益華電腦 (CDNS) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Cadence Design Systems first quarter earnings conference call.

(OPERATOR INSTRUCTIONS) Thank you.

I will now turn the call over to Jennifer Jordan, Corporate Vice President of Investor Relations for Cadence Design Systems.

Please go ahead.

Thank you, and welcome to our earnings conference call for the first quarter of 2007.

The webcast of this call can be accessed through our website, www.cadence.com, and will be archived for one week.

With me today are Mike Fister, President and CEO; and Bill Porter, Executive Vice President and CFO.

Please note that today's discussion will contain forward-looking statements, and that our actual results may differ materially from those expectations.

For information on the factors that could cause a difference in our result, please refer to our 10-K for the period ended December 30, 2006, and our 10-Q for the period ended March 31, 2007, which will be filed shortly.

In addition to financial results prepared in accordance with generally accepted accounting principles or GAAP, we will also present certain non-GAAP financial measures today.

Cadence management believes that in addition to using GAAP results in evaluating our business it can also be useful to measure results using certain non-GAAP financial measures.

Please refer to our earnings press release for a discussion of non-GAAP measures and to both our earnings press release and our website for reconciliations of GAAP and non-GAAP financial measures used in today's discussion.

Now I'll turn the call over to Mike Fister.

Thanks, Jennifer.

Cadence started the year on a strong note with Q1 revenue growing 11% over the prior year period of non-GAAP EPS of 24%.

2007 our focus is again to grow our core business and expand in the adjacencies.

We continue to increase our differentiation in the core where at the platform we are delivering leading technology tier to provide value to our customers.

As I discussed with you at analyst day customers continue to be challenged by time to market complexity and productivity.

While we're already a leader in providing technology at the platform level to help our customers we have to understand their product development process and the ramifications of exploding design complexity.

That's why we bring design solutions to market to leverage capabilities across platforms, expand to multiple engineering teams within the customers, and ultimately address enterprise product development.

Within this context let me tell you about some of our products and key achievements in Q1.

Continuing with the trend of consolidation at Cadence due to our enterprise class capability, Hitachi announced a new design infrastructure co developed with Cadence to enhance the design and manufacturing competency in terms of cost, technology, and quality.

In earlier evaluations of the co-developed Cadence and Hitachi design infrastructure Hitachi has succeeded in doubling design efficiency and reducing turn around time by 40%.

The new design system is entirely standardized on Cadence design technology.

Hitachi plans to extend and deploy this new design system to include not only information and communications products, but also digital consumer products, automotive, electronics, and medical products.

Hitachi clearly shares our end-to-end thinking about the product development process.

Our integrated approach to design and verification is embodied in our logic design team solution.

This approach is resonating well with customers and we're seeing our front end products pull verification and verification products begin to pull front end design products.

For example, UVComs team is using Incisive Formal Verifier, Incisive Simulator along with Encounter RTL Compiler in formal and in the Encounter timing solution.

In Three Leaf Networks, a company that provides scalable virtual server infrastructure for enterprise data centers is using a similar set of solutions.

These initial successes are early examples of companies applying our cross-platform, logic design team solution.

Managing today's complex design process means that our customers must coordinate the functional verification effort across many different activities and development teams, and this is where our Incisive Enterprise Verification solutions excel.

Clear Speed, a fabless semiconductor company specializing in acceleration technology for high performance computing used our Enterprise Verification Management capabilities and Plan to Closure methodology to dramatically increase compliance coverage.

Finds bugs much more rapidly and enabled project management based on metrics.

This greatly reduced the risk of respins and improved their team's work flow.

Looking up the stack, our emulation technologies are facilitating hardware and software verification in full system validation of the most complex SoCs.

Customer results reinforce that Palladium 3 is the most advanced product in the market and our segmented approach offers customers the flexibility to choose the system they need.

In addition we have a strong upgrade program.

For instance, Sharp continues to be one of the most successful multimedia consumer companies in Japan and a long-term Cadence customer.

The Palladium product line was instrumental to their system level verification of their successful product line.

As a result Q1 Sharp upgraded their Palladium system in order to continue their success.

Several important accounts are using the enterprise system level solution and have added Incisive System Extensions which we call ISX for automated hardware and software verification.

In a recent EE Times article ST Microelectronics described how they used Incisive's transaction level modeling with system C, system level test bench leveraging ISX and the Extreme and Palladium to automatically verify hardware/software subsystems.

Momentum continued in our custom IC business and the pipeline for Virtuoso upgrade is strong.

