Earnings Call Transcript - SNPS Q1 2026

Operator, Operator

Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the First Quarter Fiscal Year 2026. Today's call will last one hour and is being recorded. I now turn the conference over to Tushar Jain, Head of Investor Relations. Please go ahead.

Tushar Jain, Head of Investor Relations

Good afternoon, everyone. 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. 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 Sassine Ghazi.

Sassine Ghazi, President and CEO

Good afternoon. We're off to a strong start as we enter our 40th anniversary year with an expanded portfolio, leadership positions across the business and the most compelling road map in our history. In Q1, we achieved revenue at the high end of our guidance and non-GAAP EPS exceeded guidance. 2025 was a year that transformed the company. 2026 is the year we begin delivering on the technology promise of Synopsys plus Ansys. Let me take a few minutes to address market trends shaping our opportunity and provide some highlights from the quarter. After that, Shelagh will take you through the financials in more detail. First, the market trends. Starting with AI. We continue to see a tale of two markets. On the one hand, the multibillion-dollar AI infrastructure build-out continues unabated. That's driving system level and semiconductor R&D with continued robust design start activity for AI compute. At the same time, design starts in markets like consumer, automotive and industrial remain subdued despite signals of modest recovery. AI's rapid progress is also prompting healthy debate about whether it will disrupt established software companies. Let me explain why we're different. Our deep tech solutions power the world's most complex engineering efforts. Synopsys' decades of deep domain expertise, proprietary code bases and solvers, and native foundry design technology co-optimization deliver optimal deterministic silicon-proven results that probabilistic AI models do not replicate. While AI will transform engineering software, Synopsys is already leading that transformation. We're pioneering AI-driven design capabilities in our products that deliver orders of magnitude productivity gains for our customers and pave the way for agent engineers with increasing levels of autonomy. One highlight among many this quarter was receiving World Economic Forum honors for our work with AMD to advance AI-accelerated chip design. AI isn't disrupting our business; it's amplifying our strategic advantage. Another market trend and tailwind for Synopsys is the engineering transformation away from physical testing towards digital twins. To build smarter, more connected products at pace and at scale, companies are investing in advanced design automation, simulation and digital twins as a competitive imperative. There is incredible demand for silicon to system solutions that can enable holistic software hardware co-design to accelerate, de-risk and reduce the cost of building AI-powered products. Our combined Synopsys plus Ansys portfolio is increasingly mission-critical to the innovation of industries spanning semiconductors, aerospace, mobility, energy and advanced manufacturing. We'll have a lot more to say about this in a couple of weeks at our Synopsys Converge conference. Turning to Q1 business highlights. The global Synopsys team executed well against the backdrop of continued geopolitical and macro uncertainty as China headwinds persist. Let me share some segment highlights from the quarter. First, design automation. We saw continued strength in hardware with major competitive wins at both new and existing customers, including a marquee emulation win versus the incumbent at a leading AI HPC customer. With growing demand for software-defined, configurable systems supporting both emulation and prototyping, as well as a strong 2026 roadmap, we're well positioned to capture the expanding digital twin opportunity across industries. In EDA, we also saw sustained momentum across three trends: First, the application of AI across the stack. Major semi and hyperscale customers using Synopsys.ai have seen up to 50% faster knowledge assistance, up to 70% faster workflow assistance and up to 5x faster formal test bench generation. Our agent-engineered technology is advancing rapidly, and we have several customer engagements underway with agents across design and verification. Second, leadership in multi-die. Multi-die momentum accelerated as leading semiconductor and foundry customers adopted Synopsys' 3DIC Compiler platform, leveraging automation and AI-driven optimization with our industry-leading multiphysics analysis tools to improve signal and power integrity quality of results, enhance thermal efficiency and speed up design convergence. And third, sustained design win momentum at advanced nodes with our digital flow, including Fusion Compiler and PrimeTime achieving 100% usage on critical tape-outs at 2-nanometer and below. Moving to Ansys, which delivered a strong Q1 performance driven by robust demand for system-level digital engineering, multiphysics simulation and AI-enabled design flows. We won large multiyear agreements across aerospace, hyperscale, industrial and automotive. With Ansys as part of Synopsys, we now support more than 90% of the top 100 automotive suppliers. And at CES in January, we showcased how AI-driven simulation is helping customers like Audi reduce physical prototyping and shorten development cycles. Our confidence in this business is only increasing as global demand for electrification, autonomy, digital twins, advanced semiconductor design and mission engineering remains resilient and expanding. Turning to design IP, which performed in line with expectations. As we've said, 2026 is a transitional year for the IP business, and we're focused on aligning the fastest-growing segments of the silicon market. We're making progress on this front. The planned sale of our processor IP solutions business to Global Foundries sharpens our focus on extending our leadership positions in interconnect and foundation IP. As interconnect standards evolve at an unprecedented pace, customers count on Synopsys' one generation ahead approach. In Q1, we saw continued strong demand for high-speed protocol IP. We achieved more than 40 PCIe design wins in the quarter with HPC and automotive customers, achieved an industry-first demonstration of PCIe 8.0 and established a first-to-market position with our 224 gig SerDes on advanced nodes and leading foundries with 10 lifetime wins. We continue to expect muted FY'26 growth in IP with sequential improvement given our roadmap and sales pipeline. Longer term, several industry trends give us conviction in the growth trajectory of the business. This includes the global expansion of foundries and accelerated node transitions. Standards advancing at an unprecedented pace and increasing demand for chiplets and subsystems. Our 40th anniversary year is off to a great start with operational excellence, financial discipline and the most compelling roadmap ever. Our priority for FY'26 remains on driving sustainable growth and margin expansion by advancing our technology leadership with holistic, integrated silicon to system engineering solutions, pioneering AI-driven engineering, focusing our IP portfolio for growth and efficiently scaling to accelerate our strategy. The Ansys integration is well underway. It's great how our teams have come together at pace to solve engineering's biggest challenges. We'll have a lot more to say and show at Synopsys Converge in March, and I look forward to seeing many of you there. Now over to Shelagh.

