益華電腦 (CDNS) 2011 Q4 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good afternoon.

  • My name is Rachel, and I will be your conference operator today.

  • At this time, I would like to welcome everyone to the Cadence Design Systems fourth-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) I will now turn the call over to Alan Lindstrom, Director of Investor Relations for Cadence Design Systems.

  • Please go ahead.

  • Alan Lindstrom - Director, IR

  • Thank you, Rachel, and welcome to our earnings conference call for the fourth quarter of fiscal 2011.

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

  • With us today are Lip-Bu Tan, President and CEO of Cadence, and Geoff Ribar, Senior 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 results, please refer to our filings with the Securities and Exchange Commission.

  • These include Cadence's most recent reports on Form 10-K and Form 10-Q, including the Company's future filings, and the cautionary statements regarding forward-looking statements in the earnings press release issued today.

  • 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.

  • Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most comparable or 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 February 1, 2012, for the quarter ended December 31, 2011, and related financial tables can also be found in the Investor Relations portion of our website.

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

  • Lip-Bu Tan - President & CEO

  • Good afternoon, everyone, and thank you for joining us.

  • I am pleased to report that Cadence finished a successful 2011 with a very strong Q4.

  • For Q4, revenue totaled $308 million.

  • Non-GAAP operating margin was 21%, and we generated $62 million of operating cash flow.

  • For the year 2011, revenue grew 23% to $1.15 billion, non-GAAP operating margin doubled to 18%, and operating cash flow totaled $240 million.

  • For 2012, we are forecasting revenue growth of approximately 8% to 11%.

  • Geoff will present our full outlook in a few minutes.

  • Now, I will recap our successes in 2011, and then provide some of our Q4 highlights.

  • In 2011, Cadence demonstrated the readiness of our digital, custom, analog, and signoff solutions for 20-nanometer design.

  • We completed seven 20-nanometer test chips with companies including ARM, Samsung, TSMC, and other foundries and customers.

  • Many more are in progress for 2012.

  • We established our product capabilities for designing SoC using advanced multi-core processors, including the first ARM Cortex-A15 test chip designed for the 20-nanometer TSMC silicon.

  • 2011 was a stellar year for the Palladium XP verification computing platform.

  • An increasing numbers of customers, both semiconductor and system companies, now use Palladium to develop complex SoC and for hardware/software code design.

  • Growing adoptions of our Encounter Digital Solution was highlighted in 2011 by key displacements at two major semiconductor companies and significant business wins at many other customers.

  • In 2011, our Virtuoso 6.1 strengthened its position as a platform of choice for doing custom and analog design.

  • Virtuoso, based on the industry standard [OpenAccess] database, is enabling a paradigm shift from traditional connectivity-driven to a more automated constraint-driven methodology that is delivering a 2X productivity improvement.

  • To address the challenge of integrating hardware and software for complex systems, in 2011 we launched a system development suite.

  • The suite includes two new products, the Virtual System Platform and Rapid Prototyping Platform, both of which are already in production use at several customers.

  • In 2011, we made two important acquisition -- Altos and Azuro.

  • The Azuro technology is now offered with Encounter Digital IC Design platform, and has been a critical factor in winning several design benchmarks.

  • The products we acquired with Altos are recognized as the leading solutions for IP/Library collectivization, helping customers produce higher-quality designs at advanced technology nodes.

  • Now, let us look at a few of the highlights for Q4.

  • Business was strong across our Silicon Realization product line.

  • In particular, I want to highlight our verification, mixed-signal, and system silicon package for businesses.

  • Today, every Company doing advanced complex SoC, especially communication devices and embedded processor designs, need more verification capability.

  • Our Incisive Verification platform is winning business and gaining shares in advanced verification, because our technology and methodology advantages.

  • Incisive's matrix-driven approach, multi-language support, mixed-signal and low-power features, and tight connections with Palladium XP and Verification IP increase performance and productivity.

  • Our verification business in Q4 was highlighted by a competitive displacement at one major semiconductor company, and significant growth of our install base with another.

  • Now, turning to mixed-signal, in Q4, yet another company using Virtuoso for analog design adopted the Encounter Digital IC Design platform for their low-power and mixed-signal flow.

  • This demonstrates the advantage of our end-to-end flow for low-power and mixed-signal design, which addresses the increasing complexity of digital content in mixed-signal design, as well as the need for greater energy efficiency.

  • Our Silicon-Package-Boards business served a wide spectrum of customers, large to small, in a variety of vertical market segments, including [mail aero], networking infrastructures, medical, automotive, and consumer electronics.

  • The solutions in our Allegro platform are compelling to customers, because our tools enable increased design team productivity, have the technical capabilities to design the most complex [ports], and have [leaned] to leading mechanical CAD products.

  • Our Silicon-Package-Board business in Q4 included sales to several of the largest networking companies in the world.

  • Next, let us look at the SoC realization.

