Synopsys Inc 2026 Q3 Earnings Call

Good afternoon, everyone. Welcome to Synopsys's third 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.

Reconciliation 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, prepared remarks, and investor day information can be found on our website at www.synopsys.com. With that, I'll turn the call over to Sassine Ghazi.

Good afternoon. Synopsys delivered an outstanding third quarter with revenue, non-GAAP operating margin, and EPS all exceeding the high end of guidance. These results reflect broad-based strength, including outperformance in EDA and Ansys, and continued growth in IP. We are raising our full-year revenue, non-GAAP operating margin, and EPS guidance. In addition, we expect EDA growth to accelerate in Q4 and to deliver double-digit growth for the full year. The key takeaway from Q3 is that the fundamentals across our portfolio are strengthening. EDA is accelerating, design IP has returned to growth, and Ansys is performing strongly while beginning to create new growth opportunities across the combined portfolio. This quarter marked one year since the Ansys acquisition close, and in Q3, we launched our first joint Synopsys and Ansys solutions, Multiphysics Fusion. I want to recognize our global team for executing with focus and agility to integrate our world-class capabilities.

The combination has strengthened our competitive position, expanded our opportunity, and enabled us to deliver differentiated solutions addressing the physics challenges of modern chip design. Industry trends are aligned to our strategy and our strengths as the leading provider of engineering solutions from silicon to systems. Unprecedented design complexity driven by the demands of AI is fueling the need for the IP and design solutions necessary to deliver next-generation AI compute, infrastructure, and physical AI systems. These trends are evident in our Q3 results. Starting with design automation, which achieved healthy growth in Q3, underpinned by strength in EDA, including record hardware revenue. We expect this momentum to continue, with EDA growth accelerating to double digits in Q4 and for the full year. Design activity is highest among AI and high-performance compute customers, developing increasingly specialized chips with multi-die architectures, more complex packaging, and system requirements.

These are all areas where Synopsys leads. AMD's recently launched Instinct MI455X GPU is a good example. To deliver this highly sophisticated new product series, AMD leveraged Synopsys's 3DIC Compiler, the industry's only exploration to sign-off platform for multi-die and advanced package co-design and optimization. The complex software and system requirements of AI compute also drive demand for our hardware-assisted verification solutions. We secured 12 new and 66 repeat HAV customer wins in the quarter. As I mentioned, the launch of Multiphysics Fusion was a major EDA milestone in Q3 and creates a new growth opportunity for Synopsys. Multiphysics Fusion combines Synopsys and Ansys technology in the industry's only solution with thermal analysis fully integrated into the chip design flow. Customers, including NVIDIA, Cisco, MediaTek, and Samsung Foundry, have validated up to 10x faster design closure and 3x faster runtime.

This drives greater value for our customers and also for our products. We expect these add-on capabilities to begin contributing to EDA growth in 2027. Agentic AI is another growth vector for Synopsys, and we demonstrated strong progress in Q3. At the DAC conference with NVIDIA, we showcased the fully autonomous long-running design verification agent that can orchestrate the entire chip verification cycle and deliver up to 50x faster time to validated RTL while achieving 20% additional coverage improvement. With Microsoft and AMD, we introduced the first autonomous EDA workflows on Microsoft Discovery that can automate debug, implementation, and design closure. Early engagements show up to 40% reduction in debug cycle time, saving weeks of engineering effort while improving design quality. We're seeing strong customer interest in our agentic AI platform with more than 30 active customer engagements underway.

Early feedback has made clear that as these agents take on more engineering work, they orchestrate our underlying EDA tools at a significantly higher rate. That allows customers to run more design and verification workloads, creating an incremental growth opportunity for Synopsys as we capture our fair share of the value that these agentic workflows and foundational tools provide for our customers. Turning to Ansys. One year into our integration, Ansys continues to see strong demand. From semis to aerospace to industrial and more, companies are embracing digital engineering. Across industries, Ansys simulation is accelerating innovation while reducing development risk and cost. For example, a leading automaker is using Ansys SimAI to achieve roughly 98% prediction accuracy and move crash analysis to near real-time. A leading heavy equipment manufacturer achieved more than 10x faster motor design.

We're applying AI to extend our S&A leadership and further automate the simulation of complex systems. This includes expanding our portfolio of GPU-accelerated Ansys applications. In Q3, our largest Ansys deal was for GPU-accelerated Ansys CFD to support a company-wide digital twin at a multinational electronics component maker. Turning to Design IP, which grew sequentially and year-over-year on broad AI infrastructure demand. As AI drives demand for higher bandwidth, faster connectivity, and more complex system architectures, our interface, memory, and die-to-die IP portfolio sits at the center of the stack, and our Q3 results showed it. We won more than 95% of PCIe 7.0 opportunities, including a subsystem win at the marquee enterprise storage customer. In LPDDR6, silicon proven across multiple nodes and foundries, we've secured 25 design wins year to date.

