益華電腦 (CDNS) 2011 Q1 法說會逐字稿

Good afternoon, my name is David and I will be your conference operator today.

At this time I would like welcome everyone to the Cadence Design Systems first quarter 2011 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you.

I would now like to turn the call over to Alan Lindstrom, Director of Investor Relations for Cadence Design Systems.

Please go ahead, sir.

Thank you, David.

Welcome to our earnings conference call for the first quarter of fiscal 2011.

The webcast of this call can be accessed through our website, www.Cadence.com, and will be archived for two weeks.

With us today are Lip-Bu Tan, President and CEO of Cadence, and Senior Vice President and CFO, Geoff Ribar.

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 results, please refer to our Form 10-K for the period ended January 1, 2011, and the Company's future filings with the Securities and Exchange Commission and the cautionary statements regarding forward-looking statements in the earnings press release issued today.

In addition to financial results prepared in accordance with General 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.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results which can be found in the quarterly earnings section of the Investor Relations portion of our website.

A copy of today's press release dated April 27, 2011, for the quarter ended April 2, 2011, and related financial tables can also be found in the Investor Relations portion of our website at www.Cadence.com.

Now I will turn the call over to Lip-Bu Tan.

Good afternoon, everyone.

Thank you for joining us.

Cadence ended 2010 with good momentum and I'm happy to report that it continued into Q1.

For the first quarter revenue totaled $266 million.

Non-GAAP operating margin was 13%.

And we generated $56 million of operating cash flow.

Demand for our products and services is strong across all regions driving higher run rates on renewals.

Because of this strength, we are raising our outlook for the year which Geoff will discuss in more detail in a few minutes.

Many of you have asked about the impact on our industry from the tragic events in Japan.

First of all, our deepest sympathy goes out to the people of Japan.

In keeping with our commitment to the global community, Cadence and its employees have contributed to the relief efforts.

With respect to the effect on the semiconductor industry, the earthquake and its aftermath have caused some supply chain disruptions that may have near term impact.

But I believe the semiconductor industry will show continued growth this year.

For our own business, the only impact so far has been restriction on travel to Japan to meet with customers.

There was no material impact on Q1 results or on our outlook for Q2.

A number of our large customers have increased their emphasis on analog and mixed signal not only for SoCs but also for RF and high performance designs.

Most recently TI announced its intention to acquire National Semiconductor and Qualcomm announced its intention to acquire Atheros.

These transactions are good examples of the growing trend.

Our products are well positioned to take advantage of this trend.

And I will talk more about it in a minute.

Before we turn to the highlights of the quarter, I would like to talk about an organization change that we announced today.

Tom Cooley, our Senior Vice President of Worldwide Field Operations is leaving Cadence.

On behalf of everyone at Cadence, I thank Tom for the tremendous contribution that he had made to Cadence over the past 16 years and wish him the best.

Charlie Huang, our Chief Strategy Officer and acting CTO has been appointed to succeed him.

We are fortunate to have someone with Charlie's knowledge and experience to lead Worldwide Field Operations.

Charlie's track record of success is well respected in the EDA industry.

Charlie led the development of our synergy and is well positioned to further develop highly collaborative technology-based relationships with customers and partners.

Charlie has been a CEO, a venture capitalist.

In addition he had led large R&D organization heading up marketing group and led synergy and M&A at Cadence.

We are excited to have Charlie take on this new role.

Now I will turn to highlights for the first quarter.

Let me start with system realization.

System realization is our term for the set of tools, services and content required to design, verify and implement systems.

Our flagship system realization product, the Cadence verification computing platform also known as Palladium, was introduced in April 2010.

It enables our customer to perform emulation, acceleration and simulation on single highly scalable platform.

Cadence is the undisputed leader in this market segment which enables the co-design, co-verification of software and hardware for an expanding array of electronic systems.

Now verification computing platform contributed to the Company's strong Q1 results and Q2 outlook.

For example, Renesas Electronics and Renesas Mobile Corporation deployed multiple Palladium XPs for their system validations, reducing the overall development cycle while ensuring high quality of their end products, primarily targeting mobile and home electronics applications.