We can expect continued adoption throughout the year with customers targeting the 65 and 45 nanometer nodes, wireless design and mixed signal SoC.

For this reason we upgraded the AMS and RF kits to enhance their compatibility with the new Virtuoso.

A leading medical technology company deployed the new constraint manager in Virtuoso to improve their design process.

While MindSpeed which supplies integrated semiconductor and software networking solutions also increased their usage of Virtuoso.

We saw strong demand for our digital technology in Q1 driven by the shift to 65 nanometers and beyond.

Also increasing chip complexity and our differentiated capability in low power design.

Global unit chip used the Encounter GXL digital platform to complete the first tape out by a Taiwanese design company of 65 nanometer chip.

QLogic chose Cadence as a broad line provider of analog digital and board technology.

Momentum continued for Encounter timing system including one customer usage, who initiated usage of over 200 licenses in Q1.

As we said we would we delivered low-power solutions to complete design and verification while preserving power intent through the development process.

Early adopters include NXP, Fujitsu and Sandbridge.

In addition, every major foundry now supports the common power format.

TSMC has made available 65 nanometer library supported TPF.

UMC joined the power forward initiative this quarter and IBM, Chartered, and Samsung added TPS enhancements to their 65 nanometer common platform reference flow.

The space-based router developed through our incubation program won the Design-Con, Design Vision award as well as the EDN Innovation of the Year award for outstanding innovation in IC back end and then DFM design automation.

The space-based router is in fact a great example of the design side of DFM.

ST Microelectronics used a space-based router to tape out a 65 nanometer mixed signal communications design by achieving better routing, performance, and manufacturability.

Silicon package board business had an excellent first quarter for both our packaging and board products with a number of competitive wins.

Our channel strategy which involves using our direct sales force to capture the opportunity in large accounts and then alternate channels to consolidate the effort on smaller transactions contributed to the first quarter success in this business.

During the quarter NEC selected our Allegro platform for board layout and we're on track for the release of our Allegro platform upgrade later this year.

In fact, we disclosed part of this, the revolutionary global route environment for advanced PCB design at PCB West.

We're very pleased to have Motorola and Sun Microsystems among the collaborators and early adopters of this new solution.

Less than a year ago we introduced our system and package solution to the market and adoption rates are growing.

Advanced semiconductor engineering, also known as ASE is the largest semiconductor packaging and test company.

They selected our SIP technology to provide high-performance package design services to their customers worldwide.

With the Cadence SIP technology ASE now has an integrated co-design flow with the supply chain for optimizing design and system integration from the die and package to the final product.

Another example of how Cadence uniquely provides the end-to-end solution customers and design shape partners are looking for.

With that I will let Bill take you through some numbers.

Thanks, Mike.

I'm pleased with our first quarter performance which was highlighted by consistent execution and strong financial results.

Total revenue is up 11% year-over-year.

Non-GAAP operating margin was 24%, improving 400 basis points from Q1 of 2006, and operating cash flow was $19 million.

GAAP earnings per share for Q1 of 2007 were $0.15 compared to $0.07 in Q1 of 2006.

Non-GAAP earnings per share were $0.26 for the quarter, compared to $0.21 in Q1 of 2006, up 24% year-over-year.

Total revenue for the first quarter was $365 million compared to $328 million in Q1 of 2006.

Product revenue was $238 million.

Maintenance revenue was $95 million, and services revenue was $32 million.

Revenue mix by geography in Q1 was 48% for North America, 27% for Japan, 15% for Europe, and 10% for Asia.

We saw good levels of business across all regions with particular strength in our geographic accounts.

One customer accounted for 12% of revenue in Q1.

In the quarter, approximately 84% of our product business was represented by routable licenses.

Estimated contract life on a dollar weighted average basis was approximately three years.

Total costs and expenses on a non-GAAP basis for Q1 were $277 million compared to $290 million in Q4.

Our non-GAAP operating margin in Q1 was 24% compared to 20% in Q1 of 2006.

We're on target to achieve a 30% operating margin for the full year 2007.

Quarter end headcount was approximately 5200.

Total DSOs increased seasonally in Q1 to 103 days compared to 97 days in Q1 of 2006.

We expect DSOs to be in the mid 80s by year end.

Quality of receivables remained high with receivables 90 days past due at 1% within our historical range of 1 to 3%.

Operating cash flow for Q1 was $19 million compared to $41 million in the first quarter of 2006.

Our experience is that the profile for collections is not even throughout the year.

