Ladies and gentlemen, welcome to the Synopsis Earnings Conference Call for the third quarter, fiscal year 2025. At this time, all participants are in a 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 1 on your telephone keypad. To remove yourself from that queue, it is again star 1.

If you should 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 tishar jane investor relations please go ahead good afternoon everyone with us today are sasim ghazi president and ceo of synopsis and sheila glazer 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. Pursuant to the close of the ANSYS acquisition on July 17th, our results include roughly two weeks of ANSYS financials. As shown in today's financial statements, the vast majority of ANSYS revenue appears under the simulation and analysis product group, with the remainder included under EDA. In addition, we will refer to certain non-GAAP financial measures during this 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 8K that we released earlier today. All of these items, plus the most recent investor presentation, are 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 Sassim Ghazi. Good afternoon.

Q3 was a transformational milestone quarter for Synopsys. Against an unprecedented and challenging geopolitical backdrop, we closed the NSYS acquisition, expanding our revenue, our customer base, and our long-term opportunity. We delivered third-quarter revenue of $1.74 billion and non-GAAP EPS of $3.39. Our results were primarily impacted by underperformance in the IP business as we had the expectation of deals that did not materialize, driven largely by the following three factors. One, new export restrictions disrupted design starts in China, compounding China weakness. Two, challenges at a major foundry customer are also having a sizable impact on the year. And finally, we made certain roadmap and resource decisions that did not yield their intended results. results. We are actively pivoting our IP resources and roadmap towards the highest growth opportunities, which I'll discuss in more detail. Looking ahead, we believe we have de-risked our forecast knowing that transformation takes time and the external headwinds I cited will continue. We are taking a more cautious view of Q4 while still expecting to deliver a record revenue year. Let me provide more color on our Q3 execution and the actions we're taking to accelerate our strategy before Sheila covers the financials in more detail. Zooming out, AI continues to drive unprecedented investment in infrastructure and R&D. Demand for high-performance computing and AI applications continues, while semiconductor demand in markets like industrial and automotive remains subdued. Despite the uncertainties and industry dynamics that we must navigate, I remain very optimistic about Synopsys' future. The increasing complexity, cost, and time-to-market pressure of designing and delivering AI-powered systems is a trend that persists across industries and underpins our opportunity. Now more than ever, we believe Synopsys will be a mission-critical partner in addressing these challenges. adding ensys gold standard simulation and analysis solutions to our portfolio dramatically expands our long-term growth opportunity we are now not only the eda leader we are the global leader in engineering solutions from silicon to systems this acquisition marks a significant milestone for not only Synopsys, but also our customers and the industry. As products evolve into more sophisticated intelligent systems, their designs grow increasingly complex while development cycles continue to accelerate. The rise of physical AI underscores the importance of our combined expertise. R&D teams must not only optimize product design for performance and efficiency, but also consider the real-world interactions of these products. That's why, for example, we're embedding NVIDIA Omniverse technology into our ANSYS simulation solutions, making it easier to develop, train, test, and validate autonomous systems with greater speed and confidence. Not only can we deliver new innovation, with Ensys now part of Synopsys, we have diversified our portfolio and our global customer base. Together, we will maximize the capabilities of engineering teams across industries, from semiconductor to automotive, industrial, aerospace, and beyond, enabling them all to rapidly innovate AI-powered products. Let's move on to business highlights. Design automation revenue, inclusive of Ansys products, was up 23% year-over-year, led by strength in hardware as the complexity of designing silicon for ai workloads drives demand for synopsis powerful emulation and prototyping solutions in q3 we achieved multiple competitive wins with leading hyperscalers and shipped record zebu server 5 and haps 200 zebu 200 units eda continues to demonstrate resiliency. Our Q3 results reinforce our leadership in next-generation chip design. Synopsys continues to win competitive bids for full-flow digital implementations, including a multi-year commitment with a leading AI customer. Synopsys sign-off and extraction platforms also continue to set the industry standard with broader customer deployments and successful tape-outs on advanced designs. Synopsys' leading AI capabilities are a key differentiator. Today, roughly 20 customers are broadly piloting Synopsys.ai gen AI-powered capabilities. These capabilities paved the way for agent engineer technology. We believe the evolution of AI from a helper to a doer will truly transform engineering workflows. Multi-die momentum also continued in Q3. We enabled multiple successful multi-die tape outs for leading AI semi-companies. Customers are enthusiastic about the promise of integrating our semiconductor timing and power sign-off capabilities with ANSYS Gold Standard of Thermal Sign-Off, and we expect to deliver our first fully integrated solution in the first half of next year. i'll turn now to simulation and analysis products which empower users to build and test products virtually these solutions represent the largest portion of our ensys acquisition and performed in line with our expectations for the quarter as is typically the case the largest contributors were in the high-tech aerospace and automotive verticals. In Q3, we released ANSYS 2025 R2, providing customers access to groundbreaking advancements in AI-driven simulation, GPU acceleration, system-level modeling, and cloud computing. These newly released products extend Synopsys AI leadership into simulation and analysis to help customers more efficiently develop and deliver their innovations. Turning to design IP, which was down 8% year over year due to the headwinds I previously mentioned. Again, we need to pivot our IP resources and roadmap to the highest growth opportunities. These changes are already underway. Let me give some context. Zooming out, evolving data center architectures, particularly those focused on AI, are accelerating the demand for faster data movement. This trend is driving strong demand for high-speed protocol IP and solutions that enable both scaling up and scaling out of large scale systems at the same time the semiconductor and ip landscape is undergoing profound change what was once a business rooted in individual ip licensing is rapidly evolving the industry is increasingly requiring more sophisticated subsystems and chiplet based solutions to combat complexity and accelerate time to market in summary our high performance silicon proven ip portfolio positions us as the leader in the fast-growing interface ip market we support a broad spectrum of applications including HPC, Edge AI, automotive, mobile, and consumer. By retargeting our resources and portfolio toward higher value solutions, we are further strengthening our leadership in advanced interface and foundation IP. Before handing over to Sheila, I want to address the company-wide steps we're taking to achieve greater scale and efficiency to accelerate our silicon to systems strategy and drive long-term growth synopsis transformation which began with the divestiture of the software integrity group followed by our strategic acquisition of ansys continues Specifically, we are conducting a strategic portfolio review and will be taking actions to focus our investments and our execution on the highest growth opportunities. We look forward to delivering with ANSYS a differentiated design solutions roadmap and remain firmly committed to realizing the projected synergies of the merger. In addition, our enterprise-wide initiative to develop and deploy custom-gen AI is boosting productivity. We will continue harnessing AI efficiencies to optimize our cost structure. Taken together, we expect to undertake related actions starting soon that will reduce our global headcount roughly 10% by the end of fiscal year 2026. A few closing thoughts. Synopsys is transforming. With NSYS, we are now the leader in engineering solutions from silicon to systems. We've expanded our opportunity, broadened our portfolio, and increased the resiliency of our business. We remain focused on maintaining our leadership position while pioneering new solutions that will shape the next wave of innovation. Near-term, we are deeply committed to prioritizing our IP execution and improving our efficiency to scale the business, accelerate our strategy, and capitalize on the highest growth opportunities. Thank you to our employees, customers, and partners for your continued commitment. Engineering is undergoing unprecedented transformation, and Synopsys is seizing the opportunity to re-engineer engineering. Now, over to Sheila.

