Synopsys' Q4 2025 Earnings Call: Contradictions Emerge on IP Business Challenges, EDA Growth, and Business Model Evolution

Date of Call: None provided

Financials Results

• Revenue: $7.05B FY25 total revenue, up ~15% YOY; Q4 revenue $2.25B (high end of guidance); backlog $11.4B (up from $10.1B prior quarter).
• EPS: Q4 GAAP EPS $2.39; FY25 GAAP EPS $8.07. Q4 non‑GAAP EPS $2.90; FY25 non‑GAAP EPS $12.91 (Q4/non‑GAAP ahead of guidance). FY26 guidance: GAAP $2.49–$2.90; non‑GAAP $14.32–$14.40.
• Operating Margin: FY25 non‑GAAP operating margin 37.3%; Q4 non‑GAAP operating margin 36.5%. Design automation adj. op margin ~42% (FY25); Design IP adj. op margin 24% (FY25). FY26 non‑GAAP operating margin guide 40.5% at midpoint (+~320 bps vs FY25).

Guidance:

• FY26 revenue $9.56–$9.66B (midpoint ~ $9.61B); Ansys contribution ~$2.9B (midpoint, double‑digit growth)
• FY26 non‑GAAP operating margin ~40.5% at midpoint (+~320 bps vs FY25)
• FY26 GAAP EPS $2.49–$2.90; non‑GAAP EPS $14.32–$14.40
• Q1 revenue $2.365–$2.415B; Q1 non‑GAAP EPS $3.52–$3.58
• Cash from ops ≈ $2.2B; FCF ≈ $1.9B; CapEx ≈ $300M; restructuring cash ≈ $225M; incremental divestiture taxes ≈ $135M
• Normalized non‑GAAP tax rate 18% through 2028; diluted shares 192–194M

Business Commentary:

* Record Revenue and Integration: - Synopsys reported record annual revenue of $7.05 billion and an end-of-year backlog of more than $11 billion. - This growth was driven by the integration of Ansys, which transformed Synopsys from an EDA leader to the leader in engineering solutions from silicon to systems.

• Impact of China Market Restrictions:
• Synopsys China revenue was down 18% in 2025, with EDA contributing to a 22% decline in the region.

• The decline was attributed to the cumulative impact of restrictions and a shift to local alternatives in the restricted market.

• Design IP Challenges and Pipeline:

• Design IP segment revenue was $1.75 billion, down 8% due to transitional challenges, but with a healthy sales pipeline.

• The decrease was attributed to market evolution, especially in interconnect standards and a focus on high-value opportunities.

• Ansys Growth and Joint Solutions:

• Ansys revenue contributed $757 million to Synopsys' total revenue, with Q4 revenue being $668 million.
• The Ansys growth was driven by a strong semiconductor market and diverse customer base, with plans for joint solutions between Synopsys and Ansys to enhance value.
  
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management emphasized a transformational year with "record annual revenue of $7.05 billion" and "exited FY25 with more than $11 billion in backlog." They guided FY26 revenue near $9.6B (midpoint) and raised non‑GAAP margin target to ~40.5% (+~320 bps vs FY25), highlighted Ansys integration progress and strategic NVIDIA partnership as drivers of future growth.

Q&A:

• Question from Jason Celino (KeyBanc Capital Markets): What is the embedded organic growth rate in the 2026 guide (after adjusting for Ansys and divestitures) and any details on synergy assumptions?
  Response: Organic growth is roughly in the ~8% ballpark after adjusting for Ansys/divestitures (divestiture ~ $110M ≈ 1.5 pts); IP is expected to be muted in FY26 while Ansys grows double digits. Company is accelerating cost synergies (including a ~10% workforce reduction) and expects those actions to drive margin expansion.

• Question from Harlan Sur (J.P. Morgan): What growth is embedded for EDA and IP in the guide (assuming IP modest), and how should we think about expense/synergy flow through 2026 and exiting expense run‑rate?
  Response: EDA growth is moderated by China restrictions and a two‑tier market (AI‑infrastructure customers vs. others); IP is guided to muted growth. A $110M headwind from divestitures is mechanical. Cost synergies (workforce reductions largely completed in 2026) support the targeted margin expansion while preserving R&D investment.

• Question from James Schneider (Goldman Sachs): Update on IP headwinds (foundry/customer, China, custom IP blocks) and rationale for the NVIDIA investment—what does the investment enable beyond a partnership?
  Response: IP: management remains confident in long‑term mid‑teens growth but assumes FY26 as transitional with China/foundry headwinds and resource reprioritization; gaps on some titles targeted to be closed by mid‑2026. NVIDIA investment both endorses the combined Synopsys‑Ansys vision and accelerates compute, agentic AI and go‑to‑market capabilities; financial terms secondary to strategic alignment.

• Question from Kelsey Chia (Citi): Is the China slowdown driving share shifts to local vendors and can Ansys synergies drive revenue back to targets? Also, will IP margins normalize once revenue recovers?
  Response: There is some share shift in China toward local EDA/IP players for restricted customers; customers we can sell to continue to buy. Joint Synopsys‑Ansys solutions and agentic AI workflows are the primary upside opportunities. IP margins are pressured near term due to investment/transition (HPC tiles) but should recover as revenue returns to target levels.

