Silvaco Group Inc (SVCO) 2025 Q3 法說會逐字稿

Good afternoon and welcome to Silvaco third quarter fiscal year 2025 conference call. All participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Please note this event is being recorded. I would now like to turn the conference over to Greg McNiff, Investor relations for Silvaco. Please proceed.

Thank you. Joining me on the call today are Wally Rhines, Silvaco's CEO and director, and Chris Zegarelli, Silvaco's CFO. As a reminder, a press release highlighting the company's results, along with supplemental financial results and an earnings presentation, are available on the company's IR site at investors.avaco.com.

An archived replay of the call will be available on this website for a limited time after the call. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Security Litigation Reform Act.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company undertakes no obligation to update such statements except as required by law.

The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, earnings presentation, and on this conference call.

The risk factors section in Sabaco's annual report on Form 10k for the year filed 1231-2024. And the most recent Form 10q filing with the Securities and Exchange Commission provide descriptions of these risks. With that, I'd like to turn the call over to the Savaco CEO Wally Rhines. Wally

Good afternoon. I'm pleased To be part of Sylvaco.And I look forward to regular communication with you, our investors. Since I became CEO, I've engaged with customers, employees, and investors who provided invaluable feedback on our strengths, challenges, and most importantly, the road ahead. The conclusion is clear.

Silvaco is a company with great potential supported by a rich history, dedicated core customers, and strong foundational elements. Two broader themes came out of these discussions. First, our success requires us to focus on key products that are sufficiently differentiated to become leaders in their respective categories of use.

Achieving this requires reduced attention on mature products and concentrated focus on a limited number of growth opportunities. I can see multiple areas where this shift in focus will pay off, namely in AI, interconnect IP, and power. Second, it's clear that Silvaco allowed spending since the IPO to grow much faster than revenue. This was also clear to me from day one.

We've already taken steps to reverse this trend to strengthen our financials, and to free up resources needed to accelerate growth. I'm confident that these two areas, strategic focus on core growth drivers and financial discipline are the keys to strengthening the business and delivering profitable growth. I'll provide more color on the first, and Chris will walk you through the second.

Stepping into the CEO role at Samoco is like deja vu all over again for me. When I joined Mettagraphics as CEO in 1993, the company had failed to meet expectations for many quarters. None of Minor's products were number one in their categories. The company was not profitable, and cash conservation was an issue.

During my time at Mentor, I learned a great deal about the EDA business. Closed dozens of acquisitions, grew market value more than 10x before acquisition by Siemens, substantially increased profitability, and developed and grew a number of products including Caliber and Tessin, which by themselves generated most of the company's profits.

I find Salvaco in a similar position to where I find Minor. The company has failed to meet expectations after the IPO. It's not yet profitable, and the products are not number one in their markets except in some very specialized categories. I believe that my mentor playbook can be applied to Salvaca. The first step is focusing on two key areas, financial and operational discipline, and focusing on select core growth drivers.

We believe the key to reinvigorating the business lies in focusing on the right markets with differentiated solutions to solve critical customer challenges. We have a very clear example of this in Silvaco's AI machine learning product for process development called FTCO. Delaco created this unique AI product that gives customers a valuable tool to solve real manufacturing challenges.

This single product enabled Silvaco to establish a partnership with Micron. He will also be one of our foundational growth drivers looking forward. We can learn from FTCO as an example of building disruptive technology that can create meaningful value for our customers and for us. Another example is Mixe, the acquisition that closed in the third quarter.

With Mixel, we expect the IP business to grow rapidly. Customers have nothing but praise for Mixel's perfect quality and responsiveness. And Andy Wright, our new head of the IT business, has breathed life and growth into the rest of Salvaco's once small IT business. I see synergies emerging that exceed our initial expectations.

The Salvaco sales force will become a force multiplier from Excel while the rest of the Salvaco IP business is learning from the world-class development processes that have earned Mcel such praise in the industry. My expectation is that the legacy Sylvaco businesses can and will learn from Mcel best practices.

In the EDA business, as in TCAD, we have years of legacy products, many of which continue to generate significant maintenance revenue. These can generate steady revenue with little cost if we increase the cost discipline in our business.

