Synopsys Inc

NASDAQ:SNPS

Q3-2025 Earnings Call

[Operator]

Ladies and gentlemen, welcome to the Synopsys earnings conference call for the third quarter Fiscal year 2025. [Operator Instructions] 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, Investor Relations. Please go ahead.

[Unknown Executive]

Good afternoon, everyone. With us today are Sassine Ghazi, President and CEO of Synopsys; and Shelagh Glaser, CFO.

Before we begin, 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. Pursuant to the close of the Ansys acquisition on July 17, our results include roughly 2 weeks of ANSYS financials. As shown in today's financial statements, the vast majority of Ansys revenue appears under the Simulation and Analysis Product Group with the remainder included under EDA.

In addition, we will refer to certain non-GAAP financial measures during this 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 8-K that we released earlier today. All of these items plus the most recent investor presentation are available 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'll turn the call over to Sassine Ghazi.

[Sassine Ghazi, executive]

Good afternoon. Q3 was a transformational milestone quarter for Synopsys. Against an unprecedented and challenging geopolitical backdrop, we closed the Ansys acquisition, expanding our revenue, our customer base and our long-term opportunity. We delivered third quarter revenue of $1.74 billion and non-GAAP EPS of $3.39. Our results were primarily impacted by underperformance in the IT business as we had the expectation of deals that did not materialize, driven largely by the following 3 factors: one, new export restrictions disrupted design starts in China, compounding China weakness; two, challenges at a major foundry customer are also having a sizable impact on the year. And finally, we made certain road map and resource decisions that did not yield their intended results. We are actively pivoting our IP resources and road map towards the highest growth opportunities, which I'll discuss in more detail.

Looking ahead, we believe we have derisked our forecast knowing that transformation takes time and the external headwinds I cited will continue. We are taking a more cautious view of Q4 while still expecting to deliver a record revenue year. Let me provide more color on our Q3 execution and the actions we're taking to accelerate our strategy. before Shelagh covers the financials in more detail.

Zooming out, AI continues to drive unprecedented investment in infrastructure and R&D. Demand for high-performance computing and AI applications continues, while semiconductor demand in markets like industrial and automotive remains subdued. Despite the uncertainties in industry dynamics that we must navigate, I remain very optimistic about Synopsys future. The increasing complexity, cost and time-to-market pressure of designing and delivering AI-powered systems is a trend that persists across industries and underpins our opportunity. Now more than ever, we believe Synopsys will be a mission-critical partner in addressing these challenges.

Adding Ansys gold standard simulation and analysis solutions to our portfolio dramatically expands our long-term growth opportunity. We are now not only the EDA leader, we are the global leader in engineering solutions from silicon to systems. This acquisition marks a significant milestone for not only Synopsys, but also our customers and the industry. As products evolve into more sophisticated intelligence systems, their designs grow increasingly complex while development cycles continue to accelerate. The rise of physical AI underscores the importance of our combined expertise. R&D teams must not only optimize product design for performance and efficiency, but also consider the real world interactions of these products. That's why, for example, we're embedding NVIDIA Omniverse technology into our Ansys simulation solutions making it easier to develop, train, test and validate autonomous systems with greater speed and confidence.

Not only can we deliver new innovation with Ansys now part of Synopsys, we have diversified our portfolio and our global customer base. Together, we will maximize the capabilities of engineering teams across industries, from semiconductor to automotive, industrial, aerospace and beyond, enabling them all to rapidly innovate AI-powered products.

Let's move on to business highlights. Design automation revenue, inclusive of Ansys products was up 23% year-over-year, led by strength in hardware, as the complexity of designing silicon for AI workloads drives demand for Synopsys powerful emulation and prototyping solutions. In Q3, we achieved multiple competitive wins with leading hyperscalers and shipped record ZeBu Server 5 and HAPS 200 ZeBu 200 units. EDA continues to demonstrate resiliency. Our Q3 results reinforce our leadership in next-generation chip design.

Synopsys continues to win competitive bids for full flow digital implementations, including a multiyear commitment with a leading AI customer. Synopsys sign-off and extraction platforms also continue to set the industry standard with broader customer deployments and successful tape-outs on advanced designs. Synopsys leading AI capabilities are a key differentiator. Today, roughly 20 customers are broadly piloting synopsis.ai GenAI-powered capabilities. These capabilities pave the way for agent engineered technology. We believe the evolution of AI from a helper to a door will truly transform engineering workflows.

