Synopsys, Inc. Price & Performance (SNPS)

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, 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 eight ks that we released earlier today. All of these items plus the recent investor presentation are available on our website at www.synopsis.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call.

Good afternoon. We had a solid start to 2025. Exceeding the midpoint of our Q1 revenue guidance and delivering non GAAP EPS above our guidance range. As we outlined in December, Q1 revenue was down 4% year over year and non GAAP EPS was down 10% as we had one less work week in Q1 twenty twenty five versus Q1 twenty twenty four. Let me take few minutes to share some business highlights and then Sheila will discuss the financials in more detail. From an end market perspective, AI and HPC remained robust in the first quarter. While industrial automotive and consumer electronics remained challenged.

Despite the sale of two markets, along with headwinds in China, as we anticipated, Synopsys opportunity is tied to R and D and underpinned by the megatrends of AI, silicon proliferation and software defined systems. These trends are increasing design complexity and cost, while driving greater compute and energy demands. New design paradigms are essential to address these challenges and Synopsys is racing to deliver. I had the privilege to meet with semi and automotive customers at CES in January, who all expect their strong belief in the strategy we are driving. They underscored the passing need for solutions to design validate and optimize intelligent products virtually from silicon [indiscernible] Our pending acquisition of ANSYS will pave the way for new AI powered design solutions that fuse electronics and physics giving R and D teams the tools they need to ignite their future innovation. In January, the European Commission approved our pending pro competitive acquisition of ANSYS, and the UK CMA provisionally accepted our remedies toward the Phase one approval. As previously communicated, The U. S. HSR Act waiting period has expired. And we're making strong progress with other regulatory agencies including China. Customers overwhelmingly support this transaction and we continue to anticipate closing in the first half of twenty twenty five.

Moving to business highlights. In Q1, design automation revenue was up 4% year over year with one less week of revenue versus the prior Q1. While design activity remained strong. Synopsys is the leader in hardware assisted verification or HAV solutions. And this month, we strengthened our position, expanding our industry leading HAV portfolio to include new HAPS-two hundred prototyping systems and new ZEBU-two hundred emulation systems with up to 2x better performance versus our prior [indiscernible] AMD, ARM, NVIDIA and SiFive are among a number of customers who are the deploying our new prototyping and emulation technologies. And we were honored by their participation in our recent launch. Last year, we had our best year ever in hardware, and we expect another year of strong performance based on the enthusiasm for our newly expanded Synopsys HAV portfolio, which provides the unmatched performance and flexibility our customers require to prototype, emulate and verify ever more integrated complex and software defined systems. Strong design activity at advanced nodes [indiscernible] with two nanometer projects accelerating rapidly. Fusion Compiler is the industry leading platform for advanced node digital design implementation And this quarter, we saw a U. S. Hyperscaler tape out a two nanometer test chip exclusively using its Synopsys design flow.

Additionally, a two nanometer Fusion Compiler was the platform of choice for a U. S. HPC CPU tape out and an Asian mobile customers two nanometer SoC. Moving to Signoff Technologies, where we offer the industries essential Trusted solutions to close out timing signal integrity power and variation aware analysis. Headlining our portfolio is Primetime. Which is used by virtually all key advanced node customers. Customers are reporting significant productivity improvement with the most recent prime time release with one with multi core scaling. Our IC Validator product family is delivering tremendous value in physical verification sign off, and recent product improvements have unleashed even greater turnaround time improvements for customers. Leading edge customers are achieving greater than 2x turnaround time for full chip physical verification sign off at three nanometer and below. Enabling design teams to finish more sign off runs within the budget cycle time to improve the quality of results. Before moving out of sign off, a few points on Star RC. Which is the industry leading tool for extraction on advanced process nodes. To date, we've seen all of our major CPU and GPU customers on TSMC and three and Intel 18A using Star RC for sign off extraction with the key differentiation being the accuracy of results, and tool performance relative to competition.