Skilled engineers who support the mature products continue to add features and enhancements long after the products have stopped achieving new design wins. In general, the customers neither want nor do they adopt the new versions of the software. Only a small amount of resources required to keep the products useful,

and skilled engineers can be moved to products with growth opportunities, providing them with increased motivation and excitement. One example of a growth product that solves key customer problems is Javaro. It's been adopted by companies like Nvidia, Samsung, SK Heinx, and many others to accelerate post layout spice simulations by more than a factor of 10 with sign-off accuracy.

Looking across Silvaco, solutions that include AI, power analysis, and interconnect IP are consistently winning new customer engagements as we de-emphasize areas that are subscale or generating immaterial new revenue. We can free up resources to accelerate our stronger products, including FTCO and TCA. Our success also depends on establishing physical, fiscal, and operational discipline.

The data speaks for itself. Since our company's IPO, financial performance has been disappointing. Revenue growth has lagged peers, and operating expenses have grown much faster than revenue. Underestimation of the time and effort required to bring on the new FTCO customers produce disappointing results for what should be the key growth franchise.

The fact that expenses have grown much faster than revenue is another problem. Expense reduction has therefore become our top priority. We've initiated a significant cost reduction program at the beginning of the quarter. Chris and I have set a clear expectation with the team that we'll drive the business to profitability at current revenue levels so that growth can produce incremental profit.

Christ will discuss these actions and early progress on this goal in more detail. Operational discipline also requires a strong focus on execution. We've added several key new leaders to the team in the last few months, including our CFO, heads of the IP and EDA businesses, and our head of business development. The energy I see in this team is exactly what we need to create a culture of speed and high-quality execution.

I see a team that's not satisfied with the status quo and one that wants to win. With our renewed focus on core growth drivers, we'll be able to invest at the right levels in the right areas to ensure that we close gaps with competitors and establish Silvaco as the leading name in EDA for our targeted growth segments, including AI, power, and interconnect IP.

Another contributor to the company's underperformance has been delays in integrating and extracting value from our two most recent M&A transactions. From Excel, we underestimated the time required to activate the sales resources in Salvaco and to establish new modes of distribution, including off the shelf sales of non-customized IP. For tech X, growth remains dependent on overall market adoption of its plasma and optical solutions.

Focus on this effort should accelerate realization of the value that tech X brings. Looking forward, we expect both NXL and tech X to contribute meaningful growth in 2026. We remain optimistic on the longer-term contributions of both of these acquisitions. Now taking a step back, there's a lot of value and strength from Silvaco's rich history.

The company continues to benefit from the fact that users of EDA software are reluctant to change, and older products continue to generate maintenance revenue long after growth from new customers has slowed. This gives us a stable foundation upon which to build. It also gives us many compelling assets with which to focus and grow.

We have a lot of work in front of us. In the coming quarters, we expect to right size the business, streamline the portfolio, and focus on key growth segments to enable us to deliver steady, profitable growth. We recognize it will take some time for you to see this redoubled focus in the numbers. I encourage you to watch for our OpEx to trend flat to down, gross margins to improve, and evidence of growth starting to materialize in 2026.

Chris and I are firmly committed to an aggressive acceleration of Sylvaco's business. I'm looking forward to increased personal interaction with Sylvaco customers. We appreciate your support as we execute on these growth plans. I'm confident that we will deliver strong results as this new strategy is implemented. I'd now like to turn the call over to Chris, who will discuss our financial results and the outlook in more detail. Chris.

Thanks, Wally. Good afternoon everyone. Silvaco delivered record quarterly revenue and bookings in Q3. Bookings increased 131% year over year to $22.8 million. Strength in the quarter was driven by closing a significant ED$A contract with one of our core customers in the United States. Revenue came in at $18.7 million, up 70% year over year. 74% of revenue in the quarter came from license revenue, and the remaining 26% from maintenance and service.

EDA saw the most growth sequentially in Q3, while TCAD and IP trended down slightly. From a geographic perspective, we saw the most growth in Q3 from the Americas, which spiked to 55% of total revenue in the quarter. APAC represented 40% of total revenue. EMEA stayed flattish and at 5% of revenue in the quarter.