Thank you, Sasin. Q3 revenue came in at $1.74 billion, non-GAAP operating margin at 38.5% and non-GAAP EPS at $3.39. Backlog came in at $10.1 billion, including ANSYS, underscoring the resilience of our business. Our results were impacted by the underperformance in the IP business due to the headwinds Sucine outlined. Tailwinds from a strong quarter in our design automation segment and the close of the ANSYS acquisition partially offset these headwinds. In light of these headwinds and tailwinds, we are taking a conservative view on Q4 and updating our full year 2025 targets for revenue, operating margin, EPS, and free cash flow. I'll now review our third quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.74 billion, up 14%, with strong growth in design automation. Regionally, we saw strength in Europe and North America, and despite sequential improvement in China, headwinds persist. Total GAAP cost and expenses were $1.57 billion and total non-GAAP cost and expenses were $1.07 billion, resulting in non-GAAP operating margin of 38.5%. GAAP earnings per share were $1.50 and non-GAAP earnings per share were $3.39. Earnings included the impact of lower cash on our balance sheet and the additional $4.3 billion term loan used to fund a portion of the cash consideration and expenses associated with the ANSYS acquisition. Now, on to our segments. Design automation segment revenue was $1.31 billion, up 23%, with strong performance from our hardware business. Design automation adjusted operating margin was 44.5%. Design IP segment revenue was $428 million, down 8%. As mentioned before, our IP business faced several headwinds. In response, we are taking a more conservative view of Q4, and we are realigning our IP resources to the highest growth opportunities and improving our execution. Third quarter design IP adjusted operating margin was 20.1% due to the lower than expected revenue and the investments we are making in the IP roadmap. Moving to cash. Free cash flow was approximately $632 million. We ended the quarter with cash and short-term investments of $2.6 billion and debt of $14.3 billion. Now to guidance, which has been updated to include ANSYS as well as factoring the continuation of the headwinds previously discussed. For fiscal year 2025, the full year targets are revenue of 7.03 to 7.06 billion dollars. Total GAAP cost and expenses between 6.08 and 6.10 billion dollars. Total non-GAAP cost and expenses between 4.43 and 4.44 billion dollars. Non-GAAP tax rate of 16%. Gap earnings of $5.03 to $5.16 per share. Non-gap earnings of $12.76 to $12.80 per share. Cash flow from operations of approximately $1.13 billion and free cash flow of approximately $950 million, lower than prior expectations due to lower revenue and the interest impact of cash utilization and additional debt for the ANSIS acquisition. Now to targets for the fourth quarter. Revenue between $2.23 and $2.26 billion. Total gap cost and expenses between $2.12 and $2.14 billion. Total non-gap cost and expenses between $1.44 and $1.45 billion. dollars, gap earnings of negative 27 cents to negative 16 cents per share, and non-gap earnings of two dollars and 76 cents to two dollars and 80 cents per share. Our price release and financial supplement include additional targets and gap to non-gap reconciliations. With the ANSYS acquisition now closed, we remain confident in achieving the committed synergies of the merger. This is despite the delay in completing the follow-on divestitures of the Optical Solutions Group and Power Artist Business, which is elongating the full integration of ANSYS as we work to obtain a final regulatory approval of the buyer. In conclusion, this was a milestone quarter for Synopsys. We are clear-eyed about the challenges we face and the actions we must take to align our portfolio to the highest growth opportunities, optimize our cost structure to drive greater scale and efficiency, which will include reducing our global headcount roughly 10% by the end of fiscal 2026, and importantly, to extend our leadership position in engineering solutions from silicon to systems, delivering a differentiated design solutions roadmap with ANSYS. The team is laser-focused on executing a strong finish to the year and delivering resilient long-term growth for our shareholders. With that, I'll turn it over to the operator for questions. Thank you.

