Prepared remarks
Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Second Quarter Fiscal Year 26. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. To remove yourself from that queue, press star 1 again. If you require assistance during the call, please press star 0, and an operator will assist you. Today's call will last 1 hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Tushar Jain, Head of Investor Relations. Please go ahead.
Good afternoon, everyone. Welcome to Synopsys' second quarter fiscal year 26 earnings call. With us today are Sassine Ghazi, President and CEO of Synopsys, and Shelagh Glaser, CFO. Before we begin, I would 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 Form 8-Ks that we released earlier today. In addition, as mentioned in our earnings press release today, we plan to host an Investor Day on September 30, 2026. All of these items, plus the most recent investor presentation and the Investor Day information can be found 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 will turn the call over to Sassine Ghazi.
Good afternoon. Synopsys delivered a strong second quarter, exceeding guidance on revenue, non-GAAP operating margin, and non-GAAP EPS driven by solid execution and continued AI-driven demand strength. This is an exceptional moment to be the leading engineering solutions provider. EDA, IP, and multiphysics simulation have emerged as essential capabilities in the AI supply chain. AI scaling, semiconductor demand, architectural diversity, and complexity of both chips and the systems they power are driving increased demand across our portfolio. Our opportunities are expanding as customers design increasingly complex systems, from silicon to full-scale AI and physical AI, requiring more integrated engineering solutions across design, simulation, and system validation. Synopsys is uniquely positioned to capture this opportunity. Our recent Synopsys Converge event showcased the depth of our expanded portfolio and the strength of our roadmap. Zooming out, Q2 further reinforced my confidence in our strategy and trajectory. Our global team showed continued strong execution on the Synopsys-ANSYS integration, disciplined focus on higher-value IP opportunities, and engineering excellence to advance our differentiated innovation pipeline with agentic and multiphysics fusion technology. I look forward to diving deeper on these topics along with our strategy to increase value capture and expand margins at our Investor Day in September. Based on our momentum, leadership roadmap, and market signals, we are raising our full year 2026 revenue, operating margin, EPS, and free cash flow guidance. I will cover segment highlights before handing over to Shelagh for the financial details. Design automation delivered a strong quarter, reflecting robust AI-driven design activity and sustained demand, particularly in advanced node and 3D-IC solutions where Synopsys EDA leads. Hardware-assisted verification remained a key growth driver, with particular demand from hyperscalers and leading semiconductor customers who are scaling emulation and prototyping for increasingly complex AI designs. This drove multiple strategic system wins across ZS5, ZeBu, and HAPS-200. In EDA, our leadership in 3D-IC is translating into production-scale adoption. For example, in Q2, a leading HPC provider successfully taped out an incredibly complex next-generation AI accelerator using Synopsys' unified multiphysics-aware design-to-signoff solution. This demonstrates the production-proven capability of our 3D-IC Compiler, and we expect sustained adoption as next-generation AI designs increasingly move to multi-die and chiplet-based architectures. We also continue to lead at advanced nodes, with over 30 full-flow technical wins in the quarter driven by our ability to deliver superior PPA for increasingly complex designs. Across our EDA portfolio, we are extending our competitive advantage by pioneering new capabilities including multiphysics fusion, GPU-accelerated computing, and AI-driven automation. Early results for our forthcoming multiphysics fusion technology demonstrate meaningful productivity gains, including up to 3x faster design closure, with higher ECO success rates, and up to 2x faster turnaround times for complex analog designs compared to traditional flows. Multiphysics fusion is currently in expanding trials with leading customers and will begin rolling into commercial availability in the second half of fiscal 26. As we deliver more value to customers, we expect to share in that value creation as contracts are renewed and expanded. For example, we are seeing early signs of monetization with GPU-accelerated EDA, a premium capability driving both increased customer value and contract uplift. We are also advancing AI-driven design. Our agentic EDA capabilities are gaining traction with 20 customers now evaluating solutions across more than 25 specialized AI agents spanning front-end, verification, implementation, and analog flows. This agent-engineered technology represents a meaningful long-term opportunity to further increase productivity and drive higher-value customer engagements. We are maintaining our EDA leadership position supported by the success of recent renewals, pipeline activity, and monetization trends. Turning to ANSYS, which delivered another strong quarter, ANSYS extends our reach into system-level design and multiphysics simulation, strengthening