Multi-die momentum also continued in Q3, we enabled multiple successful multi-die tape-outs for leading AI semi companies. Customers are enthusiastic about the promise of integrating our semiconductor timing and power sign-off capabilities with Ansys gold standard of thermal sign-off, and we expect to deliver our first fully integrated solution in the first half of next year.

I'll turn now to simulation and analysis products, which empower users to build and test products virtually. These solutions represent the largest portion of our Ansys acquisition and performed in line with our expectations for the quarter. As is typically the case, the largest contributors were in the high-tech aerospace and automotive verticals. In Q3, we released Ansys 2025 R2, providing customers access to groundbreaking advancements in AI-driven simulation, GPU acceleration, system-level modeling and cloud computing. These newly released products extends Synopsis AI leadership into simulation and analysis to help customers more efficiently develop and deliver their innovations.

Turning to design IP, which was down 8% year-over-year due to the headwinds I previously mentioned. Again, we need to pivot our IP resources and road map to the highest growth opportunities. These changes are already underway. Let me give some context. Zooming out evolving data center architectures, particularly those focused on AI, are accelerating the demand for faster data movement. This trend is driving strong demand for high-speed protocol IP and solutions that enable both scaling up and scaling out of large-scale systems. At the same time, the semiconductor and IP landscape is undergoing profound change. What was once a business rooted and individual IP licensing is rapidly evolving. The industry is increasingly requiring more sophisticated subsystems and chiplet-based solutions to combat complexity and accelerate time to market.

In summary, our high-performance silicon-proven IP portfolio positions us as the leader in the fast-growing interface IP market. We support a broad spectrum of applications, including HPC, Edge AI, automotive, mobile and consumer. By retargeting our resources and portfolio toward higher-value solutions, we are further strengthening our leadership in advanced interface and foundation IP.

Before handing over to Shelagh, I want to address the company-wide steps we're taking to achieve greater scale and efficiency to accelerate our silicon to systems strategy and drive long-term growth. Synopsys transformation, which began with the divestiture of the Software Integrity Group, followed by our strategic acquisition of Ansys continues. Specifically, we are conducting a strategic portfolio review and we'll be taking actions to focus our investments and our execution on the highest growth opportunities. We look forward to delivering with Ansys a differentiated design solutions road map and remain firmly committed to realizing the projected synergies of the merger.

In addition, our enterprise-wide initiative to develop and deploy custom GenAI is boosting productivity. We will continue harnessing AI efficiencies to optimize our cost structure. Taken together, we expect to undertake related actions starting soon that will reduce our global head count to roughly 10% by the end of fiscal year 2026.

A few closing thoughts. Synopsys is transforming with Ansys, we are now the leader in engineering solutions from silicon to systems. We've expanded our opportunity broadened our portfolio and increase the resiliency of our business. We remain focused on maintaining our leadership position while pioneering new solutions that will shape the next wave of innovation. Near term, we are deeply committed to prioritizing our IP execution and improving our efficiency to scale the business, accelerate our strategy and capitalize on the highest growth opportunities. Thank you to our employees, customers and partners for your continued commitment. Engineering is undergoing unprecedented transformation and Synopsis is seizing the opportunity to reengineer engineering. Now over to Shelagh.

[Shelagh Glaser, executive]

Thank you, Sassine. Q3 revenue came in at $1.74 billion, non-GAAP operating margin of 38.5% and non-GAAP EPS at $3.39. Backlog came in at $10.1 billion, including Ansys, underscoring the resilience of our business. Our results were impacted by the underperforming. We are taking a conservative view on Q4 and updating our full year 2025 targets for revenue, operating margin, EPS and free cash flow.

I'll now review our third quarter results. All comparisons are year-over-year unless otherwise stated. We generated total revenue of $1.74 billion, up 14% with strong growth in design automation. Regionally, we saw strength in Europe and North America, and despite sequential improvement in China, headwinds persist. Total GAAP costs and expenses were $1.57 billion, and total non-GAAP costs and expenses were $1.07 billion, resulting in non-GAAP operating margin of 38.5%. GAAP earnings per share were $1.50 and non-GAAP earnings per share were $3.39. Earnings included the impact of lower cash on our balance sheet and the additional $4.3 billion term loan used to fund a portion of the cash consideration and expenses associated with the Ansys acquisition.