  • Our primary focus for IP continues to be on memory, storage, and high-speed interfaces.

  • The keys to our success are -- we offer highly differentiated products; a focus on supporting the leading industry protocols and standards; and providing the highest-performance products.

  • Cadence has the leading DDR IP products, and we saw further adoption of these products in Q4.

  • We also announced the availability of the first combined controller and PHY IP solution that supports the open NAND Flash Interface 3.0 specification.

  • Q4 was a very strong quarter for verification IP.

  • In addition to facilitating SoC verification, verification IP is increasingly used to verify end-device system connections between multiple chips and peripherals such as memory, camera, and display.

  • New protocols and increased time-to-market pressure for delivering end products are fueling the demand for our verification IP by system and semiconductor companies.

  • Following the integration of Denali and Cadence VIP offerings, including providing support across all simulators, our VIP business grew over 40% in 2011.

  • In system realizations, the Cadence Virtual System Platform, part of the system development suite, is gaining traction for earlier software development.

  • We are collaborating with Xilinx to develop the first virtual platform for the Xilinx Zynq-7000 extensible processing platform.

  • The Zynq-7000 family of products combines an ARM dual-core Cortex-A9 with Xilinx 28-nanometer FPGA.

  • The virtual platform for developing Zynq software applications is built on the Cadence Virtuoso system platform.

  • Let me conclude my remarks by pointing to what to expect in 2012 from Cadence -- first, continued growth in our digital business, as we build on our capabilities and success at 20-nanometer and with multi-core embedded processors.

  • 20-nanometer will be also drive growth in our custom, analog, and [signoff] platforms.

  • Second, the strength of our integrated mixed-signal solution will attract more customers to choose Cadence flows.

  • Third, increased use of Cadence IP for memory, storage, and high-speed interfaces and continued expansion of VIP business.

  • And finally, further adoptions of our system realization solution building on the continued demand for Palladium XP.

  • With that, I will turn it over to Geoff, who will review the financial results and provide our outlook.

  • Geoff Ribar - SVP & CFO

  • Thanks, Lip-Bu, and good afternoon, everyone.

  • As you saw in our press release and heard in Lip-Bu's remarks, Cadence finished 2011 with a very strong Q4.

  • I will review the Q4 and 2011 results in more detail, and then present our outlook for Q1 and 2012.

  • Bookings for 2011 totaled $1.158 billion, compared to $956 million for 2010, up 21%.

  • The high quality of these bookings is obvious when you consider the weighted average contract life for 2011 was about 2.5 years, down from 2.9 years for 2010.

  • So, adjusting for the average contract life, annualized bookings were up over 30%.

  • The book-to-bill was greater than one, resulting in a year-end backlog of $1.7 billion.

  • Our total backlog did not significantly increase from 2010; the quality of the backlog improved with shorter contract lives.

  • Total revenue for the fourth quarter was $308 million, compared to $249 million for Q4 of 2010.

  • Revenue exceeded our guidance range, due to strong demand across our product lines.

  • Revenue for the year was $1.15 billion, compared to $936 million for 2010, an increase of 23%.

  • For Q4, product revenue was $177 million, maintenance revenue was $101 million, and services revenue was $30 million.

  • The revenue mix for the geographies in Q4 was 44% for the Americas, 20% for EMEA, 19% for Asia, and 17% for Japan.

  • Total costs and expenses on a non-GAAP basis for Q4 were $244 million, compared to $240 million for Q3 of 2011.

  • Higher variable compensation contributed to the sequential increase.

  • Quarter-end headcount was approximately 4,700, unchanged from Q3.

  • Non-GAAP operating margin for Q4 was 21%, compared to 11% for Q4 of 2010.

  • For the year 2011, non-GAAP operating margin was 18%, compared to 9% for 2010.

  • For Q4, we recorded GAAP net income per share of $0.04, compared to a net loss of $0.14 per share for Q4 of 2010.

  • For 2011, GAAP net income per share was $0.27, compared to $0.48 for 2010.

  • But remember that GAAP net income per share for 2010 included $0.56 for an income tax benefit related to the IR settlement for the tax years 2000 to 2002, and $0.25 in acquisition-related tax benefit.

  • For Q4, non-GAAP net income per share was $0.17, compared to $0.07 for the same period last year.

  • For 2011, non-GAAP net income per share was $0.51, compared to $0.20 for 2010.

  • Operating cash flow for Q4 was $62 million.

  • For 2011, operating cash flow was $240 million, compared to $199 million for 2010, an increase of 21%.

  • DSO for Q4 was 43 days, down from 50 days for Q3 and down from 78 days at the end of 2010.

  • Our DSO target is approximately 45 days.

  • Capital expenditure for the fourth quarter was $14 million and $31 million for the year.

  • Cash and cash equivalents were $602 million at year end, an increase of $44 million over 2010.

  • In December, we used $150 million to retire the 2011 convertible notes, and spent $44 million in acquisitions over the course of the year.

