Shares of Synopsys (SNPS, Financial) dropped by 12% today despite surpassing Q4 earnings expectations and a strong AI-related market. The decline was due to bearish Q1 guidance and a modest FY25 outlook, influenced by uneven demand across various markets and regions.
Management described the current scenario as a "tale of two markets." While customers involved in AI infrastructure are thriving, benefiting Synopsys, the rest of the semiconductor market, including mobile, PC, automotive, and industrial sectors, is undergoing a refresh cycle. As Synopsys is linked to these sectors' R&D, it is maintaining stability but not experiencing growth comparable to its AI-focused clients. Additionally, challenges in China due to trade restrictions and a slowing economy pose further obstacles.
For FY25, Synopsys projects adjusted EPS between $14.88-14.96, with the midpoint exceeding consensus, and revenue growth of 10.1-11.1% year-over-year, totaling $6.745-6.805 billion, which falls short of expectations. Without the impact of an extra week and calendar year change, revenue growth would be 11.5-12.5% year-over-year, aligning with analyst predictions.
In Q4, demand was uneven. Although Synopsys exceeded earnings forecasts for consecutive quarters, revenue growth slowed to 2.3% year-over-year, reaching $1.64 billion, compared to previous increases of 12.7%, 15.2%, and 21.1%.
- Synopsys's Design Automation business led Q4 growth with a 17% year-over-year increase, highlighting strong AI demand. The company has integrated AI optimization engines into its products, enhancing hardware utilization and turnaround times. Multi-die designs are emerging in chip architecture, with 90% of high-performance computing and 70% of PC designs expected to be multi-die within two years.
- Regarding multi-die designs, Synopsys emphasized the importance of a design environment combining automation and multi-physics simulation. This is a key factor in its planned acquisition of Ansys (ANSS, Financial), expected to close in the first half of 2025.
- The Design IP business saw flat year-over-year growth, affecting overall revenue. The majority of Synopsys's IP business involves customers using chips made by Taiwan Semi (TSM, Financial) across various sectors like manufacturing, automotive, and smartphones, which are still recovering. This will likely result in fluctuating IP revenue in Q1, with Synopsys forecasting adjusted EPS of $2.77-2.82 and revenue of $1.435-1.465 billion, below analyst expectations.
Disappointing FY25 guidance, due to slowly recovering markets and uncertainty in China, led to significant selling pressure today. Despite these challenges, Synopsys remains optimistic about AI, stating it is in the early stages and will become a crucial part of the company's operations.
