Synopsys, Inc.

the last one hour 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 sir good afternoon everyone with us today are sassine ghazi president and ceo of synopsis and sheila glazer cfo before we begin i'd like to remind everyone 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 highlight during the 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 8 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 Sassine.

Good afternoon. We had a strong second quarter with revenue up 10% year over year, exceeding the midpoint of our guidance, and non-GAAP EPS was above our guided range. We are reiterating our revenue guidance for the full year as these results demonstrate the strength of our products, which are mission critical to our customers' innovation, the resiliency of our business, and relentless execution by our global team. I'll provide more details about the quarter, and then Sheila will delve deeper into the financials. At the macro level, the tale of two markets persisted in Q2. Despite market fluctuations, the AI and HPC sectors remained robust. And while we're seeing signs of stabilization in industrial and automotive, non-AI and market demand remains subdued. For Synopsys, a slowdown in China was offset by strong demand from customers in other regions. The megatrends of AI, software-defined systems, and silicon proliferation continue to drive our growth. These trends are increasing design complexity and costs, while also increasing compute performance and energy demands. Synopsys benefits as a mission-critical partner in addressing these challenges and as the industry leader in applying AI to help customers innovate faster. Our pending acquisition of Emsys will address the need for new AI-powered silicon-to-systems design solutions integrating electronics and multi-physics. We have regulatory clearances in all jurisdictions other than China. we are working cooperatively and actively negotiating with SAMR to secure China regulatory clearance. And we continue to anticipate closing in the first half of this year. Now let's move on to the business highlights. Design automation demonstrated resilience with revenue up 6% year over year. Our new hardware assisted verification products HAPS 200 and Zibu 200 are off to a strong start. These systems offer the highest performance and ultimate flexibility between prototyping and emulation. In EDA, the industry's growing adoption of multi-die architecture plays to our strengths and leadership position. In Q2, We supported multiple active production deployments with a leading HPC AI chip maker, including delivering what we consider the most complex 3D heterogeneous integrated design with over 40 chiplets and advanced packaging technology. We also displaced manual high bandwidth memory layout flows with Synopsys automated 3D IC compiler. implementation at the top tier Asian semiconductor customer, achieving best-in-class productivity and quality of results improvements. The race for performance is driving adoption of leading-edge process nodes, and Synopsys is proud to help usher in the Angstrom era with our foundry partners. In Q2, We enabled the industry's first two nanometer based HPC design and delivered multiple successful test chips across sub two nanometer process technologies. And the leading AI capabilities we've pioneered across the full stack are generating wins among both semiconductor and systems customers. In Q2, VSO.AI momentum continued, driving multiple design wins for flagship CPU and GPU cores, while a major AI infrastructure customer began large-scale deployment of VSO.AI across five projects. Additionally, our AI capabilities are winning analog designs with major automotive Tier 1 in Japan adopting Synopsys ASO.AI after extensive evaluation. Turning to design IP, where revenue increased 21% year over year as customers rely on Synopsys IP to minimize integration risk and speed time to market. Our leading foundation and interface IP also expedites customer adoption of the latest protocols and leading edge process nodes. Driven by AI and the need to transport more data faster, we're seeing strong demand for high-speed service IP, with synopsis 224 gig PHY securing multiple competitive wins in Q2. AI accelerators and GPUs necessitate ultra-efficient networking infrastructure And Synopsys is the first mover in PCIe 7.0 with seven unique customer wins and the clear leader in UA-Link with over 20 customer engagements. Our recently announced support of NVIDIA's NVLink Fusion ecosystem will further enhance scale-up optionality for AI factories. Before wrapping up, I want to thank the many customers and partners who joined us for Snug Silicon Valley and our inaugural executive forum in March. There, we showcased our generative, AI-powered, assistive, and creative capabilities, which are unlocking new levels of efficiency for customers. For example, What previously took hours searching documentation or waiting for expert help can now take minutes with Synopsys.ai co-pilot assistive capabilities. And using GenAI to generate design collateral like RTL or test benches is helping early access customers accelerate design and verification cycle times from days to hours and hours to minutes. Synopsys leading Gen AI capabilities are necessary foundation for the paradigm shift that comes next. A Gen Tech AI will transform engineering workflows, allowing R&D teams to focus on important architecture and design decisions while tasking agent engineer technology with implementation details. It's an exciting time Engineering is undergoing unprecedented transformation, and Synopsys is seizing the opportunity to re-engineer engineering. Few closing thoughts. Our business model is resilient, and our solutions are essential to our customers' innovation. We have steady momentum across the business, supported by growth trends. Synopsys is leading AI for chip design, and we are investing to maintain and extend this leadership position. Thank you to our employees, customers, and partners for a strong quarter and for your continued commitment. Now over to Sheila.

