SNPS - NASDAQ

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Fourth Quarter and Fiscal Year 2025. Later, we will conduct a question and answer session. To remove yourself from the queue, it's star one again. If you should require assistance during the call, please press 0, and an operator will assist you. Today's call will last one hour. As a reminder, today's call is being recorded. This time, I would like to turn the conference over to Tushar Jain, Head of Investor Relations. Please go ahead. Good afternoon, everyone. Us today are Sassine Ghazi, President and CEO of Synopsys, Inc. and Shelagh Glaser, CFO.

Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys, Inc. 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 this call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. As shown in today's financial statements, all of ANSYS revenue appears under the ANSYS product group, including the ANSYS semiconductor products. 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-K that we released earlier today. All of these items plus the most recent investor presentation 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 Ghazi. Good afternoon. In 2025, we redefined Synopsys, Inc. With ANSYS, Synopsys, Inc. has transformed from an EDA leader to the leader in engineering solutions from silicon to systems. We achieved record annual revenue of $7.05 billion and exited FY '25 with more than $11 billion in backlog. In Q4, we made strong progress executing the actions we identified to accelerate our strategy and drive long-term growth. More specifically, ANSYS integration is well underway following completion of the planned divestitures of the Optical Solutions and PowerArtist businesses. We've also initiated restructuring actions to drive efficiency and accelerate our committed synergies. And recently, we welcomed industry veteran Mike Aloe as our new Chief Revenue Officer. Fourth quarter revenue was in line with our guidance and EPS came in slightly ahead of guidance. Looking ahead to FY 2026, we're guiding revenue of $9.61 billion at the midpoint which factors the addition of ANSYS, the completed divestitures, and continued pragmatism around China.