The massive AI infrastructure build out that's currently underway paves the way for AI transformation across all industries. Including our own. AI is fueling chip innovation, and the AI driven EDA capabilities we pioneered. From reinforcement learning to generative AI capabilities, are delivering significant productivity gains and cementing our leadership position. But we're only at the beginning. While customers are realizing compelling value, from our initial AI driven optimization engines, These enhanced capabilities have not yet dramatically altered the underlying design flow for a chip. We see a paradigm shift coming with AGENTIC AI, where engineers can task autonomous [indiscernible] with executing complex workflows. We believe this will be massive value and productivity unlocked for our industry, which we'll talk more about at our Synopsys User Group Conference in March. But first, AI business highlights from this quarter. In Q1, we continue to drive Synopsys.AI adoption across our tools verification Test and Analog. In Verification, or VSO.ai, we saw a large U. S. Memory company begin deployment of VSO.ai to find corner case bugs realize a 2x improvement in hardware utilization while in Asian hyperscale customer achieved a 4x turnaround time improvement with VSO.ai on its HPC design. Significantly improving hardware utilization and outperforming the competition.

Our analog migration tool, ASO.AI, continues to build a strong pipeline of customer opportunities and in Q1 delivered a significant competitive displacement at a leading aerospace company. We also continue to expand our generative AI off We recently added script generation capabilities to the Copilots for Fusion Compiler and Primetime, and early customer results are demonstrating 30% average productivity improvements for designers. Additionally, Synopsys.ai generative formal verification capability [indiscernible] productivity boost in early engagements with key [indiscernible] [indiscernible] In line with our expectations, revenue was down 17% year over year versus a record setting prior year compare. While IP revenue can fluctuate quarter to quarter, the opportunity set for IP continues to expand. Particularly as AI customers accelerate protocol transitions and look for creative ways to drive enhanced performance per watt. This quarter, we launched the industries first ultra accelerator link or UAL and Ultra Ethernet IP solution to connect massive AI accelerator clusters addressing the industry need for open standard solutions. To scale AI accelerator infrastructure. We also continue to optimize our foundation IP libraries to deliver unparalleled AI performance. One, high performance AI customer used our memory and logic libraries to deliver breakthrough LLM performance at five nanometer.

Across our Interface IP portfolio, AI continues to push protocols forward at breakneck pace as customers drive for additional performance per watt. This quarter, we captured several key design wins, including a cutting edge PCIe seven point zero design with an AI infrastructure chip provider and we secured a two twenty four gig Ethernet win with a major ecosystem player. We also secured a 112 gig SERDES and PCIe six point zero agreement with a leading European telecommunications equipment provider IP development deal for a leading auto OEMs advanced two nanometer design. Our IP development for the foundry e ecosystem is a mission critical ingredient for the industry And in Q1, we announced silicon success for PCIe 4.05 IP on Samsung's SS8 process used in auto mobile, networking and storage applications. Also in Q1, we demonstrated silicon success for our onetime programmable non volatile memory IP. This technology enables secure storage for encryption keys product configuration and SRAM repair information and is now available in TSMC N4P N5, N6, and seven processes. Moving to mobile and consumer markets. Where end market demand is challenging, but design activity continues as customers ready a next wave of innovative products. A leading Asian automotive supplier adopted Synopsys Synopsys processor and foundation IP due to our long track record of delivering high quality IP.

Also in Q1, we closed [indiscernible] MIPI and USB with a leading mobile provider for an ARM based application processor. UFS or Universal Flash storage a key technology in these verticals. And we closed a UFS design with a key company driving a IPC this quarter. We also continue to see strong demand for the advanced UFS protocol in mobile to support LLM storage for Gen AI use cases. A few closing comments before we transition Sheila's remarks. We have a very resilient business model and our solutions are mission critical to our customers We have strong momentum across the business bolstered by secular growth tailwinds, including AI. The application of AI for EDA and engineering more broadly is just beginning which we'll discuss in more detail at Snug in March. Finally, customers and partners for a strong start to 2025 We are excited to continue our partnership journey with you through the year. With that, I'll turn it over to Sheila. Thank you, Saseen.

We delivered a solid start to the year with revenue in the upper end of our guided range, non GAAP operating margin of 36.5%, and non GAAP earnings above the high end of our guidance range. Our Q1 results are driven by our strong execution across the business leading technology that is mission critical to our customers, and a resilient stable business model. As a result, we are reaffirming our full year 2025 target [indiscernible] Non GAAP operating margin and non GAAP EPS. I'll now review our first quarter results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1,460,000,000 Total GAAP costs and expenses were $1,200,000,000 and total non GAAP costs and expenses were $924,000,000 resulting in non GAAP operating margin of 36.5%. GAAP earnings per share were $1.89 and non GAAP earnings per share were $3.03 Now on to our segments. Design Automation segment revenue was $1,020,000,000 up 4% as broad based strength was partially offset by one less week in Q1 twenty twenty five compared to Q1 twenty twenty four. Design automation adjusted operating margin was 39.7%, Design IP segment revenue was $435,100,000 down 17% due to timing and a tough record setting prior year compare.