Now on to our segments. Design Automation segment revenue was $1.31 billion, up 23% with strong performance from our hardware business. Design Automation adjusted operating margin was 44.5%. Design IP segment revenue was $428 million, down 8%. As mentioned before, our IP business faced several headwinds. In response, we are taking a more conservative view of Q4, and we are realigning our IP resources to the highest growth opportunities and improving our execution. Third quarter Design IP adjusted operating margin was 20.1% due to the lower-than-expected revenue and the investments we are making in the IP road map.

Moving to cash. Free cash flow was approximately $632 million. We ended the quarter with cash and short-term investments of $2.6 billion and debt of $14.3 billion.

Now to guidance, which has been updated to include Ansys as well as factoring the continuation of the headwinds previously discussed. For fiscal year 2025, the full year targets are: revenue of $7.03 billion to $7.06 billion; total GAAP costs and expenses between $6.08 billion and $6.10 billion, total non-GAAP costs and expenses between $4.43 billion and $4.44 billion, non-GAAP tax rate of 16%. GAAP earnings of $5.03 to $5.16 per share; non-GAAP earnings of $12.76 to $12.80 per share. Cash flow from operations of approximately $1.13 billion and free cash flow of approximately $950 million, lower than prior expectations due to lower revenue and the interest impact of cash utilization and additional debt for the ANSYS acquisition.

Now to targets for the fourth quarter. Revenue between $2.23 billion and $2.26 billion; total GAAP costs and expenses between $2.12 billion and $2.14 billion, total non-GAAP costs and expenses between $1.44 billion and $1.45 billion; GAAP earnings of negative $0.27 to negative $0.16 per share and non-GAAP earnings of $2.76 to $2.80 per share. Our press release and financial supplement include additional targets and GAAP to non-GAAP reconciliations.

With the Ansys acquisition now closed, we remain confident in achieving the committed synergies of the merger. This is despite the delay in completing the follow-on divestitures of the Optical Solutions Group and Power Artist business, which is elongating the full integration of Ansys as we work to obtain a final regulatory approval of the buyer.

In conclusion, this was a milestone quarter for Synopsys. We are clear-eyed about the challenges we face and the actions we must take to align our portfolio to the highest growth opportunities, optimize our cost structure to drive greater scale and efficiency, which will include reducing our global head count roughly 10% by the end of fiscal 2026 and importantly, to extend our leadership position in engineering solutions from silicon to systems, delivering a differentiated design solutions road map with Ansys. The team is laser-focused on executing a strong finish to the year and delivering resilient long-term growth for our shareholders.

With that, I'll turn it over to the operator for questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Ruben Roy of Stifel.

[Ruben Roy, analyst]

Sassine, I'm wondering if you could maybe spend a few minutes just walking through the 3 challenges around the IP business. Just kind of thinking through export restrictions and design starts in China and then the foundry customer versus the road map and the impact of that. It seems like that's potentially a bigger issue that could be a headwind longer term? And maybe you could just kind of describe Q3 and kind of what the impacts were across each of those 3 issues? And then as you think about next year, and resource reallocation, et cetera. Will this require acceleration in things like M&A? Or are you kind of positioned to address the needs of your customers with what you're working on organically? And how soon can you turn this around on what sounds to be the most important part of those 3 headwinds?

[Sassine Ghazi, executive]

Yes. Thank you, Ruben, for the question. You're right. There are 3 factors that we mentioned that impacted our IP performance for the year. The first one is the China BIS. Even though the restriction was only limited to 6 weeks, the impact from our customer behavior lasted definitely longer than the 6 weeks restriction. Customers were questioning whether or not they will invest in a multiyear commitment with Synopsys, how broad will they make that investment? If they start an investment in a chip, can they finish it? Can they take it out. So I don't want us to assume that the restriction was -- that the impact was limited to the restriction period, which was 6 weeks.

The other factor, which is the foundry customer impact where we have made a significant investment in building out our IP for that foundry customer with an expectation that there will be a return in the second half of '25, and that did not materialize for a number of reasons out of our control, there are market-driven reasons and customer-related reasons for that.

So when we look at the impact for the quarter and as we derisk our Q4, those 2 primary reasons where were -- what created the impact for the revenue during Q3 and as we're anticipating Q4 and continuation of these factors. As for the last point, which is the road map and resource allocation, it's somewhat related to bullet #2, as we make investments and as the leader in IP we have responsibility as part of the market position we have. We're not a boutique IP. We have the broadest IP portfolio, and our customers expect us to serve various needs and requirements that they have.