Thank you. As Sassine said, 2025 was a transformational year highlighted by the close of the ANSYS acquisition, record revenue, and strong backlog. Backlog came in at $11.4 billion, up from $10.1 billion last quarter, driven by strength in bookings across the business. We are acutely focusing on executing financial discipline as we head into fiscal year 2026. We are well into delivering on our plan to improve efficiency with the previously announced workforce reductions. These decisions are never easy, and I'm thankful to the Synopsys, Inc. team as we execute these actions and accelerate realizing our cost synergy commitment. Let me provide some highlights of our fourth quarter and full year 2025. All comparisons are year over year unless otherwise noted. As a reminder, full-year comparisons do not adjust for the eight extra days in fiscal 2024. In 2025, we generated total revenue of $7.05 billion, up approximately 15%, which included $757 million of ANSYS revenue. Q4 revenue was $2.25 billion, coming in at the high end of our guidance. ANSYS Q4 revenue was $668 million. Geographically, China continued to be challenged, consistent with our commentary last quarter. China ended 2025 down 18%. Excluding ANSYS, China was down 22% this year. 2025 total GAAP costs and expenses were $6.14 billion, and total non-GAAP costs and expenses were $4.42 billion, resulting in a non-GAAP operating margin of 37.3%. Q4 GAAP costs and expenses were $2.13 billion, and total non-GAAP costs and expenses were $1.43 billion, resulting in a non-GAAP operating margin of 36.5%. Q4 and full-year 2025 GAAP earnings per share were $2.39 and $8.07, respectively, which included the gain on the sales from the recent divestitures. Q4 and full-year non-GAAP earnings per share were $2.90 and $12.91, respectively, ahead of our guidance on lower expenses. Now onto our segments. Full-year 2025 design automation segment revenue, which includes EDA, ANSYS, and other, was $5.3 billion, up 26%. Excluding ANSYS, design automation revenue grew approximately 8% with steady growth in EDA software and a record year in hardware. Design automation adjusted operating margin was approximately 42% in 2025. Full-year Design IP segment revenue was $1.75 billion, down 8% due to the challenging second half with the headwinds highlighted last quarter. The IP business performed in line with our revised Q3 expectations. Design IP adjusted operating margin was 24% in 2025. Moving to cash. Free cash flow for 2025 was approximately $1.35 billion and came in ahead of expectations primarily due to the accelerated timing of collection. We ended the quarter with cash and short-term investments of $2.96 billion, which includes approximately $600 million in proceeds from the sale of the Optical Solutions Group and ANSYS PowerArtist business. Total debt ended at $13.5 billion. We repaid approximately $850 million of our term loans in Q4 '25 and $900 million in November, and plan to prepay the balance of $2.55 billion in 2026. We have incorporated this in our guidance that I will now discuss. For 2026, the full-year targets are total revenue of $9.56 to $9.66 billion. Within that, ANSYS revenue contribution is expected to be $2.9 billion at the midpoint, growing double digits. Following the close of the Optical Solutions Group and PowerArtist in October, our fiscal year '26 guidance excludes revenue associated with those groups, resulting in an impact of approximately $110 million. We expect the first half, second half revenue split to be approximately 48-52%. We expect ANSYS revenue to be strongest in Q1 given their historical strength in December driving the sequential revenue increase. Total GAAP costs and expenses between $8.47 and $8.61 billion, total non-GAAP costs and expenses between $5.69 and $5.75 billion, resulting in a non-GAAP operating margin of 40.5% at the midpoint, up approximately 320 basis points versus 2025, driven by the inclusion of ANSYS and cost synergy acceleration. We are adopting a normalized non-GAAP tax rate of 18% projected through 2028 to provide consistency across future periods. The two-point increase is driven by geographic mix of earnings, inclusive of ANSYS and recent tax law changes. GAAP earnings of $2.49 to $2.90 per share, non-GAAP earnings of $14.32 to $14.40 per share. We expect the first half, second half EPS split to be 46-54 with the second half benefiting from the debt repayment. Cash flow from operations of approximately $2.2 billion, up approximately $700 million year on year. The cash flow guide includes the impact of certain nonrecurring outflows such as restructuring costs of approximately $225 million and $135 million of incremental cash taxes from recent divestitures. We expect CapEx of approximately $300 million, up $130 million versus 2025, driven by investments primarily in compute infrastructure, resulting in free cash flow of approximately $1.9 billion. Fully diluted shares outstanding are expected to be between 192 and 194 million shares. This includes the impact of the recent share issuance to NVIDIA as part of our strategic partnership. With our plans to accelerate our term loan repayment, we expect the net impact to be accretive to EPS in fiscal year 2026, which is incorporated in the guidance. Now to targets for the first quarter. Total revenue between $2.365 and $2.415 billion, total GAAP costs and expenses between $2.165 and $2.23 billion, total non-GAAP costs and expenses between $1.395 and $1.425 billion, GAAP earnings of 22¢ to 41¢ per share, and non-GAAP earnings of $3.52 to $3.58 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. Before we take your questions, I'd like to reiterate our focus on driving sustainable growth and margin expansion through unmatched innovation and disciplined execution. 2025 was a transformational year that redefined Synopsys, Inc. In 2026, we will expand our position as a leader in engineering solutions from silicon to systems. With that, I'll turn it over to the operator for questions. Thank you. You. And if you would like to ask a question, please press 1 on your telephone keypad. Question and one brief follow-up to allow us to accommodate all participants. If you have additional questions, please reenter the queue, and we'll take as many as time permits. The first question today will come from Jason Celino from KeyBanc.

Great. Thank you for taking my question. Maybe my first one for Shelagh. The embedded organic growth rate in the 2026, you know, guide, I don't know if there's a way for us to, you know, understand what that might be and what that might imply for IP growth. I'm okay at math, but I'm just a sell-side analyst. I mean, if we adjust for the ANSYS and the divestitures, I'm getting, like, 8% growth organic. I ask the question because I'm just trying to understand the level of conservatism.

Yeah. It's definitely in that ballpark. And I think two things that I would highlight. One is, and I had it in my prepared remarks. We did have the disposition of the Optical Solutions Group and the PowerArtist Group, but it's $110 million. So that's about a point and a half. They're just pointing that out to you. As we talked about in Q3, we do anticipate a muted year of growth for IP. We are very much, well into, repositioning workforce to build out the HPC titles so that we've got those fully available for customers. But we do expect the group to be in transition this year. And so we factored in muted growth for the IP business. So you're seeing that? And as I talked about ANSYS, our guide for ANSYS is $2.9 billion at the midpoint. And that's double-digit growth for ANSYS. So we're trying to be pragmatic with our forecast in light of the body of work that the IP team needs to do in '26 to be able to, you know, get us back to the long-term growth rate in IP.

