: Contradictions in IP Revenue, Ansys Acquisition Impact, and China Revenue Decline

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 9, 2025

Financials Results

• Revenue: $1.74B, up 14% YOY
• EPS: $3.39 non-GAAP per diluted share (GAAP $1.50)
• Operating Margin: 38.5% non-GAAP

Guidance:

• FY25 revenue $7.03–$7.06B; non-GAAP EPS $12.76–$12.80; GAAP EPS $5.03–$5.16; non-GAAP tax rate 16%.
• FY25 cash flow from operations ≈$1.13B; free cash flow ≈$950M (lower vs prior).
• Q4 revenue $2.23–$2.26B; non-GAAP EPS $2.76–$2.80; GAAP EPS −$0.27 to −$0.16; includes full-quarter Ansys.
• Taking a conservative Q4 view; IP headwinds to persist; expect transitional/muted IP into FY26.
• Confident in merger synergies; 10% global headcount reduction by end of FY26.
• Ansys seasonality strongest in Nov–Dec will appear in Synopsys Q1.

Business Commentary:

* Acquisition and Portfolio Expansion: - Synopsys, Inc. completed the acquisition of Ansys, which added $78 million to its Q3 revenue. - This acquisition expanded Synopsys's revenue, customer base, and long-term growth opportunity, positioning the company as the leader in engineering solutions from silicon to systems.

• IP Business Challenges:

• Synopsys's Design IP revenue in Q3 was $428 million, down 8% year-over-year, due to underperformance driven by export restrictions in China, challenges at a major foundry customer, and road map decisions.

• Design Automation Growth:

• The Design Automation segment revenue rose to $1.31 billion, up 23% year-over-year, fueled by strong performance in hardware solutions for AI workloads.

• This growth was driven by demand for Synopsys's emulation and prototyping solutions, as well as strong customer wins with leading hyperscalers.

• Operating Margin and Cost Structure:

• Non-GAAP operating margin was reported at 38.5% for Q3, with expectations for Q4 to decline slightly to around 36%.
• The decline was primarily due to the resources-intensive IP business facing headwinds, while Ansys integration adds higher margins, contributing positively to the overall financial outlook.

Sentiment Analysis:

• “Q3 revenue came in at $1.74 billion… up 14%.” “Our results were primarily impacted by underperformance in the IP business… export restrictions… challenges at a major foundry customer.” “We are taking a conservative view on Q4 and updating our full year 2025 targets…” “Still expecting to deliver a record revenue year.” “Backlog came in at $10.1 billion.”

Q&A:

• Question from Ruben Roy (Stifel): Detail the three IP headwinds, their Q3 impact, need for M&A vs organic, and turnaround timing.
  Response: Impacts stemmed from prolonged China export restriction effects, a foundry customer shortfall, and road map/resource choices; Synopsys merged IP teams, is pivoting to subsystems, and expects an organic, multi-quarter turnaround (not within 90 days).

• Question from Ruben Roy (Stifel): Q4 operating margin degradation and bridge to mid-40s target?
  Response: Lower OM is driven by IP revenue shortfall in a resource-intensive business; Ansys is margin-accretive; long-term mid-40s OM target remains intact.

• Question from Lee Simpson (Morgan Stanley): How much warning on IP weakness and is it permanent, especially China and foundry exposure?
  Response: Signals were missed amid the Ansys close; IP weakness isn’t just Q3—expect a transitional, muted IP period into FY26, though long-term demand remains strong.

• Question from Lee Simpson (Morgan Stanley): Which IP areas are being realigned—foundation vs interface—and what’s changing?
  Response: Focus spans multiple foundries/markets with increasing customization; moving from discrete IP to subsystems, requiring more resources and new monetization models.

• Question from Yu (Charles) Shi (Needham): How does customization/subsystems affect long-term IP profitability?
  Response: Customization demand is rising; Synopsys seeks models beyond NRE+use (e.g., subsystem/chiplet economics) to capture value and sustain profitability.

• Question from Yu (Charles) Shi (Needham): How much of the $10.1B backlog is Ansys vs legacy Synopsys?
  Response: Not disclosed; strength seen across both businesses supporting long-term growth.

• Question from Joseph Quatrochi (Wells Fargo): Are you shifting IP business models toward royalties and how about time-to-market?
  Response: For subsystems, Synopsys is exploring royalty components in early customer discussions to better align value with customization effort.

• Question from Joseph Quatrochi (Wells Fargo): Target cash levels and debt paydown cadence?
  Response: Cash exceeds operating minimum; interest paid this year; principal repayments expected to begin next year; term loans due 2027/2028; divestiture proceeds to come post-SAMR.

• Question from Sitikantha Panigrahi (Mizuho): Early Ansys integration takeaways and growth drivers beyond low-to-mid teens?
  Response: No negative surprises; strong synergy in 3DIC (thermal/structural/fluids) and broader physical AI simulation; integration paced while awaiting SAMR approval of the buyer.

• Question from Sitikantha Panigrahi (Mizuho): Ansys contribution in Q4 guidance and seasonality?
  Response: Q4 includes a full quarter of Ansys; peak Ansys seasonality (Nov–Dec) shifts to Synopsys Q1; no subsegment guidance provided.

• Question from Joseph Vruwink (Baird): Timeline to reduce outsized account exposure and benefit from diversification?
  Response: Exposure partially derisked in FY25; future depends on customer path; Ansys broadens customer/region mix, aiding diversification.

• Question from Joseph Vruwink (Baird): What changed in guidance—IP vs Ansys vs China?
  Response: Largest revision is lower IP; Ansys adds modestly in Q3 and more seasonally in Q1; China headwinds embedded.

• Question from Harlan Sur (JPMorgan): Was foundry IP weakness tied to your largest customer’s node pivot, and will you support them going forward?
  Response: Customer node choices are theirs; Synopsys already built IP for prior nodes and supports multiple foundries, aiming to repurpose IP where feasible.

• Question from Harlan Sur (JPMorgan): Why are Q4 expenses higher and how to think about cost synergies into FY26?
  Response: Initial integration costs elevate Q4; a 10% headcount reduction through FY26 accelerates synergy capture; more detail to come at Q4 results.

• Question from Jay Vleeschhouwer (Griffin Securities): Would the 10% headcount cut have happened anyway, and integration/channel plans?
  Response: Yes—planned pre-close as part of a strategic portfolio/efficiency review; integration proceeds carefully due to pending divestitures; Ansys channel retained and valued.

• Question from Jay Vleeschhouwer (Griffin Securities): Will you smooth Ansys’ seasonality/ASC 606 effects and align models?
  Response: Over time, Synopsys may align offerings/renewals toward its subscription model; near term, legacy contract timing persists; Ansys channel remains unchanged.

• Question from Jason Celino (KeyBanc): Given derisking, should we still expect typical Q4 IP seasonality?
  Response: No; management expects a transitional, muted IP trajectory due to persistent China/foundry headwinds.