Design IP adjusted operating margin was 29.1%. Free cash flow was $108,200,000 outflow for the quarter and we ended the quarter with cash and short term investments of $3,810,000,000 Now to guidance. For fiscal year twenty twenty five, the full year targets are revenue of 6.745 to $6,805,000,000 total GAAP costs and expenses between $4,970,000,000 and $5,030,000,000 total non GAAP costs and expenses between $4.05 and $4,090,000,000 resulting in non GAAP operating margin of 40% at the midpoint. Non GAAP tax rate of 16% GAAP earnings of $10.09 to $10.31 per share. Non GAAP earnings of $14.88 to $14.96 per share.

Cash flow from operations of approximately $1,800,000,000 and free cash flow of approximately $1,600,000,000 Now to targets for the second quarter. Revenue between 1.585 and $1,615,000,000 total GAAP cost and expenses between $1,190,000,000 and $1,210,000,000 total non GAAP expenses between $985,000,000 and $995,000,000 GAAP earnings of $2.21 to $2.33 per share and non GAAP earnings of $3.37 to $3.42 per share. Our press release and financial supplement include additional targets and GAAP to non GAAP reconciliations. In conclusion, we delivered a solid start to the year. We continue to execute and for 2025, are reiterating 10.1% to 11.1% revenue growth. Non GAAP operating margin of 40% approximately 13% non GAAP EPS growth. Our confidence reflects relentless execution and leadership position across our segments mission critical products to enable our customers' innovation and a stable resilient business model. I'll turn it over to the operator for questions. To one question and one brief follow-up. To allow us to accommodate all participants. If you have additional questions, please reenter the queue and we'll take as many as [indiscernible] Your first question comes from Siti Panigrahi with Mizuho. Your line is open.

Thank you. And congrats on a nice quarter. And Sheila, that 200 bps margin date is impressive. So, Hassain, I want to ask about growth trends that you expect to unfold over this short to long term. And when you segment your growth into AI and non AI sites, you talked about the strong AI driven design activity. So how do you see DeepSeq going to impact EDA in general? And Synopsys in particular? And then I have a follow-up. Yes. Hi, Siti. Thank you for the question. We started talking about the tale of two markets. Maybe about a year ago. And the reason for that is if you look at the semiconductor market in particular, you have the grouping of customers that they're developing semiconductor chips for AI, HPC, and they've had a very strong demand and a very healthy roadmap that we are engaged with and support supporting and selling to. Then you have the other grouping of customers which is primarily the consumer electronics or that their opportunity to leverage AI has been shifting to the right. Now you look at the consumer electronics, in particular, the PC, and mobile, it has picked up recently due to applications like AI on PC, AI on phone, and this is where Deepseak will provide an opportunity to expand the adoption of AI on devices given affordability, the effectiveness, you don't have to go back to to cloud in order to retrieve information, etcetera, etcetera.

Now you look at the whole semiconductor R and D, it's expected to grow from a 6% of sales per year to about 9%. For us, that's fantastic because remember, we sell to R and D inside our customers. Now you zoom out completely to the Synopsys Synopsys, We not only sell to semiconductor, we sell to system company which are developing chips not to be sold, but developing chips for them to consume And that opportunity as well has been great for Synopsys Synopsys they are consuming IT hardware, software to design some of the most sophisticated Chips. So that's how we see the landscape. I hope that gave you a sense of how we see the monetization. Okay. And do you see that now the non end of traditional semi non AI side, do you think that we already hit the trough? And do you expect what kind of trends you are seeing on those outside of making AI chips? On the consumer electronics side, PC mobile, yes, we have seen over the last two to three quarters, a acceleration in our customers' roadmap in building these chips In automotive, industrial, I want to say it's it's still about the same.

Thank you. That's helpful.

Thank you. The next question comes from Lee Simpson of Morgan Stanley.