Okay. And then the operating margin EPS guide is pretty fabulous, you know, even when considering the extra dilution from the NVIDIA investment. I don't know if I heard you talk about a specific synergy number, but curious, you know, if there's any extra details there. Thank you.

Sure. So one of the things we had talked about last time that we're well on our way to do is the 10% workforce reduction. That encompasses a body of work that we've been doing on synergies. We've already done an action in the November time frame. We anticipate that we're largely complete with that in 2026. So very much on the path of working to accelerate those synergies as quickly as possible. And as you know, Jason, we've been very focused on driving margin expansion over, you know, multiple years, with this guide. It's about a 12 margin expansion since 2020. So we're very focused on that. Very focused on driving both sustainable growth and expansion of margin.

Great. Thank you.

Thank you. The next question is from Harlan Sur, JPMorgan.

Good afternoon. Thanks for taking my question. If I exclude ANSYS to the person that asked the question before me, the core EDA plus IP is going about eight, eight and a half percent year over year in the fiscal year guidance. Can you just help us understand what you're embedding for growth in EVH and IP? In the guidance, for example, if I assume IP is going modestly as you guys say, let's say 5%, then your EDA business is growing around 9%. Which is still below kind of your forward target of, like, 12, 13%. Is that kinda the way to think about it? And if so, like, why is the EDA business still undergoing your long-term sort of forward target CAGRs?

Yes. Thank you, Harlan, for the question. Your math is in the ballpark. What we're taking into account for the EDA growth because on IP, you captured it well, we're guiding muted growth for IP. In EDA, we're taking a couple of things into account. One, the China environment. Where the cumulative impact of restrictions is something that we are seeing and seen in '25 that has had an impact is different than say, 2020, '21 time frame where many start-ups and significant spending was happening in China. And the other factor is we're still operating in a tale of two markets. There are a number of companies that they're building chips for industrial, automotive, and anything outside the AI infrastructure build, their road map is somewhat muted. They're not driving at the same pace as what we're seeing with the other group of customers that they are delivering chips for the AI infrastructure. Then as you know, with EDA, there are a number of components. There is the software and the hardware-assisted verification. On HAV, we continue on seeing a significant demand due to the complexity of verification. The long-term view is double digits, but that's what we have taken into account in terms of the guide for twenty-six.

And the other thing that I would add that's just a mechanical item, Harlan, is the divestiture of the Optical Solutions Group and the PowerArtist Group. So that's a $110 million headwind. But that's just a mechanical thing just to add that into what Sassine outlined.

Got it. No. Got it. Thank you. That was insightful. And then, Shelagh, I have a question for you. Total expenses exiting Q4 was about $1.43 billion. You're guiding that to roughly about $1.41 billion in the first quarter. But if I look at your average quarterly expense run rate to the year on the full-year guidance, it's still averaging about $1.43 billion per quarter. So kinda doesn't seem like there's much in the way of synergy unlocking fiscal twenty-six or are cost synergies being offset by increased spending in other areas? And where do you expect the total expense to be run rating sort of exiting fiscal twenty-six?

Yes. So our commitment on the cost synergies, you're really seeing that flow through kind of back to Jason's question. On the op margin, the 40.5. Obviously, we've committed to mid-forties long term, so we're well on the way to that. And when we think about kind of the profile of expense structure, it is changing a little bit just because of the ingestion of ANSYS. As to how the quarterly splits run. But our expectation is, you know, throughout the pace of the year, we're gonna continue to have reductions in workforce. But we're still gonna focus our main investment on driving innovation. And driving the road map. And so the reductions will still allow us to have significant investment in R&D.

Great. Thank you.

Thanks, Harlan. Next up is James Schneider from Goldman Sachs.