Shelagh Glaser, CFO

Thank you, Sassine. As Sassine noted, Q1 '26 marked a strong start to the year with revenue at the upper end of our guided range, non-GAAP operating margin of 42.1% and non-GAAP EPS above guidance. These results reflect strong execution and financial discipline across the business. Backlog ended at $11.3 billion, underscoring our strong and resilient business model. As a result, we are reiterating our full year revenue non-GAAP operating margin and cash flow guidance while raising our non-GAAP EPS guidance for the full year. I'll now review our first quarter results. All comparisons are year-over-year unless otherwise stated. As a reminder, our Q1 '25 comparisons include the Optical Solutions Group, which was divested in Q4 '25. We generated total revenue of $2.41 billion, coming in at the high end of our guidance, primarily due to the timing of Ansys deals. Ansys revenue was approximately $886 million, reflecting our leadership in simulation and analysis portfolio and exceptional execution in the seasonally strong quarter. Geographically, China grew approximately 21% year-over-year due to the inclusion of Ansys. Excluding Ansys, China revenue declined slightly year-over-year, consistent with our outlook. Total GAAP costs and expenses were $2.2 billion. Total non-GAAP costs and expenses were $1.4 billion at the low end of our guided range due to timing, resulting in non-GAAP operating margin of 42.1%. GAAP earnings per share were $0.34. Non-GAAP earnings per share were $3.77, coming in ahead of expectations on revenue and expense timing as well as lower net other and interest expense. Now on to our segments. Design Automation segment revenue was approximately $2 billion. In addition to strength in Ansys, the segment saw strong growth in hardware-assisted verification, partially offset by the Optical Solutions Group divestiture. Design Automation adjusted operating margin was 47.3%. Design IP segment revenue was $407 million, down approximately 6% year-over-year and flat sequentially. We continue to expect fiscal year '26 to be a transitional year for the business as our IP roadmap continues to make steady progress. Design IP adjusted operating margin was 16.2%. Free cash flow was approximately $822 million in Q1, and we ended the quarter with cash and short-term investments of $2.2 billion. Total debt at the end of Q1 was $10 billion. We have repaid the entirety of the $4.3 billion term loans, consistent with our commitment last quarter. Now to guidance. Our full year targets are total revenue of $9.56 billion to $9.66 billion. We continue to expect Ansys revenue contribution of $2.9 billion at the midpoint, growing double digits. Total GAAP costs and expenses between $8.46 billion and $8.60 billion; total non-GAAP costs and expenses between $5.69 billion and $5.75 billion, resulting in non-GAAP operating margin of 40.5% at the midpoint; GAAP earnings of $2.21 to $2.62 per share. Non-GAAP earnings of $14.38 to $14.46 per share, up $0.06 from prior guidance due to lower net other and interest expense in Q1. We still expect cash flow from operations of approximately $2.2 billion and CapEx of approximately $300 million, resulting in free cash flow of approximately $1.9 billion. With the term loan fully paid off and a strong cash position, our Board of Directors has replenished our existing stock repurchase program with authorization to purchase up to $2 billion of our common stock. Our capital allocation priority will continue to be investing in the business with flexibility to opportunistically repurchase shares while paying down debt. Now to targets for the second quarter. Total revenue between $2.225 billion and $2.275 billion, total GAAP costs and expenses between $2.02 billion and $2.085 billion, total non-GAAP costs and expenses between $1.38 billion and $1.41 billion. GAAP earnings of $0.23 to $0.43 per share and non-GAAP earnings of $3.11 to $3.17 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations. In conclusion, 2026 is off to a strong start, and we're executing to the priorities we've laid out at the beginning of the year. With our broad leadership portfolio, expansive market opportunity and technology trends that play to our strength, we are focused on executing with financial discipline as we solve our customers' biggest engineering challenges from silicon to systems. With that, I'll turn it over to the operator for questions.

