Synopsys' Q3 2025 Earnings Call: Contradictions Emerge on IP Revenue, China Market Impact, and Financial Guidance

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

Date of Call: None provided

Financials Results

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

Guidance:

• FY25 revenue: $7.03–$7.06B; non-GAAP tax rate: 16%.
• FY25 GAAP EPS: $5.03–$5.16; non-GAAP EPS: $12.76–$12.80.
• FY25 GAAP costs/expenses: $6.08–$6.10B; non-GAAP: $4.43–$4.44B.
• FY25 cash from operations: ~$1.13B; free cash flow: ~$950M.
• Q4 revenue: $2.23–$2.26B; GAAP EPS: -$0.27 to -$0.16; non-GAAP EPS: $2.76–$2.80.
• Q4 GAAP costs/expenses: $2.12–$2.14B; non-GAAP: $1.44–$1.45B.
• Ansys included for all weeks of Q4; strongest Ansys seasonal period (Nov–Dec) shifts to Synopsys Q1.
• Plan to reduce global headcount ~10% by end of FY26; synergy outlook intact despite delayed divestiture closings.

Business Commentary:

* Revenue and Earnings Performance: - Synopsys reported third-quarter revenue of $1.74 billion and non-GAAP EPS of $3.39. - The company's results were affected by underperformance in the IP business, driven by factors such as export restrictions in China and challenges at a major foundry customer.

• Design Automation Growth:
• Design automation revenue rose by 23% year-on-year, led by strength in hardware and high-performance computing solutions.

• This growth was supported by demand for Synopsys' emulation and prototyping solutions driven by the complexity of designing silicon for AI workloads.

• Ansys Acquisition and Strategic Impact:

• With Ansys integrated, Synopsys now leads in engineering solutions from silicon to systems, expanding its opportunity and customer base.

• The acquisition is expected to bring long-term growth, with the integration of Ansys' simulation and analysis solutions into Synopsys’ portfolio.

• IP Business Challenges and Strategy Adjustments:

• The IP segment's revenue dropped by 8% year-on-year, impacted by new export restrictions in China and challenges at a major foundry customer.
• Synopsys is pivoting its IP resources and roadmap to focus on higher growth opportunities, with plans to merge engineering teams and scale subsystem delivery.

Sentiment Analysis:

• Management called Q3 a “transformational milestone” with Ansys closed and revenue up 14% YOY, but cited “underperformance in the IP business” and took “a conservative view on Q4,” updating FY25 targets lower. They reaffirmed confidence in achieving Ansys synergies and announced ~10% headcount reduction by FY26 to drive efficiency. EDA strength and backlog of $10.1B signal resilience, while IP headwinds (China export restrictions, foundry customer issues, and roadmap/resource decisions) weigh on near-term results.

Q&A:

• Question from Ruben Roy (Stifel): Walk through the three IP headwinds (China export restrictions, foundry customer, roadmap choices), turnaround timing, and whether M&A is needed.
  Response: IP weakness stems from lingering China export impacts, a foundry customer delay, and resource/roadmap choices; Synopsys merged IP teams and is pivoting to higher-value subsystems, but the fix will take more than a quarter and can be addressed organically.

• Question from Ruben Roy (Stifel): Q4 operating margin compression and path to mid-40% long-term target?
  Response: Margin pressure is chiefly from IP revenue shortfall; Ansys is margin-accretive, and the mid-40% long-term operating margin target remains intact.

• Question from Lee Simpson (Morgan Stanley): How much warning did you have on IP weakness, and is it permanent?
  Response: Signals were missed amid the Ansys process after an outsized IP year; expect a transitional, muted IP period extending into FY26, while broader EDA remains strong.

• Question from Lee Simpson (Morgan Stanley): Which IP areas are being realigned—foundation vs. interface?
  Response: Priorities span both foundation and interface IP across multiple foundries and markets, with greater focus on customized subsystems versus off-the-shelf components.

• Question from Charles Shi (Needham & Company): Can IP maintain long-term profitability as the model shifts to subsystems/customization?
  Response: Yes; Synopsys is evolving beyond NRE+use fees to capture more value (e.g., subsystems/chiplets) to sustain profitability as customization demand scales.

• Question from Charles Shi (Needham & Company): How much of the $10.1B backlog is Ansys vs. legacy Synopsys?
  Response: No split provided; management cited strength across both businesses supporting long-term growth.

• Question from Joe Quatrochi (Wells Fargo): Are royalties under consideration for subsystem IP, and how about time-to-market?
  Response: Yes; for subsystem engagements Synopsys is discussing models that can include royalties to better align value and prioritization.

• Question from Joe Quatrochi (Wells Fargo): Target cash levels and debt paydown cadence?
  Response: Cash is above operating minimum; expect to begin principal repayment next year, with term loans due 2027–2028 and additional proceeds after pending divestiture approvals.

• Question from Sitikantha Panigrahi (Mizuho): Early takeaways from Ansys; drivers to exceed market growth; any surprises?
  Response: No negative surprises; strong opportunity in physical AI and 3DIC (thermal/structural) with Ansys simulation integrated into chip design; integration advancing pending final divestiture approvals.

• Question from Sitikantha Panigrahi (Mizuho): Ansys revenue in Q4 guidance and seasonality considerations?
  Response: Ansys is included for all Q4 weeks; its strongest seasonal period (Nov–Dec) will largely fall in Synopsys Q1; no segment-level guidance provided.

• Question from Joe Vruwink (Baird): Diversifying away from an outsized account and timeframe for changes?
  Response: Exposure to a large account has been partially de-risked in FY25; Ansys broadens customer and regional mix, but timing depends on that customer’s trajectory.

• Question from Joe Vruwink (Baird): What changed in guidance—IP vs. Ansys adds, China impact?
  Response: The largest reduction is IP; Ansys adds to the outlook, and China headwinds are fully incorporated.

• Question from Harlan Sur (JPMorgan): With a foundry customer pivoting nodes, will Synopsys continue to support their roadmap?
  Response: Yes; as the IP leader Synopsys supports customer-chosen nodes, with monetization dependent on commitments and broader resale potential.

• Question from Harlan Sur (JPMorgan): Why are Q4 expenses higher and how should we think about synergy timing?
  Response: Initial integration costs elevate Q4 expenses; a ~10% headcount reduction through FY26 accelerates synergies; more 2026 details will come with Q4 results.

• Question from Jay Vleeschhouwer (Griffin Securities): Would the 10% headcount reduction have happened regardless of IP issues, and what’s the integration status?
  Response: Yes; it was planned as part of a strategic review and AI-driven efficiency push; integration proceeds prudently while keeping to-be-divested assets separate.

• Question from Jay Vleeschhouwer (Griffin Securities): Can you smooth Ansys’s seasonality and how will you treat the channel?
  Response: Over time Synopsys may align offerings/renewals to reduce seasonality; Ansys’s channel (~25% of revenue) remains intact and is a growth lever for Synopsys products.

• Question from Jason Celino (KeyBanc Capital Markets): How de-risked is Q4, and should we expect typical IP Q4 seasonality?
  Response: Guidance assumes continued IP headwinds; management does not expect typical IP seasonality and anticipates a transitional/muted period.