Good morning. Welcome to the 27th Annual Needham Growth Conference. My name is Charles Shi. I'm the Semiconductor Design Software and IP Analyst at Needham. With me here right now is Shelagh Glaser, Chief Financial Officer of Synopsys. Shelagh, thank you for being with us today. Charles, great to be with you. Yeah, thank you. Before we start, allow me to read the safe harbor statement from Synopsys. Today's discussion may contain forward-looking statements related to Synopsys' current outlook, expectations, and beliefs, which are subject to certain risks and uncertainties that could cause actual results to differ. Please refer to Synopsys' most recent SEC filings for discussion of risk factors that may materially affect these statements. Now let's get started. Shelagh, the past month has obviously been tough for Synopsys stock, but there seems to be some confusion around the fiscal 2025 guidance issue at the fiscal fourth quarter conference call. On a continuing basis, let me just quickly recap some of the key metrics. You guys guided 10.1%-11.1% top line growth for the upcoming fiscal year, and as well as it's a more second half weighted, let's say 45%-55% profile when we look at the revenue split between the first half and the second half. Do you mind if we start there and I'll give you a chance to really recap and hopefully clarify some of the misunderstandings around that guidance? Certainly. Thanks for the question. So as we thought about guidance for 2025, it was really informed by three things. So first of all, what we're seeing in the marketplace, which I think probably everybody on this call is seeing, is what we call a tale of two markets. We're seeing anybody in and around AI really racing ahead. The kind of the rhythm with which they're delivering products and the complexity that they're chasing is something we've never seen before. So you see those customers moving at a quite rapid clip. Really, the customers not yet indexed to AI, trying to find AI use cases. We're not seeing them move at the same clip. So you can just think about our customer base, tale of sort of two markets. The other piece that we talked about was China. China continues to have a lot of headwinds as it pertains to both economic and then as it pertains to technology. Really, when we think about China, it's not just restrictions that come out daily, but it's the cumulative impact of these restrictions. Originally, the restrictions were for a specific company, and now they're getting more field of use. So we see hesitation in the China market, so that's a headwind for us. Then lastly, we're just being balanced and pragmatic. We're about to ingest the largest acquisition in our company's history. First half of 2025, we're obviously spending considerable time getting ready for that successful close and that successful day one. Thanks. So that's a great overview. And obviously, there are several things we're going to touch upon later in this fireside chat. But I want to follow up on the 2025 outlook starting some of the product segment details. We know Synopsys runs an industry-leading portfolio in IP and hardware. Well, I don't mean that the rest of the business is not industry-leading, but these are the two businesses that we have seen that have been lumpy in terms of how the revenue progresses through the year and not quite easy for us, I mean, as analysts, as investors to really do a good forecast. But you guys seem to suggest within that fiscal 2025 profile, a very strong pickup of IP and hardware potentially in the second fiscal half of the year. What gives you the confidence that the profile is going to play out as what you see today? And And why do you guys feel like it's just a timing difference in terms of revenue recognition and it's not anything that the investor should be concerned about? Well, quite frankly, right, Shelagh, as you know, investors in general are a little bit worried about the hockey stick type of guidance. But let me put people's minds at ease by providing a little bit more color around why we are seeing what you're seeing. It you're seeing. It is like that? Absolutely. So when we think about our IP business and our hardware business, we're working shoulder to shoulder with our customers. So you can think about us as being almost a member of the design team. And so we're constant IP. We're the second largest IP supplier, as you talked about. We're constantly building IP titles, but the revenue recognition is when the customer ingests that into their product. And so our IP timing of revenue is really aligned to customer product schedules. And so that just happens to be this year more second half weighted. And you've seen us, this is why we actually did the segmentation to be able to help articulate what lumpy means. I mean, in fact, you saw us Q1 of last year, IP was up 53%. So it isn't that all that work just got done in Q1, but it is that the customer ingested. And the reason we have such high confidence on this is we're shoulder to shoulder with the customer delivering to their design. And so that lumpiness isn't about our delivery. It's about when that customer is going to ingest that into their design. And so that is what gives us confidence. On the hardware side, similarly, as somebody is building a chip, they're deciding what kind of hardware configuration they want. And then there's a specific time in the chip design cycle where they want to ingest that hardware. And so that's really how that becomes more back-end loaded. We did mention in hardware one headwind that we're running into that we're working with customers is, same as you're hearing everybody talk about data center space and power availability. You can think about our ZeBu as very purpose-built server racks for a specific workload. That's a challenge some of our customers have. So we're obviously working with them to build out what we call ZeBu Cloud so customers can actually access our systems on our premises while they secure space and power on their side, so the reason we have confidence, we're literally shoulder to shoulder with the design engineers to deliver the product, and so that's really what those schedules are. Thanks, Shelagh, and maybe let me talk a little bit more about China, right? I think you mentioned about China. You have a cautious view this year, but you have been cautious. I think this is for the second consecutive