Operator, Operator

Our first question today will come from Charles Shi from Needham & Company.

Yu Shi, Analyst

So the first one, I want to dig a little bit more into the IP segment. Thanks for the commentary, muted growth for the year, but sequential improvement from here for the remainder of the year; but it does look to me that the second half IP revenue should see some pickup. I'm not questioning you that you're not going to deliver that. But I think going back a couple of years, you talked about visibility in some development milestone-based IP revenues probably coming from some of the foundry customers, but that part of the business is going away. So wondering what gives the confidence on the second half IP business, the pickup? And maybe I can ask a second question after this.

Sassine Ghazi, President and CEO

Yes, absolutely, Charles. Our confidence in the IP business is bolstered by the strong design starts we've seen. As I noted earlier, in the AI segment, these design starts are very solid. This early engagement with customers allows us to offer our IP as a comprehensive portfolio tailored to their various needs, and our extensive portfolio gives us a competitive edge in these scenarios. Another significant change over the years is the speed at which industry standards are evolving; previously, the life of standards was typically 3 to 4 years, but now it’s about half that duration due to the growing demands for higher bandwidth and lower power. Additionally, we are noticing that our customers are seeking foundry options, and our Synopsys portfolio spans multiple foundries, which further reinforces our confidence. Regarding the second half of the year, as we communicated a couple of quarters ago, we have some work to complete on the schedule for delivering a few titles, but we are on track to meet those timelines and anticipate being able to monetize those releases toward the end of the year.

Shelagh Glaser, CFO

Yes. And I would just add on, Charles, that the availability that Sassine talked about is a little bit more Q4 weighted.

Yu Shi, Analyst

Okay. It seems that the focus has been more on the foundry side of the customers, and some of the hyperscalers may require additional support. Can you provide an update on the IP opportunity and any details about the work expected to be delivered in the second half of the year? That would be great.

Sassine Ghazi, President and CEO

Yes, Charles, to be clear, we absolutely have the right skills and what we have communicated, it was a prioritization of some of these skills to deliver on the schedule required for some of these hyperscalers. And again, it's not a question of do we have the right people with the right skill set and understanding and knowing what we want to build. Those are things that we absolutely do have. It was putting the right resources and priority of the resources to deliver on time and schedule for these titles, and that's exactly what we're doing. And I feel great actually about the progress that we're making on our roadmap and schedule to deliver to these opportunities.

Operator, Operator

Gary Mobley from Loop Capital Markets has the next question.

Gary Mobley, Analyst

Maybe this is a question for Shelagh, but I noticed the RPOs are down modestly on a sequential basis. And it's clear that the fourth quarter of last year was a strong bookings quarter. So maybe if you could speak to the seasonality of the bookings as you see it unfold for the balance of this fiscal year and in general, talk about the renewal activity on the EDA side and the simulation software side of the businesses.

