SNPS

Ladies and gentlemen, welcome to the Synopsys earnings conference call for the second quarter fiscal year 2026. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question at that time, please press star one on your telephone keypad. To remove yourself from that queue, press star one again. If you require assistance during the call, please press star zero and an operator will assist you. Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Tushar Jain, Head of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to Synopsys' second quarter fiscal year 2026 earnings call. With us today are Sassine Ghazi, President and CEO of Synopsys, and Shelagh Glaser, 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 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 8-K that we released earlier today. In addition, as mentioned in our earnings press release today, we plan to host an investor day on September 30th, 2026. All of these items, plus the most recent investor presentation and the investor day information can be found 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. Synopsys delivered a strong second quarter, exceeding guidance on revenue, non-GAAP operating margin, and non-GAAP EPS, driven by solid execution and continued AI-driven demand strength. This is an exceptional moment to be the leading engineering solutions provider. EDA, IP, and multiphysics simulation have emerged as essential capabilities in the AI supply chain. AI is scaling semiconductor demand, architectural diversity, and complexity of both chips and the systems they power, driving increased demand across our portfolio. Our opportunity is expanding as customers design increasingly complex systems, from silicon to full-scale AI infrastructure and physical AI, requiring more integrated engineering solutions across design, simulation, and system validation. Synopsys is uniquely positioned to capture this opportunity, and our recent Synopsys Converge event showcased the depth of our expanded portfolio and the strength of our roadmap. Zooming out, Q2 further reinforced my confidence in our strategy and trajectory.

Our global team showed continued strong execution on the Synopsys-Ansys integration, disciplined focus on higher-value IP opportunities, and engineering excellence to advance our differentiated innovation pipeline with agentic AI and Multiphysics Fusion technology. I look forward to diving deeper on these topics, along with our strategy to increase value capture and expand margins at our investor day in September. Based on our momentum, leadership roadmap, and market signals, we are raising our full year 2026 revenue, operating margin, EPS, and free cash flow guidance. I'll cover segment highlights before handing over to Shelagh for the financial details. Design automation delivered a strong quarter, reflecting robust AI-driven design activity and sustained demand for advanced node and 3D IC solutions where Synopsys EDA leads. Hardware-assisted verification remained a key growth driver, with particular demand from hyperscaler and leading semiconductor customers who are scaling emulation and prototyping for increasingly complex AI designs.

This drove multiple strategic system wins across ZS5, ZeBu-200, and HAPS-200. In EDA, our leadership in 3D IC is translating into production scale adoption. For example, in Q2, a leading HPC provider successfully taped out an incredibly complex next-generation AI accelerator using Synopsys' unified multiphysics aware Design to Sign-Off solution. This demonstrates the production-proven capability of our 3DIC Compiler platform, and we expect sustained adoption as next-generation AI designs increasingly move to multi-die and chiplet-based architectures. We also continue to lead at advanced nodes with over 30 full flow technical wins in the quarter, driven by our ability to deliver superior PPA for increasingly complex designs. Across our EDA portfolio, we are extending our competitive advantage by pioneering new capabilities, including Multiphysics Fusion, GPU-accelerated computing, and AI-driven automation.

Early results for our forthcoming Multiphysics Fusion technology demonstrate meaningful productivity gains, including up to 3x faster design closure with higher ECO success rates and up to 2x faster turnaround times for complex analog designs compared to traditional flows. Multiphysics Fusion is currently in expanding trials with leading customers and will begin ramping into commercial availability in the second half of 2026. As we deliver more value to customers, we expect to share in that value creation as contracts are renewed and expanded. For example, we're seeing early signs of monetization with GPU-accelerated EDA, a premium capability driving both increased customer value and contract uplift. We're also advancing AI-driven design. Our agentic EDA capabilities are gaining traction, with 20 customers now evaluating solutions across more than 25 specialized AI agents spanning front-end verification, implementation, and analog flows.

This agent engineer technology represents a meaningful long-term opportunity to further increase productivity and drive higher-value customer engagements. We are maintaining our EDA leadership position, supported by the success of recent renewals, pipeline activity, and monetization trends. Turning to Ansys, which delivered another strong quarter. Ansys extends our reach into system-level design and multiphysics simulation, strengthening our position as the leader in engineering solutions from silicon to systems. In Q2, we saw continued demand for system-level digital engineering and physics-based simulation across industries. For example, the AI data center build-out is driving S&A demand, including and beyond semis, as customers use the power of Ansys simulation from chip to grid. In aerospace and defense, customers are adopting Ansys simulation to generate physics-based synthetic data to train AI models for highly complex operating environments. In automotive, manufacturers are increasingly digitizing engineering workflows and relying on simulation for safety-critical systems.