year you have that cautious view on China, but what's your view on the impact from the export controls? Well, that was announced in early December. I think that was right in front of your earnings, right? You did provide some color, right? The HBM-related restrictions, you do expect some impact, but just last night, yesterday to today, the news is that there seems to be more restrictions around the foundries outside of China that will restrict their ability to supply to their Chinese customers, and basically, that kind of means that some of the access to leading-edge manufacturing by China is going to be further restricted. There will be all these kind of restrictions. Like you said, it's cumulative, but how should investors think about what that means to your China business? Can you kind of walk us through in a more comprehensive way? Yeah. Yeah. Yeah. So I'm not going to reference what came out 24 hours ago because obviously all of that needs to be ingested by the industry. But I will talk about what we talked about in the call and really what we're seeing in China. So over the course of multiple years, more companies have been added to the Entity List. The minute a company is added to the Entity List, there's no further engagement. So that comes at a backlog. There's no further engagement with that customer. But what has increasingly been happening is technology restrictions and field of use restrictions. And so that narrows the capability and opportunity for customers that we're working with. And so what that has the effect of doing is either delaying a decision because the customers are trying to understand whether the chip will be able to be manufactured and taken to high volume, or in some cases, cancellation of a chip because they realize that once they make that chip, it's not going to be competitive because it won't be able to be at the right performance indicator. So we're anticipating that environment continues where there's hesitation on customers or the customers may decide not to move forward with a particular design. What we talked about in HBM during our earnings call. It's not so much just that block, it's what that block's enabling. And so the need for HBM obviously is growing in the industry because as people have higher and higher compute workloads, you need that memory, that very high power memory to interface with it. To the extent that a customer can't have that technology, it makes them rethink about, well, what is going to be the performance of that chip? And so then they think about whether that chip's going to move forward or not. So that's what we talked about in earnings, but the environment we think is going to continue to have a lot of headwinds. Got it. All right. I want to switch gears towards the longer-term picture. So one of the worries that investors have is EDA growth deceleration. Of course, one should not expect a company to really set a new growth record every year. That's a little bit unrealistic. There will be ups and downs, but the long-term trend, we think it's still quite positive. But we also did see that the Synopsys growth rate on a continuing basis has come down from, let's say, 20% + in 2022 to, let's say, closer to 12% in 2025 if we really factor in the calendar differences between fiscal 2025 and 2024. But 12% is what we see, right? So what do you say to those investors who may be worried about deceleration of EDA? So what we see, and I'm going to start with the environment, and then I'll start with our role in that environment. So we see continued strength in design starts and R&D, which is really what our business is indexed to. And we play a mission-critical role. Nobody can create complex leading-edge chips without the use of our tools. It's just impossible to do. And we think about ourselves as taming the complexity that our customers are facing. So we see no slowdown in design activity. We see no slowdown in kind of the urge for continued power and performance. And we've talked a lot about the move now from chips design sort of workload down. So purpose-built chips, so more heterogeneous environments. So that's the demand environment we see. We talked about that at our investor meeting last year. We see no change in that. Short term, there's this tale of two markets. But obviously, even in that tale of two markets, the folks that aren't yet infusing AI are trying to figure out how to infuse AI. And so for us, we still are playing a mission-critical role with our customers. We see long-term growth of industry-leading double-digit growth. So there's really no change in our view of the long term. Got it. So maybe switching gear more into the P&L side of the business. Shelagh, I think since Sassine and you're part of the Sassine team, since you guys took over the leadership of Synopsys, I think you both have done a fantastic job improving the profit margin for Synopsys. Well, you just guided, let's say, 40% operating margin for fiscal 2025. But going back just a couple of years, and I think the number was in low 30s, right? So you're now targeting mid-40s% operating margin over the long term. Obviously, divesting software integrity business is one factor there. But when we look at IP, right, making 37% operating margin in some quarters, even over 47%, something seems to have changed structurally for Synopsys because I think you've told us, right, that the IP is structurally. You should expect a lower operating margin. But looking at all these IP margin numbers, it feels different. So, mind if you walk us through what you have done and, maybe more importantly, what you plan to do going forward to get to that mid-40s% operating margin and where's the confidence from to convince you that mid-40s% is really achievable? Yeah. And we are very committed to that. And as you said, we've been demonstrating that commitment. So it starts with intentionality about portfolio, discipline on our portfolio. And as you mentioned, the significant disinvestment that we drove of our software integrity business as we really looked at deploying capital inside the company, the returns on both IP and our design automation business are superior. And we've got this sort of once-in-a-generation opportunity that's really being born by AI. And then we'll talk a little bit about Ansys too. So really making sure our dollars are in the right place in the company and making sure that we've