益華電腦 (CDNS) 2012 Q4 法說會逐字稿

Good afternoon.

My name is Allie and I will be your conference operator today.

At this time I would like to welcome everyone to the Cadence Design Systems fourth-quarter and fiscal-year 2012 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, Group Director of Investor Relations for Cadence Design Systems.

Please go ahead.

Thank you, Allie and welcome to our earnings conference call for the fourth quarter of fiscal 2012.

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, 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 the 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 comments 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 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 January 30, 2013 for the quarter ended December 29, 2012 and related financial tables can also be found in the Investor Relations portion of our website.

Now I'll turn the call over to Lip-Bu.

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

Cadence delivered strong results.

For Q4, revenue was $346 million, non-GAAP operating margin was 23%, and operating cash flow was $96 million.

For 2012 revenue grew 15% to $1.326 billion.

Non-GAAP operating margin increased 5 percentage points to 23%, and operating cash flow grew 31% to $316 million.

As we look at 2013, much like this time last year, semiconductor and global economic conditions are soft and uncertain.

But for the most part customers are continuing to invest in new designs.

We also benefit from the increasing complexity of this design.

This ongoing design activity and our strong pipeline and backlog provide us with confidence in our Q1 and 2013 guidance.

Geoff will discuss this later in the call.

First, let us start with highlights for silicon realization.

In Q4 we extended our leadership in advanced node designs.

Cadence is working with leading ecosystem partners to implement test chips in preparation for customers designing for 14-nanometer and 16-nanometer FinFET processors.

We recently announced the success of two of these projects.

First, ARM, IBM, and Cadence implemented 14-nanometer test chip featuring an ARM Cortex-M0 processor implemented using IBM 14-nanometer SOI FinFET process.

Second, ARM, Samsung, and Cadence tape-out the first ARM Cortex-A7 processor targeted at Samsung 14-nanometer FinFET process.

Cadence received a TSMC Partner of the Year award for the 20-nanometer reference flow for digital custom/analog and mixed signal design.

Avago improved performance by 57% on the 28-nanometer networking chip by using the Encounter flow.

Virtuoso continues to be the gold standard for analog/custom design and layout.

The vast majority of users have successfully transitioned to the Virtuoso 6.1 product line which is native on OpenAccess, the industry-standard database.

This enables them to take advantage of improved automation and innovative capabilities such as in design sign-off which conducts checks on-the-fly to reduce layout iteration.

On Monday, Cadence introduced Virtuoso Advanced Node with breakthrough capabilities for design at 20-nanometer and below, including the support for layout dependent effects, double patterning, and FinFET readiness.

Together, this improved productivity and shortened time-to-market for complex analog/custom design.

With increasing integration of functionality and design, our customer expects continuous innovation in the capability and performance of Incisive, our verification platform.

In Q4, Cadence released version 12.2 of Incisive.

This release provides a 2 Xd improvement in performance, significantly enhanced debug capabilities, improved low-power modeling support, and new methodologies for mixed-signal verification.

Overall, Incisive 12.2 doubles productivity of SoC verification over the previous release.

2012 was also a strong year for our SoC realization solutions.

With revenue growth exceeding 30% for design and verification IP, we continue to gain momentum in design IP.

In Q4, we completed and IP contract with Tilera, a fabless semiconductor company that develops the TILE-GX multi-core processor for networking, video, and cloud applications.

This included DDR controllers, DDR-5, 10-gig and 40-gig ethernet, and other high-speed interface IP's.

Verification IP had another strong quarter to complete a stellar year with the close multimillion dollar contracts with semiconductor and system companies.

We are continuing to aggressively expand our design IP and VIP catalogs for the most advanced applications and protocols.

In Q4, we introduced the industry's first design and verification solution for the latest automotive ethernet controller standard.

Cadence received a Customer Choice award from TSMC recent open innovation platform ecosystem forum for our work supporting DRAM development, including design IP and verification IP.