Together, these trends reinforce our opportunity to deliver differentiated value at the intersection of silicon, systems, and physics. Turning to Design IP. We are increasing our alignment with hyperscaler demand for custom AI silicon, where our differentiated portfolio, first-to-protocol leadership, and silicon-proven quality enable higher-value engagements. Demand for high-speed interconnect IP continues to accelerate, driven by AI's massive data requirements. In Q2, our PCIe 7.0 IP achieved a greater than 90% win rate with 18 new licenses and a growing pipeline. We also continue to see strong momentum in advanced connectivity technologies, including 224G with multiple wins across leading and emerging innovators. The shift to multi-die and chiplet architectures is driving demand for die-to-die interoperability. In Q2, we secured additional UCIe design wins and achieved a 64G tape out on a 2-nm process, bringing total UCIe lifetime wins to over 150.

We're strengthening our position in memory IP with design wins across hyperscalers, AI startups, and leading semiconductor companies. In Q2, we also delivered the industry's first HBM4 IP test chip. While we continue to expect muted IP growth for fiscal year 2026, we believe the IP segment bottomed in Q1 and has begun its recovery. We expect sequential quarterly improvements throughout the second half, supported by our roadmap, execution, and pipeline. Importantly, we are focusing our IP business on the highest value opportunities aligned to AI-driven demand and hyperscaler customization. These engagements enable us to provide greater value as they increasingly involve deeper collaboration, customized IP solutions, and even broader Synopsys participation in the design process. Also advancing our IP strategy, we expect to close the pending sale of the processor IP solutions business shortly.

I'm increasingly confident in the long-term growth of this business and look forward to sharing more at our investor day. I'm also pleased to share that today we announced a cooperation agreement with Elliott Management and the appointment of Jesse Cohn to our board as an independent director. Jesse has deep appreciation for the company and our mission. We welcome his constructive insights and I look forward to working with him. In summary, the expansion of AI positions Synopsys for sustainable growth and margin expansion. As AI scales both chip complexity and system-level design requirements, our leadership portfolio of engineering solutions across EDA, IP, and multiphysics simulation enables us to deliver differentiated value to customers and to capture a larger share of this expanding opportunity. I want to thank the Synopsys team for an impactful Q2 with disciplined execution, continued technology leadership, and engineering excellence driving our next gen solutions.

Now over to Shelagh.

Thank you, Sassine. As Sassine noted, we delivered a strong Q2, achieving revenue of $2.276 billion, a non-GAAP operating margin of 39.5%, and non-GAAP EPS of $3.35, all exceeding guidance. The results reflect continued strong execution and financial discipline across the business. Backlog ended at $11 billion. Before turning to the financials, I'll briefly outline the drivers of our revenue outperformance. Q2 revenue exceeded guidance primarily due to the strong performance across the business. In addition, an accounting impact associated with recognizing Ansys channel revenue on a gross basis added $12.5 million to revenue and an equal amount to expense, thus neutral to EPS and cash flow. Let me provide more details on this change. Ansys integration is well underway.

As we further align and improve our operations, we have deepened our understanding and experience with Ansys' significant channel partner network by enhancing oversight and pricing visibility, which requires us to recognize channel revenue on a gross basis. This also expands our reach to customers Synopsys historically did not serve, gives us clearer business insights, and allows us to offer a broader portfolio of Synopsys and Ansys solutions. We will continue to update you on the quarterly impact through the rest of fiscal 2026, and I'll quantify the estimated full year effect in our guidance shortly. I'll now review our second quarter results. All comparisons are year-over-year, unless otherwise stated. We generated total revenue of $2.276 billion. Ansys revenue was approximately $652 million, including the accounting impact of $12.5 million related to channel revenue.