Thank you. To ask a question, please press star 1 on your telephone keypad. Please ensure you are not on mute when called upon. 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'll take as many as time permits. Again, it is star one to ask a question. Your first question comes from Ruben Roy of Stiefel. Your line is open.

Thank you very much. Cacine, I'm wondering if you could maybe spend a few minutes just walking through the three challenges around the IP business, Just kind of thinking through export restrictions and design charts in China and then the foundry customer versus the roadmap and, you know, the impact of that. It seems like that's potentially a bigger issue that could be a headwind longer term. And maybe you could just kind of describe Q3 and, you know, kind of what the impacts were across each of those three issues. And then as you think about next year and resource reallocation, et cetera, will this require acceleration in things like M&A, or are you kind of positioned to address the needs of your customers with what you're working on organically, and how soon can you turn this around on what sounds to be the most important part of those three headwinds? Thank you.

Yeah, thank you, Ruben, for the question. You're right. There are three factors that we mentioned that impacted our IP performance for the year. The first one is the China BIS. Even though the restriction was only limited to six weeks, the impact from our customer behavior lasted definitely longer than the six weeks restriction. Customers were questioning whether or not they will invest in a multi-year commitment with Synopsys. How broad will they make that investment? If they start an investment in a chip, can they finish it? Can they tape it out? So I don't want us to assume that the impact was limited to the restriction period, which was six weeks. The other factor, which is the foundry customer impact, where we have made a significant investment in building out our IP for that foundry customer with an expectation that there will be a return in the second half of 25. And that did not materialize for a number of reasons out of our control. their market-driven reason and customer-related reason for that. So when we look at the impact for the quarter and as we de-risk our Q4, those two primary reasons were what created the impact for the revenue during Q3 and as we're anticipating the Q4 and continuation of these factors. As for the last point, which is the roadmap and resource allocation, it's somewhat related to bullet number two. As we make investments and as the leader in IP, we have responsibility as part of the market position we have. We're not a boutique IP. We have the broadest IP portfolio. and our customers expect us to serve various needs and requirements that they have. So some of the decisions we made were investing, for example, in edge AI opportunities for IP that we put resources on delivering to these opportunities. And it came at some roadmap cost on which foundry to make that investment. and for data center delay in some of our IP titles. That is something we know exactly what we need to do, and we're already underway to address them and to give you some color what we are doing. Within Q3, we have merged two engineering teams. So we have our IP team that builds and delivers on what we call standalone IP, and the market is shifting towards subsystem and potentially in the future chiplet delivery. And we had a separate team that works on customization, which we call the system solution group. We merged these two groups together in order to accelerate our ability to deliver to the opportunities that are in front of us. So it's all about scaling and we are addressing the scaling opportunities And I have no doubt that we will see our ability to pivot these resources. And these are things you cannot pivot within a 90-day window. But as we look at the roadmap and the priority of the roadmap, we will commit and deliver to these items.