  • Approximately 50% of our cash was in the US.

  • For Q4 in the year, over 90% of our orders booked were ratable, including product maintenance and services.

  • Weighted average contract life for Q4 was approximately 2.3 years.

  • For the year, weighted average contract life was about 2.5 years.

  • On a weighted average basis, run rates and Q4 contract renewals increased.

  • Now, let's address our outlook for the first quarter of 2012 and for fiscal 2012.

  • For Q1 fiscal 2012, we expect revenue to be in the range of $305 million to $315 million.

  • We expect over 90% of our first-quarter backlog -- our first-quarter revenue to come from beginning backlog.

  • Non-GAAP operating and Q1 non-GAAP operating margin is expected to be in the range of 19% to 21%.

  • Total non-GAAP costs and expenses should be up sequentially from Q4, primarily due to seasonal factors such as payroll taxes and the restoration of compensation of benefits that were reduced during the downturn.

  • GAAP EPS for the first quarter is expected to be in the range of $0.08 to $0.10.

  • Non-GAAP EPS for Q1 is expected to be in the range of $0.14 to $0.16.

  • Now, for fiscal 2012 outlook.

  • Bookings are projected to be in the range of $1.265 billion to $1.315 billion.

  • We expect weighted average contract life in the range of 2.4 to 2.6 years for the year.

  • Weighted average contract life for the first quarter will be higher, at approximately three years, due to a large multi-year contract already booked this quarter.

  • We expect to book at least 90% of our orders for the year under ratable arrangements.

  • For 2012, we expect revenue to be in the range of $1.24 billion to $1.28 billion, with approximately 80% of the 2012 revenue expected to come from beginning backlog.

  • Non-GAAP operating margin is expected to be in the range of 19% to 21% on an annual basis for 2012.

  • I want to take a moment to comment on the progression of our operating margin in 2012.

  • During the downturn, we took a number of temporary actions to reduce expenses, including Company-wide shutdowns and reduced compensation.

  • We have completed that phasing out of these temporary actions during 2012, leading to a higher rate of organic expense growth for 2012 that we would expect to see in the future.

  • After the transition, I would expect to see at least 50% of our incremental revenue to drop through to operating income, although this will vary from quarter to quarter.

  • Non-GAAP other income and expense for 2012 is expected to be in the range of negative $12 million to negative $6 million.

  • We are assuming a non-GAAP tax rate of 26%, and weighted average shares outstanding of 274 million to 280 million shares for the year.

  • GAAP EPS for 2012 is expected to be in a range of $0.39 to $0.49.

  • Non-GAAP EPS is expected to be in a range of $0.60 to $0.70, and we expect operating cash flow in the range of $255 million to $295 million.

  • DSOs are expected to be approximately 45 days at year-end, and capital expenditures for 2012 are expected to be in the range of $30 million to $35 million.

  • I wanted to conclude today with a couple comments on what we expect to see beyond 2012.

  • First, the others in the industry have projected long-term growth rates for core EDA in the low- to mid-single digits.

  • We believe we will be able to grow our core business at a faster rate.

  • Second, we are targeting 2013 to achieve our goal of non-GAAP operating margin of the mid 20%s for that year.

  • Operator, we will now take questions.

  • Operator

  • (Operator Instructions) Raj Seth, Cowen and Company.

  • Raj Seth - Analyst

  • Nice execution.

  • Geoff, can you talk a little bit more, perhaps, about how to think of the model as it rolls through 2012, which I think you detailed into 2013?

  • I guess one of the questions is, should we expect to see bookings growth in 2013?

  • Do bookings come down?

  • Do we have any echo from the trough that you saw some years before?

  • And is there -- you talked about your ambition for operating margins and reaching those in 2013.

  • How should we think about normalized business levels, either revenue or cash flow, as I assume we normalize in 2013?

  • Anything you can discuss there would be helpful.

  • Thanks.

  • Geoff Ribar - SVP & CFO

  • Yes, so -- obviously, Raj, we are very excited to actually tell you that the mid 20%s are happening in 2013.

  • I think -- we are very proud of the progress we made in 2011, that we are going to continue to make in 2012.

  • I think that is where we want to stick though, Raj, on what we are actually guiding to beyond 2012.

  • I think it's important to recognize that we expect to grow faster than some of our -- some of the others in the industry have talked about in our core business, and that we are going to get to 2013, get to the mid 20%s in 2013.

  • Raj Seth - Analyst

  • Okay, I guess that is fair.

  • Lip-Bu, can you talk a little bit -- you talked about leadership at 20-nanometer, progress in digital, and involvement in multi-core designs.

  • I'm wondering if on the digital side, especially as it relates to multi-core, if you can expand a little bit on that, and perhaps comment on the consolidation that we have just seen in the industry, and your view of potential industry implications of that?

  • Thanks.

  • Lip-Bu Tan - President & CEO

  • So, first of all, Cadence decided to commit to the leadership on the 20-nanometer.