Good afternoon. Thanks for taking my question. I was wondering if you could maybe give us a bit of an update on the IP business and your expectations you laid out last quarter around some of the headwinds that you're seeing. Was that your foundry customer, China, and the execution on custom IP blocks? Can you maybe give us an update on sort of the level of progress you've had in each of those three dimensions and how that sort of plays into the overall IP outlook for the year? You expect it to be sort of low single digit or you think mid-single digit is possible? Thank you. Thank you, James. I want to start with as we zoom out, my confidence in our long-term mid-teens for our IT business only gets stronger. I know when we talked ninety days ago, we have focused on some of the headwinds. But the overall strength of the portfolio we have is such a privilege to have the portfolio we engage our customers in various markets. Not only AI HPC. Because as you know, the market of semiconductor is much broader. Today, we are the leader in providing the IP for automotive, for mobile, for many other segments. In the AI HPC, we have a very strong position and our customers constantly reminding us how mission-critical we are to their road map and development. We outlined, ninety days ago, three headwinds. China, and the whole foundry uptake. We're assuming in our guide that not much change going into FY '26. In other words, we are being balanced and pragmatic the way we're taking into account in our guide for IP these two factors. In terms of resources and prioritization, we made a number of changes. We made changes in our development leadership. We made some changes in the sales leadership as it relates to IP. And we are well on our way to close some of the gaps. You're gonna see from a customer engagement point of view on some a couple of the titles that we are being pressed on timing of delivery. Is that we will close these gaps by midyear FY 'twenty-six. So all in all, we're looking at '26 as a transitional year, muted growth, with the long-term objective of mid-teens, and that we feel very strongly about. That's helpful. Thank you. And then maybe just as a follow-up, obviously, last week, you had your announcement of the NVIDIA partnership and the investment in the company. Can you maybe give us a little bit more color on sort of the rationale for why an investment made sense? What could have been, you know, done with an investment that couldn't have been done simply through a strategic partnership that maybe kind of walk your or walk us through the logic around that. Thank you.

Sure. I'm happy to walk through how it ended up being an investment. Where the discussion started with NVIDIA, is enthusiasm and excitement about the new Synopsys, Inc. The silicon to systems engineering solutions that addresses not only the silicon part, it's going up to the whole physical AI and delivering solutions to the future of engineering in every industry. So the discussion with NVIDIA started around how do we accelerate at the computational level with the GPU and that's something that is already a number of our products. We have a road map for that acceleration. Then it went up to the Omniverse level, how to modernize or the way we refer to it, how do we reengineer engineering for intelligent systems? And this is where the ANSYS portfolio is very unique. As they bring in a multiphysics simulation leadership to bring that physical simulation, physical AI into effect and providing that modernization of engineering. The third element is our go-to-market reach. ANSYS has built a very strong channel partnership and direct sales channel that we touched thousands and thousands of customers in many industries. So as the discussion with NVIDIA started evolving on defining the technology partnership, the discussion with Jensen moved to, I want to endorse it with an investment because I know we can make money. And I know you heard his own words as we announced the partnership. So the financial aspect was second because as you can see, we have a very strong balance sheet. And we welcome the $2 billion investment. And as Shelagh outlined, we will accelerate some of the debt payment and help us with accelerating some of the strategy we have. So that's how it really came about.

The next question comes from Kelsey Chia from Citi.

Hi. Hi, Sophie. For taking my question. So I would like to tap on the EDA growth rate again. So you mentioned that it lowered EDA growth in fiscal year twenty-six is due to slower chip design momentum in China. Is that the same reason for the lower growth rate this year as well? And are there any share shift dynamics happening over there? And if synergies with ANSYS could drive that revenue growth back to target?

Yeah. As it relates to China, there is some share shift happening inside China. Because, you know, when you restrict the sale of EDA or IP, the customers in China are looking for alternatives. And that is happening, and it's happening at an accelerated rate. The customers we can serve, we're fine selling to, and they're buying from Synopsys, Inc. or other. The companies we cannot sell to, they are looking for alternatives, and these alternatives are typically organic local, EDA or IP companies. In terms of the longer-term growth opportunities for EDA, and that's why we still standing behind double-digit growth for EDA. It's gonna come from the joint solutions between Synopsys, Inc. and ANSYS. We are targeting the '26 to deliver the first wave of these solutions. There's a need for customers from customers to address the current challenges they're facing as they're designing the most advanced chips, advanced package, 3D IC, where they need the physics analysis to be taken into account during the design phase of the chip. And this is something we're very excited about. The team is already working toward the goal of delivering the first wave of the solution, and that's a monetization opportunity. But, of course, that opportunity in terms of monetization will happen over time. As customer adopt etcetera. The second monetization opportunity is as the agentic AI solution start maturing and start changing the workflow, that's another opportunity for our industry to rethink how do we sell our solution for the value and impact. So again, the China impact, we're taking it into account in our guide and the upside opportunity as we look at the long term is joint solutions and the AI changing the workflow.