Total GAAP costs and expenses were $2.156 billion, coming in higher than expectations, primarily due to the accelerated timing of restructuring costs. As a result, GAAP earnings per share were $0.09. Total non-GAAP costs and expenses were $1.376 billion, below our guided range, reflecting the progress we are making in improving efficiency and realizing synergies, resulting in non-GAAP operating margin of 39.5%. Non-GAAP earnings per share were $3.35, ahead of our expectations on the strong operational beat. Now on to our segments. Design Automation segment revenue was approximately $1.822 billion, including Ansys. As a reminder, this excludes the Optical Solutions Group, which was divested in Q4 2025. Within Design Automation, Q2 EDA revenue grew slightly over 8% year-over-year, with strength in hardware-assisted verification solutions. Design Automation adjusted operating margin was 43.3%. Design IP segment revenue was $454 million, down approximately 6% year-over-year and up 12% sequentially.

Design IP adjusted operating margin was 24.4%. Turning to cash. Free cash flow was approximately $575 million in Q2, we ended the quarter with cash and short-term investments of $2.48 billion. Total debt at the end of Q2 was approximately $10 billion. Based on our strong cash position and our early pay-down of term loans, we initiated a $250 million accelerated share repurchase in March, under which we received an initial share delivery of approximately 513,000 shares with final settlement expected by June 1st. During the quarter, we also executed a $50 million open market share repurchase of approximately 127,000 shares. Now to guidance. Given the strong first half results and continued confidence across the business, we are raising our full year revenue, operating margin, EPS, and free cash flow guidance. Let me explain further. We are updating our full year revenue guide to account for three factors.

First, the strong first half performance and increased confidence across the business increases our previous guidance by $35 million at the midpoint. Second, the Ansys channel accounting impact increases revenue by $60 million, which is accompanied by an equivalent increase in expenses. Third, the previously announced divestiture of the processor IP solutions business is expected to close shortly, resulting in reduction of revenue of approximately $40 million for the remainder of fiscal year 2026. This results in an updated revenue range of $9.625 billion-$9.705 billion. Within that, Ansys revenue contribution is expected to be approximately $2.96 billion, including the accounting impact. This is consistent with prior guidance after including the channel accounting impact. Next, expenses. We're updating our expense guidance to account for two primary factors. First, cost discipline and accelerating synergies driving expenses down.

We expect to be approximately halfway through our committed cost synergy realization by the end of fiscal year 2026. Second, a $60 million increase in expenses due to the Ansys channel accounting impact. Thus, total GAAP cost and expenses are expected to be between $8.469 billion and $8.599 billion. Total non-GAAP cost and expenses are expected to be between $5.675 billion and $5.725 billion, and non-GAAP operating margin of 41% at the midpoint, a 50 basis point raise to our previous guidance. GAAP earnings is expected to be between $2.49-$2.91 per share. We expect non-GAAP earnings of $14.72-$14.80 per share, a $0.34 increase at the midpoint from our prior guidance due to the higher revenue and increased operational efficiency. We are raising our cash flow from operations guidance to approximately $2.3 billion.

Our CapEx guidance of approximately $300 million remains unchanged, resulting in free cash flow of approximately $2 billion, an increase of $100 million versus our previous guidance. Now to targets for the third quarter. Total revenue between $2.41 billion and $2.46 billion. Total GAAP cost and expenses between $2.075 billion and $2.125 billion. Total non-GAAP cost and expenses between $1.44 billion and $1.47 billion. GAAP earnings of $0.84-$0.98 per share, and non-GAAP earnings of $3.63-$3.69 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations, as well as full year revenue guidance breakdown outlining the factors I mentioned earlier. Thanks to our global Synopsys team for a strong first half performance. Our disciplined execution and momentum across the business is a great setup for an even stronger second half.

At our September investor day, I look forward to discussing the compelling long-term opportunity we have as a mission-critical partner for our customers. With that, I'll turn it over to our operator for questions.

Thank you. 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 will take as many as time permits. Please stand by while we compile the Q&A roster. Your first question comes from the line of Siti Panigrahi from Mizuho. Please go ahead.

Thanks. It's Siti Panigrahi from Mizuho. Sassine, congrats on a good quarter. I want to ask you about the IP business. That's one of the questions we get from investors after the weakness last year. It's good to see that Q1 was kind of bottom and sequential improvement. You talked about some of the shift towards the higher value, more customized IP segments and with hyperscaler. Can you give us a sense how these deals are compared to traditional IP, and what other factors give you that confidence of second half re-acceleration, and how should we think about the growth opportunity going forward in IP?