Shelagh Glaser, CFO

Well, as you know, it's an ebb and flow of building and consuming backlog. We feel great. We are sitting at $11.3 billion of backlog. So we've got a strong understanding of what our customer demands are and what we need to deliver to them. And as you say, that just kind of ebbs and flows with the renewal timing. So there's nothing about backlog that does anything other than give us confidence sitting at $11.3 billion.

Gary Mobley, Analyst

Okay. I could just ask a quick follow-up. On the verification hardware side of the business, how do you see the product cycle of ZeBu and HAPS-200 playing out for the balance of the year in comparison to last year? And where are we at in terms of the product cycle strength?

Sassine Ghazi, President and CEO

Yes. So exactly what you pointed out, we have two parts of our hardware portfolio. We have ZeBu and HAPS, and we introduced the EP family, which is an emulation prototyping, which is a hybrid that provide our customers the flexibility to achieve the highest performance that is needed for software development as well as the ability to verify the function of the chip. We had a record year last year, and it was following a number of other record years, and we have an expectation for that business to continue on delivering to such expectations given the demand and complexity that our customers are driving that requires both a ZeBu, HAPS, EP system, and we have a number of use cases today that we're leading the market in terms of technology differentiation there.

Operator, Operator

The next question is Jay Vleeschhouwer, Griffin Securities.

Jay Vleeschhouwer, Analyst

Sassine, the first question for you and perhaps somewhat technical. You began your remarks by noting how AI could be variously constructive to your business rather than disruptive, and I have to agree with that. But I'd like to ask about three ingredients that you might have to execute upon to make sure that continues to be the case. We hear a lot, for example, about orchestration requirements across Agentic AI. I think that's probably going to be pertinent to EDA as well or engineering software broadly. Secondly, data repository across a broad apps portfolio that you now have. And then finally, traceability, particularly for simulation but also more broadly. I know it's a little technical for a call like this, but perhaps insofar as those are, I think, critical ingredients, maybe talk about your capabilities there? And then the follow-up, Shelagh.

Sassine Ghazi, President and CEO

Yes, Jay, thank you for the question. If you recall, last year at Converge, we put our roadmap for agent engineers. And in that roadmap, we mapped out L1 through L5, where L1, think of it as a reinforcement learning applied to every aspect of the technology that we offer. In L2, we have what we call a task agent, an L3 into orchestration of these agents and L5 and then L4 into the planning, etc., into a full autonomy of orchestration where the human engineer will be dramatically augmented and the workflow will change on how to design the chip. Now what stitches all of that together is a visibility and continuum of data, exactly the second point that you're mentioning. And then, of course, the traceability, visibility into the accuracy of the verification because at the end of the day, what we do, our agents cannot hallucinate. They have to be 100% accurate as you move to the next phase and the following phase of the workflow. We have a number of the task agents and we have multiple orchestration layers. We talked about these through some of our partnerships with NVIDIA, with Microsoft, etc., to leverage some of that orchestration layer and the cognitive layer that they offer. So it's a combination of what we're building and what we're partnering with the ecosystem in order to accelerate our roadmap on the vision of an agent engineer, which we believe strongly that we have pioneered and we continue on engaging the customers there. But I want to make sure that it's clear as well in order to deliver to that vision, you need the data and you need the verification ability of every step of the flow.

Jay Vleeschhouwer, Analyst

Great. Shelagh, for you with regard to Ansys, two things stand out in the results and outlook. And so the question is really about the forecastability of the Ansys business. It remains clear that their results are still heavily influenced by pronounced 606 effects, which was certainly the case for them before the acquisition. So maybe you could talk about how forecastable the Ansys business is given that variability in that particular accounting. And then also, if we think about the renewals cohort from 2023, it was heavily reliant upon automotive. That's where they had their growth three years ago. So presumably, that's where you're going to have to rely upon the renewals cohort growth for this year as compared to A&D and High Tech. So maybe talk about some of the end market assumptions behind your forecast for Ansys for this year.