Let us talk about system realization.

Our hardware business led by Palladium XP achieved record sales in 2012.

Primarily due to current economic uncertainty we expect Palladium sales to remain strong in 2013 but below the 2012 level.

As an indicator for the circular increase in the size of our emulation business, total expected hardware sales for the 2011 to 2013 period are 90% higher than the 2008 to 2010 period.

Our PCB and IC packaging product lines continue to see good growth with revenue up 11% for 2012.

We upgraded our product with the release of new versions of Allegro Package Designer, and our system in package layout solution that supports design of low-profile IC packages for smartphones, tablets, and ultrathin notebooks.

Integration of Sigrity is on track with strong demand for its products driven by increased need for accurate analysis for advanced consumer and data center products.

In summary, Cadence continued to gain momentum in 2012.

Before Geoff goes through the numbers, let me leave with you what to look for from us in 2013.

Continued progress in design solutions for advanced process nodes and featuring multi-core embedded processors.

Growth in mixed-signal and low-power designs driven by mobility, automotive, industrial, and emerging Internet of Things trends.

And continued strong demand for verification and hardware solutions driven by growing design complexity.

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

Thanks, Lip-Bu and good afternoon, everyone.

I will review the results for the fourth quarter and 2012 and then present our outlook for Q1 and 2013.

Cadence produced strong operating results for Q4 and 2012.

Bookings for 2012 totaled $1.336 billion, compared to $1.158 billion for 2011, an increase of 15%.

Booking quality was high again in 2012 with weighted average contract life within the expected range of 2.5 to 2.6 years.

Book-to-bill was above 1 and the year ended backlog was $1.7 billion.

Total revenue for Q4 was $346 million, compared to $339 million for Q3 and $308 million for the year-ago quarter.

Year-over-year revenue growth was 12% for Q4.

Revenue for 2012 was $1.326 billion, compared to $1.15 billion for 2011, an increase of 15%.

For Q4, product and maintenance revenue was $319 million and services revenue was $27 million.

The revenue mix for geographies in Q4 was 45% for the Americas, 21% for EMEA, 20% for Asia, and 14% for Japan.

Total cost and expenses on a non-GAAP basis for Q4 were $265 million, compared to $257 million for Q3 and $244 million for the year-ago quarter.

Higher sales compensation driven by better-than-expected results contributed to the sequential increase.

Q4 headcount was 5,189 people, compared to 5,119 people for Q4.

Most of the increase was due to hiring in R&D and technical field positions.

Non-GAAP operating margin for Q4 was 23%, compared to 24% for Q3 and 21% for the year-ago quarter.

For the year 2012, non-GAAP operating margin was 23%, compared to 18% for 2011.

For Q4 we recorded GAAP net income per share of $1.10, compared to $0.04 per share for Q4 2011.

For the year 2012, GAAP net income per share was $1.57, compared to $0.27 for 2011.

Included in Q4 and the fiscal 2012 GAAP net income per share were $0.90 and $0.91 respectively in tax benefits for the reversal of valuation allowance recorded against a portion of our deferred tax assets in Q4, 2008, and a settlement of our 2001 to 2003 California income tax audit.

The difference between the Q4 and the full-year impact on EPS is due to share count.

For Q4, non-GAAP net income per share was $0.20, compared to $0.21 for Q3 and $0.17 for the year-ago quarter.

For 2012 GAAP(sic-see press release "non-GAAP") net income per share was $0.77, compared to $0.51 for 2011.

Operating cash flow for Q4 was $96 million, compared to $92 million for Q3 and $62 million for the year-ago quarter.

For 2012, operating cash flow was $316 million, compared to $240 million for 2011, an increase of 31%.

DSOs for Q4 were 27 days, compared to 34 days for Q3 and 43 days for the year-ago quarter.

Our DSO target remains approximately 35 days.