Thank you, Siti, for the question. Overall, I cannot be more enthusiastic and confident about our portfolio, in particular, the IP opportunity. If you look at the Synopsys IP opportunity, we have the broadest portfolio

Serving many markets, from AI, HPC, and data center build-out, to mobile, to consumer, automotive, et cetera. That portfolio is available across multiple foundries. The area that we are focused on when we talk about high-value IP opportunities is how do we capture the value that we're delivering to the customers and a different monetization and business model. We're making actually very good progress. As I mentioned a number of quarters ago, by the end of this fiscal year, we will have few customers with signed agreements with a new business model that provide the opportunity to capture more dollar than the traditional use fee or some level of NRE.

The reason the customers is willing to entertain that change in the business model is their entire strategy, especially if you're a hyperscaler, to build your own chips, like the COT, the direction and trajectory, is built on the availability of the Synopsys IP. That discussion is very positive. I'm confident that we will get to the direction I communicated a number of quarters ago, which will accelerate our opportunity of growth in IP. As you mentioned, for the short term, or for this fiscal year, what we committed is sequential quarter-over-quarter growth. As you could see, we achieved the 12% Q2 to Q1. Q1, we hit the bottom. I have no doubt we'll continue on delivering that sequential growth for the rest of the year.

That's good to hear that royalty update on IP. Shelagh, I have a follow-up question on your margin guidance you raised for the fiscal year. If I heard you correctly, you said half of that committed Ansys cost synergy expected for this year. Can you help us frame the magnitude of the remaining synergy opportunity in the back half or in 2027? How should we think about the primary driver for further margin expansion? Any other additional levers you can talk about beyond synergy?

Yeah. Thanks for the question. Really, since we finalized Ansys last year, we've been focused on how we achieve synergies as quickly as possible. As I said, by the end of this fiscal year, we'll have achieved about half of our committed synergies. We're doing that in a very systematic way, ensuring that we're continuing to invest in building out the Multiphysics portfolio. In making sure that that's happening and making sure that we've got the right go-to market resources, but really looking at areas where we have overlap and duplication, and reducing those, both in terms of headcount and in terms of where we might have had a third-party contract with a vendor, combining those contracts. We've been working through in a very disciplined way to make sure that we're achieving efficiency in really everything we're doing.

In terms of when we'll achieve the rest of the synergies, I'll talk more about that in our Investor Day. We really do want to get through the synergy work as quickly as possible because we want the teams really focusing on building the innovation going forward.

Great. Thank you both.

Thank you, Siti.

Your next question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.

Yeah. Thanks for taking the question. I was wondering if you could help us just understand the $35 million increase to the full-year guide on the revenue outlook from business performance. How much of that was related to EDA versus IP?

We saw strength across the business. The key driver for the strength is the continued AI semiconductor, from a chip point of view, opportunities that our customers are seeing, and therefore translating into chip start or design start. System companies, i.e., the hyperscalers integrating the silicon or expanding into their own chips, the COT model. For us, it's a great opportunity on both ends, on the semiconductor suppliers as well as the hyperscalers, because for any of these designs, you will need EDA software. You need hardware-assisted verification to verify the chip in the context of the software, and IP. For any chip start, you need IP. The strengths were across the portfolio. The other part that is actually proving to be increase in demand and essentialness is the S&A solution. Most of these chips are advanced package. Thermal is essential.

All the physics simulation, like fluid structure, et cetera, are essential. We're seeing the strength across the portfolio.

Thanks for that. I guess, maybe as a follow-up, wondering if you could just provide us any sort of color on, you talked about the engagements that you're seeing on agentic AI and agents. How should we think about just the structure of those contracts? I guess as we maybe look further, how should we think about agentic AI driving EDA's share of R&D spend higher?

The whole AI for EDA started from the journey of reinforcement learning, where we insert AI in every part of our products to a co-pilot or an assistant for the human engineer. We've always thought at some point the workflow will change toward an autonomous set of engineers or agent engineers, and we're seeing it happening right now. What we're witnessing is the traditional EDA product delivery, where the focus was on the user interface, simplifying out-of-the-box results for the human engineer to manage and tame the complexity of the chips that they're designing, to a combination of human engineer and agent engineers running our tools. That's a fantastic opportunity for us because in both cases, you need more of our products in order to deal with the complexity and the new workflow that our customers are trying to evolve to.

The current thinking, and we're in early exploration with customers, is how do we build from the subscription license that our customer has for the human engineers to run our product, to subscription plus consumption for the agents to utilize our product. That's absolutely an upside for our EDA and S&A business as agents become more pervasive in our customers' workflow.

Thank you.

Thank you.