  • And clearly, we have success in the Digital Encounter side, and because of our leadership, and we mentioned of a couple of big displacements that we win -- and we won.

  • And secondly, I think, clearly the multi-core, that is a commitment, we want to be the leaders in that, and our announcement with ARM, that is very significant and opened up tremendous opportunity for us.

  • As you know, ARM is very strong in the smartphone, tablet, and even in cloud.

  • And then, the other part is clearly, and I mentioned also in my script, on the mixed signal side, because of our Virtuoso success and a couple of our big displacements coming up -- and we won.

  • And on the mixed-signal and the digital content become more and more critical, that able to provide an end-to-end flow on the design, and also drive a lot of efficiency in the power.

  • Raj Seth - Analyst

  • And so, could you talk a little bit about industry consolidation?

  • I mean, there is consolidation happening on both sides.

  • So, now it's obviously by Magma, who was, I think, perceived as one of the leaders in digital and certainly behind some of the multi-core designs we see in the app processors on the market today.

  • What is the implication of that deal?

  • It's clear from the filings that you guys didn't have a lot of interest there.

  • But what do you think the implication is on the industry?

  • And the flip side of that is, the semiconductor industry itself is consolidating.

  • How do you think of that as impacting the overall market opportunity for the industry -- Atheros, Qualcomm, and all of the deals we are starting to see, which I expect will continue?

  • Thanks.

  • Lip-Bu Tan - President & CEO

  • Sure.

  • I think it's a very profound question.

  • And clearly, I try to answer some of your questions.

  • And so, first of all, I think the industry consolidation, you mentioned about TI, National, Qualcomm, Atheros, that will be the trend that will continue.

  • And so, I think clearly, winning in the -- I call it the winning platform become critical for the EDA player.

  • That is why we have a laser focus to winning some of this big displacement, the platform we want to win.

  • And so, we are going to continue doing that.

  • And in terms of our own industry consolidations, Raj, you know me, I'm a basketball player.

  • I always like to see the game come to me rather than forcing it.

  • We like our strategy.

  • We like our growth map.

  • We stick to our focus, in terms of driving our product portfolio.

  • I take the leadership in that.

  • And then, meanwhile, we actively pursue acquisitions to add technology that can really provide the best solution for our customer.

  • Clearly, our EDA360 in our Silicon Realizations, the end-to-end flow in the mixed-signal, and SoC in our IP, and then, clearly, in our intersystem side, I think will be tremendous.

  • Just related to -- I think you mentioned about the Synopsys and Magma merger -- and first of all, clearly, it didn't change any of our technology momentum, and no change to our market positions.

  • And clearly, we are committed to our road map -- and in fact, it creates a lot of opportunity for us, because of end of life and overlapping digital flow between the two companies.

  • And then, by the way, Magma is only less than 10% of Synopsys; and so, clearly, they provide a lot of opportunity for us, while heavily engaging with the customer.

  • They are looking for this solution that we provide, excited about what we have.

  • Raj Seth - Analyst

  • Thank you.

  • Operator

  • Rich Valera, Needham.

  • Rich Valera - Analyst

  • Congratulations on a nicely executed year.

  • Wondering -- you are talking about the digital and your progress there, and I think you announced a notable first last quarter, where you had the first test chip at 20-nanometers with TSMC and ARM for their new Cortex core.

  • Can you talk about any follow-through you may have received from that, or any broader implications of being first to market with a 20-nanometer flow with TSMC and ARM?

  • Lip-Bu Tan - President & CEO

  • Sure, so let me answer that, Rich.

  • Now, clearly, we have a lot of success in the digital side, in the prepared script.

  • And clearly, the leadership in the 20-nanometer and with the foundry partners, I think clearly is a very strong position for us.

  • And then, we also mentioned about and announced the ARM A15 core development, and we have a lot of success engaging with ARM's customers that are using ARM license, and we won the field.

  • And we also have quite a heavy engagement with the others in 2012.

  • We are excited about the opportunity in front of us; clearly, we want to take the leadership there.

  • Rich Valera - Analyst

  • Great, thanks for that.

  • And then, on emulation, you guys obviously had a very strong year in emulation in 2011, as did, really, the whole industry.

  • Just wondering how you are thinking about that business heading into 2012.

  • There will be some tough comparisons, I guess, but it sounds like, by the same token, you have some secular growth there as you move to sub-40-nanometer geometry.

  • So, just wondering how you are thinking about emulation for 2012?

  • Lip-Bu Tan - President & CEO

  • Sure.

  • Rich, I will start first, and then Geoff can chip in.

  • And so, first of all, I think this hardware emulation, as I mentioned, it becomes a very critical face of a design, because more complex chip and the whole verification, the earlier you find the [pacts] is very good important for your time to market.

  • And so, any complex SoC or any 40-nanometer chip design is almost like a must-have.