Capital expenditures were $10 million for the fourth quarter and $36 million for the year.

Cash and short-term investments were $827 million at year end, an increase of $222 million over 2011, and about 50% of the cash was in the US.

For Q4 and for the year, over 90% of all orders booked were ratable.

Weighted average contract life for Q4 was approximately 2.5 years.

For the year weighted average contract life was just under 2.6 years.

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

Now let's address our outlook for the first quarter of 2013 and fiscal 2013.

For Q1 2013 we expect revenue to be in the range of $342 million to $352 million with approximately 90% of the first-quarter revenue expected to come from beginning backlog.

Q1 non-GAAP operating margin is expected to be in the range of 22% to 23%.

Non-GAAP total cost and expenses should be up sequentially from Q4, primarily due to seasonal factors such as payroll taxes.

GAAP EPS for the first quarter is expected to be in the range of $0.23 to $0.24.

Non-GAAP EPS for Q1 is expected to be in the range of $0.19 to $0.20.

GAAP EPS is higher than non-GAAP EPS for Q1 due to the expected release of tax reserves associated with a prior acquisition.

Now for our fiscal 2013 outlook.

Bookings are projected to be in the range of $1.425 billion to $1.475 billion.

We expect weighted average contract life to be in the range of 2.4 to 2.6 years for 2013, and we expect at least 90% of the orders for the year to be booked under ratable arrangements.

Revenue is expected to be in the range of $1.405 billion to $1.445 billion with approximately 70% of this total coming from beginning backlog.

This translates to 6% to 9% revenue growth over 2012.

Growth for 2013 is composed of approximately 12% to 14% growth for software, offset by a decline in revenue for hardware and for services.

Lip-Bu already mentioned that we expect hardware revenue to be down for 2013.

Services revenue is expected to decline approximately 20% from 2012 due to our decision to increase investment in IP by reassigning engineers from services to R&D to develop commercial IP.

Non-GAAP operating margin is expected to be approximately 25% for the annual basis for 2013.

At the midpoint of the guidance range this represents approximately a 50% drop-through of incremental revenue to the non-GAAP operating income for the year.

Non-GAAP other income and expense for 2013 is expected to be in the range of negative $15 million to negative $9 million.

We are assuming a non-GAAP tax rate of 26%, weighted average shares outstanding of 288 million to 296 million shares for the year.

GAAP EPS for 2013 is inspected to be in the range of $0.58 to $0.68.

Non-GAAP EPS is expected to be in the range of $0.82 to $0.92.

We expect operating cash flow in the range of $350 million to $380 million.

Our DSO forecast is approximately 35 days, and capital expenditures for 2013 are expected to be in the range of $35 million to $40 million.

I want to conclude today with the following comments.

First as you can see, we expect to achieve our goal of mid-20%s non-GAAP operating margin for 2013.

I also continue to believe that for the near term we will be able to drop approximately 50% of incremental revenue through to operating income, providing that the revenue growth is at a reasonable level.

I also continue to believe that we are able to grow our core business at a faster rate than the overall EDA industry.

Operator, we'll now take questions.

(Operator Instructions)

Rich Valera, Needham and Company.

First question, on the service change in your service model, where you're focusing more of those resources internally.

Wondering how we should think about how that plays out through the year.

You said it sounds like service revenue down 20%.

Do we think it starts down 20% in the first quarter and it stays that way?

Or does that phase in?

Do you gradually shift those resources and it accelerates as the year goes on?

Any color there would be helpful.

Rich, this is Geoff.

Yes.

It will obviously start at a higher number and the drop will go down throughout the year as the revenue rolls off, so we'd stop taking new business.

So the impact in the later half of the year will be a little bit stronger than the first half.

Great.

And in terms of the products you're going to be developing there, how should we think about them in terms of revenue impact?

Do you think they'll start generating meaningful revenue in the second half of this year?

Or is that more of a '14 in terms of revenue impact?