So some of the decisions we made were investing, for example, in Edge AI opportunities for IP that we put resources on delivering to these opportunities, and it came at some road map cost on which foundry to make that investment and for data center delay in some of our IP titles. That is something we know exactly what we need to do, and we're already underway to address them. And to give you some color on what we are doing, within Q3 we have merged 2 engineering teams. So we have our IP team that builds and deliver on what we call stand-alone IP and the market is shifting towards subsystem and potentially in the future, chiplet delivery. And we have a separate team that works on customization, which we call the System Solutions Group. We merged these 2 groups together in order to accelerate our ability to deliver to the opportunities that they are in front of us.

So it's all about scaling, and we are addressing the scaling opportunities, and I have no doubt that we will see our ability to pivot these resources. And these are things you cannot fit within a 90-day window, but as we look at the road map and the priority of the road map, we will commit and deliver to these items.

[Ruben Roy, analyst]

If I could segue then into question for Shelagh on the operating margin with IP coming down and Ansys sort of coming into the model here. If I've done my math correctly, it looks like Shelagh, the operating margin is going to net out or a little less than 6% for Q4. And just wondering if you can comment on kind of the decline in operating margins and maybe how you bridge to the longer-term target in the mid-40s.

[Shelagh Glaser, executive]

Yes. Thanks for the question, Ruben. It's really the impact of the IP business and the downside on revenue of the IP business. As Sassine talked about, that's a very resource-intensive business. So as the revenue headwinds that we talked about are hitting the business, we're realigning the resources, but we want to continue to invest in that road map for the long term. And so that's really the impact. I would say it's a lesser impact, obviously, Ansys is fully integrated. Ansys came with a higher operating margin. So the impact is really the IP.

And our commitment to the long-term operating margin in the mid-40s is still intact. So our short-term headwinds that we're managing through are really short-term headwinds, but there's no change in our long-term commitment.

[Operator]

The next question comes from Lee Simpson of Morgan Stanley.

[Lee Simpson, analyst]

Great. Maybe I'll start again with the Design IP. I mean, clearly, the weakness here has come as quite a surprise for everyone. We haven't seen this elsewhere. It does look maybe on the simplistic mathematics that it's around about $120 million that you're weaker versus expectation anyway for Design IP. And I think you've called out the 2 elements, China and, of course, the foundry customer as primary here. So I'm just trying to understand how much of a heads-up did you have on this weakness, this design IP slowdown. And maybe how much of this is permanent? I mean does the China business come back? Do you think does the foundry business evolve into something else? I really just want to get a color on how permanent this might actually be.

[Sassine Ghazi, executive]

Thank you, Lee, for the question. I want to start with that we had an aggressive plan in IP for FY '25 after an outsized performance the year prior, where we grew that IP business by 24% and the year before that by 17%. And there were some large agreements we were not able to get during this, I want to call it, hyper and intense period of our company's history. I know I communicated to some of you that during Q3, I was in China 6 times in order to work on the transformative acquisition that we got to a positive outcome, of course. And it was the most important thing we had to do, and we got it done, and we're very excited about it.

In the process there were signals that were missed in the forecast as to the magnitude of the factors I described, the 2 factors that you outlined. So I don't believe that these factors are just a Q3 impact. We will continue on derisking our forecast and anticipate that we will have a transitional, a muted year in IP, as we look ahead into FY '26. Now in December, we'll provide more color, but the overall FY '26 components and we feel strongly about the other segments of the business. But as it relates to IT and these 2 factors regarding China and the conditions in China, I don't believe this is a Q3 only challenge, as it relates to the foundry customer.

It all depends on where do they go with the technology that we already developed the IP for and what's the opportunity to sell that IP after we developed it. Now is it permanent? It depends what you mean by permanent and at what level of the IP business. We have an incredible market position in the demand actually is much higher than our capacity to deliver. One of the challenges that I described as road map, resource allocation, we have a massive team working on IT yet, we cannot capture all the opportunities ahead. I mentioned some of the actions we took. There will be more deeper look in terms of priority as well as our ability to scale by leveraging technology like a new methodology to be able for our team to deliver the IP faster, higher quality, et cetera, et cetera. So the opportunity in IT is absolutely strong, but there will be a transitional period due to the factors I mentioned.

[Lee Simpson, analyst]

Got you. And maybe just 1 for the clarification on the road map and resourcing. I'm just trying to understand, is there a specific area that we should be thinking about here. It sounds to my years, and I could be wrong, obviously, that this is mainly foundational IP that you're realigning for, because you did mention interface technology but didn't suggest that was where you're realigning that almost seemed like where you were doubling down. Have I got that the right way, around?

