Sarah
Host / Operator
As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Trey Campbell, Senior Vice President, Investor Relations. Please go ahead.
Trey Campbell
Senior Vice President, Investor Relations
Thanks, Sarah. Good afternoon, everyone. With us today are Sassine Ghazi, President and CEO of Synopsys, and Sheila Glazer, CFO. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we might highlight during this call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to certain non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable GAAP financial measures and supplemental financial information can be found in the earnings press release, financial supplement, and 8K that we released earlier today. All of these items, plus the most recent investor presentation, are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I'll turn the call over to Saseen.
Sassine Ghazi
President and CEO
Thanks, Trey. Good afternoon. In Q2, we continued our strong execution and momentum. Semiconductor and systems companies continue to invest in synopsis solutions to maximize their R&D capabilities and productivity. Revenue was up 15% year over year and at the high end of our guided range. Non-gap operating margin was 37.3%, up approximately three points year over year. And non-GAAP EPS was up 26% year over year and above guidance. Given our momentum and continued confidence in our business, we are again raising our full year revenue and non-GAAP EPS guidance. Sheila will discuss the financials in more detail. First, I'll give some context for our confidence. and share some business highlights from the quarter. We are in an era of pervasive intelligence, fueled by the rise of artificial intelligence, silicon proliferation, and software-defined systems. These trends are driving systemic complexity for technology R&D, which in turn drives unprecedented opportunity for synopsis. our silicon customers are racing to design and manufacture complex, purpose-built silicon. And our customer set is expanding as systems companies are also either designing their own chips or defining and optimizing their system performance at the silicon level. In March, many of our semiconductor and systems customers attended SNUG, our yearly Synopsys user group conference in Silicon Valley. Thousands of passionate design engineers shared best practices and learned about the innovations we're driving. And we were honored to have a dozen key customers, including NVIDIA, Intel, AMD, AWS, Tesla, and others contribute their perspective regarding the mission-critical role Synopsys plays in their innovation. As a leading silicon-to-systems design solutions company, Synopsys' opportunity has never been greater. Today, we have best-in-class EDA tools and the broadest portfolio of silicon IP. Our planned acquisition of Ansys will expand our TAM and further our mission of empowering technology innovators everywhere. Let me provide a brief update on this important transaction. Our customers have overwhelmingly told us that they see tremendous potential for the combination to accelerate their innovation and address their rapidly increasing need for system design solutions that provide a deeper integration between electronics and physics. We're pleased to announce that Ansys stockholders approved the transaction this morning. Synopsys and Ansys are making progress towards securing the necessary regulatory approvals, and we remain confident in the regulatory review process given the clear and compelling benefits of this combination for customers and partners. We continue to expect the transaction to close in the first half of 2025. Let's move to segment business highlights, starting with design automation. Q2 design automation revenue was up 14% year over year. With strength across the business and continued rapid adoption of Synopsys.ai, customers realized impressive gains in performance, power, and area. In analog and mixed signal design, Customers are looking to Synopsys as they modernize their flows and move to more advanced process nodes. We saw 10 displacement design wins in the quarter and now have 20 displacements through the first half of the year. In Q2, we delivered the marquee win for full flow displacement at the leading US systems company. while a leading Asian memory company chose our analog design environment for their next generation memory designs. Our Synopsys.ai engine for analog, ASO.ai, allows analog customers to harness the power of AI to simplify node migration. A high-speed connectivity customer recently reported a 10x productivity gain using ASO.ai. Transitioning to digital, where we continue to expand our leadership across advanced node design flows. In Q2, Fusion Compiler continued to push boundaries in performance and power efficiency optimization, demonstrating 8% better power on a two nanometer based CPU at the US CPU company. And higher performance versus competition for the flagship mobile CPU at Samsung. Demonstrably, better PPA results such as these also led to Fusion compiler wins at a large US hyperscaler and a top US mobile CPU company. While the customer results from Fusion are exceptional, we believe the combination of Fusion and AI-based optimization is game-changing. In Q2, multiple Asian design