Rich, this is Lip-Bu.

We mentioned about the service moving to the IP.

Clearly we put together a really good team under Martin Lund.

And besides the VIP we're doing really well.

Right now we are really focused on the design IP and that includes memory, storage, high-speed interface, and other standard industry standards.

And we like our strategy, the roadmap, we are executing very well on that.

Okay.

That's helpful.

And then, with respect to emulation -- wondering if you'd be willing to say where emulation finished up in 2012 relative to the 2011?

I know you started the year saying you thought it would be down, then I think you changed that to flattish to maybe up.

Just wondering if you can give any color there.

Sure.

Let me start -- first of all, on the hardware emulation, have been strong in 2012, a record year for us.

And then, as I mentioned, 2013 will remain strong but will be lower than the '12, primarily because of economic uncertainty, and we all know very soft and uncertain, but we are the gold standard and we clearly -- any complex design below 40-nanometer, this is a must-have.

And so clearly we are excited about it and we continue to drive success as the gold standard.

I think one more comment -- again, when we started last year at 2012 we guided it flat to down and we ended up back at an all-time record year.

It's inherently difficult for us to forecast this business particularly with the semiconductor and economic conditions out there.

And this is probably cutting it finer than you guys will want to give clarity on, but can you say if starting this year you have the same level of decline baked into your guidance as you did last year?

Or is it greater, lesser, than the decline you are looking at last year?

Yes.

I think we'll stick with our earlier comments.

Okay.

Fair enough.

And then, Lip-Bu, your comments sounded pretty similar this quarter to last quarter in terms of macro uncertainty in some of your semi customers.

But you said most of them are still spending.

Have you seen any change third quarter to fourth quarter in terms of increased hesitation of customers?

Or any change in customer spending that you could speak about?

Sure.

So I think we continue to remain very strong in terms of design activity, especially the [winning] Company and the System Company.

And clearly our business will be related to the engineering headcount.

We don't see any major cutbacks in terms of engineering.

As you know they were cut other places, engineering is the last thing you want to cut; and then meanwhile the Systems Company are really going vertical integration.

And also the other thing we see is the chip becomes very complex, especially in the SoC mixed-signal and also some of the complex advanced node.

We don't see any slowdown.

We see the innovation; the customer really drives innovation.

Most of you have been through the CES.

I was there for two days.

A lot of new products coming out and just exciting that we are the enabler for them to develop all these new fancy products and we are excited about it.

Great.

That's helpful.

Thanks very much, gentlemen.

Mahesh Sanganeria, RBC Capital Markets.

Lip-Bu, the question on the core Business -- that's a pretty strong guidance of 12% to 14% for the core Business.

And I would say that you probably had in the similar range for last couple of years.

Can you give us some more color into what is driving in terms of components of those percent increase in terms of how much is a price increase and how much is actually the usage increase if you can?

And also maybe you can point to some segments -- what segment is driving the higher growth?

That would be helpful.

Wonderful.

Thank you so much for the question.

So clearly we see a very strong core Business -- 12% to 14% double-digit growth.

This is very exciting for me.

And a couple of things.

One, clearly we provide better value to our customers.

And so in terms of pricing, usage -- definitely both are increasing.

And then secondly, I think it's very important to highlight, as I mentioned earlier, in terms of the design complexity and also faster time to market in terms of product cycle, and clearly, more detail in terms of digital, we make a lot of investments in the digital ICD design area.

We recruit some of the top talent in this area and we really drive a lot of success leadership in the 20-nanometer and below, like the 14 and 16 I mentioned.

And then we have significant design wins in the top 10 semiconductor companies.

And usually takes a little bit longer time to see the value, but I think we are clearly winning on that.

And then the other thing I mentioned earlier about the mixed-signal -- the mixed-signal in terms of analog.

Virtuoso clearly is the standard, and now starting to have a lot of customers I think to turn to us in terms of our digital flow win.

