After the market closed on September 9th,Synposys (Nasdaq: SNPS) reported fiscal Q3 earnings that shocked Wall Street. The company reported Q3 adjusted earnings of $3.39, which were below expectations of $3.75 per share. Looking forward, the company’s outlook for Q4 was an even bigger miss. The company guided to Q4 earnings of $2.76-$2.80, well below expectations of $4.14. 

Synopsys has been one of the most successful companies over the past decade. Adjusted earnings grew every single year, rising from $2.53 in 2014 to $13.20 in 2024. Yet the company, which is broadly seen as an AI beneficiary, was now projecting normalized earnings to drop in 2025 despite a boom across the broader semiconductor space. 

In this segment from 24/7 Wall St.’s AI Investor Podcast, technology analyst Eric Bleeker deconstructs what happened in Synopsys’ recent quarter. He also answers the most important question following their surprising earnings miss: Is this a temporary issue or should long-term investors reconsider owning Synposys?

Key Points

• Synopsys reported its fiscal Q3 earnings on September 9th and dropped 36% the next day.
• The company reported poor earnings in the prior quarter. Adjusted EPS of $3.39 came in below Wall Street’s expectations of $3.75. Its guidance was even worse. Synposys guided to adjusted EPS next quarter of $2.76-$2.80. Wall Street had expected the compayn to guide to adjusted EPS of $4.14.
• In the segment below from the AI Investor Podcast, we break down why the company’s relationship with Intel was the main reason for this surprising earnings miss. We also examine whether this is a one-time event or something that could create long-term concerns for the company.

Watch Our Segment on Synopsys’ Surprising Q3 Earnings Miss 

Here’s a summary of the key points from this discussion:

• Snyposys is a leading Electronic Design Automation (EDA) provider. The company released its fiscal Q3 earnings on September 9th, and shares fell 35% the next day. Results for last quarter were significantly below Wall Street’s expectations. Worse yet, the company’s guidance points to a significant year-over-year drop in the company’s earnings in Q4. 
• We previously added shares of Synposys to 24/7 Wall St.’s $500,000 AI Portfolio. The company operates in a duopoly alongside competitor Cadence Design Systems (Nasdaq: CDNS), and we forecast that spending trends in artificial intelligence would increase the value of both companies’ chip design software over time. 
• Digging into the details, the main culprit behind Synposys’ surprisingly bad earnings appears to be its relationship with Intel (Nasdaq: INTC). 
• Intel has engineering contracts with Synopsys to effectively pay the company to port their IP catalogue to Intel’s foundries. The revenue from these contracts flows to Synposys’ ‘Design IP’ segment. 
• Last quarter, Design IP unexpectedly shrank by 8%. The company’s guidance implies that Design IP will continue shrinking by even higher rates in Q4. 
• While Synopsys won’t name the particular customer that caused this fall-off in their Design IP revenue, it’s almost surely Intel canceling contracts. 
• The good news for Synposys investors is that the company’s most important business line – their design automation software – grew by 23% last quarter. That is to say, while Synopsys will face several quarters of poorer-than-expected results from Intel’s presumed cancellation of Design IP contracts, thelong-term trajectory for the company looks to be intact. 
• As Wall Street has had more time to digest Synopsys’ Q3 earnings, shares have bounced back. Shares are now up 20% from where the closed the day after earnings. 
• In our $500,000 AI Portfolio, we’ll continue to hold our shares of Synposys. We won’t add any more shares in the near term, but believe Synposys is still a compelling opportunity for investors with a long-term investing horizon. 

Full Transcript of Our Discussion 

Here’s a lightly edited transcript of the above segment:

Austin Smith:
I want to talk about Synopsys, an electronic design automation company. This company provides software for designing semiconductors and chips, similar to AutoCAD in its industry. As demand for specialized and custom chips from companies like Nvidia, Amazon, and Google increases, Synopsys seems well-positioned. However, there has been a massive disappointment in their recent earnings report.

Eric Bleeker:

Synopsys’ earnings were disappointing amidst a generally positive market atmosphere in recent weeks.

Their earnings missed expectations for the prior quarter, and they lowered their forecast for the next quarter. Initially, the stock reacted by dropping 15 to 20%, which is typical for such news, but it plummeted more than 35% the next day, from $620 to $365 or so at the bottom.

This was one of the largest earnings reactions I’ve seen. Since then, the stock has bounced back, gaining 13% on September 11th. It later saw further gains due to news of Nvidia’s investment in Intel.

We have been steering away from companies with significant exposure to China, especially those involved in chip manufacturing. Recently, news emerged that China has told its companies they cannot buy Nvidia chips. This situation has negatively impacted Synopsys, as their software was briefly limited in China. This has led customers to be cautious about returning to their software for fear of future restrictions.

Yet, the biggest issue for Synopsys is Intel. The new CEO of Intel, who previously led Cadence, has cut payments to Synopsys, which were previously significant. This shift could also lead to Intel sourcing more of its EDA software from Cadence, which would be another blow to Synposys. 

The reaction to the earnings report was outsized. Synopsys’ stock dropped from $620 to $365, but as we record this, it is closer to $480, which seems more reasonable. This situation is a one-time setback due to excessive reliance on Intel and deals that lacked economic viability. The good news is that the long-term duopoly between Synopsys and Cadence remains strong, and the overall growth of semiconductors is still on track. This is a setback, but I believe Synopsys will be a winner over the next five years.

Austin Smith:

Who needs Game of Thrones when there is corporate drama like this? With Intel’s new strategies and Nvidia’s investment, there is plenty of excitement in the industry.