Shelagh Glaser, CFO

Yes. I'll start with the back end of the question, Jay. So as we have the capability in Ansys really to service multiple market segments, that's what gives us a lot of confidence. Simulation and analysis is still very lightly penetrated in the TAM. So there's ample opportunity not only to grow within customers but to actually grow new customers. So that opportunity set is quite broad for us. And then in terms of how we think about the business, as you know, December was always very big for them. That happens to fall into our Q1. They were a fiscal year. Obviously, we're a 10/31 year. So what you saw in Q1 was the combination of what would have been their typical year-end. So that's a real standout in terms of our Q1 results. We anticipate that over time, that probably changes as the sales team realigns with sort of our fiscal year. But nonetheless, what we're seeing is broad opportunity really across all those segments. And as we build the forecast, it incorporates what we're seeing in existing customers, what we think the new opportunity is. And then in terms of the 606, as I talked about last time, as we're bringing Ansys in, we're building combined products where a portion of Ansys will be in what we call SCBU, which will be with EDA. We're harmonizing those accounting policies really aligned with how we're supporting the products and how we're giving further updates on the product. So over time, that's a more muted impact. I would say, really, what you're seeing here is there's just a really broad opportunity in terms of ability to service multiple markets with the leadership products in Ansys.

Operator, Operator

Jason Celino from KeyBanc Capital Markets is up next.

Jason Celino, Analyst

Sassine, I wanted to ask about the ARC processor business that you're divesting. So I understand portfolio review and you're sharpening your focus in other areas. But presumably, this was a core part of your portfolio before and should be well positioned for physical AI. If physical AI is such a big opportunity on the come, maybe it's not a growth driver today, but could be. I guess, why the rationale on the divestiture?

Sassine Ghazi, President and CEO

Sure, Jason. The ARC business has undergone several changes, transitioning from the ARC architecture to the RISC-V ISA architecture. We are observing that many of our customers are using primarily our EDA software to create and verify their own processor IPs for various embedded applications, which still presents a significant opportunity for Synopsys. We will continue to enable, enhance, lead, and support our products and our customers in their development efforts. From the perspective of our IP business, we see a larger growth opportunity in interface IP, and we plan to focus our investments there. GF will be an excellent partner as they foster that segment of their business in both interface IP and EDA, alongside our collaborative customers.

Jason Celino, Analyst

Okay. And then just for clarification, kind of on the IP messaging. I assume that because the divestiture hasn't closed yet, the ARC revenues are included in the sequential improvement that was discussed? Or is that not included?

Shelagh Glaser, CFO

Jason, that's correct. Until we close, the ARC is a part of our financials.

Operator, Operator

The next question is from Vivek Arya from Bank of America.

Liam Pharr, Analyst

This is Liam Pharr on for Vivek. You closed Ansys in July last year. What have you noticed by way of cost or revenue synergies thus far for fiscal '26 as been speaking with customers on joint Synopsys Ansys products?

Sassine Ghazi, President and CEO

Yes. Liam, what we communicated was the first half of '26 will be when we delivered the first wave of the joint solutions. And I'm looking really forward to communicating at Converge, which is our conference in a few weeks, the rollout of a number of the joint solutions with clear visibility to which market, which customer. And then, of course, once you release a product, you focus on the customer adoption and monetization. And we are anticipating the monetization of the joint solution to start in FY '27 with quite a bit of excitement from our customers to solve real problems that they have been looking forward for that integrated solution to come.

Shelagh Glaser, CFO

The teams are already trained in cross-selling existing products, which means the Synopsys sales team can sell Ansys products and the Ansys sales team can sell Synopsys products. We are making good progress on that front. We have generated revenue this year, though we haven't disclosed specific figures. Our target is to achieve a run rate of $400 million in revenue synergies by year four, which will include the joint solutions that Sassine mentioned. Regarding cost synergies, we aim for a run rate of $400 million by year three, and we are making strides to accelerate this. We are actively working to advance this timeline into years one and two, which will be 2026. We are progressing well on these initiatives.

Liam Pharr, Analyst

And then for a follow-up, I want to go a little deeper on China. I understand it remains challenging. But what are the puts and takes around it being flat or even growing year-over-year this year? And have you seen any change in the competitive landscape against a peer who continues to see a healthy design activity environment there? Any color behind that would be very helpful.