Thank you for that detail, Susie. And if I could segue then into a question for Sheila on the operating margin. with IP coming down and ANSYS, you know, sort of coming into the model here. If I've done my math correctly, it looks like, Sheila, the operating margin is going to net out to a little less than 36% for Q4. And, you know, just wondering if you can comment on, you know, kind of the decline in operating margins and maybe how you bridge to the longer-term target in the mid-40s.

Yeah, thanks for the question, Ruben. It's really the impact of the IP business and the downside on revenue of the IP business. As Sasin talked about, that's a very resource-intensive business. So as the revenue headwinds that we talked about are hitting the business, we're realigning the resources, but we want to continue to invest in that roadmap for the long term. And so that's really the impact. I would say it's a lesser impact. Obviously, ANSYS is fully integrated. ANSYS came with a higher operating margin, so the impact is really the IP. And our commitment to the long-term operating margin in the mid-40s is still intact. So our short-term headwinds that we're managing through are really short-term headwinds, but there's no change in our long-term commitment.

Got it. Thank you, Sheila. Thank you, Ruben. Thank you, Ruben.

The next question comes from Lee Simpson of Morgan Stanley. Your line is open.

Great. Thanks for squeezing me in. Maybe I'll start again with the design IP. Clearly, the weakness here has come as quite a surprise for everyone. We haven't seen this elsewhere. It does look, maybe on simplistic mathematics, that it's around about $120 million that you're weaker versus the expectation anyway for design IP. I think you've called out the two elements, China and, of course, the family customer as primary here. So I'm just trying to understand how much of a heads up did you have on this weakness, this design IP slowdown? And maybe how much of this is permanent? I mean, does the China business come back, do you think? Does the family business evolve into something else? And really just trying to get a color on how permanent this this might actually be. Thanks.

Thank you, Lee, for the question. I want to start with that we had an aggressive plan in IP for FY25 after an outsized performance the year prior where we grew that IP business by 24% and the year before that by 17%. And there were some large agreements we were not able to get during this, I want to call it hyper and intense period of our company's history. I know I communicated to some of you that during Q3, I was in China six times in order to work on the transformative acquisition that we got to a positive outcome, of course. And it was the most important thing we had to do, and we got it done, and we're very excited about it. In the process, there were signals that were missed in the forecast as to the magnitude of the factors I described, the two factors that you outlined. So I don't believe that these factors are just IQ3 impact. We will continue on de-risking our forecast and anticipate that we will have a transitional and muted year in IP as we look ahead into FY26. Now, in December, we'll provide more color, but the overall FY26 components, and we feel strongly about the other segments of the business. But as it relates to IP and these two factors regarding China and the conditions in China. I don't believe this is a Q3 only challenge. As it relates to the foundry customer, it all depends on where do they go with the technology that we already developed the IP for and what's the opportunity to sell that IP after we developed it. Now, is it permanent? It depends what you mean by permanent and at what level of the IP business. We have an incredible market position in IP. The demand actually is much higher than our capacity to deliver. One of the challenges that I described as roadmap, resource allocation, we have a massive team working on IP, yet we cannot capture all the opportunities ahead. I mentioned some of the actions we took. There will be more deeper look in terms of priority, as well as our ability to scale by leveraging technology like a new methodology to be able for our team to deliver the IP faster, higher quality, et cetera, et cetera. So the opportunity in IP is absolutely strong, but there will be a transitional period due to the factors I mentioned.

