The paragraph is the introductory section of Synopsys' second-quarter fiscal year 2025 earnings conference call. The operator begins by explaining the structure of the call and introduces Trey Campbell, Senior Vice President of Investor Relations. Trey Campbell then introduces the key speakers, Sassine Ghazi, the President and CEO, and Shelagh Glaser, the CFO of Synopsys. He highlights that the call will cover forecasts, targets, and forward-looking statements, and mentions that actual results may vary due to risks and uncertainties. Campbell notes that additional details are in SEC reports and the earnings press release, which are available on Synopsys' website, along with the presentation and prepared remarks. The call is then turned over to Sassine Ghazi.

In the second quarter, Synopsys reported a 10% year-over-year increase in revenue, surpassing their guidance expectations, with non-GAAP EPS also exceeding the guided range. They are maintaining their full-year revenue guidance, highlighting the strength of their mission-critical products and effective execution. The company observed strong demand in the AI and HPC markets despite broader market volatility, with industrial and automotive sectors stabilizing. A slowdown in China was balanced by demand in other regions. Mega trends like AI and silicon proliferation are driving growth, increasing design complexity and compute demands. Synopsys, a leader in AI-driven innovation, is set to acquire ANSYS, pending regulatory clearance in China. Design automation remained strong, with new products like HAPS 200 and ZeBu 200 showing promising starts.

The paragraph discusses the advancements and achievements of Synopsys in the electronic design automation (EDA) industry, highlighting its strong position due to the growing adoption of multi-die architecture. In Q2, Synopsys supported complex chip designs and automated processes, leading to significant productivity and quality improvements. The company played a key role in pioneering 2-nanometer HPC designs and deploying AI capabilities across the industry, resulting in major client wins. There was also a notable increase in design IP revenue, driven by customer reliance on Synopsys' IP to reduce integration risk and accelerate market entry. Due to AI demands, there is strong interest in high-speed SerDes IP, with Synopsys' 224-gig PHY achieving multiple competitive successes in Q2.

The paragraph highlights Synopsys' leadership in advanced networking infrastructure and AI-driven chip design. As a pioneer in PCIe 7.0 and a leader in UCIe Link customer engagements, Synopsys is advancing AI factory scalability through support for NVIDIA's NVLink Fusion ecosystem. The company showcased its generative AI-powered tools at recent events, emphasizing their efficiency in design and verification processes. Synopsys is positioned as a leader in AI for chip design, capitalizing on engineering's transformation through agentic AI. The resilient business model and strong growth underscore Synopsys' commitment to innovation and leadership in the field.

In the second quarter, the company reported strong financial results with a revenue of $1.6 billion, a 10% increase year over year, and a non-GAAP operating margin of 38%. Non-GAAP EPS stood at $3.67, benefiting from a building sale. The company observed regional growth in Europe and Korea, which offset challenges in China. Design automation and design IP segments showed revenue growth of 6% and 21%, respectively. Despite a dynamic macroeconomic environment, the company reaffirmed its full-year 2025 revenue and operating margin targets while updating its EPS and free cash flow guidance. The quarter ended with $14.3 billion in cash and short-term investments against $10.1 billion in debt.

The paragraph provides financial targets for fiscal year 2025, including revenue goals of $6.745 to $6.805 billion, and outlines both GAAP and non-GAAP costs and expenses. It forecasts a non-GAAP operating margin of 40% at the midpoint, a non-GAAP tax rate of 16%, GAAP earnings per share (EPS) between $10.14 and $10.34, and non-GAAP EPS between $15.11 and $15.19. The non-GAAP EPS targets have been increased due to Q2 outperformance but are partially offset by bond-related interest expenses. It also mentions expected cash flow from operations at $1.5 billion and free cash flow at $1.3 billion, both lowered due to financing and acquisition costs. For the third quarter, it anticipates revenue between $1.755 and $1.785 billion, along with specified GAAP and non-GAAP cost and expense figures, and details GAAP and non-GAAP EPS ranges. The paragraph concludes by expressing confidence in delivering a strong second half of the year due to effective execution and leadership in the semiconductor industry. The speaker then transitions to a Q&A session, inviting the first question from Lee Simpson of Morgan Stanley.

In the paragraph, Sassine Ghazi addresses recent speculations and reports about Synopsys possibly receiving a notice from the Bureau of Industry and Security (BIS), clarifying that they have not received such a notice. He reiterates their guidance for the year, which incorporates their understanding of BIS export restrictions and the expected year-over-year sales decline in China. During the subsequent Q&A, Lee Simpson from Morgan Stanley asks about the declining sales in China, noting the drop from 12% to 10% of the total sales mix and inquiring about the potential impact on margins if export controls change. Sassine responds by acknowledging the cumulative impact of restrictions and the broader macroeconomic situation in China, which have contributed to a continued deceleration in sales.