We are excited about that, and then clearly the verification, we continue to be very strong and now I think we add on this IP area and the VIP design IP.

So all in all we are just excited about the portfolio that we have in terms of the customer relationship that we are improving substantially, starting to see the payoff time now.

So another question on your strategy about taking the services down.

I don't exactly know, but I would have thought that your application engineers who were there in the field, they would act as a sales force by doing the helping out customers with designing.

And won't be a concern that if you take the services down that maybe your pullthrough of core product might come down?

Is that not a concern?

So I think first of all -- good question.

And we kind of as a Company from the corporate point of view, we decide to shift the service into IP because it's more scalable.

Secondly, it's very important for us to have a very strong balance in terms of design, verification IP, and then only really doing very high complex service such that we can really drive the operating margin going forward.

Mahesh, there's a difference between AEs and the service organization.

So we're not getting rid of AEs.

We're not taking AEs and putting them in IP.

We're taking our service organization, which is a group of very skilled engineers that we have that work on developing products for our customers, and making them develop IP going forward.

By the way we continue to hire more AEs and add more AEs across the board, there.

Very critical as you pointed out to our sales effort.

Okay.

One last question for me on your strategy on expanding the IP.

I would assume that you're going to use your balance sheet to acquire I would say at least three, four companies, smaller companies in the IP side.

Is that a good assumption?

And can you give us an idea of what range of companies that you are looking at and what segment of IP you're going after?

Yes.

Thank you for the question.

First of all, clearly we are not going to make comment any acquisition target or any trend, so I think we're not going to answer that.

But what we can say is that we like our IP roadmap.

We like our leadership.

Martin Lund, we recruit on board and then he has a very strong team below him.

And we are very focused on the product roadmap and then the portfolio that we are building up.

And so I think, all in all, I think stay tuned.

And we should have more solid portfolio to serve our customers.

Okay.

Thank you very much.

Jay Vleeschhouwer, Griffin Securities.

I'd like to ask first about the hardware business.

You mentioned that from 2011 through 2013 the hardware business would be 90% above the cumulative revenues over the preceding three-year period.

Would it be fair to deduce from that, that for 2013 the range of decline built into your guidance is about 5% to 10%, given the three-year composite revenue number that you talked about?

Yes, Jay.

Understand the question.

Unfortunately we don't give that level of detail on these calls.

Okay.

With respect to the services transition -- the services revenue did decline sequentially and year over year.

Reasonably materially so I assume that's connected with the change that you're talking about.

On the other hand, there was a reasonably material increase from the third quarter in cost of services.

Was there something of a nonrecurring nature in that?

Or are we now at the peak in terms of your services expense and we'll start to see that come off?

Yes.

So from Q3 to Q4 we clearly have started to move engineers away, but the revenue also, as you can see, decreased from Q3 to Q4 and that was the major driver of that change.

Okay.

For Lip-Bu -- when we look at the growth categories in EDA there's typically in any given time just a handful of categories that are doing particularly well for the industry as a whole, and I'd like to ask about a few and how well you're positioned in those.

So first of all, among the categories that are doing especially well, is analysis and simulation.

My question there is, outside of emulation, how well do you think you're doing in that category?

Another category that's been doing particularly well is physical verification -- if you could talk about that.

And lastly, system-level design outside of PCB, so just the hardware/software co-design part of the market, how do you think you're doing there?

Jay, thank you for the question.

A couple of categories.

I think overall, all I can say is across the board, very strong 12% to 14% in our core EDA, and in terms of more specific and in terms of beside hardware emulation, the other verifications, the IP, and also in the synthesis digital side, across the board pretty strong and there's no particular area that is overly strong.

But we just continue to provide the whole flow to our customers to serve them well in terms of their complex designs, all the way from physical verification.

And in terms of the system side, clearly our Palladium is doing well, our system hardware/software co-design, co-verification, we announced our development verification suite, we continue to progress very nicely.