This year we have more payments scheduled in the last three-quarters of the year than in 2006.

For 2007, we expect to generate operating cash flow of approximately $450 million.

Capital expenditures in Q1 were $20 million, and for 2007, we are targeting normal capital expenditures in the $75 million range plus $22 million for work on our new engineering building.

Cadence repurchased 5.9 million shares of stock in Q1 at a cost of $121 million.

Approximately $406 million remains under our current stock repurchase authorization.

Cash and cash equivalents were $947 million at quarter end.

Now I will turn to our outlook for Q2 and the year 2007.

For Q2 we expect revenue to be in the range of $375 to 385 million.

GAAP EPS should be in the range of $0.17 to $0.19 and non-GAAP EPS in the range of $0.28 to $0.30.

For the year 2007, we expect revenue to be in the range of 1.58 to $1.63 billion.

GAAP EPS should be in the range of $0.84 to $0.92 and non-GAAP EPS in the range of 1.27 to $1.35.

With respect to the seasonal pattern for the remainder of the year we expect to generate 23 to 26% of annual revenues in Q3 and 28 to 31% in Q4.

Other income and expense for 2007 should be in the range of 35 to $39 million.

We're off to a very good start in 2007, and I expect that we will attain our growth, profitability, and cash flow goals for the year.

As I said at analyst day, I believe we'll be able to grow our business while expanding our operating margins beyond 30%.

Operator, we'll now take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Mahesh Sanganeria of RBC Capital Markets.

Congratulations on a good quarter and the guidance.

Quickly, did you say routable was 84% this quarter?

Yes, for the quarter, Mahesh.

Yes.

For the March quarter.

Hello?

Yes.

Okay.

So can you give us some color on the booking?

84% routable would imply that you had a pretty strong booking.

The 84% routable number does imply that we had good business levels.

As I have said we did see good business across the geographies and also across the product lines.

As you can see from the percentage of business by revenue, there is a little bit of variability there because of the type of contracts, so it's not always apparent.

But as you look at the business kind of across a four-quarter average, I think you'll see that we're continuing to have very good business levels in our three primary product areas.

Digital, functional verification, and custom.

And I think it's good to see the digital line come back.

There was a few questions a year ago saying, gee, have you lost any of your momentum in digital?

And I think the answer is, no, we just saw some absorption and some of the advantages that we have with our holistic power approach as well as the front end logic design team are really starting to come through.

So overall I think you could see good business levels.

So how do you feel about your backlog targets for the year?

Any color?

Do you feel more confident, less confident?

Any color you can provide on that?

I'm just consistent with what our outlook was at the beginning of the year.

I think we are planning, as you know, to provide good value to customers, and I think one of the things that we are trying to achieve is a nice balance between building backlog or visibility as well as selling continuously and getting better value for customers.

So as we did last year, it's a nice balance.

I think we do expect to grow our backlog, but, on the other hand we're not trying to maximize this.

We're trying to get better value for customers and get better value in return.

Okay, thank you.

Your next question comes from Jay Vleeschhouwer from Merrill Lynch.

Mike, I would like to ask you about a metric that hasn't really come up before but I'm wondering if it might attain some additional importance, or new importance particularly as you move into the so-called enterprise EDA market.

That specifically the a measure of profitability by account.

We talked about bookings, we talk about run rate, but particularly as you move into larger deals or more comprehensive types of transactions, what does that mean for how you can gauge the profitability of accounts, particularly as certain product areas or certain customers are very support and services intensive?

Then a couple of follow-ups.

Jay, to tell you the truth, I'm really focused with Bill and Kevin on continuous selling.

I think that's the first way to go broach driving value and making sure that the customer hasn't got too much capacity.

And that is one of the kind of prerequisites for really being able to drive value.

We always look across products and services when we do these things, and I think that our application, engineering force, and services teams are some of the best assets the Company has, especially as we approach the real enterprise penetration, which is consolidations.

And certainly it's served us well in the ones we've done so far.

Most of those kind of consolidations start off with a services-led opportunity to not only demonstrate but probably even migrate some of the influx designs, and over time I think that if we look at it in combination that gives us the best vision into how we become a full service enterprise supplier.

You've talked about how Virtuoso is going to be an important product upgrade opportunity for you this year, but I'd like to ask about other areas that may not have been performing as well for you, or where you might need to add additional product capability for future incremental revenue.

A couple of things came up at the Date conference in Neese last week which is what is prompting the question.