Got it. Thank you. So on the IP business, so I know that Synopsys, Inc. provides several IPs for a large foundry customer, including the in EMID advanced packaging technology. It seems that there are several customers evaluating that. Using that technology from a large foundry customer. Will that be incrementally positive for Synopsys, Inc.? Given the new growth that you have provided? And also relating to that, on the operating margin, I believe all the expenses related to those IPs have been consistently recognized over the prior quarters. Despite the lack of customers. So does that imply that operating margins for that segment could come back to historical average? When the revenue for that large foundry customers are being recognized.

Yeah. Let me address the first part of your question, then I'll turn it to Shelagh. The way we monetize our IP, the first step is to build it. And what you build on Foundry A is not the same on what you build on Foundry B even though it's the same protocol, the same title. It does require what's called porting, and that's not a simple effort. It requires quite a bit of an R&D effort. To achieve the same performance power, etcetera. Now that's one part of the monetization, but where we look for the incremental monetization is when that foundry start on ramping customers. And if whichever foundry has expansion of customers that are using the technology that we already developed the IP, that's an incremental opportunity for us. And there, we sell to the end customer who is ramping on the foundry customer. And for us, as we're looking at FY '26, for that particular foundry that we talked about in Q3. Assuming a status quo in terms of new customers being on ramp. Shelagh, if you wanna address the operating margin.

Yeah. Sure. So in terms of operating margin, Kelsey, you're right. We still are investing and building the titles out. We've repositioned the workforce to be able to build the HPC titles up, as Sassine talked about. And so it is really we're gonna have, you know, muted growth in '26, which will mean there'll be some pressure on the operating margins. But as we get back to that mid-teen growth long term, we'll see expansion in the margins. And they do expect that IP margins are always slightly below the corporate average because it's such a people-intense body of work to deliver but, it's really a short-term effect just because of the headwinds on revenue. Of the op margin challenge through '26. On IP.

Okay. Got it. Thank you.

Thank you.

Thank you. We'll now hear from Sitikantha Panigrahi from Mizuho.

Thanks for taking my question. I want to drill it into the ANSYS. Double-digit growth for next year is pretty good. So I'd love to hear what's baked into that in terms of the jumpsuit there. It's been now more than four months since you closed ANSYS. Do you expect, you know, in terms of business model or contract, which are different, do you expect them to convert to subscription? And this is if you do so, what kind of uplift or any kind of multiplier effect we should expect there. And, Sassine, in terms of integration, where are you so far? Any color would be helpful.

Sure. Thank you, Sitikantha, for the question. In terms of what's driving our confidence in double digits growth for ANSYS, the way we look at it, there are two markets we're serving with the ANSYS portfolio. There is the semiconductor market. That the joint solutions will bring an opportunity to uplift our pricing as we integrate the ANSYS solution with the EDA solution that we offer today. Then the rest of the ANSYS market, if you look at the significant transformation that's happening on how to develop a modern car, robot, any industrial applications, drones, etcetera, aerospace, those are all customers of ANSYS. And the demand, the increase in R&D investment that we are seeing in those markets is giving us the confidence to continue on expanding the growth opportunity. In terms of the business that ANSYS has, they've always had a mix of subscription and perpetual. And that will continue based on the customer need, requirement, demand. So that's what's driving the double-digit growth assumption for the portfolio. Which, by the way, is no different than what the legacy ANSYS team has delivered in the prior year. So it's consistent in line with prior expectations. In terms of integration, since we finalized the divestitures in October, we're full force ahead in terms of integrating the teams. Our R&D teams right now, they're one team. They're delivering on the joint solutions I just mentioned. From a go-to-market point of view, we are maintaining a separate go-to-market engagement, the one that they deal with semiconductor. Those are integrated given the relationship Synopsys, Inc. has with semiconductor companies. And the slew of other customers. And I'm talking multiple factors larger than the classic Synopsys, Inc. in terms of the space that the legacy ANSYS has served that will remain separate so we don't miss a beat in terms of how to go to market with the existing portfolio that we have.