[Sassine Ghazi, executive]

Let me add more color, Lee, because it's not quite. So today, if you look at the Synopsys portfolio for IP, we serve multiple markets HPC, Edge AI, automotive, mobile consumer, and we serve that portfolio for multiple foundries, not only 1 foundry. And as I mentioned to Ruben when he asked the question, we have and our customer has expectations and we have the responsibility given that portfolio breadth that we have to serve the multiple foundries for those multiple markets in both interface IP and foundation IP.

In -- there's more and more customization in particular, for interface IP. And this customization are moving from an off-the-shelf to a more subsystem delivery which is it takes longer, it takes more resources and our ability to change the business model or the need to change the business model is an ongoing dialogue with our customers. Because as they're expecting us to do more work than just off-the-shelf IP, there's an opportunity for higher monetization and that's what we're pivoting our resources, our methodology, our approach from an architecture point of view to serve that market for the interface IP that I talked about.

[Operator]

Your next question comes from Charles Shi with Needham & Company.

[Yu Shi, analyst]

I do want to follow up on the pivoting on the IP side of the business. It does sound like other than the China and maybe the foundry customer challenges, Synopsys is really going through a transition in the IP business model. I think one thing really caught my attention in your prior remarks as I then was about higher level of customization, maybe more migration into subsystems. It seems like that it's something your IP not necessarily a competitor, but another peer of our in the IT business has been going through over the past couple of years. I wonder how should we rethink about the long-term IT operating profitability from that perspective because we do get the idea why this is moving to that direction, but are you able to maintain the same kind of IP long-term operating profitability targets going forward? Wonder if you can provide some strategic thoughts on that direction.

[Sassine Ghazi, executive]

Yes. Thank you, Charles. You know the pivot from our customers in terms of expectation from off-the-shelf IP to customization it's not new. But what is new is the magnitude in which the number of customers are expecting for us to deliver instead of discrete IP to deliver a number of IP that we glue them together with some customization, logic and logic, et cetera, and validate and ensure that it hits the mark with the right quality. Each 1 of those engagements historically had 2 components. It had an NRE component and a used fee component.

Given the demand for that customization, we need to ensure that we are capturing the right value for the impact we're delivering. Therefore, it's not something that we are, I want to say, happy to just say it's an NREs use fee, there has to be another element in order for us to put priority for these opportunities and deliver to. And that's what the discussions we're having with a number of these customers. And as you look ahead, if you fast forward 2 plus years from now, will we start delivering from a discrete IP to a subsystem to possibly chiplet? What level of chiplet? Is it a soft chiplet? Is it a hardened chip like meaning GDS 2, is it all the way down to a non good die with a partner?

These are all questions and expectations our customers are asking us, given we are the leader in that space, and we have a number of engagements with a few strategic partners. We are absolutely assessing as this market is pivoting, and we're pivoting with it. What is the business model to maintain the right profitability in order to capture the opportunity and growth that we have.

[Yu Shi, analyst]

Maybe a follow up, a short-term question, $10.1 billion backlog for the quarter exiting July. How much of that was Ansys backlog and how much of that was legacy Synopsys backlog?

[Shelagh Glaser, executive]

Charles, we're going to be breaking that out, but we have strength across the business. So we continue to see strength in our core business. We saw strong finances -- and that gives us a lot of confidence in the long-term growth of the business, $10.1 billion.

[Operator]

The next question comes from Joe Quatrochi with Wells Fargo.

[Joseph Quatrochi, analyst]

Yes. Maybe just to follow up on that last kind of train of thought on the IP business. I mean, are we to think about you looking at different business models in terms of royalties and things of that nature, similar to some of your competitors? And I guess, can you talk about just your customers, I think you talked about them wanting to move very quickly on the subsystems and IP, I guess, can you talk about just time to market and the competition there?

[Sassine Ghazi, executive]

Yes, Joe, the key is the IP business is scaling. And Synopsys, we've been fortunate. We've been in that business for 26 years, and we do have the investment and the scale. But given the fragmentation, I want to call it, based on our customer needs and requirements that are becoming more customized, no matter how much scale you have, you need to put priority. And based on the priority, the right business model in order to capture the right value for what we are delivering to those customers. And some of the discussions we're having with our customers is a combination that does include some sort of a royalty.