Looking down the P&L, GAAP gross margin in Q3 was 77.9%, up 326 basis points year over year, and non-GAAP gross margin was 81.5%, up 179 basis points year over year. Gross margin improvement was driven by growth in revenue exceeding growth in cost of sales. Going forward, we expect gross margin to benefit from our cost reduction plans.

GAAP operating loss expanded year over year but improved slightly quarter over quarter to a $9.3 million loss. Non-GAAP operating loss was $2.3 million down slightly year over year. GAAP net loss in the quarter was $5.3 million up from the $6.6 million loss posted in the same period last year. Non-GAAP net loss in the quarter was $2.1 million down slightly from the $1.8 million dollar loss posted in the same period last year.

GAAP EPS was an $0.18 loss and non-GAAP EPS was a $0.07 loss. Next, turning to the balance sheet and cash flow, cash and marketable securities. Was $27.8 million, including $12.4 million of restricted cash due to the Ngate settlement. Cash used in operating activities was $7.8 million. Remaining performance obligations or RPO at quarter end stood at $48 million with 54% expected to be recognized as revenue within the next 12 months.

With OE at more than 50% year over year and cash down since the IPO, we have begun implementing a broad cost reduction program. We began with an early retirement incentive program in the US and Asia and an early leaver program in Europe. We are taking other steps in addition to these programs, including reducing office footprints, reducing discretionary spend, and minimizing use of consultants and contractors.

These steps, when taken together and when fully implemented, are expected to reduce annualized non-GAAP operating expenses by at least $15 million annually. We also anticipate these actions to drive an increase in gross margin, enabling more leverage from future growth. Our guiding principle for Wally is to turn the business profitable at flat revenue. Achieving this goal will create a strong foundation for future profitable growth.

Now turning to guidance for Q4 2025, we expect bookings of $15 million to $19 million, revenue of $14 million to $18 million non-GAAP gross margin in the range of 78% to 82%, and non-GAAP operating expenses of $16 million to $18 million. In closing, we believe that with improved financial discipline and a focus on key growth opportunities, we will set the stage for profitable growth going forward, and with that operator, we will now take questions.

Thank you, ladies and gentlemen. I(Operator Instructions) Our first question comes from Craig Ellis with B Raleigh Securities. Your line is open.

Yeah, thanks for taking the question and appreciate all the color team. Lli, I wanted to start with you, and it's a higher level question relating to your transition from the board to the CEO role. It sounds like in a fairly short amount of time at that lower level of detail you've got a real confident graph.

Of what you've got in the portfolio, both things that are advantaged in the marketplace and other businesses that have lost their advantage, and you talked about mixing out some revenue. One is that read correct, and two, how significant is the revenue mix out that is ahead of the Company.

Well, thanks, Craig. Yes, indeed, being on the board, you really don't get the level of visibility down to individual products and people that are making the difference in the company or that holding us up from making further progress. So it's the last few months now have given me the opportunity to see that in a lot of detail. I think your assessment is correct. There is a substantial opportunity ahead.

There are specific things that I'm quite certain will grow, and then there are others that could grow given the right level of focus. But as I noted and as Chris noted in his comments, We've let the expense base grow faster than the revenue, and that's been a limiter in the available resources we can put on these key growth areas. And so going forward, while painful,

I think we will be able to Right that trend and be able to free up the resources we need to take advantage of some very specific areas of strength, and with that I think we can restore confidence that Silvaco can do what it was originally intended to do as we went public.

Excellent. Chris, I'll ask the follow-up question to you. It's a two-parter. One, you did a good job speaking to the geographic areas where you hope to, take about $15 million out of the business. So the tactical question is over what time period should we. Expect that to occur and the more strategic question is, as you've been in and have had a chance to assess the systems, the processes that are in place,

the forecasting mechanisms, given the difficulty the business had in in delivering forecasts, how do you feel about The dashboard that's in place for you and Wally and do you feel like it's one that today can deliver reliable results or are there some things you need to do to make either system or people or process changes so that the business can forecast more accurately? Thank you.