Yeah. And I would just add, Sitikantha, that the portion that Sassine talked about of ANSYS that you know, in lockstep with the EDA business, that is moving to a similar ratable, and that's included in our guidance.

Okay. And then just wanna clarify that we need the same customer now using Synopsys, Inc. EDA, and ANSYS. When you launch your combined product, should we expect any kind of uplift there, or what kind of uplift should we expect? I mean, is that one plus one would be more than two? Or less than two? Dollar there. And, Sassine, quickly, any update on that royalty model for IP you talked about in traction you're seeing?

Sure. Yeah. When we talk about joint solutions, the customers have the options. They have the choice. If they don't have a need for that new joint solution, they can continue buying the classic Synopsys, Inc. and the legacy ANSYS products and will negotiate those based on value and usage and need, etcetera. If the customer's looking for the joint solutions because we're solving a new problem, one plus one is greater than two for sure. And that's where we will capture that monetization opportunity over time as they start adopting the technology. As I stated, the first wave where the customers start using, feeling, the technology and evaluating it, is the '26. In terms of the IP, value capture, the focus we put together in Q4 that I'm very pleased with, we looked at it from, I want to say, two pathways. The first one is just a discipline in pricing and guardrails because we have a differentiated IP portfolio. And I was very pleased with the go-to-market team in monetizing around the newly established, I wanna say, guardrail and disciplines we put in place. Then the second aspect of it and that's where we spent quite a bit of time ninety days ago talking about, there's an increase in customization in IP. And we are having discussions with a number of strategic customers. That were happy to allocate resources to deliver on that work but we need to change the business model from an NRE plus a use fee to NRE plus use fee plus royalty and upside. And these discussions are happening, and I feel very good that in FY '26, we'll be able to lock up some customers in that new business model where they see the value of bringing that customization and portfolio to their road map.

Thank you.

You're welcome.

And, everyone, just a reminder, please limit yourself to one and one quick follow-up. We'll go next to Vivek Arya from Bank of America.

Thanks for taking my question. For the first one, Sassine, I'm trying to, you know, gauge whether the IP business is, you know, did it. Because if I look at your Q4 IP and I just annualize that, that's about $1.6 billion in change. But if I assume that it grows modestly, that's more like 1.8, you know, billions, right, or so. So from a year-on-year, you know, perspective, it seems dealers, but off of Q4 levels, not as much. And I wanted to get your sense. Is that a fair pushback? Just how are you thinking about the sequential recovery in your IP business? And, Shelagh, do you have a number for one, that would be very helpful also.

Yeah. I really urge you not to look at it from a quarter basis because the IP business, as we often refer to, can be lumpy. I am very confident, very confident in our portfolio, as well as the market position we have. We were very transparent in Q3, that there were a couple of titles that we needed to do some work to accelerate our road map to deliver to customers. And for those titles, we're having ongoing customer engagement with the customers with our revised road map. And I have no doubt that we will capture the opportunity for these couple of titles. The rest of the portfolio is performing incredibly well. So, yes, I feel very good. That we have derisked the headwinds that we communicated last quarter, as we look into '26.

And, Vivek, what I give you with the sort of flavor for the year is IP will be back half loaded. And that's really got to do with the availability of all the titles. So the team is actively working, hitting all the milestones to be able to deliver that a few of them are not gonna be available until the second part of the year. And so that's really kinda how we built the forecast. As Sassine said, the demand is there from the customers in, you know, very solid. But some of our delivery is more back half weighted.

Understood. And for my follow-up, what are you assuming for your China sales and on an absolute dollar basis relative to the $814 million or so that you're doing in fiscal twenty-five. And I guess, Sassine, the broader question there is, can your EDA and IP business get back to double-digit growth if we continue to see these China restrictions or if you kind of, you know, proactively, you know, derisk your business from China engagements? Thank you.