First, in terms of litho or manufacturing-ware design, it was evident last week at the conference that there is more talk about manufacturing awareness moving up into the design process, which prompts the question of where you are with that?

And secondly, system-level design.

There are multiple definitions, perhaps, but, again, it's becoming an increasingly important revenue category and industry issue.

I understand you might have some kind of an incubation program going on, but beyond Virtuoso, these two things, and perhaps others, might seem to be important for future revenue.

Strangely coincident with exactly where we focus the adjacencies, isn't it.

We have a perfect strategy associated with lithography, metallization, and chemical etch, as fundamental components of our DFM approach, which I call design side DFM.

The reason that that is, Jay, is because the electrical parameters are impacted by those, and physical sign-off is insufficient to be able to close a design if you affect electrical performance.

And, boy, I like our position in this.

It's exactly the way we target the TBS both in the modularity of it and what we bundled into the GXL.

We're making customer progress on this.

We're not overhyping it.

Everyone will follow that trend as far as I'm concerned.

On the systems side, that's what we mean by up the adjacency.

We do have not only the ISX capability which I referred to in the opening comments, but we do have some technologies that we've been very selectively engaged with.

Hitachi was a test bench for one of those.

Up that stack.

The reason that that company has had such an exciting announcement is not only that they consolidated across the Cadence tool suite but because they're a system design company.

The real moral of the story is, is they're using that to allow the system designers to use semiconductors to express some of their ideas across all different kinds of verticals.

That's because they have been exposed and can see the vision of the road map and it's more than PowerPoint, my friend, it's real.

So I think the problem with the systems category in general is that it's historically been kind of theoretical.

It's prevalent with a lot of niche players which have no connection to the implementation of a chip or of a -- of the RTL or any of the gates or even the software/hardware co-design.

I really believe that our fundamental integration of all those pieces is demonstrating a blueprint with how the system customers can really progress and evolve, and it's very exciting.

Just to press the point, however, Mike, I understand what the product road map or product intent is that you have, but I'm afraid it wasn't entirely clear when these might convert to revenue for you.

Are you saying that as this year progresses, these new things are going to convert to revenue for you as additional businesses?

Is it '08?

And if you could just clarify that, and again, back to the earlier question on profitability by account, you are planning to increase your margins by several hundred basis points over the next few years.

Does that suggest a lessening of services and support intensity on average even as you pursue larger business?

The ISX product has been out for awhile, so has a thing w call Builder which is a hardware template thing.

It's contributing.

It's relatively small percentages of the, or components of the verification business, which has got a lot of emulation, simulation content to it.

So it's kind of what I mean by progressing at the adjacency.

To tell you the truth we have not been public in breaking out the subcomponents of the verification business beyond elements of the hardware business.

On the -- and we'll think about how to do that and expose it to you.

In terms of the RF services and the ability to scale into the enterprise I think we're extremely scalable.

We've got a massive organization, the biggest and best in the industry by a long shot, and that's in both human scale and capability.

That's the most important part, because it's geocentrically deployed, and I believe we've got a ton of scale.

We've grown the business over my three years here by a long shot with almost no increase in human headcount.

And I think that's a testimonial for just how scalable it is.

This is Bill.

Just to add a little bit to Mike's comment on moving up the stack, as you can see from the success we had with our early incubation, patience in working with customers to really get the products right has been paying off as both of those products have had awards.

So we're not rushing to get those to revenue.

I think we want to make sure that they're clicking with customers and we're building up that experience out of our core business into the systems adjacency.

So I think patience helps.

We don't need those to get to our targets.

I think it's really getting the right basis for those products and getting them to work with customers, that is very important for incubations or early stages in that product.

So that experience we're going to continue.

And then on the profitability piece, as we continue to have better integration within our product platforms and amongst our product platforms, along with layering on top of it the experience with kits, we should be able to get less support-intensive work with our customers because there is not going to be the same type of hand holding you need when you're dealing at a 0.2 level.

So I think that will help naturally over time, it's not something that's immediate, but that will help us leverage our revenues down to profitability.

It's just a natural way that the field continues to train themselves and then to work with customers.

Okay.

Thank you.

Your next question comes from Rich Valera from Needham & Company.

Sorry.

Can you hear me okay?

We can, Rich.

Great.

Bill, at your recent analyst day, you talked about your three major segments and what you were sort of counting on them to grow in '07 to meet your sort of 8 to 10% sort of growth rate.

You specifically cited verification as growing sort of probably double-digits or maybe better and custom IC is also growing up in that double-digit type of rate with digital possibly flat, flat to up 10%.