Your line is open. This last quarter. And I assume herein given the discussion that you made around hardware that that hardware at least is shipping quite nicely to China. Probably not much else. So I wonder if you can maybe give us a sense for the moving parts If we leave aside export controls and the changes there, what is driving that flattening of sales in China And how should we think of that as we go through the year? And maybe as a follow on, Cecine, I couldn't help but you did tease us with the agentic AI and the productivity gains so I'm just trying to understand the viewpoint that Synopsys would have here utilizing assume deep research and like, are you looking at this as an Thank you. Regarding China, if you recall when we reported Q4 twenty twenty three and guided FY 2024, we said that we're going to be pragmatic and regarding China And we saw absolutely a trend of deceleration driven by two factors. The first one is the cumulative effect of restrictions And the second one that cannot be ignored, which is the slowing local economy and the money that's flowing into startups and the overall economy in China.

As we wrapped up FY 'twenty four, China finished roughly at corporate average. As we started looking at FY 2025 and all these I won't call them stress points in China, [indiscernible] assumed in our guidance that China will continue on decelerating and be below the corporate average. Due to the two factors I just mentioned. Now you pointed out hardware in particular and that's really not has nothing to do with one part of the portfolio or the other. Because customers when they're buying from us, they're still buying the software, the IT [indiscernible] but it has all these impact of roadmap shifting and customers we cannot sell to due to the risk [indiscernible] entity list. So that's China. In terms of Agentic AI, it's it's such an exciting opportunity. And the reason it's so exciting is truly the evolution of AI to get to a point of maturity that will truly change the workflow for engineering workflow for our customers. And we are well on our way to partner with key leading AI partners to bring in that transformation from generative AI to agentic AI to to the engineering world. Leveraging AI inside our company, absolutely. We are taking advantage of every opportunity for every function, not only the engineering functions, the various functions inside the company, to modernize and capture the product Great.

Thanks so much. Thank you.

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

Thanks for taking the questions. I was wondering if I could ask again on just kind of the design activity for non AI versus AI. For the non AI [indiscernible] have you seen like the rate of change over the past few quarters in terms of design activity, has that stabilized and improved?

Improved maybe outside of the the PC smartphone AI dynamic Thanks Joe for the question. For The way Synopsys Synopsys with semiconductor companies we engage on pretty much every single chip they have on their roadmap. So our observation and insights is based on the following. When a customer is designing a chip, say within a window of about fourteen sixteen months tape out meaning before they hand it over to the foundry to manufacture, are we seeing a shift to the right of that roadmap? And that's what we classified as that tail of two markets where if you are in the AI HPC, they're going from sixteen, eighteen months development down to twelve months. So it's a significant acceleration For the consumer electronic market, as well as auto industrial. For a period of time, the road map was not being fueled by the opportunity to [indiscernible] So that had we observed it through our IP pull down and the pace in which they move to the next project on their roadmap. We are seeing absolutely the pickup in the mobile and PC. And when it comes to auto and industrial, I want to say there is not much change compared to what we've seen over the last three ish four quarters or so.

But it does not mean they are not [indiscernible] but the pace in which they're developing and releasing it's not with the same pace and acceleration.

That's helpful. I appreciate the detail. As a follow-up, you talked about the new hardware solutions that you launched this month. Should we think about just the growth trajectory there as a pipeline And then in the context of is, I think your inventory increased a decent amount this quarter. I think it's at a record level. [indiscernible] let me make a comment in general on the market, then I would like to turn it to Sheila. In terms of the new hardware system, we're so excited about our launch because we we focused on the use case of a hybrid emulation prototyping use case where customers are looking for every bit of performance they can achieve in order to validate their software before the chip is available. And this has been the use case that Synopsys has led for many years. And with this new launch we continue on expanding that leadership. [indiscernible] Yes.

And we've been investing in hardware as you know. We're up about 15% quarter on quarter, about 9% year on year. That's not all finished goods. So obviously, as Cessin mentioned, we just launched a few weeks ago the exciting new platforms.

We're racing to build those products, finish those products out Demand exceeds supply right now.

We see much more back half loaded. In fact, Q4 loaded hardware year just because availability of those new units. [indiscernible] we're racing as quickly as we can to fulfill that customer demand But that's why we're putting so much more investment in hardware to be able to service those important important workloads for our customers.

Thank you.

The next question comes from Charles Shee of Needham and Company. Your line is open.

Thanks for taking my questions. Maybe the first one, a housekeeping item. Sheila, what's the backlog exiting fiscal Q1 twenty twenty five?

The backlog exiting Q1 is $7,700,000,000 Okay, got it.

Thanks.