• Question from Siti Panigrahi (Mizuho): For Ansys, what is baked into double‑digit growth (subscription conversion expectations) and integration progress—will contracts convert to subscription/ratable revenue?
  Response: Ansys double‑digit guidance reflects semiconductor uplift via joint solutions plus strength in broader industrial/aerospace/automotive markets; Ansys will retain a mix of subscription and perpetual based on customer needs, though portions aligned with EDA will move to more ratable recognition. R&D teams are integrated and first Synopsys‑Ansys joint solutions expected H1 2026.

• Question from Vivek Arya (Bank of America): Is the IP business de‑risked given Q4 levels and how should we think about China sales assumptions and the prospect of EDA returning to double‑digit growth under continued China restrictions?
  Response: IP is lumpy but management is confident in recovery—IP demand is solid but some HPC titles are back‑half weighted; guidance de‑risks China by assuming the challenging environment continues. Long‑term EDA double‑digit growth is still expected driven by joint solutions and AI‑driven workflow changes despite near‑term China headwinds.

• Question from Joe Vruwink (Baird): Will the mid‑teens IP growth target be achievable by FY27 given pipeline and mid‑year commitments, and are the cash/FCF one‑time items (restructuring, divestiture taxes) expected to settle out?
  Response: Management expects customer engagements and backlog ($11.4B) to clarify recovery; several commitments are active and execution is key. The restructuring and divestiture‑related tax cash outflows are one‑time items in the FY26 guide; company targets long‑term unlevered free cash flow margins in the mid‑30s percent.

• Question from Charles Shi (Needham & Company): The EDA/IP industry growth has decelerated despite AI strength—is this a monetization problem and how will you solve it on both IP and EDA sides?
  Response: Management agrees the industry can capture more value; plans include monetization via Synopsys‑Ansys joint solutions, agentic AI‑driven workflow shifts, disciplined IP pricing and new IP business models (NRE+use+royalty) to better align value and upside.

• Question from Ruben Roy (Stifel): Where specifically in China is the headwind concentrated (EDA vs IP vs hardware vs Ansys) and is there further downside risk beyond current assumptions?
  Response: Headwinds are concentrated in classic Synopsys IP and advanced EDA sales where export/entity/tech restrictions prevent serving certain customers; legacy Ansys performed reasonably well in China. Guidance assumes continued China challenges but does not assume additional restrictions beyond current environment.

Contradiction Point 1

IP Business Challenges and Long-Term Growth Expectations

It involves mixed signals regarding the challenges faced by the IP business and its long-term growth prospects, which are crucial for investor expectations and strategic planning.

What is the current status of the IP business and the headwinds mentioned last quarter? - James Schneider (Goldman Sachs)

2025Q4: Synopsys is confident in the long-term mid-teens growth for IP. The focus is on changing development leadership and customer engagement to address headwinds. New business models are being explored with customers, including royalty and upside agreements. - Sassine Ghazi(CEO)

Can you explain the three challenges affecting the IP business and how you are addressing them? - Ruben Roy (Stifel)

2025Q3: The IP business was impacted by new export restrictions in China, disruptions at a major foundry customer, and strategic resource decisions. To address these, Synopsys has merged engineering teams to accelerate subsystem delivery, prioritizing higher growth opportunities. - Sassine Ghazi(CEO)

Contradiction Point 2

EDA and IP Business Model Evolution

It reflects differing perspectives on the monetization strategy and business model evolution for EDA and IP, which are critical for revenue and pricing strategies.

What is the EDA monetization issue, and how do you plan to address it? - Charles Shi (Needham & Company)

2025Q4: We are exploring new monetization models for IP and EDA. The industry needs to capture more value, and we are addressing this by focusing on joint solutions and new workflows for AI, which promise increased pricing opportunities. - Sassine Ghazi(CEO)

Are you considering a royalty-based model for IP? - Joseph Quatrochi (Wells Fargo)

2025Q3: Synopsys is exploring new business models, such as royalties, for higher-value subsystem and chiplet solutions to ensure proper value capture. - Sassine Ghazi(CEO)

Contradiction Point 3

IP Business Growth Expectations

It involves differing expectations for the growth of the IP business, which is crucial for understanding the company's strategic focus and financial outlook.

Can you update us on the IP business and the headwinds from last quarter? - James Schneider (Goldman Sachs)

2025Q4: We are confident in the long-term mid-teens growth for IP. The focus is on changing development leadership and customer engagement to address headwinds. New business models are being explored with customers, including royalty and upside agreements. - Sassine Ghazi(CEO)

How will DeepSeek impact EDA and Synopsys specifically? What non-AI trends are emerging outside AI chip manufacturing? - Sitikantha Panigrahi (Mizuho)

2025Q1: IP business grew 14% and IP CAGR guidance remains at 15%. We expect this growth to continue across the year. - Sassine Ghazi(CEO)

Contradiction Point 4

EDA Growth and Market Dynamics

It highlights differing perspectives on the growth of the EDA segment and the impact of external factors, which are crucial for understanding market trends and the company's strategic positioning.

Can you clarify the growth rates embedded in FY guidance for EDA and IP? - Harlan Sur (J.P. Morgan)

2025Q4: The lower EDA growth is due to slower chip design momentum in China and the differing pace of companies building chips for AI and non-AI markets. The guide reflects these factors. - Sassine Ghazi(CEO) and Shelagh Glaser(CFO)

Will EDA revenue growth return to double-digit levels? - Yu Shi (Needham & Company)

2025Q1: Design automation is expected to grow at 12% CAGR. This is driven by increased R&D spending in both semiconductor and system companies, underpinning our long-term growth expectation. - Sassine Ghazi(CEO)