We're in fairly early phase in this discussion, and those are very much related to subsystem type of delivery to our customers. So I hope that clarifies it, Joe. What I mean by we need to look at something different than an NRE plus use fee, given that customization opportunity.

[Joseph Quatrochi, analyst]

Yes. Appreciate the detail. And then as a follow-up, for Shelagh. How should we think about just on a go-forward basis? Like what's the right level of cash balance that you need day-to-day as we think about just the debt paydown and the pace?

[Shelagh Glaser, executive]

Sure. So in terms of our day-to-day cash balance, we have a minimum that we hold just to ensure that we're properly able to invest in the business. We're well above that with the cash balance we have. This year, we'll make interest payments on the debt, and we anticipate being able to start to pay some of the principal next year on the term loans. Those 2 term loans are due in '27 and in the '28 time frame. So we're well above our minimum to be able to manage the business. And the one other cash inflow that we'll have once in my prepared remarks. But once we complete the approval with of the buyer of OSG and Power Artist, will have that cash inflow from both of those disposition.

[Operator]

Your next question comes from Siti Panigrahi with Mizuho.

[Sitikantha Panigrahi, analyst]

I want to switch to the Ansys acquisition. So it's been now Ansys 1.5 -- more than 1.5 months with -- after the close. So what are the puts and takes in terms of what you expected the beginning last year, when talked about versus after you having? What are the surprises that you have seen? And specifically, I think you talked about the revenue synergy you still reiterated. But going back to the Ansys growth, if we look at S4 filing there, they are talking about low to mid-teens over the next few years. So what are the potential drivers for that Ansys to grow above that 10% market growth? Any color would be helpful.

[Sassine Ghazi, executive]

Yes. Thank you, Citi, for the question. As you can imagine, we are incredibly thrilled and enthusiastic about the opportunities ahead. And the market is speaking actually. When you look at the moves that are happening in the market to grab assets in order to bring in the solution that is required for physical AI to have a digital twin of a system. And in order to have it on time with high quality and low cost, you need simulation, you need virtualization of these systems. And in order to have it with high quality, you need a sign-off product at multiple level of physics in order to make it happen.

Now the opportunity is not waiting for the physical AI when it takes place, and it happens. There's an immediate opportunity, which is 3DIC. With 3DIC, there's a thermal need, there's a structure need, there's fluid needs. And Ansys is bringing a great position into the Synopsys portfolio and integrating this technology during the sum conductor and chip design phase. So when you're building that multi-die system, you are confident that you're signing off with the right technology in order to achieve the right outcome.

So from a surprises, there are no surprises actually, except pleasant ones, given we know the team very well, a lot of enthusiasm and energy and excitement from the teams. As Shelagh mentioned in her remarks, we -- there's a final stage that we're trying to close with as soon as possible, which is the acquisitions scope has been -- or sorry, the divestiture scope has been approved, but the buyer is in the process of approval. So we are taking some measures that -- to keep the business and the integrity of the optical and Power Artists separate. But once that is behind us, the integration is full force ahead to deliver on these solutions.

[Sitikantha Panigrahi, analyst]

And Shelagh, just a follow-up to that. ANSYS revenue, $78 million in Q3. But what's your adjuntionof ANSYS revenue embedded into the Q4 guidance. Q4 historically a strong quarter for Ansys, but again, it will only include October. So is there any linearity in the quarter that we should consider? Any color would be helpful.

[Shelagh Glaser, executive]

Yes. So in Q3, as you noted, the $78 million in revenue disaggregation of S&A. And as we noted in the prepared remarks at the beginning, there's a small portion of Ansys revenue that is also in our EDA. And for Q4, it's included in the full guide that we have Ansys for all weeks of the quarter. And then in terms of Ansys, they have conformed to our fiscal calendar, which, as you note, their Q4 only 1 month and it falls into our fiscal calendar. So obviously, some of that strength that you see in sort of the November December time frame, that will be in our Q1. And so we've aligned that fully. But I'm not going to give a subsegment view as we don't guide below the total company.

[Operator]

Your next question comes from Joe Vruwink with Baird.

[Joseph Vruwink, analyst]

EDA and IP as industries have fairly diversified opportunities, and that's true across customer accounts and end markets. But Synopsys has always been fairly unique in that traditionally. You have 1 outsized account exposure and some of the things you're saying seem to consider a need to diversify further. You made a remark, Sassine, earlier about 2 years. 2 years from now, we'll look back and I think about contract lengths being 2 to 3 years. Is that the appropriate time frame to fully enact the changes you're focused on and getting the business back on the track you believe is right?