Gotcha. And maybe just one further clarification on the roadmap and resourcing. I'm just trying to understand, is there a specific area that we should be thinking about here? It sounds to my ears, and I could be wrong, obviously, that this is mainly foundational IP that you're realigning for, because you did mention interface technology, but didn't suggest that that was where you're realigning, that almost seemed like where you were doubling down. Have I got that the right way around?

Let me add more color, Lee, because it's not quite. So today, if you look at the synopsis portfolio for IP, we serve multiple markets, HPC, Edge AI, automotive, mobile, consumer, and we serve that portfolio for multiple foundries, not only one foundry. And as I mentioned to Ruben when he asked the question, we have and our customer has expectations and we have the responsibility given that portfolio breadth that we have to serve the multiple foundries for those multiple markets in both interface IP and foundation IP. There's more and more customization in particular for interface IP. And these customizations are moving from an off-the-shelf to a more subsystem delivery, which is it takes longer, it takes more resources, and our ability to change the business model or the need to change the business model is an ongoing dialogue with our customers. because as they're expecting us to do more work than just off-the-shelf IP, there's an opportunity for higher monetization. And that's what we're pivoting our resources, our methodology, our approach from an architecture point of view to serve that market for the interface IP that I talked about.

Great, that's very clear. Thanks so much.

Thank you, Lee.

Your next question comes from Charles Shi with Needham & Company. Your line is open.

Yeah, good afternoon. I do want to follow up on the pivoting on the IP side of the business. It does sound like other than China and maybe the foundry customer challenges, Synopsys is really going through a transition in the IP business model. I think one thing really caught my attention, your prior remarks as I've seen, was about the higher level of customization, maybe more migration into subsystems, it seems like it's something your IP, not necessarily a competitor, but another peer of your IP in the IP business has been going through over the past couple of years. I wonder how should we rethink about the long-term IP operating profitability from that perspective, because we do get the idea why this is moving to that direction, but are you able to maintain or the same kind of IP long-term operating profitability targets going forward? I wonder if you can provide some strategic thoughts on that direction. Thanks.

Yeah, thank you, Charles. You know, the pivot from our customers in terms of expectation from off-the-shelf IP to customization is not new. But what is new is the magnitude in which the number of customers are expecting for us to deliver, instead of discrete IP, to deliver a number of IP that we glue them together with some customization logic and test logic, et cetera, and validate and ensure that it hits the mark with the right quality. Each one of those engagements historically had two components. It had an NRE component and a use fee component. Given the demand for that customization, we need to ensure that we are capturing the right value for the impact we're delivering. Therefore, it's not something that we are, I want to say, happy to just say it's an NRE plus a use fee. There has to be another element in order for us to put priority for these opportunities and deliver too. And that's what discussions we're having with a number of these customers. And as you look ahead, if you fast forward two plus years from now, will we start delivering from a discrete IP to a subsystem to possibly chiplet? What level of chiplet? Is it a soft chiplet? Is it a hardened chiplet, meaning GDS2? Is it all the way down to a known good die with a partner? These are all questions and expectations our customers are asking us, given we are the leader in that space. And we have a number of engagements with a few strategic partners. We are absolutely assessing, as this market is pivoting, and we're pivoting with it, what is the business model to maintain the right profitability in order to capture the opportunity and growth that we have?

Thanks. Maybe I'll follow up a short-term question. 10.1 billion backlog for the quarter exiting July. How much of that was ANSYS backlog and how much of that was legacy synopsis backlog?

Hi, Charles.

We're going to be breaking that out, but we have strength across the business, so we continue to see strength in our core business. We saw strength in ANSYS, and that gives us a lot of confidence in the long-term growth of the business, $10.1 billion. Thanks for the question, Charles.

The next question comes from Joe Cuadrochi with Wells Fargo. Your line is open.

Yeah, thanks for taking the questions. Maybe just to follow up on that last kind of train of thought on the IT business, I mean, are we to think about, you know, you looking at different business models in terms of royalties and things of that nature, similar to some of your competitors. And I guess, can you talk about just, you know, if your customers, I think you talked about them, you know, wanting to move very quickly on these subsystems and, you know, IP, I guess, can you talk about just time to market in the competition there?