Very good question, Craig, and thanks so much for that. The, both questions are good from a time period perspective. The way that we're looking at it, you should expect most of the cost to be out of by the end of this year, but that means you won't see as much of the impact in Q4, but you should see, a reduction in opbacks in Q1, and then the rest of it should be throughout the rest of 2026.

So expect to see a step down in Q1 opbacks as most of it is out by the end of the year. And fair question on the forecasting methodologies and tools as well. That's something that Wally and I looked at almost immediately from day one, and I'll tell you, they, the tools are in place. We do see the data, the pipeline, is robust. We do review what is expected in the coming. Quarters,

so I'm confident that what we've given it is something we have high visibility into and something that we're confident in, but that being said, Craig me, I think there are things we can do to further improve and build upon that and that's something that I'll be working on with the team, but I'm confident that what you heard from us is something we're confident in and we will deliver on.

Excellent. Thanks, Chris. Thanks, W.

One moment for our next question. Our next question comes from Charles Shi with Needham and Company. Your line is open.

Hey, good afternoon, Wally, Chris. Hey, first off, Wally, never thought that we're going to have a conversation like this. But, once again, looking forward to working with you and Chris. So maybe the first question, maybe for Wally, I understand the priority probably is to, if I may, just to get the house in order. But Wally, you mentioned about Caliber,

you mentioned about the Tesla and, those were the two successful products of Mentor, which were based, are basically the golden standard for the industry. I think it's, it would be ideal, for some of the Silvaco products to get there. What do you think? What kind of products in the portfolio today has the potential, to get to what the caliber is, what the testing is today.

And, by the way, how do you get there? The reason why I ask this is I do read your bibliography. And I knew, both, it takes probably both effort and maybe you need a little bit of luck to really get there. But time has changed and what's your thought there in that question? Yeah, thank you.

Yeah, well, thank you, Charles. It's good to talk again. We've been talking over many years. And you're right, when I just joined Minor, you initiated the work that developed Caliber, and we did an acquisition that was the basis for Tessin, and yet it took quite a long time before those became the dominant industry standards in their space.

I believe the way you do this is you start out with a focused market and a focused set of customers and see something that you can be the leader in. And so I have been searching within. Sobaco, where are the seeds that can lead to the same kind of success? A good example is where they've taken tools that were really created for IC design and applied them to displays, for example,

and the manufacturing of those displays where they build a franchise with 6 different display companies using the same flow. Once you build a franchise that's dominant, or excuse me, being that is the leader in that area, then you expand. To next areas. So you ask me where do I see that potential?

Well, as I mentioned in the earlier comments, the Salvaco has been very early into actually building machine learning models around process development, and it's a market that others haven't been chasing. It's relatively specialized and it takes a lot of work, and you need a TCAD foundation to build upon, so that eliminates the number of companies that could do it.

But I think that's the kind of basis that can lead to a franchise, that can lead to an industry leading product. Similarly, if you're in the IP business, you being a supplier of general-purpose IP may generate revenue, but it doesn't generate market advantage and profitability at the same level as if you pick specific types of IP and become the leader. So, I think the Acquisition of Mixel was well thought out.

Clearly in Mfi there are only two major suppliers. They have a strong reputation. And then you say, okay, well what comes beyond? There are lots of IO standards that they can expand into plus there's the existingobaco business that's really quite successful, actually has More demand than we can currently service in areas like memory compilers and even in the standard cell-based libraries.

So, and lastly, of course I mentioned the area of power where Silvaco models I found for silicon carbide, gallium nitride, and other things form a foundation. For differentiated products. My strategy, do what others aren't doing. Pick things you can do better than anyone else, build upon those franchises, and that's indeed exactly what I plan to do here at Solaka.

Thanks, Wally, you partially answered my second question, but I do want to maybe just double down on that to get a little bit more color. Speaking of Nixa, I know you just closed the deal, the last quarter, but it sounds like you think highly of the team, of the product, and, wonder if you can walk us through again what exactly they do. I think I can see the press release, 30, five,

but what exactly they do that makes you think. This is a high-quality product, a high-quality team, and what makes you think it's actually the benchmark for the rest of the Silvaco team, as you mentioned in the prepar remarks. Thanks.