Your next question comes from the line of Vivek Arya from BofA Securities. Please go ahead.

Hi, this is Liam Pharr on the line for Vivek. Thank you so much for taking our questions. I guess just to start, in regards to your largest customer, it sounds like 18A and 14A pipeline is building. Have you seen any of that benefit? If not, how and when does it start to impact your numbers?

The great news for Synopsys is any new foundry or a new technology within the same foundry is a tailwind, in particular for our IP business because you cannot on-ramp a customer to any technology, process technology or foundry without our IP. It starts with the foundation IP, which is the library, et cetera, and the interface IP. When we see or you hear about customers like Intel Foundry, expanding their engagements, we are, of course, aware of these engagements very early on when that target customer's evaluating the technology. To remind you, we get paid once the customer commits to the technology, and they want to go into production. During the eval phase, it's just an eval. Once it goes into production, we get paid for it.

In terms of how are we taking it into account, for FY 2026, we're not accounting or taking into account or in our guidance any upside. As these wins move from an eval into production, we'll absolutely see the upside.

Makes sense. For my follow-up, new investors, new board members, what do you expect to change from pricing or an operational perspective?

You're referring to Jesse and Elliott. Actually, from day one, our interaction with Elliott and in particular in a number of interactions I had with Jesse, there was an immediate alignment on the value creation that Synopsys provide, the essentialness of our assets. There was no debate on that point. We're passionate about the portfolio and the leadership we have. The two other points that they were made, given the value creation and essentialness of the asset, is there an opportunity to monetize further? The third point, can we improve the efficiency, profitability and translating it into a better operating margin for the company? As we've been talking about for at least three quarters now, we see the same thing. You need an inflection point in order to go from that value creation to broader value capture.

We're seeing it on the software side with AI, as I mentioned earlier, with the opportunity to have broader set of users of our technology from human engineer to agentic engineers. On the IP side, with the move from a merchant silicon to COT and the essentialness of the IP portfolio, we absolutely see the opportunity to change the business model and capture more dollar for the value we're delivering. On the operating margin, there's no debate. There's an efficiency as well that we can drive. We're demonstrating it in the last number of quarters. This year, we're raising our operating margin by more than 300 basis points, in terms of delivery to where we finished last year. We see the opportunity to continue on improving on both the top line and bottom line.

Thank you very much.

Thank you.

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Please go ahead.

Great. Thanks for taking my question. Wow, Sassine, not shying away from tough questions. For me, I wanted to ask about your IP business. It seems like it was through the trough, as you might call it. Did you close any business earlier than expected or see some earlier drawdowns? I'm just trying to understand the sequential improvement commentary. Are you upticking on IP here? Maybe that's my first-parter.

Yeah, Jason, the current IP sequential improvement is based on the pipeline that we've had and the closing the engagements that we could see in our forecast with the existing business model that we have with our customers. Where you are seeing a strong confidence and enthusiasm is the engagement around the new business model, in particular in HPC and the AI-based chips with the hyperscalers.

Yeah. Jason, I would just add that as we talked about last time, a part of the sequential is as we move the resources to more fully deploy on HPC, there's title availability that becomes available as we move throughout the back half of the year. We need those titles, obviously, to be available for the customers to pull down.

Okay. Helpful. When we look at the Ansys business, it looks like it's growing in the mid-teens, even when excluding the accounting stuff. Keeping the guidance the same for the year, I think the guidance assumes roughly 10%-ish growth. Help me understand the strength in Ansys and why you're seeing these mid-teens growth levels and what would drive that steep decel down to double digits in the second half or the full year. Thank you.

The one thing I'll start with is our very successful integration of the two companies. As you know, acquiring a company like Ansys with a broad portfolio as well as a go-to-market motion, making sure we're not missing a beat on both the technology integration as well as the go-to-market, I cannot be more thankful and happy to see that integration coming along. From a market dynamics point of view for the portfolio, there is the semiconductor part of Ansys, think of it like the EDA part of Ansys, and that's where the Multiphysics Fusion into the portfolio is taking place. The number of the engagements with customers with that new technology is happening at a rapid pace with very good outcome. Now, the monetization of that is not happening yet because we're in an eval phase with those customers with the new technology.

The part of Ansys that serves industrial, automotive, aerospace, and defense, we're seeing an uptick. The reason we're seeing that uptick is, picture those products that are being designed for the future. They're intelligent systems. They're very complex. The need for more simulation and analysis to reduce the cost as well as increase the fidelity of delivering to that product is the sweet spot of Ansys' portfolio because it's the trusted multiphysics simulation for these markets. That's the tailwind that we are seeing outside of the semiconductor.