Heavily engaging with the winning customer, we have our success on that.

Okay.

Just two last ones.

Actually another emulation question -- you ascribed the likely decline in the business this year to economic uncertainty, which certainly we've seen in the past affect this particular Business.

On the other hand, there's been a several-year trend of improvement in emulation for longer-term secular reasons.

Could you talk perhaps about other competitive pressures that you might be seeing outside of economic pressures in emulation?

And perhaps talk about the age of your product line and the context of one or two of your other competitors having newer products?

Yes.

I think good question.

As I mentioned, the hardware continued to be strong.

It's a record year for us in '12, and '13 remains to be strong; but clearly we all know the economic situation and this is a hardware and we want to be -- meanwhile the product is the gold standard, is the leader.

Any complex design, this is a must-have.

We heavily continue to drive success with our customers.

And in terms of competitor, I think it's true that our competitors are doing well because this overall verification and [find the parts] earlier is good for the industry.

Our objective is to serve the customer well.

Help them to design, time-to-market.

And I think we like our chance and we have a solid gold standard and we continue to drive improvement on that.

And I think, Jay, the gold standard is much more important than age of product.

We're still the gold standard.

Okay.

Thanks very much.

Gus Richard, Piper Jaffray.

Geoff, could you talk a little bit about pricing and your expectations for price negotiation this year?

Yes.

I think, Gus, the pricing continues to be competitive and then clearly we are very focused on our customer relationship and this has been very well, which I think we see the benefit of our relationship with customers and continue to drive value to them and solve their design challenges.

And then the other thing is, four years ago I started quality improvement, deal quality improvement.

And so clearly it's help us in terms of our relationships with the customer and also we can really provide the best value to our customers.

And then in terms of the IP strategy, you're clearly putting more resources into developing IP.

A couple questions.

One, how long after you make this investment do you expect it to translate into revenue growth for your IP business?

Good question.

Clearly, the IP business is very important to us.

And clearly we are very focused on the design IP side.

Primarily focused on memory toward the Denali acquisition and also the storage controller.

And then also right now not focused very much in the high-speed interface-related industry-standard.

With Martin Lund's background and this is an area he is very comfortable with.

He's familiar with the SoC and he's been recruiting some of the top-notch talents on board.

Stay tuned.

We are excited about our product offering.

Okay.

And are you targeting any specific process?

As you design IP, particularly as you go to the more advanced nodes it becomes very much process-specific and it doesn't necessarily translate from one foundry to the next.

Are you spreading it across different foundries?

Or are you focusing on different foundries as you move forward?

It's a very good question.

And we very much focus on the advanced node processors.

And clearly 28-nanometer is going to be a big node and we are very focused on that.

And meanwhile we also are engaging with -- across all of the leading fabs so that we can work with them.

Ecosystem partner is very important for us.

As I mentioned, we announced in the ARM, TSMC, Samsung, and that list go on.

We work with all the key foundries and so that is very important.

Okay.

Thanks so much.

(Operator Instructions)

Krish Sankar, Bank of America.

Geoff, on your guidance -- if I take the low end of your revenue and EPS, it looks like it's about a 6% revenue growth year over year and 6% EPS.

Just trying to get a sense of, is that really right?

In other words not a whole lot of operating leverage on the lower end of the guidance, but quite phenomenal leverage in the upper end of the range?

Yes, Krish.

We obviously look at the complete guidance range and look at both the high end and the low end of the range and the midpoint of the range.

And I think we're quite happy with the range as is.

We won't comment on specific ends of the range.

Got you.

All right.

Okay.

All right.

And then in terms of the emulation business, just trying to get a sense of how big do you think the emulation market was in calendar '12?

And were you guys the number one or number two market share in it?

As I mentioned earlier, clearly we are the gold standard and the leader.

And that market, as best I know, is a $350 million market.