services firms exceeded maximum frequency targets with DSO.AI, and a leading US GPU company deployed DSO.AI for improved productivity. In verification, our flagship VCS product delivered 15 competitive displacements in the quarter, led by wins at an Asian systems company a leading US hyperscaler, and a top US GPU company. The Synopsys.ai optimization engine that partners with VCS, VSO.ai, saw significant adoption as well. We are now engaged with over 30 customers, demonstrating up to 10x fast turnaround time and double digit increase in coverage. Shifting to hardware-assisted verification. Demand exceeded our expectations for the quarter with four new customer wins and over 50 repeat customer wins. At Snug, we announced Zebu EP2 and saw the first sales to a large Asian mobile SOC company in a competitive win for full SOC verification. We also saw significant customer pull for HAPS, including at a large US mobile company, which deployed multi-die designs on HAPS and reduced bring-up time by approximately 40%. On to Design IP, which delivered 19% revenue growth as the IP supplier of choice. for leading HPC, AI, automotive, and mobile chips at advanced nodes. Q2 was particularly strong quarter for automotive wins. Electrification, infotainment, and ADAS features continue to drive strong demand for our comprehensive automotive portfolio. Chip-level security continues to be a concern to chip designers. In Q2, We announced the acquisition of Intrinsic ID to add physical unclonable functions, or PUFF technology, to our extensive IP portfolio. More broadly, we gained over 10 secure interface IP wins in the quarter, including five new customers. Demand for interface IP for AI and data center applications is growing at a blistering pace. In the quarter, we launched the industry's first 1.6 terabyte Ethernet solution to meet the high bandwidth needs of AI and hyperscaler chips, securing design wins at two leading high-speed Ethernet customers. Additionally, we secured more than 10 design wins for PCIe 6.0 and CXL 3.0 solutions. We also have the industry's most expensive IP library for multi-die, starting with the standard for die-to-die interconnect, UCIE. We won five UCIE IP licenses in the quarter across end markets from memory to mobile to HPC. With these wins, we now have 50 lifetime wins for die-to-die connectivity. As silicon becomes foundational to innovation in nearly every industry, we've seen an infusion of government support and funding for chip manufacturing around the world. Synopsys plays a mission critical role as an on-ramp to the world's foundries, enabling manufacturing success for our mutual customers. In Q2, We want a significant enablement engagement with the emerging, leading-edge Japanese foundry, Rapidus Corporation, involving our leadership 2-nanometer interface IP. This builds on a major Rapidus design win for foundation. Having a portfolio of trusted IP is a requirement for every world-class foundry. As the leading provider of interface and foundation IP, Synopsys is often the first stop for foundry enablement. Synopsys IP provides a path for mutual customers to bring rapidest manufactured chips to market faster and with lower risk. The design and manufacturing of semiconductors is inextricably linked. and we engaged deeply with all the major foundries. At TSMC's symposium, we announced TSMC N2IP development and demonstrated silicon proof points for N3E and N3P IP. At Samsung, we secured multiple IP wins, enabling customers to confidently adopt Samsung's leading processes for AI, storage, automotive, and other applications. We also partnered with Intel Foundry to accelerate advanced chip designs with Synopsys IP and certified EDA flows for their 18A process. This quarter also marked another transformative milestone as we accelerate our silicon to systems strategy and prioritize growth investments in our core EDA and IP businesses. We recently announced the definitive agreement to sell the software integrity business to ClearLake Capital and Francisco Partners. This transaction, valued at up to $2.1 billion, will establish SIG as a newly independent leading application security testing software provider. and is expected to close in the second half of 2024, subject to customary closing conditions and regulatory approval. This agreement fulfilled the key priorities we had for the sale. Find our team and our customers great new owners that can care about nurturing and investing in the business to deliver to its full potential, focus on speed and certainty to close, and deliver financial value and smooth transition for Synopsys. We are proud to have started the business, grown it to be the application and security testing leader, and will partner with the new owners to ensure a seamless transition. We have strong continuing momentum across the business supported by multiple secular growth drivers. We have a resilient business model, and our customers continue to prioritize investments in the silicon and systems that position them for future growth. We are aligning our portfolio investment with the greatest return potential to accelerate our growth. Thank you to our employees, partners, and customers for their passion and commitment. With that, I'll turn it over to Sheila.