The paragraph discusses the company's financial outlook and the impact of declining revenue in China. Despite an expected year-over-year decline in China's revenue from FY24 to FY25, the company is maintaining its full-year guidance due to strong performance in other regions and portfolio strength. There is also mention of a $10 billion raising and the first payment due on October 1st, which will be a catch-up payment followed by regular biannual payments. Additionally, the company does not split revenue details by region but indicates that the revenue mix in China is similar to that in the rest of the world.

The paragraph involves a discussion during a Q&A session where Jason Celino asks Sassine Ghazi about the impact on expenses following the 2019 Huawei ban. Ghazi explains that it's difficult to quantify this impact due to the global nature of their operations, which haven't changed, including in China. Then, Vivek Arya, with Liam Farr speaking on his behalf, asks Ghazi about their largest customer, presumably Intel, and the effect of reduced R&D spending. Ghazi indicates that while fluctuation in Intel’s roadmap might affect hardware and IP, it generally doesn't impact EDA software due to multiyear, non-cancelable agreements. He notes that although there can be quarterly variations, the agreements remain stable.

The paragraph discusses the pending ANSYS acquisition by Synopsys, emphasizing the importance of the deal for both companies and the industry. Sassine Ghazi highlights the support received from customers and regulators, viewing the completion of the transaction as the primary focus and scenario they are considering. He mentions the high confidence in this scenario due to approvals from various jurisdictions and ongoing negotiations with SAMR, aiming for closure in the first half of the year. The conversation then shifts to a question from Sitikantha Panigrahi about design activity, particularly non-AI sectors, to which Ghazi responds by noting strong demand in the AI and HPC infrastructure markets.

The paragraph discusses the current trends in the industrial and automotive sectors, noting a stabilization and renewed energy in these markets, reflected in increased interest in Synopsys' IP portfolio as clients start designing new chips. Sitikantha Panigrahi inquires about the potential expansion of custom chip design beyond hyperscalers, to which Sassine Ghazi responds positively, highlighting three categories of chip design opportunities: using merchant chips for data centers, developing ASIC-like custom chips with some in-house design, and independently designing entire AI systems. Each category represents a valuable opportunity for Synopsys.

The paragraph discusses the opportunities for Synopsys in the context of chip design and verification. It highlights the significance of hardware opportunities, such as the HAPS 200 and ZeBu 200, even for companies not designing their own chips, as they need to verify chips with software. Synopsys sees a chance for growth whenever customers are advancing their technology roadmaps or developing new, more complex systems and chips, as this creates demand for new EDA tools and hardware. The dialogue also touches on the potential influence of R&D spending changes across the industry, noting that even during customer renewals, there are opportunities to expand business when customers invest in next-generation technology.

The paragraph details a discussion between Gianmarco Conti and Sassine Ghazi about the confidence in closing the ANSYS deal by the first half of the year, with China being the only potential obstacle. Ghazi expresses confidence in the deal's progress, citing successful phase one approvals in other jurisdictions and ongoing positive negotiations with China's SAMR, which boost their confidence in closing based on the deal's merits. Following this discussion, a new question is introduced by Jay Vleeschhouwer from Griffin Securities, who queries Shelagh about the observed increase in Synopsys's current RPO (Remaining Performance Obligations) by approximately $100 million, suggesting a high single-digit year-over-year growth.

The paragraph discusses the sustainability of high single-digit current RPO growth and the company's strong business environment, supported by a significant backlog. Jay Vleeschhouwer references a previous discussion about the need for engineering workflow changes in six specific areas and questions how AI, particularly agentic AI, might impact these changes and present both risks and opportunities. Sassine Ghazi responds by highlighting two concepts covered at SNUG: "reengineering engineering" and "agent engineer solutions," which apply to different levels within the semiconductor market.

The paragraph discusses the challenges and opportunities in advanced multi-die package systems, emphasizing the integration of thermal, fluid, and electronic considerations during the design phase to prevent issues post-production. It highlights the emerging importance of digital twins in engineering and the role of AI in optimizing and simplifying these complex systems. Synopsys, among other companies, has made significant progress in this area with strong customer adoption of its AI-driven products. The text also mentions the potential of agent technology for specific engineering tasks, such as RTL and formal verification, where human-defined goals are achieved by AI agents.