We clearly are the gold standard and leader.

It's a must-have for the leading company that is doing 40-nanometer and below complex chip, and we have a lot of success on that.

All right.

And then a couple of other quick questions.

In terms of the guidance, is it fair to assume that all the tailwind of the model transition is behind us, and none of that is there in actually calendar '13 EPS?

Yes.

We concluded that in Q4 of 2012, so it's all behind us.

Got you.

And then in your fiscal '13 guidance, is there any way to figure out how much of your revenue is coming from 20-nanometer design activity?

We don't look at it that way, because a lot of our contracts are structured -- we tend to look at it by customer and by product more than specific nodes.

All right.

Final question from my side -- when I look at your Business, you guys have done a bunch of acquisitions in the past.

Last year you guys did Sigrity.

Maybe there are a few more out there, but just trying to get a sense of what is your capital allocation priority?

Is it still mostly focused on bolt-on acquisitions, or do you still have some outstanding buybacks out there, you have some debt, and is there any dividend on the costs?

Just trying to get a sense of what kind of capital allocation, how you look at it?

First of all, we don't speculate about acquisition.

We very much focus on our strategy.

We like our strategy and it's doing well.

We only make acquisitions if it fits into our strategy.

And I will let Geoff comment on others.

Obviously, we need a certain amount of cash to operate.

We have the converts that we're going to be paying off both in end of 2013 and end of 2015 out of US cash.

We're going to make organic investments and in some cases we'll make inorganic investments in our key growth areas.

Got it.

All right.

Thank you.

Sterling Auty, JPMorgan.

I apologize in advance.

I'm jumping between calls.

I'm sure some of this is going to be a repeat, but did you give 2013 bookings guidance on the call?

Yes, we did.

Hang on just a second.

The guidance for bookings for 2013 is $1.425 billion to $1.475 billion.

Okay.

And the commentary about the emulation Business for 2013 -- did you actually see that in the fourth quarter, taking a look at the inventories on the balance sheet, was there -- did you see some of that trend already?

No, we didn't.

Revenue was actually up in emulation Business from Q3 to Q4.

Okay.

But the commentary around the economy -- is that just coming from the comments that you're seeing from semi companies at the moment?

Is that something that over the next quarter or so, as they start to get more clarity, you could see yourself getting more constructive on that business?

Or do you think that fade in the emulation is going to happen regardless?

Yes.

Let me start first.

First of all, I think as you can tell we have a record year, 2012.

And going to remain strong in 2013, primarily because of the economic uncertainty and by meanwhile saying that we're the gold standard, we're the leader, we continue to drive success.

And a lot of our customers are engaging with us and that's kind of -- we still very solidly like the business.

And then, Sterling, it is just really difficult -- inherently difficult for us to forecast this business in this condition with how the semiconductor companies are doing and economic environment overall.

So --

Okay.

And then last question -- it was touched upon in the last question, which is the operating leverage -- again, I'm on the road so I haven't crunched the numbers here, but just eyeballing it, it would seem like you're not putting in as much of the operating leverage, or if you're still expecting 25% for the full year, is there something in other income or the tax rate that's going to weigh on EPS in 2013?

Well, yes.

So clearly I think we have an impact in the other income and expense; that's a little bit different from where the street was guiding 2013.

I think that's one impact.

I think the other impact is, the share count we guided to is a little bit higher than I think you guys have.

But the operating leverage I think is 50%, at the midpoint of guidance.

All right.

Perfect.

Thank you, guys.

Tom Diffely, DA Davidson.

Another emulation question, so popular today.

You guys dominate the high-end, seems like Mentor has done a pretty good job at the midrange and EVE's made some inroads at the low-end.

When you talk about the competition, do you actually see competitive takeaways?

Or is everybody just growing up with their own customer base, refreshing their own customer base as time goes on?

Let me start first.

This is Lip-Bu.