So maybe more of a longer term question. But the question is rooted in last year's number. Last year, fiscal twenty twenty four, the EDA revenue was Synopsys if I back out the extra week impact in fiscal Q1 twenty twenty four, the growth rate was around 9% year on year. But when I look at your peer, their core EDA revenue also kind of show some sort of a deceleration from double digit to like high single digit in the last fiscal year. So it feels like you guys are probably seeing the same thing here, but [indiscernible] you think about the long term? You guys were thinking about 12% over long term, but was last year kind of hitting a six figure bottom in terms of EDA revenue growth or we still need to wait a little bit of recovery, let's say, the non AI side, you keep referring to a payoff to markets. For that to recover to get back to the low double digit EDA growth.

Charles, thanks for the question. For design automation, it has both EDA software and hardware. So you can lumpiness quarter over quarter. If you look at trailing twelve months and what we have communicated in our Investor Day, which is a 12% growth for For design automation, that was based on the next five year CAGR And we do believe that that will continue and we have no signals at this stage to believe that that will be any different. The Remember, we sell to a grouping of customers. There are the system companies and there are the semiconductor companies. The semiconductor R and D investment has been going up which is very good for Synopsys Synopsys it's as I said earlier, from 6% to 9%, we benefit from that growth because they're investing more in hardware, in IP, in EDA, etcetera. And then you have the system companies, which is growing at a higher rate than the 9%. And that's why we believe that 12% is appropriate for us to commit to and deliver towards the 12%. Thanks. Maybe a quick follow-up on China.

So, seeing I think last quarter, when you provided the first look at the fiscal twenty twenty five China, you adopted like the prior fiscal year, you want to be a little bit more cautious. But you actually did not provide a quantitative guidance on where you think China growth rate or percentage contribution to our total revenues can be in fiscal 'twenty five. But look at the reported the first fiscal Q1 number, it's a pretty meaningful step down from last year's average China revenue run rate, let's say $250,000,000 per quarter, but fiscal Q1 was like 174 Even if I think of China revenue is going to be flat year on year for you, that means a pretty meaningful catch up for the next three quarters.

So are you at a place where maybe you can start to call the direction of China, maybe even the absolute dollar base or percentage wise where the China revenue can go this year in fiscal twenty twenty five? Are you there yet? To make a call?

So Charles, what I can say at this point last year we finished at corporate average. The deceleration and the headwinds in China are getting stronger that we don't believe it will be at corporate average We will finish below corporate average in terms of China growth. And that has been accounted for in our guide.

Thanks. You're welcome.

The next question comes from Joe Ruink with Baird. Your line is open.

Great. Hi, everyone. I see in the 10 Q that backlog composition actually swung a bit more to current bound where I think over recent history, you've had strong backlog developments, but it's been particularly notable in long term RPO and those multiyear engagements I guess I'm just wondering how you kind of think about the trade off between annual contract value and total contract value Is it true that there's a maybe shifting in duration that you generally don't mind as it provides an opportunity to reengage with customers over that contract Or are some of the changes we've seen in backlog composition is that at all reflecting how customers are preferring to engage with you?

There is definitely no change in terms of customer behavior And as you know, Joe, the backlog you build and burn the backlog The EDA type of contracts, there's still on the same average duration. So we have not seen a big customer behavior change at all. On IP and hardware, as I mentioned in the tale of two markets remarks, that it even though the contract may be committed by when the customer pulls it down, varies based on the pace in which they are building these chips. So but there is no behavior change from customer or market point of view or anything differently we're driving in terms of extending durations with customers?

Yes. And Joe, I would just add sort of a nuance. When we do our backlog, we also report our FSA That next twelve months of backlog is X the FSA. So if you look at it that way, there's not really as much variation. Anyway, just and again, that's that's customer preference when we go to sign a contract with them. What's in the base contract and then what's in the FSA. And as you know, the FSA is a committed non cancelable but it's going to be pulled down when the customer needs it.

Yes. Okay, then makes sense, Sheila. I wanted to go back to to your comments. So seeing that the current generation of AI you have available the optimization products. That's not necessarily changing design methodology.

Would you say that impacts your view at all that you expressed a year ago about how AI could lift industry growth rates for EDA by about 200 basis points or I guess a different way to ask have you actually seen that type of benefit And it's either because of your product demand or the markets you serve, But that 200 basis points of benefit is maybe being a bit masked by its the more tepid results from the analog markets you've been discussing?