  • And then, we have the best of class; and so, we are going to continue seeing significant growth in this area, and customers that we talked to, they continue to love our products and are buying from us.

  • And so, we are going to continue doing that.

  • And in fact, we are going to expand that into our Virtuoso system platform, and also the Rapid Prototyping Platform, and a couple of customers already engage and extend to that whole suite of products that we are offering.

  • And that time to market is so critical for them.

  • And so, we have a very good 2011, and we are going to continue to see growth in 2012.

  • Geoff Ribar - SVP & CFO

  • Yes, Rich, this is Geoff.

  • So, I think a couple of additional points.

  • Our customer base has expanded here from our traditional chip companies, but also to system companies.

  • We are seeing that in the Palladium XP, but also in every other businesses, that we are becoming more important to a group of system companies.

  • We did have extremely strong growth in the Palladium XP in 2011.

  • We do think it's a secular trend, that there is going to be continued use.

  • We do expect that growth rate, though, not to be the same in the Palladium XP from '11 to '12 as it was from '10 to '11.

  • Rich Valera - Analyst

  • Great.

  • That is helpful.

  • And then, just following up on the mid-20%s op margin in 2013, Geoff, in the past you have talked about achieving that at some point, somewhat independent of revenue level, i.e.

  • you would cut expenses if you needed to get there.

  • Just wondering if you can give us any other color, in terms of how you intend to glide into that mid 20%s op margin.

  • Sounds like you are expecting revenue growth somewhere north of the mid- to low-single digits, but can you give us any more calibration there, on how you look to get to that?

  • Geoff Ribar - SVP & CFO

  • Sure.

  • We kind of guided this year's growth at approximately 10% in 2012 from 2011.

  • Obviously, we are not expecting to cut expenses to get there; we are expecting the growth to continue.

  • So, we expect to see growth continue, as I think we said, we expect to grow faster than some of our competitors have committed to, and we think that will get us there.

  • We obviously have to continue to execute to get there, it's not a slam dunk.

  • But I think you have seen our execution be materially good in the past year, and we need to continue that and continue to improve on that.

  • Rich Valera - Analyst

  • Okay, that is helpful.

  • Thank you.

  • Operator

  • Sterling Auty, JPMorgan.

  • Sterling Auty - Analyst

  • A couple questions.

  • First, on the term length of the 2.3 years in the fourth quarter -- definitely at a very low end, even for what you are seeing last couple years.

  • Can you give maybe a little bit more color as to what the discussions were going on in those contract terms?

  • How much of it may have been some of the uncertainty in the semiconductor market during the quarter?

  • Lip-Bu Tan - President & CEO

  • Let me start first, and then Geoff will chip in.

  • So, this is very significant for us, because since I came on board three years ago, I was driving the team to really focus on the term, the quality of the terms, and the way we engage with our customer.

  • After three years, I think our relationship with our customer tremendously improved.

  • And then, secondly, I think the team is -- I am very proud of my team, that are very disciplined in terms of providing the right terms and the right products, technology to the customer, to enable them to successful in that.

  • And that is something very significant.

  • That is why you notice that, even though in our revenue and our booking guidance for you -- but if you look at the duration and the quality, is tremendous improve.

  • Geoff Ribar - SVP & CFO

  • Yes, and I think, again, we are trying on -- the sales quality has been a focus since Lip-Bu took over, right?

  • And I think we have made a lot of success there.

  • We don't want to trade sales quality off for deal term.

  • I think the other thing is, the shorter term provides some benefits to us.

  • To get back to Raj's earlier question, it means much less likely that we are going to be concerned about any holes in bookings or revenue going forward, because the shorter deal term means those deals are coming up for renewal more often; it gives us more chance to sell, more chances to be successful, and it also doesn't leave a giant hole out there.

  • So, I think that is very important, also.

  • Sterling Auty - Analyst

  • Oh, absolutely.

  • And we are bouncing around between calls, so I apologize if you mentioned this already -- but when you look at the outlook for the first quarter, it seems extremely strong.

  • I'm trying to put into context, with the new Palladium release, is there some Palladium orders that maybe you got in the fourth quarter, ship in the first like we did last year?

  • Or how should we think about the context of the first-quarter outlook?

  • Geoff Ribar - SVP & CFO

  • So, our business, I think, has changed with the ratable business model over time.

  • I think you are not going to see the traditional quarterly pattern that you have seen, you will see more sequential growth as you go forward.

  • And I think that is how you should look at our business going forward.

  • Lip-Bu Tan - President & CEO

  • And also, I think, Sterling, across the board, our [order] product line has been very strong in Q4, and it will carry on forward.

  • Sterling Auty - Analyst

  • Okay.

  • And then, last question -- Lip-Bu, you are back to probably touched on the first one, the first question, which is, if you look at throughout 2011, there was an awful lot of semiconductor uncertainty, whether we are still inventory correction or what was happening in the demand environment.

  • It felt like things got better here in the fourth quarter, but it was still mixed.