Our die-to-die business is on pace to double year over year, and we now have more than 100 cumulative design wins. The industry continues to rely on Synopsys for silicon-proven quality and unrivaled scale. Our standards-based build once sell many IP model remains foundational to our growth strategy. We will continue to invest and grow this business, what I call Factory One, which benefits from strong chip start activity and solid traction across industries. For example, in automotive, we have sustained a 90% plus design win rate for three consecutive quarters as ADAS platforms refresh onto 5 and 3 nanometer. In mobile consumer and Edge AI, our USB IP has now crossed $2 billion in lifetime bookings with tier 1 design wins already moving to the leading edge node.

As AI extends beyond digital infrastructure into physical products, demand for silicon will continue to expand, providing a tailwind for our standards-based IP business. The higher growth opportunity in IP lies with a growing set of AI customers who are asking for deeper collaboration and IP solutions optimized to their specific workloads and architectures. To meet that demand, we are expanding into differentiated IP subsystems and enabling custom silicon solutions. Customers ranging from hyperscalers, ASIC vendors, foundries, and classic semiconductors want to partner with Synopsys to accelerate their chip development efforts and leverage our IP and engineering expertise to build increasingly differentiated custom silicon. This is our Factory Two model for customized IP. It moves us up the value chain from licensing alone to licensing plus royalties and positions us to capture the fast-growing custom silicon opportunity. This is a large focus and we are making strong progress.

We are in active discussions with multiple Factory 2 customers and I look forward to sharing more at Investor Day. To summarize, I want to thank the entire Synopsys team for their continued focus, innovation and execution. Q3 reinforced the strength of our strategy and our confidence in a strong finish to the year. AI is driving demand for advanced silicon, system-level engineering and AI-powered design. Our leadership portfolio positions us to capture a greater share of R&D investment across industries. We remain focused on translating our technology leadership into sustainable growth and margin expansion. Now over to Sheila. Thank you, Sassine.

We delivered an outstanding Q3, achieving revenue of $2.477 billion, non-GAAP operating margin of 41.6% and non-GAAP EPS of $3.91, all beating the high end of our guidance range. With broad-based strength across the business, the revenue outperformance was driven by EDA as well as strength in the Ansys business. Backlog remains very strong at $10.9 billion, modestly down quarter over quarter due to the divestiture of the Processor IP Solutions business that closed in Q3. With the strength in Q3, strong cash flow generation and continued momentum into Q4, we are raising our full year revenue, non-GAAP operating margin, EPS and cash flow guidance. I will now review our third quarter results. All comparisons are year over year unless otherwise stated. We generated total revenue of $2.477 billion, up approximately 42%, including Ansys revenue of approximately $711 million.

As Sassine noted, one year into the combination, Ansys continues to perform strongly. We are also ahead of the schedule on the cost synergy commitments we made at close and have repaid the term loans earlier than planned. Total GAAP costs and expenses were $2.119 billion with GAAP earnings per share of $2.84. Q3 GAAP EPS includes a gain associated with the sale of the Processor IP Solutions business that closed in the quarter. Total non-GAAP costs and expenses were $1.446 billion on the lower end of our guided range as we continue to improve operational efficiency and deliver Ansys cost synergies ahead of schedule, resulting in non-GAAP operating margin of 41.6%. Non-GAAP earnings per share were $3.91, ahead of our guidance, underscoring our strong operational execution in the quarter. Now onto our segments. Design automation segment revenue was approximately $2 billion.

As a reminder, this excludes the Optical Solutions Group, which was divested in Q4 2025. Within the design automation segment, Q3 EDA revenue increased 8.5% year-over-year, reflecting robust EDA software performance and another record quarter for hardware-assisted verification solutions. Design automation adjusted operating margin was 45.2%. The design IP segment returned to growth with revenue of $474 million, up approximately 11% year-on-year. Consistent with our outlook, this represents continued sequential growth in the IP segment as we have repositioned the portfolio to focus on the highest value opportunities. Design IP adjusted operating margin was 26.5%. Turning to cash, free cash flow was $746 million in Q3, and we ended the quarter with cash and short-term investments of $3.6 billion. Total debt at the end of Q3 was approximately $10 billion. Now to guidance for the full year.