Verification computing platform will be at the center of some very exciting product announcements that we will be making later this quarter.

Now I want to turn to SoC realization.

SoC realization is our term for the set of tools, services and content that enables the delivery, integration and support of high quality silicon IP.

We acquired Denali last year to accelerate our ability to provide SoC realization products, especially memory and storage management IP.

I am pleased to report that the integration of Denali into our strategy and operation will be complete in Q2.

Our SoC realization business led by the Denali team and products had a very strong Q1 and momentum is building.

Now I will describe our strategy to SoC realization in more detail.

SoCs require the integration of silicon IP from three primary categories.

First one, processor IP; second, interface IP; and third, memory and storage IP.

For processor IP, we collaborate with leading IP providers so that we can support the compute needs of SoC designers.

In interface IP category, we will focus on high performance interface IP solutions such as PCI Express Gen 2 and Gen 3 and gigabit Ethernet, 10 gigabyte Ethernet and 40 gigabit Ethernet.

Additionally, the combined Cadence and Denali service team offers decades of design expertise and will continue to deliver highly optimized integrated IP solutions.

Memory and storage IP is the performance roadblock for today's complex SoC that must support HD video, 3-D graphics, cloud computing and other advanced features.

Historically most design teams have built their own memory and storage controllers.

In order to meet the time to market and cost pressures, they are increasingly open to purchase commercial IP products from Cadence.

We believe the memory and storage management is the next frontier in IP and it is one of the pillars of our silicon SoC realization synergy.

We have over 100 design wins for DDR3 and building on that success, we just introduced the industry first complete DDR4 IP solution which includes controller IP, soft and hard PHY, memory models, verification IP and tools and methodologies.

The completeness of our solution, unique in the market, enables our customers to be first to market with highly differentiated SoCs.

This quarter we also announced the industry first Wide I/O memory control core, along with the integration environment that brings PC-like performance to mobile applications such as smartphones and tablets.

Complemented by our memory models, verification IP and sophisticated 3-D IC design technology, our Wide I/O IP significantly lower the risk and overall costs of SoC design.

Let me finish the review of business by giving some highlights from our silicon realization.

Silicon realization is our term for the set of tools and services required to design, verify and implement silicon, package and boards.

Result from silicon realization was strong in Q1, with both increasing renewal run rates and incremental sales of our core products and services.

For example, Rambus is a strong user of Cadence Virtuoso custom analog platform and has trusted Cadence in this domain for years.

Their designs have continued to expand in the areas of complex mixed signal and 28 nanometer advanced node design.

Rambus saw the need to develop a converged flow.

Rambas has now standardized on Cadence for digital design, functional verification and implementation solutions including Encounter and Incisive platforms which provides a mixed signal flow for their complex designs.

Earlier I talked about the growing importance of high performance analog mixed signal design.

This is the area of strength for us.

We are recognized as the market segment share leader by a wide margin.

Virtuoso, our custom analog solution, together with Encounter digital implementation system provide the only integrated solution for the mixed signal design in EDA.

We continue to enhance our market leading Virtuoso platform.

In Q1 we announced major enhancements to our custom analog flow, extending its capabilities to the 20-nanometer nodes.

The enhancements include capabilities for DFM and power management integrated within the Virtuoso environment.

Cadence has production flows in place for custom analog, digital and mixed signal design at 20 nanometers and we are actively working with our customers and ecosystem partner preparing for the deployment of the 20-nanometer nodes.

Let me give you an example of a customer who is benefiting from our mixed signal solution.

Hittite Microwave, a developer of high performance mixed signal IC and a longstanding customer, has been expanding its use of the Cadence analog mixed signal technology.

Hittite use a complete suite of Cadence AMS products from simulation to layout and physical verification.

Let me conclude my remarks with the following thoughts.

First, the Cadence team executed well in Q1.

The results support it and we have momentum going into Q2.

Second, we have recently launched major upgrades to our verification, digital, custom analog and package board solutions.

We have introduced exciting additions to our IP portfolio and will soon add to our system realization portfolio.

We will use this new technology to continue to expand the value we deliver to our customers this year.

Lastly, our strategy is working.