our position as the leader in engineering solutions from silicon to systems. In Q2, we saw continued demand for system-level digital engineering and physics-based simulation across industries. For example, the AI data center build-out is driving ANSYS demand, including in and beyond semiconductors, as customers use the power of ANSYS simulation from chip to grid. In aerospace and defense, customers are adopting ANSYS simulation to generate physics-based synthetic data to train AI models for highly complex operating environments. And in automotive, manufacturers are increasingly digitizing engineering workflows and relying on simulation for safety-critical systems. Together, these trends reinforce our opportunity to deliver differentiated value at the intersection of silicon, systems, and physics. Turning to design IP, we are increasing our alignment with hyperscaler demand for custom AI silicon, where our differentiated portfolio, first-to-protocol leadership, and silicon-proven quality enable higher-value engagements. Demand for high-speed interconnect IP continues to accelerate, driven by AI's massive data requirements. In Q2, our PCIe 7.0 IP achieved a greater than 90% win rate with 18 new licenses and a growing pipeline. We also continue to see strong momentum in advanced connect technologies, including 24 gig, with multiple wins across leading and emerging innovators. The shift to multi-die and chiplet architectures is driving demand for die-to-die interoperability. In Q2, we secured additional UCIE design wins and achieved a 64-gig tape-out on a 2-nanometer process, bringing total UCIE lifetime wins to over 150. We are strengthening our position in memory IP, with design wins across hyperscalers, AI startups, and leading semiconductor companies. In Q2, we also delivered the industry's first HBM4 IP test chip. While we continue to expect muted IP growth for fiscal year 26, we believe the IP segment bottomed in Q1 and has begun its recovery. We expect sequential quarterly improvements throughout the second half, supported by our roadmap execution and pipeline. Importantly, we are focusing our IP business on the highest-value opportunities aligned to AI-driven demand and hyperscaler customization. These engagements enable us to provide greater value as they increasingly involve deeper collaboration, customized IP solutions, and even broader Synopsys participation in the design process. Also advancing our IP strategy, we expect to close the pending sale of the processor IP Solutions business shortly. I am increasingly confident in the long-term growth of this business and look forward to sharing more at our Investor Day. I am also pleased to share that today we announced a cooperation agreement with Elliott Management and the appointment of Jesse Cohn to our board as an independent director. Jesse has deep appreciation for the company and our mission. We welcome his constructive insights and look forward to working with him. In summary, the expansion of AI positions Synopsys for sustainable growth and margin expansion. As AI scales both chip complexity and system-level design requirements, our leadership portfolio of engineering solutions across EDA, IP, and multiphysics simulation enables us to deliver differentiated value to customers and to capture a larger share of this expanding opportunity. I want to thank the Synopsys team for an impactful Q2, with disciplined execution, continued technology leadership, and engineering excellence driving our next-gen solutions. Now over to Shelagh.
Thank you. As Sassine noted, we delivered a strong Q2, achieving revenue of $2.276 billion, a non-GAAP operating margin of 39.5%, and non-GAAP EPS of $3.35, all exceeding guidance. The results reflect continued strong execution and financial discipline across the business. Backlog ended at $11 billion. Before turning to the financials, I will briefly outline the drivers of our revenue outperformance. Q2 revenue exceeded guidance primarily due to the strong performance across the business. In addition, an accounting impact associated with recognizing ANSYS channel revenue on a gross basis added $12.5 million to revenue and an equal amount to expense, thus neutral to EPS and cash flow. Let me provide more details on this change. ANSYS integration is well underway. As we further align and improve our operations, we have deepened our understanding and experience with ANSYS' significant channel partner network. By enhancing oversight and pricing visibility, we are required to recognize channel revenue on a gross basis. This also expands our reach to customers Synopsys historically did not serve, gives us clearer business insights, and allows us to offer a broader portfolio of Synopsys and ANSYS solutions. We will continue to update you on the quarterly impact through the rest of fiscal 2026, and I will quantify the estimated full year effect in our guidance shortly. I will now review our second quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $2.276 billion. ANSYS revenue was approximately $652 million, including the accounting impact of $12.5 million related to channel revenue. Total GAAP costs and expenses were $2.156 billion, coming in higher than expectations primarily due to the accelerated timing of restructuring costs. As a result, GAAP earnings per share were $0.09. Total non-GAAP costs and expenses were $1.376 billion, below our guided range, reflecting the progress we are making