  • Do you feel comfortable enough with the conversations you are hearing from customers that they've got enough insight into their business that they feel good about R&D budgets, where they won't have to make any cuts or put any spending at risk as we move into 2012?

  • Lip-Bu Tan - President & CEO

  • Yes, I think, Sterling, it's a good question, in that we watch that very careful and we are heavily engaging with our customer.

  • And so, clearly, some customers and other top leading customers, they are increasing their R&D and they are hiring people.

  • Of course, there are a few that are laying off people or cut back their R&D, but so far, from my visibility, the R&D engagement in the design has been increasing and is very steady.

  • We are very optimistic and cautiously optimistic, and the use of our tools, we like our product portfolio, our leading position.

  • And we don't see any slowdown in terms of the design engagement with us.

  • Sterling Auty - Analyst

  • All right, great.

  • Thank you.

  • Operator

  • Jay Vleeschouwer, Griffin Securities.

  • Jay Vleeschouwer - Analyst

  • Lip-Bu or Geoff, I would like to ask first about your customer base or customer concentration.

  • That is, if you look at the top 10 or so customers in 2011, was it appreciable difference in terms of the names on that list or the concentration of revenues from that list in 2011, versus, let's say, 2009 or 2010?

  • And looking forward, would you expect there to be any appreciable changes in your customer concentration or top-listed names for 2012 and 2013?

  • Lip-Bu Tan - President & CEO

  • Yes, I think, Jay, good question.

  • Clearly, we have a very broad and diversified customer base.

  • We don't have any single customer more than 10% of our revenue, and we are very engaging with our top 10 customers.

  • Is there much changes?

  • Not much.

  • I think it's a winning company that we are engaged more, that are increasing, and we like that and we plan to continue that.

  • Jay Vleeschouwer - Analyst

  • Okay.

  • Following up on some of the earlier questions about emulation or the hardware-based business -- doing some rough math, it looks like the hardware business accounted for something like 40% of the total increase in your product revenue in 2011 versus 2010.

  • As you pointed out, it was a strong business.

  • In dollar terms, how do you think 2012 might look versus 2011, in terms of the possible increase in emulation?

  • Or put another way, are there any other product lines that could account for considerably large increases in product revenue in 2012 versus 2011, besides the emulation business?

  • Geoff Ribar - SVP & CFO

  • So, Jay, this is Geoff.

  • So, emulation business was a very strong business for us last year, as you (inaudible).

  • We won't comment on the exact numbers, but it was a very strong business for us.

  • I think we grew at well over 20% in revenue from year over year -- and again, a portion of that was emulation, but a portion of that was also our core business.

  • That core business growth we anticipate going forward; we expect emulation growth to slow down.

  • Jay Vleeschouwer - Analyst

  • Okay, and one or two last ones.

  • I would like to tie in your comments about IT and your strength there to geography -- that is to say, you had good growth in the second half of the year, and for the year as a whole in Japan and Asia-Pac.

  • And what makes Asia-Pac interesting is that it's quite a large market for IT, the second-largest market overall for the consumption of IT -- it's bigger than Japan.

  • And China and Taiwan look like 25% of the spending over there, for example, is just in IT versus tools.

  • And so the long question usually is, how are you positioned for that very large market in IT?

  • And what kind of growth rate do you expect to see in that part of the world for that part of your business?

  • Lip-Bu Tan - President & CEO

  • Yes, so, Jay, let me try to answer that.

  • And first of all, clearly, in our growth engine I mentioned earlier, in our IP SoC and also in the system side, we continue to make good progress on that.

  • On the IT side, you will recall, we bought the Denali that gave us tremendous leadership in the memory IP.

  • We are going to continue doing that, and right now we are moving into the storage and also in the high-speed connectivity side.

  • So, very differentiating value IT that provide to a customer.

  • You correctly point out there is a lot of important customers in Asia Pacific that would like to have IT growth, while heavily engaging and while winning a couple of them, and we continue to win, continue to engage with many of our customers in Asia.

  • Asia Pacific growth, as we all know, is a fast-growing area.

  • Cadence is very well-positioned in that region, and we are very active, we have the right team driving success and engaged with our customer.

  • And so, we are going to continue doing that.

  • Geoff Ribar - SVP & CFO

  • So, I would also like to point out one of our strong growth areas was verification IP in the past year, where it grew over 40% year over year.

  • So, we think it's a very strong business [for us, with] very strong growth characteristics.

  • Jay Vleeschouwer - Analyst

  • All right.

  • And then, lastly, there was an earlier question referring back to the events of a few years ago, in terms of your business model and the transition.

  • Just a follow-up to that -- is there remaining any lumpiness in your business, Geoff?

  • You and I have spoken about the lumpiness reflecting what happened a few years ago, in terms of the run-off of bookings and contracts.

  • Or do you think that everything is now pretty much smoothed out, and any non-linearities, so-called, are pretty much done?

