Shares in electronic design automation (EDA) and engineering simulation software company Synopsys (SNPS 0.43%) had a very eventful September. The stock declined by 18.2% in the month, according to data provided by S&P Global Market Intelligence. However, that figure only tells half the story, as the stock lost 35% of its value in early September following a disappointing set of third-quarter earnings. That said, the stock has recovered somewhat since then. Here are the details of what happened and what investors might expect next.
Synopsys' difficult quarter
The company reports out of two segments. Design automation encompasses its core EDA business and the newly acquired engineering simulation software business, Ansys. This segment combines EDA tools for designing and developing semiconductors with simulation software (Ansys) to test the results of the products and their interaction with the chips designed using EDA.
NASDAQ: SNPS
Key Data Points
The smaller design intellectual property (IP) segment provides third-party IP blocks that customers license to use in their semiconductor designs.
The design automation segment is performing well (third-quarter revenue up 23% year over year), but the design IP segment is not (down 8%).
What went wrong
CEO Sassine Ghazi disclosed three factors that negatively impacted the design IP segment in the quarter:
- The Trump administration imposed export restrictions (now lifted), causing "disrupted design starts in China," and it's going to take time for confidence to return among its customer base, not least as they can't be sure restrictions won't return.
- A major foundry customer (not named, but possibly Intel) for which Synopsys built out IP, in anticipation of a demand pick-up, is facing challenges that have reduced its demand for Synopsys design IP.
- Ghazi referred to "certain road map and resource decisions that did not yield their intended results," which include the foundry customer noted above.
These issues won't be resolved in the near term, and management is undertaking a strategic portfolio review aimed at focusing the company on growth opportunities.
Image source: Getty Images.
Where next for Synopsys
As indicated above, Synopsys is facing challenges from a major foundry customer, which may turn out to be Intel (the two companies have a decades-long partnership) , and the stock recovered significantly on the news of Nvidia's investment in Intel.
While Intel's involvement in the design IP segment issues remains an unknown, it's clear that the segment's difficulties won't be resolved over a quarter or two.
On a more positive note, the integration of Ansys enables management to pursue its goal of expanding its EDA customer base by selling to Ansys' broader customer base. In addition, there's a significant growth opportunity coming from the ever-growing penetration of semiconductors, AI, and intellectual property in products, which should open up new customers for Synopsys in the future.
The company has an exciting future, but it needs to navigate a difficult period in its design IP segment in the coming quarters.