[Sassine Ghazi, executive]

You're right in terms of EDA and IP, we have a fairly diversified customer base simply because you cannot build the semiconductor chip without the need of EDA or IP. So while we have a fairly diversified customer base, Synopsys has been very successful with capturing the large percentage of wallet from leading large semiconductor companies. That has been our strength. With this one customer exposure that you're talking about, we have derisked part of that exposure in our FY '25 and there's a blend of contracts we have with that customer no different than any other customer, which is EDA software, hardware and IP. They have different time horizons and it's very difficult at this stage to forecast what will happen and by when, not knowing the situation of that customer 1, 2 years from now.

But that being said, we work very actively to expand our business at multiple level of growth opportunities and that's where Ansys will bring us a significant and positive opportunity to diversify the portfolio as well in terms of customer concentration as well as regional concentration. For example, the percentage of business in Europe versus China for Ansys is very different than Synopsis classic. So there's a big opportunity to diversify further with the Ansys addition to the portfolio.

[Joseph Vruwink, analyst]

Okay. That's helpful. Shelagh, maybe you answered this already, but I think it would be helpful just to get a baseline around what's changing in this guidance versus the guidance that was previously on the table. How much is IP coming down, how much does Ansys China is a factor, just anything there that can help get us all on the right baseline going forward?

[Shelagh Glaser, executive]

Sure. So as you know, the 3 headwinds that Sassine talked about in the IP, those are fully incorporated and a balance between those, what the impact was. And then as you noted, Ansys has been added, and it was a stub period in Q3. So somewhat minimal. You saw the S&A $78 million. And then Ansys for Q4, again, I will remind you the question that was asked previously. The big part of the Ansys quarter is usually in the November-December time frame, and that will be in our Q1. So I would say the biggest decline was really that update on the IP, and then that's offset by the addition of Ant. Thanks for the question.

[Operator]

Your next question comes from Harlan Sur with JPMorgan.

[Harlan Sur, analyst]

I assume that the Q3 foundry revenue weakness in IP was due to your largest customer, as they pivot from their prior focus on 18 8 to now 14 8 foundry manufacturing technology. Is that the right assessment? And given the challenges of this customer, I mean, there's still question marks on their ability to be successful in foundry. Is this Synopsys team still going to support this customer under future foundry road maps?

[Sassine Ghazi, executive]

Harlan, as you know, this -- I used the word earlier, there's an expectation when you're the leader in and you engage with a customer. We cannot tell that customer that we want to pick and choose what project or which foundry and for which application we want to engage, because then they will not trust and expand the relationship with Synopsys. And that has been our strength. As far as the whole 18a and the pivot to possibly a different technology, that's a customer choice, whatever choice they make, we already have the IP available to the node that we have built it to. And part of the relationship with the foundry is we look ahead at timing and the size of the opportunity. Meaning the commitment to Synopsys and the post delivery on that IP, what is the available market that we can sell it to. So that's really the situation that we have in general in IP and specifically with some of our foundry customers.

[Harlan Sur, analyst]

And then, Shelagh, it looks like your total expense guidance for Q4, it's coming in about $5 million higher, about 3.5% higher -- and if I just combine your total expense structure and Ansys' total expense structure prior to the close of the acquisition. So what's driving the higher expense outlook for Q4? And then more importantly, from the Q4 base,-- how do we -- how should we think about the potential cost synergies looking out over the next few quarters? In other words, how should we think about the fiscal '26 4Q exit run rate on total expenses?

[Shelagh Glaser, executive]

Thanks for the question, Harlan. On the first one, there's just some costs with really the initial quarter of bringing Ansys on, and we want to make sure that it's a very successful integration. So I would say it's just part of ensuring that we've got a smooth integration going on. And then in terms of longer-term guidance, we'll talk about that in our Q4 earnings, what the expectations are for 2026. As we talked about in our prepared remarks, we are taking a comprehensive portfolio look and we're also driving greater scale and efficiency with 10% overall head count reduction that will drive through fiscal year 2026. And so that has the effect of actually accelerating our synergies that we had talked about when we announced the deal. So we'll talk more specifically though, Harlan, about sort of the direction of travel in '26 when we do Q4 earnings.

[Operator]

Your next question comes from Jay Vleeschhouwer with Griffin Securities.