in improving efficiency and realizing synergies, resulting in a non-GAAP operating margin of 39.5%. Non-GAAP earnings per share were $3.35, ahead of our expectations on the strong operational beat. Now onto our segments. Design automation segment revenue was $1.822 billion, including ANSYS. As a reminder, this excludes the Optical Solutions Group which was divested in Q4 2025. Within design automation, Q2 EDA revenue grew slightly over 8% year-over-year with strength in hardware-assisted verification solutions. Design automation adjusted operating margin was 43.3%. Design IP segment revenue was $454 million, down approximately 6% year-over-year and up 12% sequentially. Design IP adjusted operating margin was 24.4%. Turning to cash, free cash flow was approximately $575 million in Q2, and we ended the quarter with cash and short-term investments of $2.48 billion. Total debt at the end of Q2 was approximately $10 billion. Based on our strong cash position and our early paydown of term loans, we initiated a $250 million accelerated share repurchase in March, under which we received an initial share delivery of approximately 513 thousand shares with final settlement expected by January 1. During the quarter, we also executed a $50 million open-market share repurchase of approximately 127 thousand shares. Now to guidance. Given the strong first-half results and continued confidence across the business, we are raising our full year revenue, operating margin, EPS, and free cash flow guidance. Let me explain further. We are updating our full year revenue guide to account for three factors. First, the strong first half performance and increased confidence across the business increases our previous guidance by $35 million at the midpoint. Second, the ANSYS channel accounting impact increases revenue by $60 million, which is accompanied by an equivalent increase in expenses. And third, the previously announced divestiture of the processor IP Solutions business is expected to close shortly, resulting in a reduction of revenue of approximately $40 million for the remainder of fiscal year 26. This results in an updated revenue range of $9.625 billion to $9.705 billion. Within that, ANSYS revenue contribution is expected to be approximately $2.96 billion, including the accounting impact. This is consistent with prior guidance after including the channel accounting impact. Next, expenses. We are updating our expense guidance to account for two primary factors. First, cost discipline and accelerating synergies driving expenses down. We expect to be approximately halfway through our committed cost synergy realization by the end of fiscal year 26. Second, a $60 million increase in expenses due to the ANSYS channel accounting impact. Thus, total GAAP costs and expenses are expected to be between $8.469 and $8.599 billion. Total non-GAAP costs and expenses are expected to be between $5.675 and $5.725 billion and a non-GAAP operating margin of 41% at the midpoint, a 50 basis point raise to our previous guidance. GAAP earnings are expected to be between $2.49 to $2.91 per share. We expect non-GAAP earnings of $14.72 to $14.80 per share, a $0.34 increase at the midpoint from our prior guidance due to the higher revenue and increased operational efficiency. We are raising our cash flow from operations guidance to approximately $2.3 billion. Our CapEx guidance of approximately $300 million remains unchanged, resulting in free cash flow of approximately $2 billion, an increase of $100 million versus our previous guidance. Now to targets for the third quarter: total revenue between $2.41 billion and $2.46 billion; total GAAP costs and expenses between $2.075 and $2.125 billion; total non-GAAP costs and expenses between $1.44 and $1.47 billion; GAAP earnings of $0.84 to $0.98 per share; and non-GAAP earnings of $3.63 to $3.69 per share. Our press release and financial supplement include additional targets and GAAP-to-non-GAAP reconciliations as well as full year revenue guidance breakdown outlining the factors I mentioned earlier. Thanks to our global Synopsys team for a strong first half performance. Our disciplined execution and momentum across the business is a great setup for an even stronger second half. At our September Investor Day, I look forward to discussing the compelling long-term opportunity we have as a mission-critical partner for our customers. With that, I will turn it over to our operator for questions.
Questions and answers
Thank you. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up. Allow us to accommodate all participants. If you have additional questions, please reenter the queue, and we will take as many as time permits. Please stand by while we compile the Q&A roster. Your first question comes from the line of Sitikantha Panigrahi from Mizuho. Please go ahead.
Thanks. This is Sitikantha Panigrahi from Mizuho. So Sassine, congrats on a good quarter. I want to ask you about the IP business. That is one of the questions we get from investors after the weakness last year. It is good to see that Q1 was kind of the bottom and sequential improvement, and you talked about some of the shift towards the higher-value, more customized IP segments and with hyperscalers. Can you give us a sense of how these deals compare to traditional IP and what other factors give you that confidence of second-half reacceleration, and how should we think about the growth opportunity going forward in IP?