Yet in your first quarter it seems like it was pretty much the reverse with digital showing really strong year-over-year growth.

I think about 30%.

And the other two segments down year-over-year.

Just wondering if there's anything to read into this.

You mentioned you feel like you've got some sort of reacceleration in digital, but should we still expect those other two segments, verification and custom, to grow, reasonably this year?

Is there anything that would have changed your view based on these results?

Thanks.

Yes, Rich.

Don't see anything based on these results that changed our look for the year, particularly in those product areas.

As I've mentioned, I think we do have -- did have strong performance, but because of the mix of contracts where you have certain of the areas having more revenue in a particular quarter, you don't get to see that strength, and that will come out over time.

We do see a good pipeline in our Virtuoso upgrade process, and that will continue to pull other business with it, as has been our experience, and in functional verification.

The real breadth of that offering continues to do very well against the competition.

So I think both of those will be good growers for us.

I think I mentioned there's upside from the other product areas, and that's the nice thing about having a portfolio.

You can't always predict exactly where the portfolio will perform, but I think over the year we should see strength in all three areas.

Great.

And, Mike, you mentioned the space-based router in your comments.

Can you talk about, is that a potential upgrade cycle on the digital side?

Will you get incremental revenue for that if customers upgrade to the space-based router, or is that a maintenance upgrade?

It's not a maintenance.

It's a feature differential in the tiering of the products.

The further up the stack in the GXL, that's where it's implicit and it's most evident in the custom -- in the Virtuoso platform, Rich.

So it really is cool technology.

There were people questioning just how cool, cool was.

I guess if the industry has voted, then we know where they voted.

And the early customer trials were just glowing, as you know.

ATI and IBM were both early testimonials for it.

I think it really bodes nicely, especially for the advanced process nodes and for our design side VFM and it's absolutely structural and strategic on our part.

To me it's very engaging that we see such strong response from the industry and recognition for it.

Great.

Bill, I think you addressed in this your comments.

Just wanted to clarify.

The cash flow from ops was pretty light this quarter.

Lighter than it's been in several quarters.

But it's just purely a timing issue and you feel like you'll make that up to hit that 450 target for the balance of the year?

We do Rich.

And we look carefully at what our scheduled payments are.

This is just one year.

You can see that there's generally some movement in quarters where it's not always sequentially up.

Some quarters have stronger cash flow than others.

So it it's just the way that the year rolls out.

The cash is in the year, and we do expect to hit that 450 number.

Great.

Thanks very much.

Your next question comes from Terence Whalen from CIT.

Thanks for taking my question, from Citigroup.

My question links to the first question.

We've seen the ratable up here at about 83 or 84% for the past two quarters, now is that a function really, of the third quarter of '06 being more up-front?

Is it exogenous or thirdly, is it indicative maybe of going more toward a mix of 80% ratable for the rest of the year.

Then I have a follow-up.

Terence, it's not indicative of a change in mix for the rest of the year.

It's more indicative of business levels in Q1 which is normally a seasonally lower quarter than what we saw normally in Q4.

So you can have a higher mix being affected by just a little bit lower volumes, but I think on average the way to read into it is good business levels.

Okay, great.

Then a couple follow-ups regarding the balance sheet.

I think there was a pretty large increase actually in other assets going from about 246 million to $364, an increase of $120 million.

What was that increase?

And then secondly, related to that, do you expect a working capital draw or source of cash flow next quarter?

Thank you.

Sure.

If you look at the balance sheet, there are some significant increase in both other assets as well as long-term liabilities, and that is the impact from adoption of FIN 48, the new income tax accounting standard.

And you will be able to take a look at that and read that in more detail in our 10-Q.

But essentially, the balance sheet gets grossed up for deferred tax assets as well as for liabilities.

So that's really the change on the balance sheet.

And then I would expect that throughout the year, we would continue to see our working capital get a little bit more efficient.

So I'd say a draw, but it's always kind of hard to predict quarter to quarter.

Okay, great.

Then just squeeze one last in if I can.

On the cash, sorry, on the stock buyback.

Do you expect stock buyback dollar levels to remain at similar level or decline or increase through the rest of the year?

Thanks.

Terence, I'd just say that we have authorization, and I think we'll be selective as we use it.

We don't try to forecast that level of repurchase with any degree of specificity for the year, but we like to do it it.

You can see our history.

I'd just say be patient and we'll tell you about it at the end of every quarter.

Thanks.

Nice job.

Your next question comes from Harlan Sur from Morgan Stanley.