Jason, I would just add, there's a mechanical aspect here. As we closed the acquisition of Ansys in July last year, we retooled them to be on our fiscal year, which means that their December, their prior Q4, is actually our Q1, and so you saw outsized growth in Q1, our fiscal Q1. As we go throughout the year, they're re-profiled to ours. We do see strong growth for Ansys, but it's just got a different seasonality to it. We anticipate that that seasonality remains with their strongest quarter always being a Q1 because that traditionally had been their Q4. There's a bit of mechanical nature to things, too.

Okay, perfect. Wonderful. Thank you.

Thank you.

Jason.

Your next question comes from the line of Gary Mobley from Loop Capital. Please go ahead.

Hi, everybody. Thanks for taking my question. Just seeing over the last several quarters when describing chip design activity broadly, you talked about a tale of two cities, where in the analog design community, I think you were hopeful you would see some acceleration in chip design activity, but not quite yet. I think the evidence is there in the marketplace that a lot of these big analog chip companies are seeing a much improved business environment. Therefore, have you seen a resurgence in that customer base from a renewal activity perspective or just in general chip design activity?

Gary, we track chip start very closely. What we are seeing is a chip start increase or a design start increase in anything AI related. In industrial, in automotive, while customers are reporting strength in revenue, there are multiple reasons for that, but the design starts are definitely not growing at the pace as we're seeing for the other cohort. Now, where we're seeing customers' excitement in the analog space is things related to physical AI, because you need sensors, you need actuators, you need the actual analog to interface with the real world and translating it into the digital world. From a design start, it's still fairly muted design start activity in that domain.

Good. Appreciate that color. As my follow-up, I wanted to get a gauge on the monetization of maybe the half dozen or so joint and collaborated products between Synopsys and Ansys as outlined at Converge. When would you expect the first phase of that $400 million in revenue synergies, post-acquisition, and then eventually that $1 billion in revenue synergy?

FY 2027, because we released to limited set of partners the technology. We're expanding it further as we're getting more feedback and input from the early customers that they're evaluating the technology. The key principle here, Gary, the key principle that we are putting guardrails around with the sales organization and the engagement with customers is one plus one must be greater than two. Many of these customers, they have access to Synopsys technology, they have access to Ansys technology. The new Multiphysics Fusion, it's additive to the baseline. One plus one must be greater than two to get access to that technology, and that will start in FY 2027. We did communicate a $400 million in revenue synergy for that base. The base meaning the semiconductor-related multiphysics opportunity. We, I want to say, had a thesis that is accelerating around the whole physical AI, digital twin, et cetera.

We're still on track to what we have committed, and actually the confidence is higher given the early customer feedback that we're receiving.

Thank you, Sassine.

Thank you, Gary.

Your next question comes from the line of Andrew DeGasperi from BNP Paribas. Please go ahead.

Yes. Thanks for taking my question. I wanted to ask one on where you mentioned about the leading HPC provider successfully taping out the next generation of AI accelerator. Just wondering, is this like a first one in terms of what you've seen from a data center customer? How meaningful could this be for you?

If you're referring to a hyperscaler taping out an accelerator, no, it's not the first one. There are, of course, different hyperscalers at different stages of maturity when it comes to their ability to bring their own silicon inside their data centers. In each one of these engagements, Synopsys IP, hardware, EDA, Ansys portfolio is in use. When I say everyone, is everyone. There are none of these COT that does not use the EDA, HAV, IP, and S&A. The point I'm emphasizing, for IP in particular, as these customers are moving to more sophisticated, complex COT, they need to make sure they have a customized IP, the latest IP, that is competitive with what they get from a merchant silicon. That's the opportunity we're seeing that is expanding, and I'm very excited about and confident we'll be able to change the current engagement model.

That's helpful. Shelagh, I just want to ask a question on the organic revenue for the quarter. Just given the noise around the channel, and also the divestitures, we're shaking out somewhere between 3% and 4% ex Ansys. Is that what you're seeing, or are we missing something? Thanks.

Yeah. I think in terms of the channel piece, you saw us, $60 million for the year. That included the $12.5 million that was in Q2, and you can think about that growing through the year as we're building with the channel. We've talked about IP sequentially growing, which you saw from Q1 to Q2, so we'll have sequential growth. Really for the balance of the business, it's really timing of when, because we've got the upfront hardware piece in EDA, so it's really timing between Q3 and Q4 of hardware.