Customer regularly tell me that Cadence is different now and they like the change.

Thank you.

Now Geoff will review the financial results and provide our outlook.

Thanks, Lip-Bu.

And good afternoon, everyone.

Cadence posted very strong financial results for Q1 and we have good momentum going into Q2.

I will review the results of the first quarter and then present our outlook for Q2 and update you on 2011.

Total revenue for the first quarter was $266 million, compared to $222 million for Q1 of 2010.

Product revenue was $142 million.

Maintenance revenue was $96 million.

And service revenue was $28 million.

The revenue mix for the geographies was 44% for the Americas.

21% for EMEA.

19% for Japan.

And 16% for Asia.

You will note from our revenue mix table which accompanies our earnings press release that the mix of revenue from custom IC declined 7% from Q4 to Q1.

The sequential design was primarily due to revenue from an up-front contract recognized in Q4 that included a large custom IC component.

In fact, Q1 was a strong quarter for custom IC with the highest level of bookings in over two years.

Total cost and expenses on a non-GAAP basis for Q1 were $230 million compared to $222 million for Q4 of 2010.

The sequential increase was primarily due to seasonally higher employee related costs.

Quarter end headcount was approximately 4,600.

Non-GAAP operating margin for Q1 was 13%.

For Q1, we recorded GAAP net income per share of $0.02.

Non-GAAP net income per share was $0.09.

Approximately $0.01 was included in both GAAP and non-GAAP EPS due to the reversal of bad debt reserves.

Operating cash flow for Q1 was $56 million.

Total DSOs for Q1 decreased to 62 days from 78 days in Q4.

The reduction was primarily due to continued focus on improving accounts receivable and DSO.

We have driven DSOs down from over 150 days at the end of Q1 2009 and our target for DSOs for the year is 65 to 75 days.

The quality of receivables remained high with less than 1% of receivables more than 90 days past due.

Capital expenditures for Q1 were $5 million.

Cash and cash equivalents were $612 million at quarter end.

Approximately one-third of our cash is in the United States.

Over 90% of our orders booked in Q1 were ratable.

Weighted average contract life for Q1 was about 2.5 years, below the expected range of 2.6 to 3 years.

As Lip-Bu mentioned, on a weighted average basis run rates on contract renewals in Q1 increased.

Now let's address our outlook for Q2 of 2011 and our update for fiscal 2011.

We are increasing our fiscal 2011 outlook for bookings, revenue and operating cash flow due to a strong start of the year including better hardware sales, better linearity in Q1 and the positive impact of shorter contract lives on revenue.

For Q2, 2011, we expect revenue to be in the range of $270 million to $280 million.

We expect revenue for the Cadence verification computing platform to be stronger in the first half of the year than in the second half as we work through strong initial orders for the product.

Q2 non-GAAP operating margin is expected to be in the range of 14% to 16% with non-GAAP total cost and expenses increasing sequentially due to higher cost of product and a lower level of bad debt reversals when compared to Q1.

GAAP EPS for the second quarter is expected to be in the range of $0.04 to $0.06.

Non-GAAP EPS for Q2 is expected to be in the range of $0.09 to $0.11.

Now for our update on fiscal 2011.

Order levels are now expected to be in the range of $1.08 billion to $1.12 billion compared to the prior range of $1.04 billion to $1.08 billion.

We are improving the expected range of weighted average contact life from 2.6 to 3 years to a range of 2.5 to 2.9 years.

We expect to book at least 90% of our orders under ratable arrangements.

We now expect revenue to be in the range of $1.075 billion to $1.15 billion (sic - see press release) for 2011 compared to a prior range of $1.03 billion to $1.07 billion.

Non-GAAP operating margin is expected to be in the range of 14% to 16% on an annual basis for 2011 compared to the prior range of 12% to 14%.

Non-GAAP other income and expense for 2011 is expected to be in the range of negative $18 million to negative $14 million.

For 2011, we are assuming a non-GAAP tax rate of 26% and a weighted average shares outstanding of 268 million to 275 million shares.

GAAP EPS for 2011 is expected to be in the range of $0.11 to $0.19 compared to the prior range of break even to $0.10.