[Jay Vleeschhouwer, analyst]

Sassine, for you first. is the 10% targeted reduction of headcount, something that you would have done irrespective of the current and anticipated unpleasantness in IP. And in other words, you would have done that anyway. It looks as though your organic head count ex Ansys was up over 2,000 heads year-over-year, up over 600 sequentially. So perhaps you got a bit ahead of yourselves in terms of the organic expansion. And in the meantime, can you talk about the integration or consolidation that you've done of Ansys already. Our understanding is that very soon after the close, you consolidated around the named accounts direct business. And perhaps you can also talk about your intentions on their very large indirect business. And then my follow-up for Shelagh.

[Sassine Ghazi, executive]

Jay, thanks for the question. As you can imagine.

With an 18 months regulatory process, we were somewhat limited in terms of our ability to take actions on either portfolio or head count adjustments. So the 10% head count adjustment is something we would have done, and we've been planning for it for a while. And before even the acquisition was approved in preparation that we will be ready to act and carefully and thoughtfully of where to target that reduction.

So we have gone through internal strategic portfolio review. We're looking at the multiple layer of management, processes, systems, the impact of AI that we have been deploying inside the company for about 2 years. So there are many opportunities actually to make sure we're putting the resources at the high impact, high return and reducing where we can reduce leveraging technology and the impact of it for further reduction or cost avoidance in the future. So there's a very thoughtful process. We've gone through for a number of months in preparation for action to be taken post close.

In terms of integration, as I mentioned a few questions ago, we have to make sure that we are very careful in our integration speed, as we still are owning OSG, which is the optical business and Power Artists to make sure there is no contamination. There's no impact whatsoever in terms of the health of that business as we're handing it over to the buyer. So we are moving an integration in some places where there's no impact. In other places, we've been very cautious and careful how fast do we go.

[Jay Vleeschhouwer, analyst]

Okay. For Shelagh, you made the interesting comment that you've already coordinated Ansys' fiscal period with yours, and you noted the Q1 concentration. Following up on that, historically, Ansys was indeed highly seasonal, particularly in their Q4, but not only in their Q4 because of 606 effects. So the question is, do you think that over time, you could perhaps smooth out the seasonality and/or 606 effects that they had, so pronounced in their numbers. In other words, do you think you might change their lease and upfront model to more of your prevailing subscription model?

[Shelagh Glaser, executive]

Jay, that's certainly something we're looking at over time as we deploy new products and have new offerings for customers, how they're might be more alignment with how we renew with customers, we give products to customers and then we service customers. So that's certainly something that, as you mentioned, that's a bit longer term because the renewal dates and the products that customers are buying are those have to be on the shelf right now. So as we move forward, there's opportunity to do that.

I do want to follow up because you had a question for Sassine on the channel, I think, and so I want to make sure that we do address that. As a really important part of Ansys is about 25% of Ansys. We're really thrilled to have such a robust channel, and we are ensuring that, that's very smooth, and that's very seamless and those customers continue to get service. And then there's an opportunity, of course, because that Synopsys classic, we did not have a channel, but now there's opportunity for our products to be sold by those great partners. So there's no change whatsoever for the channel there, just a wonderful asset, and we're ensuring that there's no disruption to the channel as we move forward.

[Operator]

Our final question comes from Jason Celino with KeyBanc Capital Markets.

[Jason Celino, analyst]

No, I appreciate you fitting me in, I'll just ask 1 in the essence of time. I think, you've mentioned multiple times that you've tried to derisk the Q4 guide to adjust for some of the headwinds you've been seeing without knowing how much Ansys is contributing, it's hard to measure how conservative or derisked it is. So maybe I'll ask it a different way and say, IP historically has been up sequentially for the past 2 years in Q4. Maybe it's regular seasonality or maybe it was something more specific. But given the headwinds you've seen directionally, could we see the same trend again with seasonality in IP for the last couple of years?

[Sassine Ghazi, executive]

Yes. Jason, we do expect a transitional period and the muted year as we look ahead in and that's due to the 2 factors we don't believe they will disappear in a short period of time. Now we have it balanced with a number of other opportunities to scale and deliver to the points I mentioned, like the subsystem opportunity that's serving the various markets, various foundries, et cetera, et cetera. But that's the expectation as we look ahead.

[Unknown Executive]

Thank you all for joining our call. We look forward to talking to you through the quarter. Sarah, could you please close the. .

[Operator]

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