Got it. In referring to Q2 this quarter specifically, is the organic growth accurate?

Oh, in Q2?

Am I wrong?

Yeah. In Q2, it's really the upfront piece. We saw IP grow. We had a good hardware quarter also in Q2, and then you got the specifics on Ansys performance, too. Ansys obviously had the much bigger Q1.

Got it. Thanks.

Your next question comes from the line of Joe Vruwink from Baird. Please go ahead.

Hi. Thanks for the time tonight. I wanted to go back to Multiphysics Fusion. Is the greatest initial applicability really within sign-off? I ask because Synopsys and Ansys already have very high market share in sign-off respectively. I think the opportunity is probably accelerating at the category level, just given what's happening around advanced packaging. That certainly brings a lot more sign-off challenges into design efforts. Is it really a case where the overall pie is starting to grow and the bringing together of your two companies into this new format. Who are going to capitalize on that?

Yeah, Joe, you're absolutely right. The sign-off is always an essential part before a customer commit to the next phase of the workflow. We're fortunate that we have the sign-off leadership across multiple physics as well as timing, power, et cetera. The opportunity and the innovation we're driving is customers are moving more and more towards 3D IC and chiplet in an advanced package. The complexity of beyond electronics into structure, fluid, thermal, taking these factors into account during the design phase. We have the leadership position in 3DIC Compiler and Fusion Compiler, bringing that technology in during the design phase so our customers has a convergent flow, so they're not running into surprises later in the flow, is the value we're adding to customers.

As much as the sign-off piece is important, bringing some of these algorithm and solvers early in the design phase is the value that we'll engage the customer on.

That's great. On backlog, I know this is just really noisy right now, but the quarter-over-quarter decline to $11 billion, is that as expected, and is it relating to just when renewals happen to fall within the fiscal year?

Yeah, you got that right, Joe. There's the normal ebb and flow. We build and then we burn, and it's really based on when renewals are, and it's very much what we expected.

Thank you.

Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Please go ahead.

Thank you. Question for you, Shelagh, first on expenses, I'll follow up with Sassine for the follow-up. Your headcount as of the end of Q2 was down about 7% from the peak at the close in Q3, after Ansys added about 6,000 or more employees. It would seem on the one hand that you have a few points left to go to fully complete the RIF that you announced some time ago. On the other hand, what's interesting is that over the last number of months, there's been an unmistakable sequential uptrend in your open positions for both Synopsys Classic and Ansys Classic. As an example, Synopsys Classic positions are more than four times the number at the end of Q4. Ansys Classic more than double where they were a few months ago.

Maybe talk about what you're thinking of with respect to bringing people in as per those numbers, versus on the other hand, reducing your head count to keep the margins in line. My follow-up.

Yeah. You're right, Jay. We still have some more reductions to go for our 10%. As we had said, we're doing that through the course of the year, so there's still some more actions that are taking place. At the same time, we're also investing in critical areas and making sure that we've got the right technical folks, both in the go-to-market and on the engineering side, to deliver the roadmap that Sassine has been talking about. We are doing a mix of reducing in areas that are not priorities for us while we're investing in key priorities for ourselves, and we're being very disciplined about the roles that we're hiring for. It's really about building the roadmap out and then making sure that we've got the right robust go-to-market team to be able to support that. We are still committed-

Understood.

to the 10%. You're right. We've done a majority of the reductions, what we have left to go is a bit more measured. Nonetheless, we're still investing and making sure that we've got key critical technologies funded properly.

Understood. Thank you. Sassine, the accounting thing with regard to the Ansys channel is interesting, but I am more interested in the operational plans that you have for that channel. In Ansys's last year, it was a more than $600 million business, overwhelmingly not EDA. The first batch of the Multi Fusion cohort is largely about EDA integrations. It probably would have happened anyway. Could you talk about what the product set has to look like beyond this first batch in Multiphysics to really enable you to sell more conjoined products into that Ansys channel beyond just the EDA products? Maybe speak more broadly about what your new CRO has been doing over the last half year.