got closed-loop expectations of type of return on those dollars. And then it also starts with making sure that we're building a modern work environment for our customers. If you think about what do we sell to our customers, we sell them tools to tame complexity. We need to be doing that to ourselves. We need to be modernizing our own work environment. So we've got specific dedicated focus on really how do we continue to be best in class in a modern work environment for every engineer. We're mostly an engineering company. So how do we ensure that those folks have the latest, greatest? And we're constantly creating engineering capacity, which is what we do for our customers. So how do we do that for us across our software engineers and then our hardware engineers and our IP engineers? So that's a dedicated focus for us inside the company on that. And then also, if you think about the core sort of engine of the business, we've got a dedicated focus on driving digital transformation. So you can think of that more being on the sales and the G&A side. So I think we're excited as we bring Ansys on to be able to bring their capability and then jointly between the two of us to drive margin in the mid-40s. Yeah, that's a very good segue to talk about Ansys and overall picture on M&A. So Synopsys has made, I mean, quite a few announcements over the last, I would say, one or two months related to the regulatory approval of the Ansys acquisition. You guys talk about the U.S., the latest on the U.S. And obviously, we've seen press releases on the U.K. and the E.U. review process. You've made progress. Mind if you recap for us a little bit because there's a lot there? And more importantly, what do those milestones mean? Mind if you kind of unpack a little bit for us towards the eventual closure of that Ansys acquisition? Absolutely. Yeah. So we're really pleased with the process. This is obviously a critical part. And so I'm going to make sure that I get them all right. The EC has approved our pro-competitive transaction in phase one. The UK CMA provisionally approved the transaction in phase one. And as you mentioned in our earnings call, we talked about having the HSR period had expired. We're working with the FTC for that finalization. And we're working through to make sure that all those various parties review the remedies that we've talked about. You've seen us announce the sale of our optical business to Keysight. You similarly saw Ansys announce the sale of the PowerArtist business to Keysight. We also announced recently that China had accepted our filing, which means they're now in the review process. And so all of those milestones, just if I would summarize, give us the confidence that we will be able to close in the first half of 2025. And obviously, each jurisdiction has a slightly different set of meetings and requirements and things like that. But this is all very positive, seeing kind of the provisional phase one and then the phase one approval in the U.K. So we feel very positive. We're working very cooperatively with these agencies. And I think really what underpins it, Charles, is we've had enormous support from customers in terms of their interest in having us be able to create this, if you will, combined design environment to help them really accelerate their product development. So been very positive. Thanks, Shelagh. So sounds to me, right? I'm no legal expert, but that sounds to me that the approval process with the U.S., U.K., or E.C. looks like it's on a more advanced stage at this point. But China looks like still relatively early. Do you have any thoughts on the China side, especially given that the Chinese, well, the track record of approving the U.S. semiconductor deals in the past few years hasn't been really great. But what's the thought there? So it's been strong engagement, and it's been a very cooperative process. And what we see is when you look at U.S. to U.S. transactions, they largely have been approved because if you think about we're already subject to the U.S. restrictions, so is Ansys. And so there's really no change in terms of how we can conduct business in China. And we're working cooperatively through the process, and we're seeing strong engagement for them. So again, it leads us to confidence of first half of 2025. Got it. So let's discuss some post-close financial questions. Well, it's been a year since you guys announced a deal, still looking at the first half 2025 close. I recall, well, we did have some differences in things like EPS accretion, deleveraging, I mean, my view versus your goals. So I think fair disclosure, right? I mean, we did think that the first year post-close, you guys probably are going to see a little bit of EPS dilution. And I think that we also did think that the deleveraging target is quite challenging. I mean, it doesn't mean that they're not achievable, but I think it looks pretty challenging to us. So any updated thoughts since it's been a year, right? You announced those post-close financial targets. Maybe just let me be a little bit more direct. Where do you think we might have missed when we published our view on those post-close financial targets about a year ago? Yeah, so there's really no change on our commitment on those financial targets, and I would say, if anything, we now have more fidelity around those numbers because we've been able to engage in integration planning processes, obviously not hands-on, but the planning process, so in terms of our commitment to a rapid delever, we're very committed to that. Obviously, individually, we both generate significant cash, and then jointly, we'll generate significant cash, so we're very focused on driving a rapid delever to under 2x within two years, and if you think about the synergy target that we took and the long-term and short-term margin targets, it's really greater fidelity about exact timing of all those different things, so there's no change on those. Our commitment is unchanged, and now we've got a bit more fidelity on exactly how we go about those things, so no change. Thanks, Shelagh. Well, lots of exciting things ahead in 2025 for Synopsys, so I guess this is the first time probably I host a fireside just with you. Obviously, there was another time with Sassine and both of you there, but this time just you, so I'm going to have one question for you, dedicated for you, and as the CFO, what