Sassine Ghazi, President and CEO

Yes. Sure, Liam. China for the quarter, for Q1 performed in line with expectations. As we mentioned as well in the prepared remarks, the classic Synopsys was down slightly, whereas Ansys portfolio performed fairly well. Now the reason you're seeing that mix per se in the performance is the cumulative impact of the restrictions, both in entity list and technology are truly having an impact on our customer commitment and demand. The reason it impacts Synopsys in a greater way, I want to say, is the mix in our portfolio. We have a leadership position in our IP business that part of the business in China, customers may decide not to go for an external foundry and look at the domestic foundry, for an example. And therefore, that will impact the IP business. But it may not impact as much the hardware business or the EDA business. So that's from a macro standpoint, the way we're seeing the landscape in China. As far as the domestic competitors, yes, we're seeing them because, obviously, if customers cannot use our technology, they're looking for alternatives. And the customers who can use the technology, they absolutely still prefer to use our technology versus domestic.

Operator, Operator

The next question is Kelsey Chia with Citi.

Wei Chia, Analyst

My question is about IP. I understand that Synopsys is a leader in interconnect IP with PCIe 8. However, the company seems to be behind in terms of delivering IP. Is there a risk that Synopsys could miss customer design starts or that customers might decide to switch away from using the IP developed by Synopsys?

Sassine Ghazi, President and CEO

Kelsey, it depends. And let me explain why it depends. What we sell to is a customer schedule. Customers' engagement starts with aligning what we have to when do they need the IP and their tape-out. So a number of the one that you mentioned, the PCIe or the 224, I'll expand it into an HBM, LPDDR, UCIe, which are all titles that customers need in order to design a high-end HPC chip. And for a number of those customers, we are engaged with selling that whole portfolio based on aligning the schedule. The comment I made earlier where we do have the expertise, we do have the capacity is the prioritization for specific customers to deliver. And we're putting a lot of focus on that, and that's why the point Shelagh made earlier that our confidence in the second half weighting is coming through the roadmap alignment and by when do we deliver on these titles.

Wei Chia, Analyst

Got it. As a quick follow-up, IP operating margins are currently low. Can we apply the Rule of 50 to estimate what the operating margins would look like under normal conditions? Additionally, you mentioned an eventual shift to a royalty business model. Is there a way to derive a normalized operating margin framework for IP?

Shelagh Glaser, CFO

Let me take the operating margin, and I'll have Sassine comment on evolving the business model. So as we've talked about IP growth this year is muted. We're still investing to build out the titles that Sassine was talking through. So we've got the engineering team working very diligently, making lots of progress on the titles, but with muted growth, we get muted operating margin. So for this year, we're going to see more muted operating margin. Over time, though, once we get to the back to having the titles on time, my expectation is that's a very good business. So the operating margin will always be below the corporate average because it's more people intensive, but that's my expectation. That's how we've run that business over time. But you will see muted compressed operating margin this year, just driven by the muted revenue, and we're not changing our investment profile there because we're still building out those titles.

Sassine Ghazi, President and CEO

Yes. In terms of the business model, I'll start with the market. The great news is there's such a high demand for customization as well as acceleration of delivering on the IP titles, in particular, for hyperscalers because they don't have their own IP team. They are counting on us to be able to deliver on time and what we call one generation ahead for various of the titles I just mentioned earlier. Therefore, it's an inflection point. It's a great opportunity to focus on the quality of the deals and capturing the right monetization for that value. We're in active conversations with a number of these partners, and I do expect that we will close a number of these conversations will move into an actual business in FY 26. Now of course, you won't see it in terms of that upside until we deliver and the customer tape out and start delivering product for it. But we're very excited about this opportunity to improve the monetization.

Operator, Operator

Your next question is from Lee Simpson, Morgan Stanley.

Lee Simpson, Analyst

I have a couple of quick questions. Last week, we heard from a competitor that monetization for Agentic Play might be based on value or possibly on a token model. Have you considered a similar approach, and could this business, specifically Agent engineer, be profitable from day one? Additionally, regarding Ansys, which is a market leader with a diverse range of customers, does this present any additional risk since value isn’t uniform across all clients? For instance, areas like 3D ICs hold significantly higher value. Could this potentially limit growth for Ansys this year and into next, or at least introduce some risk?