Thank you, Vivek. So we expect the environment to remain challenging in China. That's why when we look at FY '26 compared to '25, what we are taking into account in our forecast and guide is truly pragmatic balanced view. We're not assuming that the environment is gonna change in the next one or two quarters. To the positive. So, therefore, we continue on derisking it in our guide for FY '26. In terms of the double digits growth for EDA, we still feel strongly about the opportunity to achieve double digits from a long-term basis and it's driven by the complexity and the need for the joint solutions and as AI evolves from generative to agentic, it will change the workflow, and that's a great opportunity for our industry to find a new way to monetize for the value that we will be delivering to the customers. So, again, from a China point of view, we continue on derisking with an assumption of the environment remains the same, and the long term for EDA double digits is something we're holding for that commitment.

Thank you.

Thank you, Vivek. The next question is from Joe Vruwink from Baird.

Great. Thanks for taking my question. I just wanted to stay on the IP topic and given everything that's come up so far in terms of the titles you're seeking availability on midyear and some of the other, like, strategic elements, the custom IP and potentially changing the business model. That midyear time frame, would you expect to know by then the magnitude of commitments you have in hand so that FY '27, you can maybe make the statement it will be back to mid-teens growth. I guess my question is mid-teens growth is that capable for FY 2027 based on the pipeline of opportunities you see today?

Yeah. To just let me clarify the midyear. We're not waiting for us to talk to the customer until midyear. We talk to the customer, we have active engagement and even in contract phases with customers based on their road map and based on our road map of delivery. We have established very strong trust with those customers, and they build their road map based on our ability and delivery. So the other thing I'll point out in terms of IP and in general is the strength of the backlog we're entering the year. Entering the year at $11.4 billion in backlog. That shows the strength of the bookings, the commitment we've had with customers, and it's all about execution. And delivery. So, Joe, in general, as I keep repeating, my confidence in our IP portfolio is driven by the discussions we're having with customers and the essentialness of what we're delivering here.

Okay. No. Thanks for that clarification. I guess I'll next ask about cash flow performance. I look at your adjusted EBIT margins better than 40%. That's nearing the mid-40 goal. Cash flow, I think the guide implies something closer to 20%. So, obviously, a lot of upside still to the margin framework there. Just would you expect some of these one-time cash items restructuring do those start to settle out of the model as we think forward into the out years?

Yeah. Absolutely, Joe. That's why I called them out because I very much think they're one-time, kind of one-off. Items. The two that I called out was the restructuring. And then, obviously, as a part of the OSG PowerArtist, there's a gain, and so there's the tax on the gain. But those aren't, you know, those are not recurring. And we're very much focused, you know, that's the $700 million improvement year on year. We're very much focused on driving to the, you know, long-term commit of unlevered free cash flow in the mid-30s margin.

Great. Thank you.

Thanks for the question, Joe.

Charles Shi from Needham and Company has the next question.

Hi. Thanks for taking my question. Hey, Sassine. Maybe a question for you a little bit longer term, a little bit beyond fiscal twenty-six. A lot of the, you know, pushbacks I'm hearing from the investment community Synopsys, Inc. and, actually, not just Synopsys, Inc., but the entire EDA industry, entire group is AI is doing very well, but the sector you are in continue to show a, I mean, continue to show deceleration, I would say, since 2022. And it's kinda hard for a lot of folks to understand the given you have all the exposures to all the AI players there, but your business didn't really turn up. And over the past few years, is that a monetization problem? And, if yes, how do you plan to solve the monetization problem? Thank you.

Charles, if I understood your question correctly, when you look at the AI from a semiconductor road map development point of view, it continues on being very strong. If you're a hyperscaler and pretty much every hyperscaler, they have three parts to satisfy their infrastructure build-out. They're buying merchant chips, they're engaged in ASIC. And pretty much each one of them, they have their own COT. Where the customer owns tooling, where they're developing their own semiconductor chips. And the reason they're counting on all three is because of the optimization they need to do for different workloads from a cost and power consumption and the overall ownership of the consumption it makes sense for them to have a strategy based on these three vectors. From a Synopsys, Inc. point of view, that's a great opportunity because remember, we don't sell based on volume. We sell based on chip start. So if the chip is coming from a merchant or coming from ASIC or the customer themselves building it, for us and the industry, that's an upside. So we don't see that changing actually, and we see these hyperscalers are doubling down on that strategy.