This is actually [John Ohn] calling in for Harlan.

I'd like to focus in on the end markets, or the end applications that you guys are seeing, especially in the area of analog and wireless.

Can you share any kind of trends that you might be seeing within this marketplace?

Wireless is on the rise everywhere.

It's not only about a particular wireless standard but actually mixed devices where they will have two or three integrated at once.

802.11 and WiMAX will be a popular combination so that you can kind f hook up to the high-bandwidth source that's near and dear to your heart.

Beautiful thing for a company like us, because we're the -- very sophisticated in the mixed signal technology capabilities for the tools and enable that kind of integration either in system or on die.

The analog trends are up and down.

I think we're going to enable some more growth in pure analog because of the capabilities that are implicit in new Virtuoso, that's the so-called assertions that allow to you drive consistency, like I often use the right and left channel of a stereo.

If the right channel was louder than the left would it drive you crazy.

The tools will have the capability of saying it's important that the right and the left match each other, and like magic it tells you if you're going to do something stupid.

So this is the purview of mostly smart designers before.

It's not so much that they couldn't do it but sometimes it took a couple of tries to get it right.

Like four or five tries.

Customer experience with this is it gets down to maybe two tries to get it it right.

All those trends are on the rise.

The mixed signal integration pure analog and sometimes I say big A, little d and big D, little a.

Sometimes it's a lot analog with a little digital.

Sometimes it's a lot of digital with a little analog.

That's why Bill and I always say it pulls across.

It's pulls together and that's we have optimized the tools across them.

So it's not just base Virtuoso capability but also what we do to drive the optimization with Encounter.

It's very interesting.

Great.

That's really good to know.

Now, kind of getting on to the Virtuoso platform, it was introduced at the end of last year so I think you had maybe two quarters of performance under your belt in a way, and I know there's a lot of people asking this.

I'm not sure if you're at a point to give us an idea of any kind of ASP uplift or any kind of trends that you're seeing in the ASPs going forward for the new Virtuoso platform.

John, it's still a little early for that, as you recall.

It took us really to get four quarters of data to really mine and get some history before we were able to roll that out for both the Incisive and the Encounter lines.

So I'd just say be patient.

The mix is something that we're just watching now, still kind of in the teens with GXL, and that's about the only color that I'd share.

Until we get a little further along and get some more volume so we can start to be a little bit more predictive.

That's fair enough.

Just one last housekeeping question.

How does book to bills look for the March quarter?

Well, again, we don't get to that level of describing bookings.

We'll do that on an annual basis.

So that's -- I think the earlier question, I do expect to have reasonably good business, but we're not going to try to predict it quarter to quarter.

We're trying to match visibility and value, and that's just something that is more important over the longer term.

Okay, fair enough.

Nice job, guys.

Thank you.

Your next question comes from Matt Petkun from D.A.

Davidson & Co.

Just real quickly, Bill, I think I missed the percentage of revenue that came from backlog in the quarter.

Was it two-thirds, as usual, or a little bit more?

Yes, Matt, in the first quarter it's a little higher than that.

As we look throughout the year we're about at that two-thirds level.

Did you give a specific number for this quarter?

No, did not.

Did you just say a little higher?

It's just one of those things that I don't think the need to get to that level of specifics.

We still have normally the third of the business that we'll generate from pipeline as we get into the second quarter and I think that's one of the things that we focus on.

Then I was hoping that you guys could give us a little bit of an update on your Emulation business.

Obviously your competitor has been making more noise in the hardware space in general recently, and I was just kind of wondering how you guys saw that play out in your first quarter.

Yes, the -- I mentioned in my comments the Palladium 3 by our customer response is the performance leader.

The tiered offering that we have that not only includes Palladium 1 and 2 but also the accelerators give us a nice price lineup and that may be the real way to go in and look across that continuum.

I do know that there are other trials that are engaged with some of the competitive alternatives, but I would encourage you to dive into whether those are trials or real business for them, and I think the real strength of our Emulation capability is the coupling into what we do across the rest of the verification.

It's a solutions oriented approach as opposed to a tool point of light.

And that kind of drag effect between simulation and our Emulation visa versa and what we do with VPA the process automation is where all the real power is that helps you to go drive co-design in the hardware space as well as the functional logic verification that is kind of the history of Emulation.

Then just my next question, also kind of on verification, Mike, I don't know that anybody wants to put too much stake into Cooley's numbers but did he point out, at least in his survey, a mild pickup in HDL simulator use for Synopsis over Cadence, attributing it to what Synopsis and Menner would like to us believe is a shift to System Verilog that you guys haven't been embracing so clearly.