Yeah, Joe, the key is the IP business is scaling. And Synopsys, we've been fortunate. We've been in that business for 26 years, and we do have the investment and the scale. But given the fragmentation, I want to call it, based on our customer needs and requirements that are becoming more customized, no matter how much scale you have, you need to put priority. and based on the priority, the right business model in order to capture the right value for what we are delivering to those customers. And some of the discussions we're having with our customers is a combination that does include some sort of a royalty. We're in fairly early phase in this discussion and those are very much related to subsystem type of delivery to our customers. So I hope that clarifies it, Joe, what I mean by we need to look at something different than an NRE plus a use fee, given that customization opportunity.

Yeah, appreciate the detail. And then as a follow-up for Sheila, how should we think about just on the go-forward basis, like what's the right level of cash balance that you need day-to-day as we think about just the debt paydown and the pace?

Sure. So in terms of our day-to-day cash balance, we have a minimum that we hold just to ensure that, you know, we're properly able to invest in the business. We're well above that with the cash balance we have. This year, we'll make interest payments on the debt, and we anticipate being able to start to pay some of the principal next year on the term loans. Those two term loans are due in 27 in the 28 timeframe. So, we're well above our minimum to be able to manage the business. And the one other cash info that we'll have once we, it was in my prepared remarks, but once we complete the approval with SAMR of the buyer of OSG Empower Artists, we'll have that cash info from both of those. Thanks for the question.

Your next question comes from Citi Panigrahi with Mizuho. Your line is open.

Thank you. I want to switch to the ANSYS acquisition. So it's been now ANSYS more than one and a half months after the close. So what are the puts and takes in terms of what you expected at the beginning last year when you talked about versus after you're having? What are the surprises that you have seen? And specifically, I think you talked about the revenue synergy, you still reiterated, but going back to the ANSYS growth, if we look at S4 filing there, they were talking about low to mid-10s over the next few years. So what are the potential drivers for that ANSYS to grow about that 10% market growth? Any color would be helpful.

Yeah, thank you, CT, for the question. As you can imagine, we are incredibly thrilled and enthusiastic about the opportunities ahead. And the market is speaking, actually, when you look at the moves that are happening in the market to grab assets in order to bring in the solution that is required for physical AI, to have a digital twin of a system. And in order to have it on time with high quality and low cost, you need simulation, you need virtualization of these systems. And in order to have it with high quality, you need a sign-off product at multiple level of physics in order to make it happen. Now, the opportunity is not waiting for the physical AI when it takes place and it happens. There's an immediate opportunity, which is 3DIC. With 3DIC, there's a thermal need, there's a structure need, there's a fluid need, and ANSYS is bringing a great position into the Synopsys portfolio and integrating this technology during the semiconductor and chip design phase. So when you're building that multi-die system, you are confident that you're signing off with the right technology in order to achieve the right outcome. So from surprises, there are no surprises actually except pleasant ones, given we know the team very well, a lot of enthusiasm and energy and excitement from the teams. As Sheila mentioned in her remarks, there's a final stage that we're trying to close with SAMR as soon as possible, which is the divestiture scope has been approved, but the buyer is in the process of approval. So we are taking some measures to keep the business and the integrity of the optical and power artists separate. But once that is behind us, the integration is full force ahead to deliver on these solutions.

And thanks. And Sila, just a follow-up to that. ANSYS revenue, $78 million in Q3. but what's your adjunction of ANSYS revenue embedded into the Q4 guidance? Is Q4 historically a strong quarter for ANSYS, but again, you'll only include October. So is there any linearity in the quarter that we should consider? Any color would be helpful.

Yeah, so in Q3, as you noted, the $78 million in the revenue disaggregation of S&A. And as we noted in the prepared remarks at the beginning, there's a small portion. of ANSYS revenue that is also in our EDA. And for Q4, it's included in the full guide that we have ANSYS for all weeks of the quarter. And then in terms of ANSYS, they have conformed to our fiscal calendar, which as you note, their Q4, only one month of it falls into our fiscal calendar. So obviously, some of that strength that you see in sort of the November, December time frame that'll be in our q1 and so we've aligned uh that fully but uh i'm not going to give a sub segment view as we we don't guide below the total company thanks for the question thank you your next question comes from joe ruwing with baird your line is open uh great thanks for taking my questions uh eda and ip as industries have fairly diversified opportunities, and that's true across customer accounts and end markets, but Synopsys has always

been fairly unique in that traditionally you have one outsized account exposure, and some of the things you're saying seem to consider a need to diversify further. You made a remark to Sine earlier about two years. Two years from now, we'll look back, and I think about contract length being two to three years. Is that the appropriate time frame to fully enact the changes you're focused on and getting the business back on the track you believe is right?