Sassine Ghazi, President and CEO

Yes. Thank you, Lee. On the Agentic, as we communicated about a year ago when we introduced the agent engineer is that the workflow will change. The moment. The workflow will change; it's an opportunity for us to adjust the monetization based on value. So yes, what you commented on will value-based be in consideration. Absolutely. That's what we've been communicating for about a year now that the workflow will change and there will be a monetization adjustment and the customers, by the way, they are very receptive for that conversation because they understand that they have to change as the workflow changes and how will that value equation from a time-based license to a different type of license as we're accelerating their ability to deal with complexity and schedule. Now on Ansys, we see Ansys as a force multiplier for our business. As Shelagh mentioned, when you look at the various markets that are doing engineering R&D, the penetration of sophisticated simulation analysis, CAD environment, etc., has a significant opportunity, very different than semiconductor that the Moore's Law pushed and accelerated the adoption of EDA. Now with physical AI, if you are in industrial or automotive or robotics, you cannot build those products without investing more in R&D and therefore, investing more in system-level design, simulation and analysis. So as the results speak to themselves for Q1, this is not a one-time phenomenon. We see that opportunity for the long term, as I mentioned, as a force multiplier and an expansion in customer base for Synopsys that we're very excited about.

Operator, Operator

Next, we'll go to Siti Panigrahi from Mizuho.

Sitikantha Panigrahi, Analyst

Can you hear me?

Sassine Ghazi, President and CEO

Yes, Siti.

Sitikantha Panigrahi, Analyst

I don't know this question answered. A question is about your NVIDIA partnership that you announced recently. There was a big investment from NVIDIA. I'm wondering how that partnership is coming along? And how should we see about the product priorities evolve and how you think about the monetization there?

Sassine Ghazi, President and CEO

Yes, Siti, I want to clarify that this partnership is much more than just a press release. It represents a strong commitment from both companies, as we identified a market opportunity that we aim to accelerate and seize. This collaboration has two main components. The first component involves a roadmap we've established to integrate several of our products, including EDA and the traditional Ansys products, with GPU acceleration. We anticipate achieving significant acceleration targets through joint R&D, with plans to deliver several products by 2026. This effort will include a revised business model; for instance, if you're using product A from Synopsys on a CPU, that version will remain available, while we will also offer a GPU version of the same product. Should the GPU version provide 15 to 20 times the performance, there's a corresponding value increase for the customer. The second component focuses on Omniverse, facilitating the creation of digital twins for physical AI applications. Achieving physical AI requires more than traditional physical prototypes; digital twins are essential, and their effectiveness depends on precise simulation and analysis, which is where our Ansys portfolio comes into play. We aim to capitalize on both GPU acceleration and the digital twin opportunities for physical AI.

Operator, Operator

The next question will come from Gianmarco Conti, Deutsche Bank.

Gianmarco Conti, Analyst

Could you provide some insights on the current usage of Agentic among customers, specifically comparing the front end and back end? Also, do you have an estimate of customer penetration for the next 12 months and how customers are currently utilizing it? Will they need increased computational resources as their designs evolve more quickly with additional agents? I'm interested in how the delivery method is being handled for these customers.

Sassine Ghazi, President and CEO

Yes. I will provide more details, and Shankar will also discuss it at Converge. At a high level, we currently have several task agents. For instance, I mentioned in my prepared remarks the value we're observing with formal advisement. This is an area where test coverage has always been a time and compute-intensive task for our customers. It presents a significant opportunity to utilize an agent for specific tasks and a series of agents to streamline and speed up both coverage and the entire verification process. Regarding your question about the front end and back end, we are actively working on both. The initial opportunity we see is in the front end, which addresses the bottleneck that our customers experience in terms of time and the number of engineers they allocate. However, we do have a roadmap for both areas. So, stay tuned for more updates at Converge, as we are seeing substantial progress with the number of customers we are engaging with in early initiatives.

Gianmarco Conti, Analyst

Got it. Shelagh, maybe just like one last one for me would be. What's driving the lower GAAP EPS guide despite GAAP expenses being lower?

Shelagh Glaser, CFO

So I think the real delta this year between GAAP and non-GAAP is if you look at, it's really the amortization schedule, and there's more detail in our quarterly filing on that. So we've got the restructuring, which is one-time only. It's '26 and '27, but there'll be an amortization schedule that will be rolling through over the next several years.

Operator, Operator

Next up is Joshua Tilton, Wolfe Research.

