Drill Down Earnings, Ep. 471: Synopsys Q3 earnings – ($SNPS) – A Deep Dive with Cory Johnson

Cory Johnson (0:04)

Welcome to Drill Down News, we have quarterly results up from Synopsys, a great quarter from an important company, one of the 50 most important companies in technology says me, Cory Johnson, Chief Market Strategist of Epistrophy Capital Research. And I want to take some time to look at this so important company. Synopsys builds a software that every chip gets designed and verified with.

After swallowing a company called Ansys about a year ago, a little over a year ago, they also simulate how a finish machine handles heat, power, stress, all using software. Nobody ships anything in AI, any kind of AI accelerator without paying Synopsys first. It is the engine, the power is the engines, the power of AI. Q3 numbers were better than Wall Street's expectations. They did 2.487 billion in revenue, $3.93 in gap earnings per share. But while that was a beat, we can be smarter about these companies. These are just numbers. Let's talk about what this company actually did in the quarter. They did this big acquisition of Ansys, now a year old in the books, and it's going well. We can see it from the numbers here. These things don't always go well.

Indeed, it can be a CEO killer, and that's not the case here. Sassine Ghazi is still at the helm here because the acquisition is going well. If he'd screwed this up, he wouldn't still be there. But 42% revenue growth on a year-over-year basis is that acquisition is fueling that growth. But when you look beyond those numbers, you see really nice numbers. ANSYS doing $711 million in the quarter, and their margins are really getting better. While they're still absorbing some costs, there's still some restructuring costs happening. Restructuring costs were quite low, a lot lower this quarter. But their gap EPS of $2.84 a share, and I mentioned their adjusted EPS of $3.91, that was shared. Well, there was a gain in that from selling a big part of their IP business to global foundries. The rest of their IP business still doing really well. And their margins, as I mentioned, getting better profit margins, bouncing to 14% in the most recent quarter.

Operating leverage is happening there at Synopsys, which is what you want, of course, with any company. Now, what do they sell? So they sell design automation tools, software to design stuff, whether it's chips or the things that go around these chips and to measure how these chips are going to operate in the real world once they're designed. And then they also sell some IP, so they have finished pieces of IP. I always, when I'm doing these reports, call them like Legos of big chunks of IP that can help a designer move quickly to finish a product. And we see all these products happening so fast. The design of Vera Rubin and NVIDIA happening so quickly on the heels of Grace Blackwell, chips that changed the world only a few years ago. The reason they can do it so quickly is because the software coming from Synopsys is so much better than it used to be. And you see the results of the chip makers as well as in Synopsys. So their design automation business growing a 53% ANSYS giving that a boost and a really powerful quarter for that business. But their design IP business, which had been faltering, and there were some concerns. Let's talk about it for a second. So, there were concerns that the Sasspocalypse, right, that the software, some kind of software out there, is going to be replaced by Claude and Claude Code, by the products coming out of OpenAI, Codex and so on. I think that's true. But, and there was worry that maybe that's what was happening to the design IP business within Synopsys. And indeed, the sale of some of that business to global foundries maybe made you wonder, geez, are they getting rid of this thing too? But no, the design IP business is picking up. They told us it was going to get better. It is getting better.

Sequential growth, 11% growth on a year over year basis as well for the design IP business. That's powerful stuff here.

And the acquisition of ANSYS, again, adding a new leg to the growth at Synopsys and what Synopsys is right now. You had to look, they raise their guidance in revenues, they raise their guidance in margin, they raise their guidance in earnings per share.

It was hard to find any bad news in this quarter. The market loved it. We'll talk about that in a second. The only thing may be backlog decelerating, backlog down 1% sequentially, well, revenues are up 9% sequentially, but generally a very strong quarter. Synopsys talked in the conference call about how AMD designed their Instinct MI-455X while using the compilers coming from Synopsys and how their multi-physics function was used. Nvidia, Cisco, MediaTek, Samsung, Foundry, all saying they saw 10x faster design closure because they were using the latest tools from Synopsys here. So how did the market like these numbers? The market, after one of the worst days in years for the stock a year ago, when they announced a quarter that the market didn't like, the market loved these results. The stock's up 13% in trading now. The stock is still down 25% in the last year, but big recovery after these results came out. The question was posed to CEO Sassine Ghazi about, you know, how much could AI disrupt their commercial electronic design automation software? Could you do these things with ClawdCode? Is it a risk? If not, why? Here's what Sassine Ghazi had to say.