Thank you, Siti, for the question. Overall, I cannot be more enthusiastic and confident about our portfolio, in particular the IP opportunity. If you look at the Synopsys IP opportunity, we have the broadest portfolio, serving many markets from AI, HPC, and data center build-out to mobile, consumer, automotive, and so on. That portfolio is available across multiple foundries. The area we are focused on when we talk about high-value IP opportunities is how we capture the value that we are delivering to customers in a different monetization and business model. We are making very good progress, as I mentioned a number of quarters ago. By the end of this fiscal year, we will have a few customers with signed agreements with a new business model that provide the opportunity to capture more dollars than the traditional use fee or some level of NRE. The reason the customer is willing to entertain that change in the business model is their entire strategy, especially if you are a hyperscaler building your own chips, is built on the availability of Synopsys IP. That discussion is very positive. I am confident that we will get to the direction I communicated a number of quarters ago, which will accelerate our opportunity of growth in IP. And as you mentioned, for the short term, what we committed is sequential quarter-over-quarter growth, and as you could see, we achieved the 12% Q2 over Q1; Q1 was the bottom. I have no doubt we will continue delivering that sequential growth for the rest of the year.
That is good to hear and helpful. And so Shelagh, I have a follow-up question on your margin guidance. You raised the fiscal year, and if I heard you correctly, you said half of that committed ANSYS cost synergy is expected for this year. So can you help us find the magnitude of the remaining synergy opportunity in the back half or in 2027? And how should we think about the primary driver for further margin expansion synergies? Any other additional levers you can talk about beyond that?
Thanks for the question. Since we finalized ANSYS last year, we have focused on how we achieve synergies as quickly as possible. As I said, by the end of this fiscal year we will have achieved about half of our committed synergies and we are doing that in a very systematic way, ensuring that we are continuing to invest in building out the multiphysics portfolio and making sure we have the right go-to-market resources. We are looking at areas where we have overlap and duplication and reducing those both in terms of headcount and third-party contracts with vendors, combining those. We have been working through that in a very disciplined way to make sure we are achieving efficiency in everything we are doing. In terms of when we will achieve the rest of the synergies, I will talk more about that at our Investor Day. We do want to get through the synergy work as quickly as possible because we want the teams focusing on building the innovation going forward.
Great. Thank you both.
Thank you, Siti.
Your next question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.
Yes. Thanks for taking the question. I was wondering if you could help us kind of understand of the $35 million increase to the full year guide on the revenue outlook from business performance, how much of that was related to EDA versus IP?
Yeah. So we saw strength across the business. The key driver for the strength is the continued AI semiconductor opportunities that our customers are seeing and therefore translating into chip starts or design starts. System companies, i.e., the hyperscalers, are integrating silicon or expanding into their own chips. For us, it is a great opportunity on both ends: semiconductors as well as hyperscalers. For any of these designs, you need EDA software, hardware-assisted verification to verify the chip in the context of the software, and IP. So the strength was across the portfolio. The other part that is proving to be increased demand and essentialness is the ANSYS solution. Most of these chips are advanced package; thermal is essential. All the physics simulation, like fluid and structure, are essential. So we are seeing strengths across the portfolio.
Thanks for that. And then as a follow-up, wondering if you could provide any color on the engagements you are seeing on agentic capabilities and agents. How should we think about the structure of those contracts? As we look further, how should we think about agents driving EDA's share of R&D spend higher?
The whole AI-for-EDA started from the journey of reinforcement learning where we insert AI in every part of our products up to a copilot or an assistant for the human engineer. We have always thought the workflow will evolve toward an autonomous set of engineers or agent engineers, and we are seeing that happen now. What we are witnessing is the evolution from the traditional EDA product delivery, where the focus was on the user interface and simplifying out-of-the-box results for the human engineer, to a combination of human engineers and agent engineers running our tools. That is a fantastic opportunity because in both cases you need more of our products to deal with the complexity and the new workflow our customers are trying to evolve to. In early exploration with customers, we are discussing how to build from the subscription license our customers have for human engineers to run our product to subscription plus consumption for the agents to utilize our products. That is absolutely an upside for our EDA and ANSYS business as agents become more pervasive in our customers' workflows.
Thank you.
Your next question comes from the line of Vivek Arya from BofA Securities. Please go ahead.
Hi. This is Liam Pharr on for Vivek. Thank you so much for taking our questions. So I guess just to start, in regards to your largest customer, it sounds like Intel and pipeline is building. Have you seen any of that benefit? And if not, how and when does it start to impact your numbers?