In the paragraph, Sassine Ghazi responds to a question about the company's financial performance in China, noting that they initially predicted growth in line with the corporate average but have since revised their expectations to a year-over-year decline. This revision is due to macroeconomic challenges and ongoing restrictions in China. Despite this, the company maintains its overall annual financial guidance. Additionally, Ghazi addresses the issue of soft recurring revenue in the second quarter, which mirrors the first quarter, and includes a discussion on pricing power with customers.

The paragraph explains that despite a decline in China, the company remains confident in its full-year guidance due to strong performance in other regions and segments. It describes the company's strategy of planning a larger second half of the year, driven by hardware system rollouts and customer renewals. The company met its guidance in the first half and expects similar outcomes in the second half. Pricing is based on customer value, with opportunities to improve with renewals or new technology needs. Additionally, recurring revenue fluctuations are typical, with the IP business growing and contributing significantly upfront, as evidenced by a 21% increase.

The paragraph is a discussion primarily focused on fluctuations in business performance and regulatory developments related to sales in China. Nay Soe Naing and Sassine Ghazi exchange thanks before Joe Vruwink from Baird asks about potential restrictions on sales to China by the commerce department, noting that historically, EDA vendors had insights into such deliberations. Sassine Ghazi clarifies that Synopsys has not received any information from the Bureau of Industry and Security (BIS) regarding new restrictions. The conversation then shifts to the broader semiconductor landscape, with Ghazi noting stabilization in the automotive and industrial sectors and seeing improvements in chip R&D similar to the strong period of 2021 and 2022, suggesting a positive trend in bookings and revenue growth outside of China.

The paragraph discusses the evolving needs of industrial customers concerning R&D and chip development, emphasizing a shift towards more sophisticated chips imbued with AI capabilities. This evolution necessitates changes or increases in R&D investments to ensure the right skills are available. Additionally, it highlights a conversation between Gary Mobley from Loop Capital and Sassine Ghazi about the transition of EDA tools to GPU-based compute, suggesting benefits in accelerated computing solutions and questioning the pricing and cost impact of such cloud-hosted computations. Sassine Ghazi mentions that Proteus, an OPC product in manufacturing, has been introduced with GPU acceleration.

The paragraph discusses the use of GPUs to significantly accelerate compute-intensive processes, achieving a fifteen-fold speed increase over CPUs. It emphasizes pricing based on the total cost of ownership (TCO) benefits seen by customers switching to GPUs. The conversation touches on other compute-heavy applications, like verification and timing, where pricing is aligned with customer-perceived value. The speaker is confident there are no downsides to this acceleration due to the complexity involved. It also addresses a supply chain query, with Shelagh Glaser stating they can meet customer demand despite wanting more supply, particularly noting an improved supply situation in Q4.

The discussion centers around clarifying the company's expectations and performance regarding revenue from China. Despite concerns, revenue for Q1 and Q2 in China was in line with internal forecasts. The company feels confident about its overall yearly guidance, despite expecting a year-over-year decline in China's revenue. Their forecast anticipated a tougher first half and a less severe decline in the second half of the year. Thus, the guidance for the year takes into account a better performance in China in the latter half compared to the first half.

The paragraph discusses a company's confidence in achieving its revenue targets despite potential declines in sales to China. Joshua Tilton asks about the company's ability to maintain industry-leading double-digit revenue growth even if sales to China are halted. Sassine Ghazi responds by expressing their confidence in achieving this growth organically and emphasizes their success in design automation and IP growth. The conversation then shifts to Blair Abernethy, who asks about the adoption of AI portfolio products like DSO.ai, design.da, silicon.da, and fab.da, in relation to other optimization products, and inquires about a timeline for rolling out Agentic EDA.

Sassine Ghazi discusses the positive reception of their AI products, like DSO.ai, and highlights the growing customer engagement with these technologies. He also mentions the importance of improving communication about the adoption of their dot DA products, which serve as a data integration infrastructure within the design flow. Ghazi explains that while Fab dot DA is limited to companies with in-house manufacturing, it strengthens their optimization products by providing valuable insights. He touches on the development of agentic technology, noting that they are in the L2 and L3 phase of creating customer-specific workflow agents, with plans to continue progress into higher levels. Ghazi emphasizes the ongoing excitement and commitment to updating stakeholders on their advancements.

The paragraph indicates the conclusion of a conference call, thanking participants for joining and allowing them to disconnect.

This summary was generated with AI and may contain some inaccuracies.