Non-GAAP EPS is now expected to be in the range of $0.36 to $0.44 compared to the prior range of $0.30 to $0.40.

For 2011, we are expecting operating cash flow in the range of $200 million to $220 million compared to a prior expectation of $190 million to $210 million.

We expect DSO to be in the range of 65 to 75 days at year end 2011.

The prior range was 75 to 85 days.

My long term goal remains to see DSOs approach 60 days.

Capital expenditures for 2011 are expected to be in the range of $30 million to $35 million.

Cadence is clearly off to a good start in 2011.

Demand is stronger than we expected.

We are delivering both new and enhanced technology in line with our strategy.

We are starting to see the benefits of our emphasis on deal quality with decrease in average contract life and an increase in run rate.

Cadence made significant improvements in our key operating metrics in 2010 and this is continuing into 2011.

Finally, sustainable profitability remains a key imperative to us as we are continuing to drive non-GAAP operating margin to the mid-20%s.

Operator.

We will now take questions.

(Operator Instructions) Your first question comes from the line of Rich Valera of Needham & Company.

Thank you.

Good afternoon, nice results and outlook.

Just wanted to understand what was driving the upside.

I think in your prepared remarks, Geoff, you mentioned that better hardware sales were driving the upside but you also made some reference to customized C -- some very strong customized C bookings.

Just wanted to understand; were both of them driving the upside or was it predominantly the hardware side?

Everything was -- we had a bunch of things driving our upside.

We had much better bookings and much stronger start of the year across all businesses.

Hardware sales were clearly better.

I think the deal quality is showing up in shorter contract terms which increases the annual run rate for the same bookings dollars.

So as we increased bookings, I think the booking quality actually improved.

So it was broad based not just hardware?

It was broad based, not just hardware.

Fair enough.

Wondering if there is anything you can do to help us get a frame around the contribution from hardware this year.

I guess you had said you expected to be stronger in the first half and the second half.

Is there anything you could say qualitatively or quantitatively to give us a sense of the magnitude of the contribution for the whole year or the relative contribution in the first versus second half on the hardware side?

Rich, we are not giving specifics but we are -- as we said before we had this -- we introduced Palladium XP about a year ago, or just about a year ago now.

We had strong orders.

As the manufacturing ramped up we are delivering strong business in the first half of the year.

And second half of the year will be more a normal run rate pattern.

But again very good business throughout the year.

But we are not giving quantitative answers.

Sure.

When you say more normal run rate pattern, would you say more like what you saw last year?

Like in terms of year-over-year should we think of that as getting back to -- I'm assuming you have very significant year-over-year growth in emulation in the first half and perhaps maybe flattish in the second half?

Is that a way to look at it?

Second half will be up year-over-year.

Okay.

Fair enough.

And just to add on to what Geoff described, I think our Palladium is a very strong offering for our system realization approach.

And any 40-nanometer below design complex chip is a must-have and we are the best of class in that area and also give us a lot of expansion into the whole virtualization and rapid prototyping and that whole suite approach and it is going to be a good engine for us.

That's great.

Lip-Bu, are there any examples you can give us of chips or customers or specific chips where historically these customers have not used emulation but due to doing 40-nanometer or below chips that they are actually starting to use emulation?

Are there any anecdotal or specific examples you can give?

Sure.

So I think this is something that we are going to be launching in our product offering and clearly couple of key customer we announced in the past like NVIDIA and anything that is DSP intensive, anything in the complex chip design and we will -- this is really a must-have and in fact we are going to launching the product in this quarter as I mentioned in my script.

Which product specifically?

I don't think I want to announce now because we are going to announce that this quarter.

Fair enough.

Okay.

Finally, just on the interface IP side, you mentioned a few specific interfaces that you guys were looking to generate IP for, I guess PCI Express, GEN2 and I think Gigabit Ethernet, and then I know at your analyst day you were talking about developing SerDes interface.

Just wondering where you stand with these various interfaces, and are all those all being developed in-house with your in-house engineers?

So I think I mentioned in my script that in the IP strategy there is a three category.

One is the processor compute area and one is the memory storage.

I think memory storage we highlight the DDR4 and Wide I/O that we announced.