So the great news for Synopsys is any new foundry or a new technology within the same foundry is a tailwind, in particular for our IP business, because you cannot on-ramp a customer to any process technology or foundry without our IP. It starts with the foundation IP, such as libraries and interface IP. When you hear about customers like Intel Foundry expanding their engagements, we are, of course, aware of these engagements very early on when that target is evaluating the technology. To remind you, we get paid once the customer commits to the technology and wants to go into production. During the evaluation phase, it is just an evaluation. Once it goes into production, we get paid for it. So for FY 2026, we are not accounting for any upside in our guidance. But as these wins move from evaluation into production, we will absolutely see the upside.
Makes sense. And as a follow-up, with new investors and the new board member, what do you expect to change from a pricing or operational perspective?
You are referring to Jesse and Elliott. From day one, our interactions with Elliott Management and in particular my interactions with Jesse showed immediate alignment on the value creation Synopsys provides and the essentialness of our assets. There was no debate on that point. The two other points that were made, given the value creation and essentialness of the asset, are: is there an opportunity to monetize further; and can we improve efficiency and profitability and translate that into better operating margins? As we have been talking about for at least three quarters now, you need inflection points in order to go from value creation to broader value capture. We are seeing it on the software side with AI, with the opportunity to have a broader set of users of our technology from human engineers to agentic engineers. On the IP side, with the move from merchant silicon to customer-owned technology and the essentialness of the IP portfolio, we see the opportunity to change the business model and capture more dollars for the value we are delivering. On operating margin, there is an efficiency opportunity as well that we can drive. We are demonstrating that over the last several quarters. This year we are raising our operating margin by more than 300 basis points versus where we finished last year, and we see the opportunity to continue improving both top line and bottom line.
Thank you very much.
Thank you.
Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Please go ahead.
Great. Thanks for taking my question. Sassine, I wanted to ask about your IP business. It seems like it was through the trough as you might call it. Did you close any business earlier than expected or see some earlier drawdowns? I'm trying to understand the sequential improvement commentary. Are you upticking on IP here?
Jason, the current IP sequential improvement is based on the pipeline that we have had and closing the engagements we could see in our forecast with the existing business model with our customers. You are seeing strong enthusiasm around engagements with the new business model, particularly in HPC and AI-based chips with the hyperscalers.
Jason, I would add that as we talked about last time, part of the sequentiality is as we move resources to more fully deploy on HPC, title availability becomes available as we move throughout the back half of the year. We need those titles to be available for the customers to pull down.
Okay. Helpful. Then when we look at the ANSYS business, it looks like it is growing in the mid-teens even when excluding the accounting item. But keeping the guidance the same for the year, I think the guidance assumes roughly 10% growth. Help me understand the strength in ANSYS and why you are seeing these mid-teens growth levels and what would drive that deceleration down to double digits in the second half for the full year? Thank you.
The first thing I will say is our very successful integration of the two companies. Acquiring a company like ANSYS with a broad portfolio and go-to-market motion and making sure we are not missing a beat on technology integration and go-to-market execution has gone well. From a market dynamics point of view, for ANSYS there is a semiconductor part—think of it like the EDA part of ANSYS—where multiphysics fusion is integrating into the portfolio. The number of engagements with customers on that new technology is happening at a rapid pace with very good outcomes; monetization is not happening yet because we are in evaluation with customers for the new technology. The part of ANSYS that serves industrial, automotive, aerospace, and defense is seeing an uptick because products being designed for the future are intelligent systems and very complex; they require more simulation and analysis to reduce cost and increase fidelity. That is the sweet spot of the ANSYS portfolio because it is trusted multiphysics simulation for these markets.
And Jason, I would add there is a mechanical aspect: we closed the acquisition of ANSYS in July last year and retooled them to be on our fiscal year, which means their prior Q4 is our Q1. You saw outsized growth in our fiscal Q1, and as we go through the year, they are reprofiled to our seasonality. Their strongest quarter traditionally has been their Q4, which is our Q1, so you see a bit of mechanical seasonality.
Okay. Perfect. Thank you.
Your next question comes from the line of Gary Mobley from Loop Capital. Please go ahead.