Clearly we're the leader -- we are the gold standard.

Any complex design is a must-have.

We continue to drive success on that.

In terms of our competitor, overall I think it's a good market.

Clearly the hardware emulation is going to continue to grow.

We have a lot of respect for our competitors, and Mentor continue to do well, and then EVE on the low end, and the prototyping area.

So I think we are going to see growth, but clearly any complex design our hardware emulation is a must-have and it's a gold standard.

And again Tom -- this is Geoff -- it remains a secular trend; we believe that emulation is a business that's going to continue to grow for everybody.

Okay.

Is it your belief that the high end of that is the fastest-growing, strongest part of that market?

Yes.

I guess we can't really comment on which end is growing faster or not, but again we think it's a secular trend.

Okay.

And then, when you look at your IP business, from a competitive point of view is your main competitor at this point still the in-house design teams?

Or Synopsys or some smaller players the main competition?

Yes.

Let me comment first -- I think clearly in-house internal development IP is still the one.

But clearly more and more customers are more comfortable to outsource if it's a standard and if it's good quality.

And that's why we emphasize the quality; we focus on the area that we really have value to offer in the memory, storage, the high speed connectivity interface area is our primary focus right now.

And other industry-standard over time we will add on to it, but the key thing is to provide high-quality IP that customers can comfortably trust and use.

Okay.

So for some of these markets that you're keen on right now, are those markets then that don't have a merchant supplier today?

Or you feel a top-notch merchant supplier and you're trying to fill a void?

Yes.

I think clearly, first of all, the memory side we're the gold standard.

And we continue to drive success on that.

And then the controller side, the storage controller side, we continue to make very good quality to our customer.

And now we are very focused on the high-speed interface and really drive quality, and so the Company customer can depend on us and on the quality IP that we can provide them and helping them in the design time to market.

Okay.

Switching gears here -- when you look at the amount of capacity that the foundries are adding today, have you started to see a pickup in the leading-edge demand from your second- and third-tier fabless customers?

Can you repeat the question again?

Wondering with a lot of the foundry capacity growing up right now, the leading-edge, if the second- and third-tier fabless guys now believe they're going to get access to that sooner than they previously thought and maybe are more actively working on advanced designs; wherein cycles past they may have waited a year or two to start those design activities?

Sure.

So I think clearly we see the customer moving more to the advanced node.

Clearly the 40s still a big volume and then the 28 is going to be a long node, and so in terms of the Tier 2 or Tier 3 moving to the 28-nanometer and include some of the China company already moving in.

So I think we are heavily engaged and helping them to migrate from moving towards the advanced nodes.

We see tremendous activity, yes.

Okay.

I guess when we look at the full-year revenue guidance is there any unusual linearity or seasonality this year that makes the linearity of that business different than it has been in the past?

Nope.

Okay.

Sorry.

That's good.

Just wanted to make sure.

Brian Murphy, Sidoti & Company.

Geoff, did you touch on how we should think about the service gross margin in 2013?

No, we didn't.

But I suspect you could expect it to maintain approximately where it is.

Thanks a lot.

Thank you.

I would now like to turn the call over to Cadence's President and CEO, Lip-Bu Tan for his closing remarks.

Thank you.

In closing I'm extremely pleased with the progress that we have made at Cadence in the four years since I joined Cadence as CEO.

We have strengthened and expanded our technology portfolio, transformed the Company culture, and deepened customer relationships across the board.

This has contributed to our strong financial performance.

Cadence has regained its edge as an innovator and we are actively recruiting the best talent in the industry.

We have significantly improved our balance sheet and operating profitability.

This enables us to continue investing in innovation organically and through targeted acquisition.

We are well-positioned to deliver value to our customers and shareholders.

Thank you, everyone, for joining us this afternoon.

Thank you for participating in today's Cadence Design Systems fourth-quarter and fiscal-year 2012 earnings conference call.

You may now disconnect.