Yeah. So maybe I should make my question clear because I think all the trends you described, I think that's pretty well understood. But at the same time, folks are looking at your revenue growth and, especially the EDA IP part. Maybe not just Synopsys, Inc., but also Cadence and some of your peers. This whole EDA/IP industry seems to have quite a bit of a deceleration, a growth deceleration over the last couple of years. So this is kinda in the opposite way of which have seen the very strong AI uplift. So kinda let us to kinda think maybe you what the problem you have is not exposure. Not that you don't have exposure to AI, but you have a little bit difficulty to monetize AI. And I think one of the things you mentioned about maybe opening up a third avenue of monetization for IP business basically, for getting into the royalty is the right direction. But we're still kinda curious. What do you do about that on the EDA side? It has been a segment that's kinda growing in the single-digit range for a couple of years. It looks like it's gonna be another single-digit growth year again. Thanks.

Yeah. It's yeah. Charles, thank you for clarifying. Absolutely, as an industry, we can do better in capturing more value for the impact we're delivering to our customers. No question. Given the complexity of these chips, what these customers are building is not possible without Synopsys, Inc. and the industry to deliver to the complexity of what we're building. If you look at it from an EDA point of view, the hardware part of EDA is growing at a pace that, each year, we're saying we're breaking the prior record. And so customers are willing to pay in order to deal with that complexity. On the EDA software, there is a challenge in terms of the inflection point of monetization. From a Synopsys, Inc. perspective, every one of these advanced customers are looking for that joint solutions between ANSYS and Synopsys, Inc. that's an opportunity one plus one to be greater than two. As we move to a different workflow for agentic AI, that's another opportunity for the industry. To rethink how do we sell that solution. From an IP standpoint, the conversations are happening. And that's why when we talked about it ninety days ago, we were talking about it from a position of strength and an opportunity that those customers are expecting and wanting to engage differently. And we're having the right conversations right now to say we're happy to do it but we need a different monetization upside. For these engagements. So good observation, Charles, and I hope my, the way I'm describing where we've been, where we are, where we're going, it's giving you confidence and shedding some light to it.

Thanks, Sassine.

And our final question today comes from Ruben Roy from Stifel.

Thank you. Sassine, you spent a lot of time talking about China, but I do have one question. On sort of where you are with China revenue. It's still meaningful. Exit rate around 10% of overall revenue. And I'm wondering if you could talk about the mix there and if the headwinds that you're, you know, sort of seeing in the pragmatism is across, you know, the mix? Meaning, is it core EDA plus IP plus hardware and ANSYS, or, you know, are there specific areas that you're more concerned about, you know, as you think about, you know, this year or even longer term relative to China. And I guess I'm trying to get to is this a reasonable floor, you know, once you get past maybe, you know, some of the IP issues that you have there or, you know, are there other shoes to maybe drop, you know, in China as we think about the longer-term model? Thank you.

Yeah. Thank you, Ruben. I wanna clarify, and I know Shelagh mentioned it in her prepared remarks, the Synopsys, Inc. Classic had a decline in China. The ANSYS portfolio performed fairly well in China. Because they sell to a very broad market that is not restricted. And we believe a lot of those customers will continue on seeing the value in the legacy ANSYS portfolio and that will continue on growing. On the classic Synopsys, Inc. side, what we're facing in China is primarily our inability to sell to the market that needs the most advanced solution. And you're familiar not only with entity list, but with technology restrictions. From a Synopsys, Inc. standpoint, where it impacts us the most is in IP, given the proportion of our business and our leadership in IP, not only in China broadly, but in China that has a fairly big impact on Synopsys, Inc. From EDA in general, as I answered it earlier, we're not losing share to our standard or the peers that you think about when we are losing share in China, are for customers our industry cannot sell to, and, therefore, there's an erosion that is happening on the EDA side on customers that we cannot deliver or support due to entity restriction or technology. So we believe we have derisked it. In our guide for '26. And, of course, when you pass '26 and assuming the environment is the same, meaning no additional restrictions, then the comps get easier. In terms of comparing, year over year.

And everyone, that does conclude our question and answer session. I would like to hand the conference to Tushar Jain for any additional or closing remarks.

Thank you all for joining the call. We look forward to talking to you during the quarter and meeting you at CES. Lisa, you can go and close us out. Thanks.