I don't know that I believe that, but I'd like to hear your response and kind of what you're hearing from your customer base as they do make the transition to System Verilog.

That is a topical question.

I guess if you go survey the East node, you're probably going to get a little bit of a competitive bias, aren't you.

I read that with some interest.

I think it was about maybe a 3% return rate, so I don't even know if it's statistically relevant.

The body language from our customers is that the trailblazers that are out there with E are happy as a clam and pushing along forward.

Those are really complex digital devices.

There's a lot of momentum in VHDL and Verilog as it exists and there's a lot of hype for System Verilog.

I think you characterized it correctly yourself.

You have potential fodder out there, or fud around the convergence of a System Verilog across all the different continuums.

That's going to be a tough thing to do.

That may take ten years as far as I'm concerned.

I think our strength is that we're agnostic across all those languages.

IP today is sourced across a lot of historical artifacts including VHDL and E.

That doesn't make it a dream that we can continue to succeed if some kind of a standard emerges on System Verilog.

We went public in January that we had a huge number of customers out there using our System Verilog early solutions, and throughout the year we continuously enhanced that part of it.

So our agnosticism includes a strong System Verilog offering ever strengthening through the year for whatever niche our customers find it valuable.

I think once again, back to the Emulation point, this is a unified approach we have across all pieces of our verification business, not just a IP sourcing language, so the real power is the seamlessness to that with the rest of is our verification and implementation suites, and I like the foundation and the momentum of our strategy.

Okay.

Thank you.

Sure.

(OPERATOR INSTRUCTIONS) Your next question comes from Tim Fox from Deutsche Bank.

Thank you.

Good afternoon.

Mike, I was wondering if you could just dive a little bit more into the strength in the digital performance this quarter, and wondering if there's anything there around an increase in run rates, maybe some competitive displacements, or was it largely a, just the timing of book in connection with.

I would say yes, yes, and yes.

Tim, we earn every customer that's doing digital.

The theater strategy is to penetrate at the high end.

We're doing all the complex devices as far as I'm concerned.

I think what you see are three other elements of it.

It's not about Point tools.

If anybody degenerates to that, that's something that -- it's symptomatic of a strong -- or a weakness in there across their total offering.

Low power is material.

We are out there with CPF across all the product lines, customers are watching it, and in production settings.

This is invaluable to them, and it's a drag for the digital business.

Second, logic design team is out there in the public domain.

I commented it was doing quite well.

It's a pull across our verification and front-end logic, not only for Synthesis but across Conformal which we enjoy a very nice technology and market position in, and our test capabilities.

That is a strength of the digital line.

The third thing is the tiering of the digital line from top to bottom.

Someone learns how to use the most complex stuff.

It works nicely in the low end, and visa versa.

I think that is the momentum.

You're always going to see, as Bill said, in his own very particular way -- I'm going to say it's a little blotchy from quarter to quarter, and I don't think people should draw a conclusion on that.

It's great technology.

We get a lot of good feedback.

I think really the strength of ours is going to be in the solution approaches, either in minuscule or macroscopy across things like power and front end design, and that's why we did it that way.

Thanks.

Bill, just one question on cash flow.

450 is a solid number this year but obviously trailing earnings growth.

Could you just address what the divergence there may be?

And I guess, more importantly, looking into '08, do you anticipate cash flow to start to get back to tracking earnings growth?

Well, I think it does track pretty well, Tim.

If you look at our earnings for the year at $1.30, and you look at our cash flow per share at $1.30, I think that's a pretty high quality of earnings.

I think always as you grow the business there's potentially a slight lag from a working capital perspective, but not significant.

We're always looking at how we can increase value for the customers and at the same time get a little bit more cash for us.

So I'm not saying that we're going to have an increase in working capital necessarily, but there is always a little bit of that, that that happens.

But I think I would expect cash flow to grow with earnings.

It's just a matter of is it going to be the exact same percentage.

Hopefully but there could always be a slight delay as that catches up.

Okay.

So the catch-up, we could see the catch-up in '08?

I do expect to see both profitability increase and cash flow increase next year.

Great.

That's all for me.

Good quarter.

Thank you.

Thank you.

Your next question comes from Rohit Pandey from HSBC Securities.

A few questions.

What was that restructuring charge in this quarter about?