are your top priorities for fiscal 2025? Yeah. So top priorities are obviously continued fiscal discipline, as we've talked about. So making sure that we're investing in that leadership, but we're also making sure we're creating that modern environment. So we're driving that leverage over time. And then the second one is obviously preparing for Ansys. So that'll be the largest acquisition in our company's history. The opportunity that we have bringing these two great companies together for our customers is really meaningful. And so making sure that not only that's coming together, but the financial underpinnings are all coming together to continue to deliver on our commit. Thank you, Shelagh. Maybe this is time for questions from the audience. Just as a reminder, if you're on the webcast, there's a box, a Q&A box. You can type your question there, submit, and then I will be able to see the questions. I won't announce your name, but I will ask the question on your behalf. I'll take advantage of the opportunity to ask a question directly to Shelagh live and in real time, please. The first question I have here, maybe Shelagh, you talk about the HSR expiration, right? You guys talk about that on earnings call. So mind if you educate us a little bit more. What does that mean, HSR expiration? Yeah. So it's a positive sign because that means that the review process that we went through, and as I said, there's a series of meetings and a series of reports and a series of analysis that needed to be done. So that's a positive sign that it expired. The steps that are now happening are the engagement with the FTC on concluding, making sure that their review of our remedies and the two that everybody is well aware of because we've disclosed, making sure that that is sufficient in their minds. And so that process is working through very cooperatively, but it's a positive sign that it cleared that, that there were no items that were flagged that meant that there was some hesitation. Got it. The second question from the audience, it's about the embedded IP revenue growth in 2025. The question is this. Is the IP growth target for fiscal 2025 already in your backlog or not? So a large amount of our IP business is what we do is we sign contracts with customers that have a guaranteed term and a guaranteed dollar. So those contracts are in our backlog, but we also have a terms business with our customers. You could come in today if you want and ask for an IP block, and if I already have that, I can deliver to you. So a portion is going to be in backlog, but a portion of that business is a terms business. Okay. So the next question from the audience. So Shelagh, can you share some details on the individual verticals that you have seen under pressure from your business perspective? Because you did mention it's a tale of two markets, right? AI and non-AI, the AI haves and the AI have nots. But can you give a little more granularity in the non-AI side, maybe? Sounds like. And what do you think? Any bright spots, any weak spots in those different verticals? Sure. So one that I would call out in the bright spots is obviously really anybody indexed to AI. So we're seeing both semiconductor customers indexed to AI, and then we're seeing the hyperscalers indexed to AI go at a very rapid clip in terms of sort of their designs and the complexity of their designs. Where we're seeing some of the tail of the other market is, for instance, automotive. We're seeing there's some challenges in that market. And so we're seeing it's not that customers are not still investing in chips. They're just not adding extra chips, or they might be slowing down the schedule on a chip. They might be elongating the schedule on a chip, which again, for our software business doesn't change because our software business is aligned to a number of engineers, but it would change how much IP they need or how much hardware they need. I would say even in PC markets, still trying to find the use case for AI. I would say generally what we're seeing is still design activity, but it's just not at the pace that the AI cohort is driving at. Got it. Thanks. The next question. Well, I have a good number of questions. I do want to get them addressed. So next question. Are there any contingency plans of how to deal with a situation where China just takes a very long time to approve the Ansys acquisition and is not making a decision? We've seen this in the past. I wouldn't want to speculate on that. Our expectation is that we will be able to successfully close in the first half. We're working cooperatively, but I wouldn't want to speculate on something like that. Okay. Thanks. So next question. This may be a little bit more technical. The question is this. How will the migration to 2-nm gate-all-around and maybe what TSMC calls A16, right? The backside power addition to 2-nm be beneficial to Synopsys? You can kind of think of more complexity being beneficial to us. The more complex the design, the more complex the design rules, the more complex the design environment, the more that customers need more tools from us. Then they're kind of looking to us to tame some of that complexity. I would say it's good news for us because customers are going to have to navigate yet more design rules going forward, which is good news for us. It's really good news for all parts of our business. The payoff is there. That's why customers are going through this complexity. It's not pain without gain, but it just means that they need more assistance from us. Thank you. We still have time for, I would say, maybe two more questions. Anything from the audience? If you're not comfortable using the Q&A box, you can send the questions directly to me at cshi@needhamco.com. I can read the email and ask the question on your behalf. Let's give it a few more seconds and see if more questions are coming over. All right. Looks like no more questions. I think we probably can wrap it up and give a few minutes back to everybody. Shelagh, thank you so much for carving out a few minutes with us and spending time with me and talk through all the top issues that people were discussing about Synopsys. I'm sure investors appreciate the transparency and appreciate all the color you provided on this call. Once again, thank you so much. Charles, great to see you. Thanks a lot. Yeah. Thanks, everybody. Enjoy the rest of the conference.