Hi, everybody. Thanks for taking my question. Over the last several quarters when describing chip design activity broadly, you talked about a tale of two cities, where in the analog design community you were hopeful you would see some acceleration in chip design activity but not quite yet. It looks like evidence in the marketplace suggests many big analog chip companies are seeing much improved business environment. Have you seen a resurgence in that customer base from a renewal activity perspective or general chip design activity?
We track chip starts closely. What we are seeing is design start increase in anything AI related. In industrial and automotive, while customers report revenue strength, design starts are not growing at the same pace as the AI cohort. We are seeing customer enthusiasm in the analog space related to physical AI, because you need sensors and actuators and analog interfaces to connect the real world to the digital world. But from a design-start perspective in that domain, activity is still fairly muted.
Appreciate that color. As my follow-up, I want to gauge the monetization of the jointly collaborated products between Synopsys and ANSYS outlined at Converge. When would you expect the first phase of that $400 million in revenue synergies post-acquisition and then eventually the $1 billion in revenue synergy?
FY 2027. We released a limited set of partners to the technology and are expanding as we get feedback from early customers evaluating it. The key principle we are putting guardrails around with the sales organization and customer engagement is 1 plus 1 must be greater than 2. Many of these customers have access to Synopsys and ANSYS technology; the new multiphysics fusion needs to be additive to the baseline. That will start in FY 2027. We communicated a $400 million revenue synergy for the semiconductor-related multiphysics opportunity, and that base is on track. We had a thesis about acceleration around physical AI and digital twin opportunities. We are still on track with higher confidence given early customer feedback.
Thank you, Gary.
Your next question comes from the line of Andrew DeGaspari from BNP Paribas. Please go ahead.
I wanted to ask where you mentioned a leading HPC provider successfully taping out the next-generation AI accelerator. Is this the first one you've seen from a data center customer? How meaningful could this be for you?
If you are referring to hyperscaler taping out an accelerator, no, it is not the first. Different hyperscalers are at different maturity stages in bringing their own silicon into data centers. In each of these engagements Synopsys IP, hardware, EDA, and ANSYS portfolios are in use. For those customer-owned technologies, Synopsys is essential: EDA, hardware-assisted verification, IP, and simulation are all required. As customers move to more sophisticated custom technology, they need customized IP that is competitive with merchant silicon. That is the expanding opportunity and I am excited about the potential to change the current engagement model.
That is helpful. Sheila, a question on organic revenue for the quarter. Given the channel accounting noise and divestitures, are we in the 3-4% organic growth range excluding ANSYS?
In terms of the channel piece, it is $60 million for the year that included the $12.5 million in Q2, and you can think about that growing through the year as we build with the channel. We talked about IP sequentially growing, which you saw from Q1 to Q2, so we will have sequential growth. For the balance of the business it is really timing of when the upfront hardware piece in EDA occurs, so it is a timing difference between Q3 and Q4 of hardware. In Q2 specifically, we saw IP grow and had a good hardware quarter, and ANSYS had a big Q1 as noted earlier.
Your next question comes from the line of Joe Vruwink from Baird. Please go ahead.
Hi. Thanks for the time tonight. I wanted to go back to multiphysics fusion: is the greatest initial applicability really within signoff? I ask because Synopsys and ANSYS already had very high market share in signoff respectively, but the opportunity is probably accelerating at the category level given advanced packaging. Is the overall pie starting to grow and the combination of the two companies will capitalize on that?
Joe, you are absolutely right: signoff is always essential before a customer commits to the next phase of the workflow. We are fortunate to have signoff leadership across multiple physics as well as timing and power. The opportunity we are driving comes from customers moving to 3D-IC and chiplet advanced packaging. The complexity beyond electronics into structure and fluid and thermal must be taken into account during the design phase. We have leadership in 3D-IC Compiler and Fusion Compiler, and bringing that technology into the design phase so customers have a convergent flow and avoid surprises later is the value we are adding. While signoff is important, bringing algorithms and solvers early in the design phase is a key way we will engage customers.
Great. Then on backlog, I know it is noisy, but quarter-over-quarter it declined to $11 billion. Is that as expected, and is it related to timing of renewals within the fiscal year?
Yes. There is a normal ebb and flow. We build and then we burn, and it is really based on when renewals are, and it is very much what we expected.
Thank you.
Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Please go ahead.