You're right. In terms of EDA and IP, we have a fairly diversified customer base, simply because you cannot build a semiconductor chip without the need of EDA or IP. So while we have a fairly diversified customer base, Synopsys has been very successful with capturing the large percentage of wallet from leading large semiconductor companies. That has been our strength. With this one customer exposure that you're talking about, We have de-risked part of that exposure in our FY25, and there's a blend of contracts we have with that customer no different than any other customer, which is EDA, software, hardware, and IP. They have different time horizons, and it's very difficult at this stage to forecast what will happen and by when, not knowing the situation of that customer one, two years from now. But that being said, we work very actively to expand our business at multiple level of growth opportunities. And that's where ANSYS will bring us a significant and positive opportunity to diversify the portfolio as well in terms of customer concentration, as well as regional concentration. For example, the percentage of business in Europe versus China for ANSYS is very different than Synopsys Classic. So there's a big opportunity to diversify further with the ANSYS addition to the portfolio.

Okay, that's helpful. Thank you. Sheila, maybe you answered this already, but I think it would be helpful just to get a baseline around what's changing. in this guidance versus the guidance that was previously on the table? You know, how much is IP coming down? How much does ANSYS add? China is a factor. Just anything there that can help get us all on the right baseline going forward.

Sure. So, as you note, the three headwinds that Sassine talked about in the IP, Those are fully incorporated, and it's a balance between those three, what the impact was. And then, as you noted, ANSYS has been added, and it was a stub period in Q3, so somewhat minimal. You saw the, you know, the S&A, 78 million. And then ANSYS for Q4, again, I will remind you the question that was asked previously. the biggest part of the ANSYS quarter is usually in the November-December timeframe, and that'll be in our Q1. So, I would say the biggest, you know, decline was really that update on the IP, and then that's offset by the addition of ANSYS.

Okay.

Thank you. Thanks for the question.

Your next question comes from Harlan Seur with JP Morgan. Your line is open.

Good afternoon. Thanks for taking my question. I assume that the Q3 Foundry revenue weakness in IP was due to your largest customer as they pivot from their prior focus on 18A to now 14A Foundry manufacturing technology. Is that the right assessment? And given the challenges of this customer, I mean, there's still question marks on their ability to be successful in Foundry. Is the Synopsys team still going to support this customer on their future Foundry roadmaps?

Harlan, as you know, I used the word earlier, there's an expectation. When you're the leader in IP and you engage with a customer, we cannot tell that customer that we want to pick and choose what project or which foundry and for which application we want to engage because then And they will not trust and expand the relationship with Synopsys. And that has been our strength. As far as the whole 18A and the pivot to possibly a different technology, that's a customer choice. Whatever choice they make, we already have the IP available to the node that we have built it to. And part of the relationship with Foundry is we look ahead at timing and the size of the opportunity, meaning the commitment to synopsis and the post-delivery on that IP, what is the available market that we can sell it to. So that's really the situation that we have in general in IP and specifically with some of our Foundry customers.

Thank you for that, Sassine. And then, Sheila, looks like your total expense guidance for Q4, it's coming in about $50 million higher, about 3.5% higher than if I just combine your total expense structure and ANSYS's total expense structure prior to the close of the acquisition. So what's driving the higher expense outlook for Q4? And then more importantly, from the Q4 base, how should we think about the potential cost synergies looking out over the next few quarters? In other words, how should we think about the fiscal 26 4Q exit run rate on total expenses?

Thanks for the question, Harlan. On the first one, there's just some cost with, you know, really the initial quarter of bringing ANSYS on. And we want to make sure that it's a very successful integration. So I would say it's just part of ensuring that we've got a smooth integration going on. And then in terms of longer-term guidance, we'll talk about that in our Q4 earnings, what the expectations are for 2026. As we talked about in our prepared remarks, we are taking a comprehensive portfolio look, and we're also driving greater scale and efficiency with a 10% overall headcount reduction that will drive through fiscal year 2026, and so that has the effect of actually accelerating our synergies that we had talked about when we announced the deal. So, we'll talk more specifically, Bill Harlan, about sort of the direction of travel in 26 when we do Q4 earnings.