Thank you, Sassine. We delivered a strong Q2 with revenue of $1.6 billion non-GAAP operating margin of 38%, and non-GAAP EPS of $3.67. Backlog came in at $8.1 billion, up $400 million quarter-on-quarter. These results reflect our leadership position, consistent execution, and resilient business model in a market fueled by the secular megatrends of AI, software-defined systems, and silicon proliferation. Despite a dynamic macroeconomic environment, we are reaffirming our full year 2025 targets for revenue and non-GAAP operating margin and updating our EPS and free cash flow guidance to account for our Q2 results and bond issuance. I'll now review our second quarter results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1.6 billion 10% with strong growth in design IP. Regionally, we saw strength in Europe and South Korea, offsetting China headwinds. Total gap costs and expenses were $1.23 billion, and total non-gap costs and expenses were $995 million, resulting in non-gap operating margin of 38%. Gap earnings per share were $2.24, and non-gap earnings per share were $3.67. Non-GAAP earnings included a $0.28 benefit from the sale of a building, as well as approximately $0.06 of net charges associated with the $10 billion bond issuance in Q2. These items were not included in our prior guidance. Now onto our segments. Design automation segment revenue was $1.12 billion, up 6%, against a strong compare. Design automation adjusted operating margin was 40.9%. Design IP segment revenue was $482 million, up 21%, with strong performance from interface IP. Design IP adjusted operating margin was 31.2%. Moving to cash. Free cash flow was approximately $220 million. We ended the quarter with cash and short-term investments of $14.3 billion, and debt of $10.1 billion. Now to guidance. Full year revenue and operating margin targets remained unchanged from the prior guidance. For fiscal year 2025, the full year targets are revenue of 6.745 to $6.805 billion, total gap costs and expenses between 5.01 and $5.07 billion, Total non-GAAP costs and expenses between $4.05 and $4.09 billion, resulting in non-GAAP operating margin of 40% at the midpoint, non-GAAP tax rate of 16%, GAAP earnings of $10.14 to $10.34 per share, non-GAAP earnings of $15.11 to $15.19 per share. Our non-GAAP EPS targets have been increased from the prior guidance to reflect the Q2 outperformance, partly offset by net interest expenses associated with our bond issuance. Cash flow from operations of approximately $1.5 billion and free cash flow of approximately $1.3 billion, lower than the prior guide due to financing and acquisition-related costs. Now to targets for the third quarter. revenue between $1.755 and $1.785 billion, total gap costs and expenses between $1.27 and $1.29 billion, total non-gap costs and expenses between $1.06 and $1.07 billion, gap earnings of $2.63 to $2.74 per share, and non-gap earnings of $3.82 to $3.87 per share, which includes a $0.13 impact from bond-related costs. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. In conclusion, we delivered a strong Q2 and are poised to deliver a strong second half. Our confidence reflects our relentless execution and leadership position to take advantage of the secular megatrends driving the semiconductor industry. With that, I'll turn it over to the operator for questions. Thank you. And everyone, if you have a question today, please press star 1 on your telephone keypad. 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 to allow us to accommodate all participants. If you have additional questions, please re-enter the queue and we'll take as many as time permits. Our first question today comes from Lee Simpson from Morgan Stanley.