And in terms of the interface IP this is a very important -- we basically focus on high performance, differentiating interface.

And that I mentioned about PCI Express GEN2, GEN3.

Gigabyte Ethernet 10 and 40 gigabyte Ethernet and clearly the SerDes and all the high performance interface IP will be a strong offering.

Stay tuned, will be a series of announcements.

Okay.

That's helpful.

Thanks very much.

Your next question comes from Paul Thomas of Bank of America.

Good afternoon.

Thanks for taking my questions.

Maybe as a follow on a little bit there to the IP revenue so the Wide I/O controller and then the mobile applications you were talking about, Lip-Bu, should we be thinking of those as products that were developed at Denali and so we really haven't heard about the new sort of products you were talking about at the analyst day?

Or are some of these things already been developed since the acquisition?

Good question.

Paul, thank you.

So I think all I can mention is all this DDR4, Wide I/O are the combination of Denali and Cadence.

It is an integrated team now that we are developing this suite of new products.

Okay.

Thanks for that.

Then maybe in the second half of the year just think about how the profile of the revenue is going to be.

So we should still be thinking that Q4 is still going to be normally the highest revenue for the year so Q3 might dip down a little bit?

Or what would the profile look like considering Palladium orders and all the other moving parts?

So, Paul, we have given obviously Q1 actual, Q2 guidance and the year; but we are not counting that in the seasonal patterns.

Okay.

Fair enough.

Maybe one last one on operating margins.

You raised your operating margin target for the year and Q1 came in ahead.

I'm just wondering; are you guys looking for further OpEx reduction at this point?

Or do you think it is mostly going to be top line driven from here?

We aren't looking for future OpEx reductions.

So it's top line driven and control the spending that we have planned.

Okay.

Fair enough.

Thank you.

And your next question comes from the line of Sterling Auty of JPMorgan.

Thanks.

Hi, guys.

With the contract duration down to 2.5 years you continue to do a good job both on the bookings and the revenue front so can you give us a sense.

You talk about the run rate being up.

Is it more licenses per engineer?

More engineers that need licenses or more products being sold into the customer that are driving the increase in run rate?

Hi, Sterling.

So what we had said previous quarters is that run rate was flat to up; now we're saying that run rate is up.

I think the deal quality that we've really worked on has really, really helped.

We are not really ready to give specifics on what's driving it.

But I think it's going to be a sum of all three of those.

Sterling, this is Lip-Bu, just to add on to Geoff's comment.

Clearly the shorter durations provide -- yield better value to us.

And also we'll be more in line with the customer design and we can also provide us more frequent opportunity to introduce our new products to our customer.

And we are confident the strength of our product technology will be helping us going forward.

Okay.

And then second question would be on the large targeted accounts, Lip-Bu, that you talked about for about the last year.

Can you give us an update now that 2010 is done, you're into 2011.

Give us a progress update in terms of how you feel the performance for Cadence into those large targeted accounts is going.

Good question, Sterling, and first of all I think, as I mentioned in my script that our strategy is working.

Our customer is very pleased with our engagement, our deep collaboration and closer collaboration.

And so instead of going specific into specific account we are making great progress with large accounts.

Okay.

Then final question, I thought in your prepared remarks you actually mentioned products for the printed circuit board area.

If so, that seems to be a new comment.

I know it's not the sexiest part of the product line but a decent revenue and profit contributor and it's been an area that I haven't seen much investment out of Cadence over the last couple of years.

Seems like Mentor took a lot of focus into that area over the last 24 months.

So I'm curious; was that really the case and what are you expecting out of that part of the business as 2011 rolls on?

Wonderful.

I think, Sterling, thank you for the questions and we are very delighted that we are so well positioned we can provide end to end solution in a design through manufacturing.

And so this is something very unique to us and we are very good at it and right now we make it even more integrated.

And so we have the whole silicon package board business and that extending from complex 3-D IC and to -- we also announced our Allegro PCB business, the 16.5 high end, high speed board design.

This is part of our offering that is going to be very helpful for complex chip design customer want to know from design all the way to the packaging and that's something that is very unique for us.

Great, thank you.