  • Geoff Ribar - SVP & CFO

  • Yes, in the history we had some customers that we only recognized revenue when they paid.

  • Japan was a part of that.

  • It's still a little bit there.

  • But because of the ratable nature of our business right now, we don't expect to see much lumpiness.

  • We expect to see much more sequential growth period over period.

  • We are still completing the model change; that won't be totally done until Q4 of this year.

  • So, 2013 will be the first year where we are essentially 100% converted.

  • But again, I think you will expect to see sequential growth out of us going forward.

  • That is our goal and our expectation.

  • Jay Vleeschouwer - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Krish Sankar, Bank of America Merrill Lynch.

  • Krish Sankar - Analyst

  • Lip-Bu, what is your view on the semi R&D spending and EDA growth for 2012?

  • Lip-Bu Tan - President & CEO

  • Sure.

  • So, I think, Krish, a couple of points.

  • So clearly, the semiconductor industry -- the earlier question in term of some bigger company success, continue to hiring; and then, there are some laying off and -- but overall, the trend is moving upward, and even the system company are starting to engage a lot in the semiconductor design.

  • So, we are continuing to see the low-single-digit growth in the semi industry, in terms of the R&D.

  • And as I mentioned earlier, the engagement with the R&D development, we see a steady increase and still very active, especially in some of the mixed-signal and then the leading [edge] process for the leading company, we don't see any slowdown at all.

  • Geoff Ribar - SVP & CFO

  • And Krish, this is Geoff.

  • Again, we are seeing that 10% growth in our business, right?

  • That is obviously driven by our views of our customers -- as Lip-Bu said, our customer base in some ways is expanding, because we are having more and more systems business, as some of our customers consolidate on the semi side.

  • Lip-Bu Tan - President & CEO

  • Right.

  • And I think Geoff mentioned earlier some of our friends in the EDA, in the industry, and I mentioned about single-low-digit growth.

  • And we are basically indicating 8% to 11% growth for us, so we will be growing faster.

  • Krish Sankar - Analyst

  • Got it.

  • Yes, that is very helpful.

  • So, just to follow up on that -- the delta, from the low single digits to your midpoint 10% growth, how much of that is actually coming from incremental share gains, versus how much is coming from the tailwind of your revenue model transition?

  • Geoff Ribar - SVP & CFO

  • So, the tailwind of our model transition is actually probably the smallest portion that is out there.

  • We are seeing our sales quality continue to improve.

  • As I think we mentioned, our run rate is actually improving on old deals versus new deals, so that is good.

  • The sales quality is improving, and we are seeing market-share gains.

  • I think we talked [of it] in Q2, I will have a couple top-10 providers that moved to our digital flow.

  • We talked about a verification win in this past quarter.

  • And you are seeing it in the other places, too, but those are some of the notable ones.

  • Krish Sankar - Analyst

  • Got it.

  • And if I can just extrapolate that, given the fact that you expect next year 2013 op.

  • margins in the mid 20%s, what kind of top-line function, what other ranges you are baking into the expectation?

  • Geoff Ribar - SVP & CFO

  • Yes, we are not baking any expectation to it.

  • It's a core imperative of the Company, and we are going to get there.

  • Now, obviously, we expect some revenue growth to get there, but we will get there either way.

  • Krish Sankar - Analyst

  • And then, the final question from my end.

  • Can you talk a little bit about how the renewal calendar for this year is shaping up, when the customers come back to renew, and how would we contrast [address] versus what you saw in 2011?

  • Geoff Ribar - SVP & CFO

  • Yes, so, I think it's obvious from our bookings growth.

  • Just look at our bookings growth and the numbers we are talking about in our bookings growth.

  • They are growing faster than revenue is.

  • Our contract life continues to be extremely good.

  • So, I think you can see we expect a pretty good calendar and pretty good booking year.

  • Krish Sankar - Analyst

  • Got it.

  • Thanks, guys.

  • Operator

  • (Operator Instructions) Mahesh Sanganeria, RBC Capital Markets.

  • Mahesh Sanganeria - Analyst

  • Geoff, just wanted to follow up on the last comment you made on the increase in run rate.

  • Can you provide more color what is driving -- how are you able to get the run rate increase?

  • Is it the newer technology, you are able to get the better pricing?

  • Or broader product portfolio?

  • Geoff Ribar - SVP & CFO

  • Yes, so, clearly, technology is probably the most important part to us, as we have worked hard to improve our technology, to expand our technology offerings, to be an end-to-end provider.

  • And so, that provides for the same engineer on the other side, provides an opportunity to sell more tools to them.

  • So that is part of it.

  • The second part is our sales quality -- again, we have worked really hard to improve our discounts, improve our run rates, improve our timeliness of our business, and I think that contributes also.

  • And I think the third part is market-share gains.

  • Mahesh Sanganeria - Analyst

  • Okay.

  • And just a quick question on the expenses -- of course, it's going up a little bit more normal this time, because of the catch up.