Okay. Thank you.

Your next question comes from Jay Fleashower with Griffin Securities. Your line is open.

Thank you. So, seeing for you first, is the 10% targeted reduction of headcount something that you would have done irrespective of the current and anticipated unpleasantness in IP? And in other words, you would have done that anyway. It looks as though your organic headcount, ex-ansys, was up over 2,000 heads year over year, up over 600 sequentially. So perhaps you got a bit ahead of yourself in terms of organic expansion. And in the meantime, can you talk about the integration or consolidation that you've done of ANSYS already? Our understanding is that very soon after the close, you consolidated around the named accounts direct business. And perhaps you could also talk about your intentions on their very large indirect business. and then my follow-up for Sheila.

Jay, thanks for the question. As you can imagine, with an 18-month regulatory process, we were somewhat limited in terms of our ability to take actions on either portfolio or headcount adjustments. So the 10% headcount adjustment is something we would have done and we've been planning for it for a while and before even the acquisition was approved in preparation that we will be ready to act and carefully and thoughtfully of where to target that reduction. So we have gone through internal strategic portfolio review. We're looking at the multiple layer of management processes systems, the impact of AI that we have been deploying inside the company for about two years. So there are many opportunities actually to make sure we're putting the resources at the high impact, high return, and reducing where we can reduce leveraging technology and the impact of it for further reduction or cost avoidance in the future. So there's a very thoughtful process we've gone through for a number of months in preparation for action to be taken post-close. In terms of integration, as I mentioned a few questions ago, we have to make sure that we are very careful in our integration speed as we still are owning OSG, which is the optical business and power artists to make sure there's no contamination, there's no impact whatsoever in terms of the health of that business as we're handing it over to the buyer. So we are moving an integration in some places where there's no impact, in other places we're being very cautious and careful how fast do we go.

Okay. For Sheila, you made the interesting comment that you've already coordinated ANSYS's fiscal period with yours. and you noted the Q1 concentration. Following up on that, historically, anthocins was indeed highly seasonal, particularly in their Q4, but not only in their Q4 because of 606 effects. So the question is, do you think that over time you could perhaps smooth out those seasonality and or 606 effects that they had so pronounced in their numbers? In other words, do you think you might change their lease and upfront model to more of your prevailing subscription model?

Dave, that's certainly something we're looking at over time as we deploy new products and have new offerings for customers, how there might be more alignment with how we, you know, renew with customers, we give products to customers, and then we service customers. So that's certainly something, but as you mentioned, that's a bit longer term because the renewal dates and the products that customers are buying, those have to be on the shelf right now. So as we move forward, there's opportunity to do that. I do want to follow up because you had a question for Sucine on the channel, I think. And so I want to make sure that we do address that. That's a really important part of ANSYS. It's about 25% of ANSYS. We're really thrilled to have such a robust channel, and we are ensuring that that's very smooth and that's very seamless and those customers continue to get serviced. And then there's an opportunity, of course, because at Synopsys Classic, we did not have a channel, but now there's opportunity for our products to be sold by those great partners. So there's no change whatsoever for the channel. They're just a wonderful asset, and we're ensuring that there's no disruption to the channel as we move forward. Good.

Thank you. Our final question comes from Jason Salino with KeyBank Capital Markets. Your line is open.

Hey, no, I appreciate you fitting me in. I'll just ask one in the essence of time. I think, you know, you've mentioned multiple times that you've tried to de-risk, you know, the Q4 guide to adjust for some of the headwinds you've been seeing. Without knowing how much ANSYS is contributing, it's hard to measure how conservative or de-risked it is. So maybe I'll ask it a different way and say, you know, IP historically has been up sequentially for the past two years in Q4. Maybe it's regular seasonality or maybe it was something more specific. But, you know, given the headwinds you've seen directionally, you know, could we see this same trend again with seasonality and IP for the last couple of years?

Yeah, Jason, we do expect a transitional period and a muted year as we look ahead in IP. And that's due to the two factors we don't believe they will disappear in a short period of time. Now we have it balanced with a number of other opportunities to scale and deliver to the points I mentioned, like the subsystem opportunity, the serving the various markets, various foundries, et cetera, et cetera. But that's the expectation as we look ahead.

Thank you all for joining our call. We look forward to talking you through the quarter. Sarah, could you please close us out?

Thank you. This concludes today's conference. We thank you all for joining. You may now disconnect.