Your next question comes from the line of Raj Seth of Cowen and Company.

Thanks for taking the question.

Hey, Lip-Bu, is it possible for you to comment or could you please comment on what you think the growth rate of EDA is this year?

I'm curious how much of the outperformance that we have seen in the last couple of quarters, at least Q1, and you guided Q2, how much of this momentum that you talk about is simply driven by a tail wind for the entire industry and how much do you think is driven by share gain or Cadence specific improvements.

Thanks.

Thanks so much, Raj, for the questions.

And first of all let me address it in the broadest sense.

So overall I think that semiconductor environment is healthy.

Good end market demand.

Clearly I think the Japan impact as I mentioned affect the supply chain disruptions.

And so I think that will be short-term but overall I see continued growth in semiconductor.

In term of the R&D spending because our business very much related to the R&D spending, we don't see major impact of the R&D design.

So I think I see a steady 10% good growth in R&D spending.

Clearly the winning company is putting a lot of energy in R&D.

We are heavily, heavily engaging with that.

So I think overall I see the EDA industry no change.

I think still the mid to high single digit growth and I think good for the overall industry.

In terms of the Cadence side, we really excited about our EDA360.

It clearly forms the foundation for us to grow.

Silicon realization, we are making tremendous good progress with the top customers in term of integrated in flow that we can provide a whole mixed signal flow and then all the way end to end to the packaging.

In the SoC realization with the Denali acquisition, with the memory and interface IP I think it provide us a very strong path in terms of growth.

And now we are looking at the whole system realization with the Palladium virtual platform that we have, the Palladium add to the growth.

And then we can starting to move into rapid prototyping, the virtualizations that provide tremendous growth for us in the systems side in the years to come.

So I think we have a good clear path.

We have a clear strategy and we are laser focus on the execution.

Couple quick follow-ups if I might.

I have something quickly, Raj.

Obviously we are growing much faster than the industry is.

I think it's for the reasons Lip-Bu gave and also the continued focus on deal discipline and the capture of value.

Right.

And so the growth rate that Lip-Bu threw out for the industry, mid to high single digits I think is what he said.

Is it unfair to assume that the run rate assumptions you have are similar to that kind of a number?

Or is there a reason that they would be materially different?

And then for Lip-Bu, are there examples in pure digital where you are because people are taping out early test vehicle kind of stuff at 28-nanometer?

Are there people using your tools right now, pure digital yet to do 2X designs that are in the pipe and beginning to come out?

Thanks.

So I think let me address the last question and then Geoff will address the first question you have.

In term of the advanced node 28-nanometer we have multiple tapeouts; we are heavily engaging.

In fact, as we are speaking we also are engaging with our foundry and IDM partners on the 20-nanometer process and provide a complete flow mixed signal that include digital and analog and custom.

In the pure digital side, though we are engaging heavily with a couple of major customer I don't think it's the right time for us to announce.

Stay tuned.

We will have more announcement coming.

On the run rate question, Raj, I think the issue is we previously guided to flat to slightly up in the last time.

Now we are saying up.

We are not getting to specifics beyond that.

But I think that's a material change.

Okay.

Great.

Thank you.

(Operator Instructions) Your next question comes from Tom Diffely of D.A.

Davidson.

Good afternoon.

First of all I just wanted to follow up.

Did you say that most of the customers at this point are on the 2X node with your product line?

Sorry, I don't hear the question.

Say again.

Did you say that most of your customers at this point are on the 2X node, the 20 to 28-nanometer node.

Sure, I think I mentioned earlier we have multiple engagement on the 28-nanometer nodes.

And so we are multiple tapeouts already.

And I also mentioned that we are engaging with our foundry partners and IDM on the 20-nanometer process.

Okay.

And then on your end to end solution, is there some way to quantify what the opportunity is for you guys for 3D IC or the through silicon via movement we are starting to see?

Yes, I think I mentioned earlier this is very unique for us that we can -- able provide end to end.

We definitely engage quite a lot of advanced customer in the 3D IC.

This is a very new area.

It's very challenging and for our customer; we are working with our customer on that.

Same thing on the 20-nanometer.

It's very challenging.