Sheila Glazer
CFO
Thank you, Saseen. We continued our strong momentum in Q2 with revenue at the high end of our guided range, non-GAAP operating margin of 37.3%, and non-GAAP earnings above the high end of our guidance. Our Q2 results are driven by our relentless focus on execution, leading technology that is mission critical to our customers, and a resilient and stable business model with $7.9 billion in non-cancelable backlog. We remain confident in our business, and after raising guidance at our investor day in March, we are again raising our full year target for revenue and non-GAAP EPS. SSE noted we entered into an agreement to sell our software integrity business. Unless otherwise noted, Our software integrity business has been presented as a discontinued operation and our consolidated financial statements for all periods presented. I'll now review our second quarter results, which are presented on a continuing operations basis. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.45 billion, up 15%. Total gap costs and expenses were $1.12 billion. Total non-gap costs and expenses were $911.7 million, resulting in non-gap operating margin of 37.3%. Gap earnings per share were $1.92, and non-gap earnings per share were $3. Now on to our segment. Design automation segment revenue was $1.05 billion, up 14%, driven by strength in EDA software and hardware. Design automation adjusted operating margin was 39.6%. Design IP segment revenue was $399.8 million, up 19%, driven by broad-based strength. Design IP adjusted operating margin was 31.2%. Operating cash flow, including discontinued operations, was $477 million for the quarter, and free cash flow, including discontinued operations, was $438 million. We ended the quarter with cash and short-term investments of $1.66 billion. Now to guidance, presented on a continuing operations basis. For fiscal year 2024, the full-year targets are revenue of $6.09 to $6.15 billion, total gap costs and expenses between 4.56 and $4.61 billion, total non-gap costs and expenses between 3.77 and $3.81 billion, resulting in non-gap operating margin improvement of approximately two percentage points at the midpoint, non-gap tax rate of 15%, gap earnings of $9.14, to $9.36 per share. Non-GAAP earnings of $12.90 to $12.98 per share. Cash flow from operations of approximately $1.3 billion. Free cash flow of approximately $1.1 billion. Now to targets for the third quarter. Revenue between $1.505 and $1.535 billion. total gap costs and expenses between $1.10 and $1.12 billion, total non-gap costs and expenses between $920 and $930 million, gap earnings of $2.22 to $2.35 per share, and non-gap earnings of $3.25 to $3.30 per share. Our press release and financial supplement include additional targets and gaps to non-GAAP reconciliations, as well as historical, financial, and operating metrics presented on a continuing operations basis. In conclusion, we are on track to achieve revenue growth of 14.5 to 15.6 percent, approximately two percentage points of non-GAAP operating margin improvement, and 22% to 23% non-GAAP EPS growth in 2024. Our confidence reflects our leadership position across our segment, mission-critical products to enable our customers' robust design activity and a stable and resilient business model. With that, I'll turn it over to the operator for questions.
Sarah
Host / Operator
Thank you. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question, please ensure that your phone is not on mute when asking your question. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up. If you have additional questions, please re-enter the queue and we'll take as many as we can. Your first question comes from the line of Joseph Vrunewink with FAIRS. Your line is open.
Joseph Vrunewink
Analyst at FAIRS
Great. Hi, everyone. I wanted to start, it sounds like analog and verification AI products are really gaining a nice foothold at customers. So there's probably a bit more of a baseline financial experience. Is it possible to say just what the uplift around ACV tends to be with these customers adopting the newer AI products? I think the 20% uplift upon renewal figure you provided last year was more driven by DSO.AI. I'm just wondering how the newer AI products are maybe starting to change and factor into the model.
Sassine Ghazi
President and CEO
Yeah, very good question. So it's true. The 20% uplift is based on the DSO.AI incremental booking and revenue were able to capture and the baseline increase for Fusion Compiler. On ASO.AI and VSO.AI, we're still in early stages. It's very difficult at this stage to give you what will the average be. So give us some time before we're able to capture more data points. But the one thing that we can confirm is is as customers are using that technology in production, we're able to monetize it through the same approach, an uplift to get access for the technology and an uplift based on the consumption, the baseline consumption.
Joseph Vrunewink
Analyst at FAIRS
Okay, that's great. And then, yeah, good to hear about the update on Ansys. Maybe anything you can say in terms of financial performance of ANSYS and just how you two are working together and kind of your expectations for the balance of the year as you approach joint customers and kind of think about the financial performance of the ANSYS business.
Sassine Ghazi
President and CEO
So two points on the ANSYS performance. One, as you know, we're operating as two separate companies. So my suggestion here is to refer you back to what they're communicating, which is their continued commitment for double-digit ACV and revenue growth for their FY24 program. And the other point is during our diligence process, we had a close insight in terms of the shape of the year, where it's tilted more for a second half performance compared to the first half in terms of the shape. So really, that's the most we can say at this stage. But if you have any questions, refer back to the ANSYS commentary.
Joseph Vrunewink
Analyst at FAIRS
Okay, thank you very much.
Sassine Ghazi
President and CEO
Thank you.
Sarah
Host / Operator
Your next question comes from Jason Salino with KeyBank. The line is open.
Jason Salino
Analyst at KeyBank
Hey, great. Thanks for taking my questions. You know, this quarter was a little unique in that we got basically an update, you know, 60 days ago at Snug and the analyst day. Nice to see the quarter come at the high end and raising the guide again. But curious, like I don't see Synopsys as being like a very back-end loaded company, but curious what exactly drove the strength and the upside just from that short period ago.
Sassine Ghazi
President and CEO
So continued momentum in the core business. I mean, what we're seeing is the ongoing demand for faster, compute, energy efficient compute, either by semiconductor companies or by hyperscalers, is increasing the demand for the latest, greatest EDA technology, as well as the demand for our IP portfolio. So with that, we are in a fortunate position with our customers and our portfolio that's driving that growth. And I know just 60 days ago, we updated to take the software integrity as a discontinued operation. But as we went through the quarter and we're looking at the rest of the year, it gave us confidence to raise the midpoint to 15%, which is roughly another 30 million raise for the year.