Yes, excellent question, Joe. When we talk talked a year ago, we talked about two things, if you remember. We talked about Synopsys.ai Synopsys the AI optimization and the generative AI. We were not talking at the time about eGentic AI because we thought it was further down the road. And we kind of teased autonomous design at the time. But it did not from a technology point of view feel that it's coming as fast as it's coming right now. From a monetization point of view, the AI optimization we are monetizing it.

But is that monetization in aggregate will result on the 200 basis point Not by itself. No. But when you add generative and agentic are we still seeing an opportunity when we change the workflow for our customers and give them a different approach to design a chip cheaper, faster for us to monetize given the business model for AGENTIC will be very different. The answer is yes. That's why if you recall during our Investor Day, when we talked about AI optimization and generative, we did not put necessarily a timeline for that 200 basis point for that specific reason. But adoption from customers excitement about the technology penetration of the optimization across DSO, VSO exactly what where we thought we will be in the cycle. Okay.

That's great color. Thank you very much. Question comes from Jason Celino with KeyBanc Capital Markets.

Your line is open.

Hi. Thanks for taking my questions. Just wanted to follow-up on some of Charles' questions on China. So compared to ninety days ago when you initially set guidance, have your assumptions changed at all? I understand below corporate average makes sense. But if this is a change, the implication if it's true since you're holding the full year guidance the same, that something maybe in your EDA or IP business might have improved since ninety days ago?

So wanted to clarify that and see if that's the case on those segments.

Yes, Jason, the assumptions in our planning and therefore guiding the year has not changed. We've always believed that there will be and ongoing deceleration in China What we, I want to say, in our communication have our clarifying and changing is will it end similar to last year, a deceleration towards corporate average or do we believe it will go further below corporate average? And that's really the nuance in Claris But the assumptions we made in our guidance and our internal forecast based on regions, the portfolio, EDA software, IP hardware, none of that changed.

Okay.

And then the HAPS 200, the 200 announcements, you upgrade your products more frequently than your two competitors. How should we view these versus the prior? Iterations? I'm just trying to wonder if if we could see an air pocket, in demand as customers wait in the second half? Thank you.

That's the advantage we have within FPGA versus a custom chip. That you have a much faster refresh cycle and ability [indiscernible] perhaps 200 and the ZEBU-two hundred, actually no air pocket. And the reason for that is the same customers that they were buying from us the EP, remember we talked about the EP before, Now with that next generation they have already are purchasing the prior generation EP plus the new capacity that we can provide with the 200 And as Sheila mentioned, right now the demand is [indiscernible] to that demand, which we're building the capacity and our ability to expand it.

Thank you. Yes. And Jason, my comment was more about availability, not about air pocket and demand. So that is much more Q4 weighted Yes. Thank you.

Thank you.

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

Thank you. Good evening. So I see I'd like to ask your tale of two markets point from a different perspective and that is strictly with respect to semi R and D. And that is we do seem to have seen over the last number of quarters, more concentration of those semiconductor companies that are continuing to show good or even very good growth as compared to we might have seen previously where the growth was broader among the population of semi companies Is this something that you've seen or might be concerned about that in an already [indiscernible] sources of really good growth are becoming fewer and fewer. Then I have a follow-up. Jay, as you can imagine, we we are very intimate with every [indiscernible] investments, etcetera, and we track it very, very closely. If you look at it in aggregate, the increased investment in order to support their roadmap be it very advanced chips, N2 and N3, [indiscernible] advanced package even actually a bit earlier this week, discussions with automotive and industrial customers looking for the next opportunity to deal with more integration on their chip and move to the next node, albeit it's not an N3 or an N2, but going to FinFET, for example.

In order to provide a cheaper, more competitive chip, That's a great opportunity for us because they are investing more in R and D and they're doing a refresh per se on the IP that they want to pull down using more hardware using the latest EDA software, etcetera. So in aggregate, when we see the growth from 6% to 9% in the semiconductor R and D, we are seeing how it's matching with our growth It's not like they're growing from 6% to 9% and we're staying flat. We are growing with their growth of R and D investment. In aggregate, that's as a whole, yes.

Right, understood.