Data patterning and all the different design process, we are working deeply with our foundry partners.

And then I guess just finally are you seeing much in the way of new customers coming up in Asia, some new design houses if you will or new fabless players?

Is that becoming a bigger part of your business?

Actually, clearly the Asia Pacific is growing very rapidly and especially China, so we are seeing a lot of fabless companies coming up.

I think you saw some of our prior announcement.

Spectrum is a good example that is converting to the Cadence flow in the advanced nodes and then we also have a couple other customer announcement.

So I think this is a fast growing area.

We are very well positioned in China.

Okay.

With your relationships you think you have a higher than average share in that region then?

We will work executing on our plan.

Okay.

All right.

Thank you.

Thank you.

And your next question comes from the line of Jay Vleeschouwer of Griffin Securities.

Thanks.

Good afternoon.

At the analyst meeting recently you spoke about improving trends in the metric of platform usage across different parts of the business.

I'm wondering if you have an update on platform usage.

And looking out for the balance of the year and into next, could you foresee some customers, especially those that haven't yet renewed at higher run rates, beginning to run into capacity constraints?

And have you taken that into account at all in the outlook for the remainder of the year?

Yes, I think clearly we mentioned in our analyst day and we are really providing a comprehensive flow in the platform end to end.

This is something that holistic and differentiating and I think we are going to continue doing that with our customer.

And we have a lot of good response from our customer and this is something that we continue to make good progress but I won't want to go into more specific right now.

All right.

There were earlier questions about the contribution from the hardware business.

Would it be fair to infer when we look for instance at the sequential changes in your cost of product revenue that first your hardware revenue contribution was the highest in nearly three years.

I think your last such high quarter was second quarter of '08 and now you have had your second best quarter -- your best quarter since then.

Specifically would it be fair to infer that your product revenue and hardware was around $25 million or so, about 10% of the total revenue for the quarter?

So, Jay, we don't break our business out that way and don't comment on it that way.

Sorry.

Okay.

In the last couple of years as you have been working your way through the model transition and trying to overcome the effects of earlier contract practices in terms of either doing too much up-front business or long deals or both, the backlog that you had was characterized as lumpy.

We talked a little bit about this at the analyst meeting.

I'm wondering now if what you are seeing is the inverse of that; that all those negative effects of lumpy backlog are now beginning to be less of a drag in terms of detracting from your reportable revenue and you are now seeing in addition to bookings just the removal of that hit to revenue from the prior backlog practices.

Let me start -- this is Lip-Bu, let me start first and then Geoff can add on to it.

First of all this is very, very important for us in terms of the deal quality and also very disciplined to execute and make sure that our design and then with the customer are in line.

And that's why we like that shorter duration and also not early renew and naturally renew is very important.

And then more important we basically provide the solution they need in term of their tapeout and on time and in the advanced node.

So we are heavily, heavily engaging with customer, provide them the best solutions, and very disciplined on our deal quality and then the renewal.

And then Geoff can comment more.

So, Jay, we've said previously that '10 was better than '09, '11 was better than '10, '12 will be better than '11 as far as the transition is concerned.

We expect to be fully complete with our transition by Q4 2012.

Which means 2013 will be the first year that we are fully ratable per the definition we provided, essentially 90% plus ratability.

Okay.

Just one or two last ones.

On your data sheet you show that non-Japan Asia, was about 16% of revenues in the quarter.

I know these numbers come down to around from quarter to quarter but that was a lower proportion coming out of Asia than in the preceding three or four quarters yet Asia has been for many years the fastest growing region of EDA.

I'm wondering if this is just a quarterly anomaly or is there some underlying trend here in terms of your relative growth in the fastest growing region of the market?

I think it's a quarterly anomaly.

Generally Asia is going to be a fast growing market.

Sometimes we are going to have swings from quarter to quarter, but generally we still perceive Asia be a very fast growing and one of the fastest growing businesses for us.

Okay.

Thank you.

There are no further questions in queue at this time.

I would like to turn the call over to Lip-Bu Tan, President and CEO.

Thank you so much everyone for dialing in this afternoon.

We are looking forward to speaking with you soon and thank you again for joining us.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may now disconnect.