Sheila Glazer
CFO
Yeah, and the other thing I would add is, I think as Saseen said in his prepared remarks, we outperformed on hardware this quarter. So it was another nice quarter of execution by the hardware team.
Jason Salino
Analyst at KeyBank
Okay, perfect. And then maybe just a quick one for Sheila. I think you said backlog of 7.9. Is that a XSIG backlog number?
Sheila Glazer
CFO
Absolutely, Jason. So thanks for the question. It's XSIG because, of course, that's moved into discontinued operations. And just to give you some relevant comps that will come out later in this week as you get the quarterly filing, Q1-24 on that same basis was 7.7, and then Q2-23 on that same basis was 6.8. So that's, you know, versus what I just shared, our Q2 actual is 7.9. Okay.
Jason Salino
Analyst at KeyBank
Excellent. Thank you.
Sassine Ghazi
President and CEO
Thank you.
Sarah
Host / Operator
Your next question comes from the line of Charles Shi with Needham. Your line is open.
Charles Shi
Analyst at Needham
Hey, good afternoon. Congrats on the solid results for the quarter. I have a question about the IT business. It seems like it takes a little bit of a pause in April quarter, but your four-year guidance suggests seems to suggest maybe IP will have a slightly higher run rate from the fiscal second quarter level into the third and into the fourth. I recall like 90 days ago you were talking about maybe IP is going to be a little bit the first half weighted. Is that still the shape you're expecting? And if I may, is it more concentrated in Q4 because your Q3 guidance and the four-year guidance kind of implies another very strong sequential growth into the year and wonder if it's IP driven. Thanks.
Sheila Glazer
CFO
Well, as you noted, IP tends to be lumpy for us. And so you saw us have about 53% IP growth in Q1. So Q2 is a bit muted from that, although we're still at 19% year over year. And we anticipate another strong year for IP. And the lumpiness is really about the timeline in which the customers need to ingest the IP into their design. And so as you noted, that'll continue through the year, and we expect continued growth throughout Q3 and Q4 with a strong Q4.
Charles Shi
Analyst at Needham
Thanks. May I ask again that the China revenue, you guys were expecting contribution to be lower in fiscal 24 compared with 23, but dollar-wise still going to be a I mean, are still going to grow on a young year basis. Is that still the case?
Sassine Ghazi
President and CEO
Yes. As you recall, Charles, we communicated early in the year that we're a little bit cautious on China as we see macro challenges in the economy in China and some impact of the restrictions on We had a good first half. We are anticipating growth in China. But overall, we're taking a balanced approach for the overall macro.
Sheila Glazer
CFO
Thanks. Thanks, Charles. You're welcome.
Sarah
Host / Operator
Your next question comes from the line of Josh Tilton with Wolf Research. Your line is open. Hey, guys.
Sheila Glazer
CFO
Can you hear me?
Operator
Operator
Yes.
Josh Tilton
Analyst at Wolf Research
I really appreciate the color on kind of tracking these displacements that you called out. I think you mentioned the 20. I don't remember if that was this quarter or year to date. But could you maybe just give us a little bit more color on what's driving those, where they're coming from, and kind of how we should expect those displacements to trend for the rest of the year?
Sassine Ghazi
President and CEO
Sure. You know, our customers are – expecting analog design workflows and environment methodology, et cetera, to be more modernized. Think of it feeling more like digital. and this is a great opportunity for synopsis, and we introduced a couple of things. One is the AI for analog, which is ASO.AI. Our customers are using it primarily for migration from a node-to-node or, in some cases, foundry-to-foundry. And the other aspect of the analog competitive wins that we've had is the full flow. when you look at the complete design environment, simulation, etc., and offering a modern competitive platform for our customers. And we're actually very excited about the momentum that ASO.ai is driving and the overall workflow that we're putting together for our customers.
Josh Tilton
Analyst at Wolf Research
Maybe just a follow-up to that. I know you mentioned that you and Ansys are running separate businesses at the moment, but are you already seeing any changes in purchasing behavior? And what I mean by that, are there any customers you can identify that maybe weren't the strong buyers or starting to go more all-in or maybe weren't customers at all but are now starting to buy Synopsys because of the future they see between you and Ansys that will exist as a combined business?
Sassine Ghazi
President and CEO
Yeah, remember Josh, we've had a partnership since 2017. So the customers that we engage, we Synopsys engage with in our core business, we already have that established go-to-market and established technology connections between the products that are relevant for that grouping of customers. So I won't say there is anything different in terms of customer behavior at this stage. Think of it as a continuation of what we started in 2017. Super helpful.
Sheila Glazer
CFO
Congrats on a great quarter, guys. Thank you.