  • But is there a specific model we should be using in terms of OpEx year over year -- OpEx growth is low single digits.

  • Is OpEx growth a good number to model going forward beyond this year?

  • Geoff Ribar - SVP & CFO

  • So, I think what I said in my prepared remarks is that we expect at least 50% of our revenue increases to drop to the bottom line.

  • I think if you go back over the past couple years, you will see that we have actually exceeded that occasionally.

  • So, that will vary a little bit, but we expect that generally to be going forward, I think that is how you should model your OpEx.

  • Mahesh Sanganeria - Analyst

  • And one more clarification on your non-GAAP operating margin for 2013 -- is that something you plan to achieve at the beginning of the year?

  • Or you are applying that for the full year, or towards the end of the year?

  • Geoff Ribar - SVP & CFO

  • Mid 20%s in 2013.

  • Mahesh Sanganeria - Analyst

  • Okay.

  • All right, that explains.

  • Thanks.

  • Operator

  • Tom Diffely, D.A.

  • Davidson.

  • Tom Diffely - Analyst

  • Lip-Bu, I was hoping to talk a little bit more about the Chinese market.

  • Obviously, you guys are very strong there, so I was wondering if you could quantify how big that market is today for the overall EDA market?

  • And then, what kind of growth you are seeing there and how big it could become in the next several years.

  • Lip-Bu Tan - President & CEO

  • Yes, it's a good question, Tom.

  • And so, clearly, if you look at the China, they consume about one-third of the semiconductor.

  • That includes some of the Foxconn, Flextronics manufacturing and also some of the internal consumption, and it's growing, and it's the fastest growing area.

  • We are very well-positioned there; and then, clearly, you are going to see quite a few world-class companies coming up, like Spectrum, High Silicon, a few others in a long list of names, they are coming up very strong, very well-positioned.

  • And Cadence are heavily engaging with that; that will be one of the very fast-growing area, we pay a lot of attention on that.

  • And I think the -- some of these companies become a world-class company, and they are starting to really pay attention to the IP, the legitimate EDA tool, and that really plays into our strength, and we are very well-positioned to capture that.

  • Tom Diffely - Analyst

  • So, do you think that your exposure there could give you a couple percentage points of leverage above the rest of your business, on an annual basis, for a while?

  • Geoff Ribar - SVP & CFO

  • Yes, Tom.

  • We would love to comment, but we can't.

  • I'm sorry.

  • Tom Diffely - Analyst

  • So, Geoff, maybe a couple more questions on the income statement.

  • The R&D level seems to jump around a bit, and I'm wondering what causes the -- it doesn't seem to be revenue-driven, usually.

  • And so, what goes into that, what factors?

  • Geoff Ribar - SVP & CFO

  • So, the vast majority of R&D spend is people, right?

  • The most important attribute, the most important part of the Company, is the people.

  • So, we do have some swings based on incentive plans and those types of things, as we perform well; and I think that is probably where you are seeing the swing is, a little bit.

  • But I think pretty steadily on percentage, we managed it quite well.

  • Tom Diffely - Analyst

  • Okay.

  • And it also looks like the other income line was positive for several quarters in a row, and it has gone negative, and it looks like you are projecting negative for this year as well.

  • What changed on that line?

  • What factors inside of that line?

  • Geoff Ribar - SVP & CFO

  • Foreign exchange.

  • So, we are going to be conservative guiding foreign exchange, going forward.

  • Right now, we had some benefits from foreign exchange in the past year.

  • Tom Diffely - Analyst

  • And then, the biggest exposures there?

  • Geoff Ribar - SVP & CFO

  • Well, most of -- almost all of our revenue is in dollars, except for Japan.

  • But we have large organizations around the world in a bunch of different geographies, from Europe to India to China to Japan.

  • And so, how those play out will swing those numbers around.

  • Tom Diffely - Analyst

  • Okay.

  • So, you are just conservatively viewing the dollar getting a little weaker at some point?

  • Geoff Ribar - SVP & CFO

  • Yes, I wish I could predict FX.

  • Tom Diffely - Analyst

  • Yes.

  • Okay, thank you.

  • Operator

  • Thank you.

  • I will now turn the call back over to Lip-Bu Tan for any closing remarks.

  • Lip-Bu Tan - President & CEO

  • Thank you.

  • In closing, I am very proud of the accomplishment of the Cadence team in 2011.

  • In addition to outstanding financial results, our accomplishments include introduction of new products for hardware/software core design and core verification, leadership for 22-nanometer and advanced multi-core processor design, and deep collaboration with industry leaders.

  • We have momentum on many fronts, and I am very excited about our prospects for 2012.

  • Thank you, everyone, for joining us this afternoon.

  • We look forward to speaking with you soon.

  • Thank you.

  • Operator

  • Thank you for participating in today's Cadence Design Systems fourth-quarter 2011 earnings conference call.

  • You may now disconnect.