Yes, and I'm basing that on customer feedback, talking to actual users, asking them what they think, and they're quite specific in saying if all of Silvaco produce the kind of quality and the. Execution to schedule and other things that Nixel had, we would be champions of the IP business.

So it's not just my impression talking to people, it's my conclusion from dealing with customers and looking at the track record, 27 years and they've never had a customer find a bug in their IP. Really admirable. And another aspect is they have the vast majority of their of the people that are developing the products and supporting them are based in Cairo, Egypt. I have a long history there.

At Minor, I started the group and it became a very valuable resource to us for having cost effective engineers who are very well educated, very experienced. The Cairo University and Einschamps have programs in EDA, and I found that's a very good basis to build upon.

So, I'll put it all together. I think it's a great acquisition. I think you will see substantial growth next year because of that, and I think the interaction with mixixel will greatly improve the performance of the existing Sovaco business, and the two together will cause substantial growth in the coming year.

Thanks.

One moment for our next question. Our next question comes from Blair Abernathy with Rosenblatt Securities. Your line is open.

Hi, thanks for taking. My call. Guys, I appreciate it. I'm sorry I missed the very beginning of the call, but I wanted to ask a little bit about the pipeline. And Wally, I know you, you've only really been getting into the weeds of it for a couple of months now, but how are you thinking about the pipeline of the business as it stands? And is the FTCO, how is that looking? You, I know it's a longer sales cycle, but how does that opportunity look from your standpoint at this point?

Yeah, they will first with regard to the overall pipeline, there is a large base of very mature products that produce pretty stable, maintenance revenue and give the opportunity to grow each year. So roughly half of our total business can be generated. Just from those renewals which don't require an enormous amount of effort, the rest of the business requires more direct effort,

and I think it's been highlighted before that the FTCO is a big opportunity. It's a big opportunity because Silvaco's gotten ahead of the game. And because Silvaco has a teacher customer in Micron who's been quite vocal about expressing the value of it. The disappointing part is it's evolved very slowly. There was a continuing expectation last year that we would announce additional customers. That hasn't occurred.

And the reason it hasn't occurred is there is an adoption process that requires an extensive amount of interaction with the customer, customizing it to the uniqueness of. Of their processes and so it requires a funnel of customer opportunities and then a lot of resource to go with it.

So disappointment in how quickly it's arisen, optimism at what it can become, and how it can take AI into one more branch of EDA that other people are not focusing on that Silvaco can and has the base business in TCAT to build upon and create success as we bring on those additional customers.

Okay, great. Thank you for that. And then Chris, the, just on the expense savings, is this out of the core business? Is there any of the acquisitions that you did this year that are impacted by that? And that just to clarify, you said that you'll be completely done by the end of this fiscal.

So a majority of it will be, we believe a majority of it will be out by the end of this fiscal year. So by the end of the year, you won't see the benefit of that really until, Q1 just from a full quarter's perspective, and then the rest of it will come out, through the 2026. it is, the cost areas are pretty broad. For example, Mcel had an office in California. We have a headquarters in California,

so, we can put those two together and kind of save costs there. We'll reduce, office footprints in other places, it's mostly what I would call the core silvaco side of the business is kind of what we're looking at. When we do these actions, so it's again to get us, to right size the cost structure and then help us be more nimble and focus on growth. Okay, great,

thanks very. Much guys.

One moment for our next question. Our next question comes from Chris Krueger with TTD Cowen and Your line is open.

Thanks for taking my question and Wally, welcome back and nice to have a seasoned operator at the helm. I had two questions, but maybe the first one for Chris. When I look at your guidance, it looks like the revenues are looking a little lighter, and, I thought that Q4 is seasonally strong for you.

And if I look at the full year revenue guide, it's only up like 2% despite all the acquisitions. So I'm kind of wondering, are there any idiosyncratic things in Q4 or what is going on? I had a follow-up for Wally.