Yeah. Jay, your observation is correct. The sales organization had the direct sales and the channel. Most of the EDA were handled with direct. Very little was handled in the channel. The semiconductor customers and the customers that they're classic to Synopsys and the Multiphysics Fusion, that will continue on happening primarily through the direct channel. In most of the direct channel is the Synopsys Classic channel, where we have integrated the Ansys EDA into the Synopsys Classic go-to-market team. There's some cross-selling opportunity with some of these customers, and that's what Mike, the CRO, is working on, and ensuring that there is a smooth interface to the customers. So far, actually, I've been very pleased with the way that integration is going from a go-to-market point of view. Then you have the channel partner that Ansys has built over decades, which is truly impressive.

The ability to go after long tail of customers and capture the opportunities is something that the Classic Synopsys would like to leverage in areas of the portfolio that we did not have the similar investment or coverage. We are moving some products from the Classic Synopsys into the channel in order to just do what they do best, engage with customers in a light touch and broadly to sell that portfolio. Mike, as you know, brings in a very strong knowledge of both EDA semiconductor and has a very strong view and experience in the whole system-level design and the whole industrial, automotive, aerospace from just the fact where he came from. He's been very deliberate on architecting the organization to deliver the current as we're building the future opportunities.

Okay. Thank you.

Thank you, Jay.

Your final question comes from the line of Josh Tilton from Wolfe Research, LLC. Please go ahead.

Thanks, guys. I've never sounded so official in my life. I have two. The first one is more of a clarification question. I was just hoping that you can maybe help us unpack some of the strength you saw from a geographic perspective. China was up sequentially, but North America and I think Europe declined. Anything to call out on what kind of drove the dispersion there? I have a follow-up.

No, overall, actually, I'll comment on China first, but then the rest of the regions, there are no surprises per se. Even with China, there isn't much in terms of change from what we've communicated before, where the design start environment in China remains challenged given all the restrictions and the cumulative impact of the restrictions. As we've communicated, we're fairly pragmatic when it comes to our guide in China. As far as the U.S., Europe, et cetera, where we are seeing strength as outlined in our S&A portfolio in number of areas outside of semi, like aerospace and defense, automotive, industrial, and that's happening across the board.

Mm-hmm. On China in particular, that did show strong growth, and that's also the addition of Ansys, because we didn't have Ansys. It was a pretty easy compare versus Q2. We haven't changed anything in terms of our forecast of China for the year. We're continuing to be pragmatic about China.

Makes sense. Maybe just a follow-up and a very high level one and kind of stepping back. I think a lot of investors listening to this call, and even myself, kind of look at Synopsys and see a whole laundry list of reasons as to why we are all hoping and betting and looking to a future where we think growth can be better, whether it's pricing on Multiphysics Fusion, the IP business recovering, agentic opportunities, new hardware. The list is endless. Sassine, when I listened to you in the prepared remarks, it felt like you used the word durability of growth, a lot more than kind of this talk track around improving growth.

I'm just kind of curious, I don't want to ruin what you're going to give us at the Investor Day, but just how do you think about the potential for Synopsys to improve the growth rate from here versus more that durable type of growth you were talking to? Anything you could just help us understand maybe the shape or just how you're thinking about the future growth power of the business, given that whole laundry list of opportunities I kind of just rattled off. That would be great.

Yeah. Thank you, Josh. The part I want to emphasize is there's a beauty about having the durability of the business, but at the same time, there are a number of inflection points, you just, as you said, rattled a number of them. The few I outlined that there is commitment, focus, discipline in changing the monetization capture is around IP, is around EDA and S&A when it comes to the inflection point with AI. We're not expecting the customer to pay 20%, 30% more by just delivering the same. As they're injecting a change in their workflow with agents, with collaborating with humans, and there's a massive increase in demand for licenses to train and influence these agents, we are absolutely expecting that the change in monetization and business model will happen, and we will drive it and we'll make it happen.

That's what I'm really looking forward for the Investor Day to share with you all how are we thinking about it, and this is not something new. We started thinking about it in the last couple of months. We've been talking about it for a number of quarters, that we are determined. Given the value we're delivering and creating, we will capture different value and different business model to drive it home. We'll talk about it more at Investor Day. I know we're out of time. With that, I'll take the opportunity to just really wrap up with my enthusiasm to be the leading provider of engineering solutions from silicon to systems. Our portfolio spanning the EDA, IP, multiphysics simulation are all essential for the AI innovation.

A huge thank you to our global Synopsys team for an amazing quarter, and thanks to our customers, shareholders for your continued commitment. Thank you.

This concludes today's call. Thank you all for attending. You may now disconnect.