Synopsys operates in a particularly complex field, as it is active in the EDA (Electronic Design Automation) and IP (Intellectual Property) software markets. These two segments provide semiconductor manufacturers with the tools and software they need to design their chips. To simplify, imagine that an electronic chip is a house: EDA software represents the architect's plans and tools, while IP corresponds to prefabricated modules (windows, stairs, doors) that can be inserted directly into the house without having to be redesigned each time.
Synopsys is one of the world's leading players in both of these markets. The group recently acquired Ansys for nearly $35bn in order to expand into multiphysics simulation (thermal, mechanical, electromagnetic) and thus offer a more comprehensive EDA suite, from chip logic to validation of its actual behavior in a system.
This quarter was marked by Ansys' first contribution to the accounts. But that's not what caught analysts' attention.
The company stands out for its particularly strong growth. Revenues have tripled in ten years and margins have increased by two-thirds. This momentum is reflected in a particularly demanding valuation: over 50x profits, 10x revenue, and 30x operating income on average over the period.
To justify such ratios, the group must consistently meet or exceed its targets. Conversely, the punishment can be brutal, as yesterday's trading session illustrated.
Synopsys disappointed and surprised on many levels. First, the company warned that US export restrictions were contributing to a slowdown in growth in China, the company's second-largest market. This is not the first time Synopsys has mentioned the risks associated with Washington's desire to limit China's access to advanced semiconductors, but it is the first time this has been so clearly reflected in the accounts.
Second, the IP business is not performing as well as hoped. Synopsys was counting on several deals that did not materialize due to obstacles to projects in China, difficulties experienced by a major foundry customer, and certain poorly calibrated internal decisions. In this regard, CEO Sassine Ghazi acknowledged mistakes: "Some decisions made on our roadmap and resource allocations did not deliver the expected results." These factors led the group to revise its annual targets downward.
The publication is therefore undeniably disappointing. However, this setback should not obscure the fact that the potential remains significant given the group's fundamentals and exposure. After all, this is only a quarterly publication: the long-term potential is not in question at this stage.
In this sense, artificial intelligence is a powerful catalyst for the EDA software industry for two main reasons: first, because it improves design tools and thus accelerates time to market; and second, because it stimulates growth in the semiconductor market through chips dedicated exclusively to AI tasks, which are power-hungry.
Furthermore, the merger with Ansys is very promising: if it is well integrated, it will enable the group to broaden its scope of opportunities and better navigate the growing complexity of modern electronics. Some analysts are talking about $400 million in annual synergies over three to four years and potentially more than $1bn in the longer term.
Synopsys has suffered a severe setback, with its stock price recording its sharpest intraday decline since 1992. In response, management plans to reallocate its internal resources and reduce its workforce by 10%.
The stock is back to its April levels, when fears about customs policy caused panic in the markets. A new catalyst will undoubtedly be needed in the coming months to kick-start a marked upturn, as Synopsys has experienced many times before.