Okay, no, that's a very fair question. So when we look at Q4, I think you're right. I mean, in Q3, the mix all acquisition, for example, was a nominal addition to revenue, as you can see in the numbers. It'll be a stronger contributor in 2026. There's some sequential growth there, in Q4, but it'll be stronger next year. Tech X is more of a stronger grower in 2026 as well.

When we look at next quarter, I mean, you saw the EDA strength in Q3. Based on how we recognize revenue, EDA will step down sequentially in Q4, but TCA and the IT business are expected to increase sequentially, which is how we landed on these numbers. I would just point to, what Wally said earlier.

I mean, there was some expectation that a second FTCO, engagement would materialize sooner than expected, and we do, we're still working on several engagements, we're still confident in that, but we're not seeing that, in Q4 of this year.

Got it. Super helpful, Chris. And then, Wally, I'm just kind of curious, do you have all the pieces of the pie to grow from here, or do you need more M&A to complete the product circle? Or is there a goal to increase term base of software licenses as a percentage of Revenue?

Yeah, we're somewhat limited in the number of acquisitions we can do going forward just based upon the resources we have to do them. So what Chris and I have come down to is, look, we need to grow with the existing companies or the existing resources we have. We've done three good acquisitions that will add to growth, and the base, the overall business needs to be stable and growing but at a lower level.

So, looking forward we're planning things around that no significant acquisitions for a while now and that's why, as Chris noted, that we want to be sure that at the current revenue levels we can be profitable. So that the growth we experience both from these acquisitions and any growth in other parts of the business will fall through as profitably and create a clear path ahead so we don't have to wait for the time that we accelerate our acquisitions once again.

Well, thanks a lot, Wally and welcome back.

Thank you.

(Operator Instructions) Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Your line is open.

Great, I just was regarding the $15 million in in OpEx reductions on a year over year basis. Should we assume that kind of comes from the midpoint of your OpEx guidance for this quarter, meaning kind of $68 million minus $15 million to get to $53 million? Is $53 million kind of the target, or $55 million or $51 million Is it crystal clear to me.

This is correct. I can take that one. So, yeah, you can look at the midpoint of the guide in Q4 at the starting point. I would just come the $15 million will be realized when all of the actions are implemented over the course of 2026. So, you wouldn't expect it to be all, 25' to 26'. It'll be,

it's mostly out by the end of this year. You'll see a benefit in Q1. The rest will play out through the year and so the full year over year impact would be less just given the timing of the reductions. I hope that gives you a good sense of how we're looking at it.

Yeah, that helps. And then on mixle it kind of sounded like, there was some commentary about, time to accelerate sales, etc. I know you guys have previously highlighted, that you expected, $3 million to $5 million in revenue quickly after closing the acquisition, the remainder of 25'. I assume you didn't attain that goal. Can you give us an idea of. What you do anticipate selling them?

We didn't attain it in the third quarter. We will see more growth in the fourth quarter. And as you alluded to, I think here, the great machine of profitability in EDA is when you take a company with great product but limited distribution and combine it with a company that has worldwide distribution. And maybe not as much in the way of products. That's the great way that the EDA industry grew.

That's how Cadence started by acquiring ECAD and then build upon it. And the same thing is true here. I think Mel is a great example. They have basically one salesperson producing that. The level of revenue that they have today, you combine that with our sales force,

and the inevitable result is that we can keep them fully loaded with demand and then they can continue to add resource and grow the revenue. So that's, it's almost a perfect model for the kind of acquisition for which there is leverage for a company like Sylvaca.

Great. And then my last question, more longer-term, on a multi-year time frame basis, given the products that that you have in hand, and it sounds like no, meaningful acquisitions, in the near term, if we never made another acquisition again. What type of top-line growth prospects do you think the company has like a range of outcomes.

Well, the longer-term clearly needs to be double-digit. We're in an industry that's growing double-digit. And we expect to gain share out in the future. So clearly the long long-term target is there, getting there, we are below that clearly today and so we'll have to increase as we head through 2026,

but I don't think long-term is five years away. I think it's much closer and we can return certainly to low double-digits and then in the longer-term mid double-digits as we move forward Perfect thank.

You no other questions.

(Operator Instructions) And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.