Rohit, you'll generally notice that there's a small credit in restructuring, and that's because as we -- and those are leases, because we have the ability to do a little bit better in closing out some of those leases.

We got $1 million back because we're not going to have to pay that liability.

As soon as we realize it and close out a lease like that we would adjust our accrual.

And then how should we think about the G&A line going forward for the rest of the year?

Should it go up from these levels or should it go down?

I would expect it to be relatively flat in terms of G&A.

Okay.

And I'm looking at the inventory line, and that probably is all the Emulation inventory, I guess, so why has the inventory been building up for the past four quarters?

I think inventory is relatively flat if I look at it compared Q4 to Q1 so let me just check that.

It is flat compared Q4 to Q1, and I thought you built inventory in Q4 to sell it in Q1 but year-over-year it's up from $23 million to about $37 million.

Well, again, I think we're seeing that business as being something that we can continue to grow, and we want to make sure we have enough inventory to be able to service the needs across all the product lines.

So I'm not concerned about seeing building inventories.

I think we look forward and we think we have enough to grow the business, and that's really what we're trying to do.

Should this line go up or down?

I think over time as we grow the business it could go up, but that's just something that we kind of watch quarter to quarter.

Okay.

And the stock-based compensation is about $0.09 to $0.10 per quarter.

So should this be the way we should think about it going forward?

Yes.

And as you look at the year it's very comparable to last year.

And so that's -- I think we've hit a steady state for stock-based compensation.

If anything, I think the trend generally is across all industries and technologies, that that probably comes down slightly over time as people are just continuing to be more judicious with stock compensation.

I do not expect it to go up any significant degree over time.

Okay.

And finally, just looking at the growth on a year-over-year perspective, first quarter was 11%, second quarter guidance implies about 8%, so is it just a conservative guidance, or do you expect growth to slow down on a year-over-year basis somewhat as the year goes forward?

Well, I think you've seen other history, Rohit, which is generally we try to make sure that we are, I'd say, conservative in our outlook, and if we have the ability to get some better value we take it.

If not, we're going to be able to grow the business in terms of top line and profitability with the guidance that we set out at the beginning of the year which is, I think, healthy in a maturing industry that's sitting around at 8%.

So 8% is a good number.

If we do better on a quarter, that's great.

But you're going to see us grow the business at kind of that base level, plus or minus as we look at a particular quarter.

Okay.

Got it.

Thank you.

Your next question comes from Sterling Auty from JPMorgan.

Hi, guys.

It's [Sakit] for Sterling.

Three questions here.

First, at your analyst day, I think that you had put out the goal of converting 50% of your Virtuoso base to the new platform.

Would you say you're still on track to achieve that goal?

By mid 2008, that is.

I think that's a range, Sakit.

I think that the upgrade cycle looks good for us, and as we get a little more experience we'll decide whether that needs to get updated, but I think the opportunity is there, and we're seeing good results from customers.

We'll find out whether it's going to be a little faster or a little slower than that as we get a little bit more experience.

Secondly, in response to a question before about the ebbs and flows among verification, analog and digital, it almost sounded like it was a revenue flow issue.

So would it be fair to say that, verification, analog, sort of your two stronger products historically?

Would you say that those two products had stronger bookings, or bookings that were in line with your expectation this quarter, even though the revenue was maybe a little bit less than some were expecting?

Yes, as I was inferring when I called business levels, I think the business levels for both of those platforms were in line, they are doing well.

Got you.

Okay.

And lastly, just accounting-wise, G&A was up a little bit more than we were expecting as was other income.

Just wanted to know if there was anything behind that.

Nothing in particular, as we look, there's just some -- across the board there's 1.5 million here or there in G&A.

There wasn't any major theme.

That's probably going to stay constant or tail a little bit.

Other income there, we saw a couple of items that gave us some positive surprises.

We did a little better in foreign exchange for a couple million dollars.

We had some liquidity events that we could not forecast from our portfolio, and so that provided us with another couple million dollars of upside.

And then just in general we got a little bit better return on our cash portfolio.

So it was kind of the combination of those things.

As we look into Q2, obviously two of the three of those probably we can't forecast to reoccur.

We can't necessarily see foreign exchange or some of the liquidity events, the portfolio.

Okay.

That's it for me.

Thanks.

Okay.

And that was our final question.

I would now like to turn the call over to Mike Fister, President and CEO of Cadence.

Mr.

Fister.

Well, thinks.

It's always a pleasure to talk to you, and I hope that you will consider CDN live coming up in Munich, if you're out in Europe, and if not, in September in the United States.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.