So your point about changes in productivity and workflow and the like is historically I think really interesting. And over the last four decades that commercial EDA has existed, it has probably always been the case that there are differences in how customers employ EDA and get a return on investments. EDA, it's never been equally distributed productivity. Let's say. And you look at a current example where the largest spender on EDA spends a higher percentage of R and D on commercial EDA, probably more than double the next largest company and yet we could look at differences of return on on the employing of the VDA. So the question is, as as you and your peers, infuse more AI capabilities across the design process. Do you think that that historical differentiation of capability changes and customers become perhaps more and more alike in their capabilities because of the availability of this wholly new class of technology?

The leading customers, they I want to say they worry about did As they invest bigger amount of their budget towards R and D Will AI democratize across and will make the number two catch up faster to the number one. Because of the AI and improving productivity.

The answer is the following. If you look at the workflow, so far, AI has not changed the workflow. The steps that you go through from phase the first phase until tape out of a chip has been the same from a workflow point of view, even though there has been tremendous amount of automation and innovation to deal with the increased complexity where we believe the agentic AI will have an opportunity is to change the workflow. And by the way, this is no different than other leading enterprise software companies, the way they are talking about the moment it changes the workflow, then you have an opportunity to monetize. So far EDA for the last X number of years or a couple of decades has provided amazing amount of technology and innovation, but the workflow has remained the with the same So that's the nuance, Jay, that we're highlighting. In terms of opportunity with AGENTIC. Understood. Thanks, Hassim. Thank you.

Comes from Neissi Ng with Berenberg.

Hi. Thank you for the question. Just got one, please.

On your cost control in the quarter and then how you guide it for next quarter as well? If I've got my math right, I think for the Q1, you're guiding towards the midpoint about 5% year on year total expenses growth. I think the quarter came in around 2%, so really nice outperformance there. But for Q2, you were guiding for cost growth about 8.5% at the mid point. So in light of how you perform in Q1, how should we think about the Q2 guide? And also if you could maybe Just some thoughts on the cost element H2 as well, please.

Sure. So we were a little bit lighter on costs in Q1 than we had originally anticipated, not really came down to just timing of hiring and timing of some big ticket expense items. We expect no change for the year. Structurally, Q2 always steps up because that's when our merit, our annual performance budget kicks in. And so that's the structural change that you see between Q1 and Q2. But no change for the full year, even though Q1 we are a little bit lighter just due to some [indiscernible] Got it. Thank you. Helpful.

Thank you.

Thank you. Thanks for the question. We have time for one more question. It will come from the line of Joshua Tilton of Wolfe Research. Your line is open.

Hey, guys. I really appreciate you sneaking me in here. Can you hear Yes.

Great. Saseem, maybe this one is for you.

It's more of a first a clarification and then trying maybe a point of understanding. If I remember correctly, the talk track around the guidance for this year coming out of Q4, was it you guys expected China to grow in line with the corporate average And I feel, correct me if I'm wrong, but I feel like now the expectation is that China is actually going to grow below the corporate average for the year. So my first part of my question is just clarify that's correct. Guess my follow-up to that question is, I guess what gives you guys the the confidence to reiterate the guide given now that you feel like China will be growing below the corporate average for the year? Thank you.

Yes. Joshua, you got it correctly. When we guided FY 2025, given we just came out of FY 2024 where China decelerated to corporate average. We did say that it should that based on our guide, of FY 2025, it will be around the corporate average growth. Now given the headwinds that we are seeing, and I want to say they're getting stronger even after we announced or guided number of customers got added to the entity list, etcetera. We believe that China by itself will be decelerating below the corporate average. However, the guide in itself is not changing. We see a number of strengths in technology and other regions, customers that we feel very good about the guide that we provided for the year.

Super helpful. Maybe is there any way you could just take that one step further and just maybe unpack one layer deeper into some of the strengths that you're seeing that is offsetting the China weakness?

Yes. That for example, the one that we just talked about, the half 200 and ZEBU 200 family, that's a great opportunity for for us to monetize IP. In the strong demand and requirement from system companies and AI, HP grouping of semiconductor, given our scale for IP, that's another opportunity. Today with IP, I want to say it's it's really a challenge and an opportunity around scaling. It's not the lack of opportunities. We have plenty of opportunities and given our position and leadership position in the market, that's a great opportunity These chips require very advanced EDA. And to reemphasize what I said earlier about AI optimization the latest fusion design platform ICV, the IC Validator competitive displacement, ASO, I mean, those are all things that are giving us great confidence that both growing share and being able to monetize that share and therefore sticking to to the guide that we provided. You're welcome, Joshua. Thanks, Josh. You close this out, operator?

Yes.

Yes, thank you.

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