Thank you. A question for Shelagh first on expense and then a follow-up for Sassine. Your headcount as of the end of Q2 was down about 7% from the peak at the close after ANSYS, having added about 6,000 employees. It would seem you have a few points left to go to fully complete the RIF you announced some time ago. On the other hand, there has been an unmistakable sequential uptrend in open positions for both Synopsys Classic and ANSYS Classic. For example, Synopsys Classic positions are more than four times the number at the end of Q4, and ANSYS Classic positions more than double. Can you talk about what you are thinking regarding bringing people in versus continuing headcount reductions to keep margins in line?
You are right, Jay. We still have some more reductions to go for our 10% target. As we said, we are doing that through the course of the year. There are still more actions taking place. At the same time, we are also investing in critical areas and making sure we have the right technical folks both in go-to-market and engineering to deliver the roadmap Sassine has been talking about. We are doing a mix of reductions in areas that are not priorities while investing in key priorities, and we are very disciplined about the roles we are hiring for. It is really about building the roadmap and making sure we have the robust go-to-market team to support it. We are still committed to the 10% target. We have done a majority of the reduction, so what is left is more measured, but we are still investing to ensure critical technologies are funded properly.
Understood. Thank you. Sassine, the accounting change regarding the ANSYS channel is interesting, but I am more interested in the operational plan for that channel. ANSYS had a sizable channel business across industrial customers. The first batch of multiphysics fusion is largely about EDA integrations that might have happened anyway. Could you talk about what the product set needs to look like beyond this first batch to sell more conjoint products into the ANSYS channel beyond just EDA products? Also, can you speak about what your new CRO has been doing over the last half year?
Jay, your observation is correct: ANSYS had both direct sales and a significant channel for its industrial markets, and most EDA business was handled direct. Semiconductor customers are primarily in the Synopsys direct channel where we have integrated the ANSYS-system EDA into the Synopsys go-to-market team. There is some co-selling opportunity with these customers and that is where Mike, our CRO, is working to ensure a smooth interface to customers. So far, I am pleased with how the go-to-market integration is progressing. ANSYS' channel partner network is impressive; it allows us to go after the long tail of customers in a light-touch manner and capture opportunities in areas where Synopsys Classic did not have similar coverage. We are moving some products into the channel to leverage that capability. Mike brings strong knowledge of both EDA and system-level solutions and has been deliberate in architecting the organization to deliver current and future opportunities.
Your final question comes from the line of Joshua Tilton from Wolfe Research LLC. Please go ahead.
Thanks. I have two. First, can you help us unpack some of the strength you saw from a geographic perspective? China was up sequentially but North America and Europe declined. Anything to call out on what drove that dispersion?
Overall, there are no surprises. On China, the design-start environment remains challenged given the restrictions and the cumulative impact of those restrictions. We have been pragmatic in our guidance for China. For the U.S. and Europe, we are seeing strength driven by the ANSYS portfolio outside of semiconductors in areas such as aerospace and defense, automotive, and industrial, and that is happening across the board.
On China in particular, it did show strong growth in the quarter, and that includes ANSYS because we did not have ANSYS previously. It was also a relatively easy compare versus the prior Q2. We have not changed our forecast for China for the year and remain pragmatic.
Makes sense. My follow-up is more high-level. Many investors look at Synopsys and see a long list of reasons why growth could improve — pricing for multiphysics fusion, IP business recovery, agentic opportunities, new hardware, and more. In the prepared remarks you used the phrase 'durability of growth' more than improvement. How do you think about the potential for Synopsys to improve the growth rate from here versus more durable growth? Can you help us understand the shape or how you think about future growth given that list of opportunities?
Thank you, Joshua. I want to emphasize the value of durability while also noting there are a number of inflection points, as you mentioned. The key inflection points include changing monetization to capture more value, particularly around IP and EDA/ANSYS combined opportunities. With AI, customers will not simply pay more for delivering the same product, but as they inject workflow changes with agents and broader user sets, there will be increased demand for licenses to train and influence these agents. We expect changes in monetization and business models to happen over time, and we are determined to drive and capture that change. We will provide more detail at our Investor Day. This is not a new thinking; we have been discussing it for several quarters. Given the value we are delivering and creating, we will capture value with different business models to drive growth. I will wrap up by reiterating my enthusiasm to be the leading provider of engineering solutions from silicon to systems. Our portfolio spanning EDA, IP, and multiphysics simulation is essential for AI innovation. A huge thank you to our global Synopsys team for an amazing quarter and thanks to our customers and shareholders for your continued commitment.
This concludes today's call. Thank you all for attending. You may now disconnect.