Synopsys : Second Quarter 2024 Prepared Remarks

Synopsys Second Quarter Fiscal Year 2024 Earnings Conference Call

Prepared Remarks

Wednesday, May 22, 2024

These Prepared Remarks contain forward-looking statements, including, but not limited to, statements regarding Synopsys, Inc.'s ("Synopsys", "our" or "we") short-term and long-term financial targets, expectations and objectives; strategies related to our products, technology and services; business and market outlook, opportunities, strategies and technological trends, such as artificial intelligence; our pending acquisition of ANSYS, Inc. (the "Ansys Merger"), including, among other things, expectations regarding the financing of the pending acquisition; the exploration of strategic alternatives for our Software Integrity segment; the potential impact of the uncertain macroeconomic and geopolitical environment on our financial results; the expected impact of U.S. and foreign government actions and regulatory changes, including export control restrictions, on our financial results; customer demand and market expansion; our planned product releases and capabilities; industry growth rates; the expected realization of our contracted but unsatisfied or partially unsatisfied performance obligations (backlog); software trends; planned stock repurchases; our expected tax rate; and the impact and result of pending legal, administrative and tax proceedings. These statements involve risks, uncertainties and other factors that could cause our actual results, time frames or achievements to differ materially from those expressed or implied in such forward-looking statements. Such risks, uncertainties and factors include, but are not limited to: macroeconomic conditions and geopolitical uncertainty in the global economy; uncertainty in the growth of the semiconductor and electronics industries; the highly competitive industry we operate in; actions by the U.S. or foreign governments, such as the imposition of additional export restrictions or tariffs; consolidation among our customers and our dependence on a relatively small number of large customers; risks and compliance obligations relating to the global nature of our operations; failure to complete the Ansys Merger on the terms described in our filings with the SEC, if at all; failure to obtain required governmental approvals related to the Ansys Merger or the imposition of conditions to such governmental approvals that may have an adverse effect on us; failure to realize the benefits expected from the Ansys Merger; and more. Additional information on potential risks, uncertainties and other factors that could affect Synopsys' results is included in filings we make with the Securities and Exchange Commission (the "SEC") from time to time, including in the sections entitled "Risk Factors" in our latest Annual Report on Form 10-K and in our latest Quarterly Report on Form 10-Q. The financial information contained in these Prepared Remarks should be read in conjunction with the consolidated financial statements and notes thereto included in Synopsys' most recent reports on Forms 10-K and 10-Q, each as may be amended from time to time. Synopsys' financial results for its second quarter of fiscal year 2024 are not necessarily indicative of Synopsys' operating results for any future periods. The information provided herein is as of May 22, 2024. Although these Prepared Remarks are expected to remain available on Synopsys' website through the date of the earnings results call for the third quarter of fiscal year 2024, their continued availability through such date does not mean that Synopsys is reaffirming or confirming their continued validity. Synopsys undertakes no duty, and does not intend, to update any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law.

These Prepared Remarks also contain non-GAAP financial measures as defined by the SEC in Regulation G. Reconciliations of certain non-GAAP financial measures to their most closely applicable GAAP measures are included in the second quarter fiscal year 2024 earnings release and financial supplement, each dated May 22, 2024 and available on Synopsys' website at www.synopsys.com. Additional information about such reconciliations can be found in Exhibit 99.1 of Synopsys' Current Report on Form 8-K, filed with the SEC on May 22, 2024.

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Synopsys Second Quarter Fiscal Year 2024 Earnings Conference Call

Prepared Remarks

Wednesday, May 22, 2024

Good afternoon. In Q2, we continued our strong execution and momentum. Semiconductor and systems companies continue to invest in Synopsys 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-GAAP operating margin was 37.3%, up approximately 3 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. Shelagh 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 Synopsys. 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.

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Synopsys Second Quarter Fiscal Year 2024 Earnings Conference Call

Prepared Remarks

Wednesday, May 22, 2024

Let me provide a brief update on this important transaction. Our customers have overwhelmingly told us 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 as customers realize 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 a marquee win for full-flow displacement at a 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 2nm-based CPU at a US CPU company and higher performance versus competition for a 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

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Synopsys Second Quarter Fiscal Year 2024 Earnings Conference Call

Prepared Remarks

Wednesday, May 22, 2024

are now engaged with over 30 customers demonstrating up to 10X fast turn-around time and double-digit increases 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 a 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 PUF technology, to our extensive IP portfolio. More broadly, we gained over 10 secure interface IP wins in the quarter including 5 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 terabit 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 expansive IP library for multi-die starting with the standard for die-to-die interconnect, UCIe. We won 5 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 won a significant enablement engagement with the emerging, leading-edge Japanese foundry Rapidus Corporation involving our leadership 2nm interface IP. This builds on a major Rapidus design win for foundation IP. 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 Rapidus-manufactured chips to market faster and with lower risk. The design and manufacturing of semiconductors is inextricably linked, and we engage deeply with all the major foundries. At TSMC's Symposium, we announced TSMC N2 IP 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

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Synopsys Second Quarter Fiscal Year 2024 Earnings Conference Call

Prepared Remarks

Wednesday, May 22, 2024

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 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 a 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 Shelagh.

Thank you, Sassine. 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- cancellable backlog. We remain confident in our business, and after raising guidance at our Investor Day in March, we are again raising our full-year targets for revenue and non-GAAP EPS.

As Sassine 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 in 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 GAAP costs and expenses were $1.12 billion. Total non-GAAP costs and expenses were

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Synopsys Second Quarter Fiscal Year 2024 Earnings Conference Call

Prepared Remarks

Wednesday, May 22, 2024

$911.7 million, resulting in a non-GAAP operating margin of 37.3%. GAAP earnings per share was $1.92, and non-GAAP earnings per share were $3.00.

Now, onto our segments. 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 GAAP costs and expenses between $4.56 and $4.61 billion; total non-GAAP costs and expenses between $3.77 and $3.81 billion, resulting in non-GAAP operating margin improvement of approximately 2 percentage points at the mid-point;non-GAAP tax rate of 15%; GAAP 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 the targets for the third quarter: revenue between $1.505 and $1.535 billion; total GAAP costs and expenses between $1.10 and $1.12 billion; total non-GAAP costs and expenses between $920 and $930 million; GAAP earnings of $2.22 to $2.35 per share; and non-GAAP earnings of $3.25 to $3.30 per share.

Our press release and financial supplement include additional targets and GAAP 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 14.5-15.6%, approximately 2 percentage points of non-GAAP operating margin improvement, and 22-23%non-GAAP EPS growth in 2024. Our confidence reflects our leadership position across our segments, 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.

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