Joshua Tilton, Analyst

Congrats on a solid start to the year. I have two. My first one is more of a longer-term question. And I guess the question is, Sassine, I think the words you used were 2026 is the year that you begin to deliver on the technology promise of Synopsys plus Ansys. And what I'm trying to understand is, and I'm assuming you will, but when you guys do deliver on this technology promise in 2026, what does it mean for the direction of growth for your business in '27 and beyond? I think a lot of investors see the growth that Cadence is putting up and they're kind of excited for your organic growth to sort of trend in that direction. So any help or any color would be greatly appreciated.

Sassine Ghazi, President and CEO

Yes. Sure, Josh. As far as the long-term growth view, it has not changed. On EDA, double digits, on IP, mid-teens as well as on the simulation and analysis, it's a double-digit growth. So that puts the company as a whole in a double-digit growth opportunity driven by the demand and the leadership we have in our portfolio. When I say that 2026 is the year where we begin delivering on our technology and the value promises, there are, today, problems are not being solved with the current offering that the industry is providing the customers. And when we talk about the joint solutions, how to bring in physics analysis into the design phase when you're designing a multi-die system. A lot of the challenges our customers are dealing with is they design, they go to sign off, they discover an issue, say, a thermal or a structural issue, then they have to iterate and iterate in order to solve. So that takes time and risk. And this is what we're so excited about with the joint solution, given what Ansys has is a leadership sign-off for physics. And what Synopsys has is a leadership position in the design platform. And that's where the joint solution comes together that our customers are anxiously waiting to see innovation and bringing these two platforms together. So that's where we're seeing the opportunity of growth. Now as we compare to the market or our closest peer, our commitment is on what I just mentioned in terms of double-digit growth. In IP, in particular, we have communicated and we repeated that it's a transitional year for us for '26, but the market opportunity is there. We have the scale, we have the skills, and we have no doubt that we will deliver to our long-term view for IP.

Joshua Tilton, Analyst

Makes sense. Maybe just a quick follow-up for Shelagh. More of a clarification question. Did I hear correctly that relative to your guys' expectation that it was Ansys that drove most of the outperformance to the revenue guide? And if that is the case, when we think about the potential for upside throughout the rest of the year, are we playing for that upside coming from the Ansys business and more of an in-line year for the organic business? How do I think about that?

Shelagh Glaser, CFO

We observed significant strength in the first quarter for Ansys, reflected in the $866 million figure. The strength was evident across all the industries that Ansys serves. For the entire year, while we do not provide guidance by segment, we anticipate strong performance across all lines.

Operator, Operator

And next up is Joe Vruwink, Baird.

Joseph Vruwink, Analyst

I wanted to ask about EDA software specifically within design automation. If hardware was a big contributor to strength for the overall segment, I'm assuming the software piece is still growing in the single digits. Maybe can you walk through some of the biggest items in your mind that start to lift the growth profile in the EDA software business higher? And are you seeing any evidence of that yet in bookings or renewal opportunities that are on the horizon?

Sassine Ghazi, President and CEO

Thank you, Joe. Regarding EDA software, this is a stable and predictable business, and we are aware of when renewals are due. We engage with customers early to implement new technology, which varies by client. When I refer to two different market segments, the first segment is focused on AI development. These customers are eager to use Synopsys.ai, the 3DIC Compiler, Fusion Compiler, PrimeTime, VCS, and more. We maintain a leading position in EDA software and continue to collaborate, engage early, and look for upsell opportunities during and between renewal periods. The second segment of customers has not seen as much R&D investment and push for acceleration. Typically, our renewals are aligned with the monetization process. Overall, we are enthusiastic about the opportunities arising from the foundational work at Synopsys. The next significant opportunity will be a joint solution that utilizes the Ansys portfolio to develop new products and monetization avenues.

Operator, Operator

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

Sassine Ghazi, President and CEO

Thank you. It's such an exciting time to execute as one company and Ansys now part of Synopsys. With that, we have extended our technology leadership into simulation and analysis, and we expanded our customer base into new market opportunities. The other point is on AI. AI is absolutely a megatrend that is fueling system level and semiconductor R&D investment. And our AI products are capable and are mission-critical for our customers' success. We are focused on executing with financial discipline as we solve our customers' biggest engineering challenges from silicon to systems. Big thank you to the global Synopsys team for a strong start to 2026, and thank you all for joining us today.

Operator, Operator

Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.