益華電腦 (CDNS) 2013 Q2 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Cadence Design Systems' second quarter 2013 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, Ginger, and welcome to our earnings conference call for the second quarter of fiscal year 2013.

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 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 comments regarding forward-looking statements in the earnings press release issued today.

In addition to financial results prepared in accordance with generally accepted accounting principals 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 July 24, 2013, for the quarter ended June 29, 2013, 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.

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

Cadence delivered solid results in Q2.

Total revenue was $362 million, non-GAAP operating margin was 24% and operating cash flow was $75 million.

This result reflects our ability to support our customers' needs, to innovate and invest in new design activities.

They also reflect the strength of our organization, our products and our customer relationships.

As has been the case for the past three years, the environment continues to be challenging with macro uncertainty and softness in semiconductors.

Despite that, most of our customers continue to innovate and invest in new design activities.

Now let us review some of the Q2 highlights.

Our customers expect Cadence to collaborate with them and their ECO systems as they develop, design and build their great products.

They look to us for innovative design solutions.

Today I will highlight two of our recent internally developed innovations, one in timing sign-off and the other in custom analog design.

I will also highlight our progress in IP as we closed additional acquisitions in Q2 and sign our largest design IP contract to date.

Timing sign-off is a critical step in the design flow.

We introduced Templis, a virtual static timing analysis enclosure II.

It will enable system on the chip developers to accelerate timing closure and to move their chip designs to fabrication more quickly.

Templis' use of massive distributed parallel engines that can scale across hundreds of CPUs to deliver up to 10 times faster performance than traditional timing analysis solutions.

It can handle designs with hundreds of millions of objects without compromising accuracy and deliver faster and more accurate design closure and sign-off.

TSMC certified Templis for sign-off for -- on their 20-nanometer processes.

Having a powerful timing sign-off solution will compliment and counter our design -- digital design platform.

In custom analog we are extending our leadership by continuing to invest in more automated solutions and addressing advanced nodes in true syntax.

We recently introduced an electrically aware design capability in the Virtuoso custom design platform.

This is a groundbreaking approach to custom analog design.

It provides electrical aware feedback during layout design.

This enables engineers to reduce their design cycle up to 30% in addition to optimizing chip size and performance.

Earlier this month we announced that TSMC expanded their collaboration with Cadence for custom analog design.

TSMC deploy Virtuoso for advanced nodes include 16-nanometer FinFET designs.

TSMC will create and deliver native skill base process design kits, also known as PDKs.

PDKs will provide -- these PDKs will provide the best user experience and the highest level of accuracy for Virtuoso customers.

As you know, growing our IP business is a key focus for Cadence.

In Q2 we expanded our IP portfolio in addition to the Tensilica acquisition.

We closed the acquisitions of Cosmic Circuits and the Evatronix IP business.

These acquisitions add complimentary USB and mid P IP that is silicon proven at advance nodes.

They also bring us talented development teams in India and Poland.

We begin integrating Tensilica, Cosmic Circuits and Evatronix IP business with earlier acquisition and our internal development teams.

As a result, Cadence now offer a broad IP portfolio that addresses the IP requirements of our customers.

We demonstrated this by signing our largest design IP contract so far, a multi-million dollars deal with an Asian customer.

This contract includes a combination of products such as DDR, mid P, USB IP.

The mid P and USB IP are from Cosmic Circuits.

Our Tensilica business is off to a good start, with a strong quarter.

The transition has been smooth and the customer interest, engagement, and orders are strong.

Our verification IP or VIP business continues to be strong.

We work closely with the standards body so that we can introduce new VIP and memory models at or even before the ratification of the newest portal costs.

New VIP introduced this quarter includes HDMI2.0, mobile PCI express and YIO2.0.

Finally, I wanted to provide an update on the acquisition of [Siquity] which completed a year ago.

Siquity is contributing to the renewed growth of our printed circuit board or PCB business.

Our PCB business is reaching an inflection point as customers move to high-speed design for mobile, consumer and cloud infrastructure segments.

The combination of our Allegro product line, the Siquity power signal and terminal analysis gives us a complete solution to address the requirements for development of high-speed products.

For the first half of 2013, our PCB and IC packaging revenue was up more than 30% over the first half of 2012.

In summary, this quarter we introduced two innovative products in the digital and custom analog domains.

We closed three previously announced IP acquisitions and now have the critical mass needed to address more of our customers' IP requirements.

We are continuing to attract top talent to Cadence, both through hiring and acquisitions, which keeps strengthening our innovation engine.

We continue to drive excellent operational and financial performance as today's results demonstrate.

Now I will turn the call over to Geoff to review the financial results and provide our outlook.

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

I'll review the results for the second quarter, present our outlook for Q3 and update the outlook for 2013 including our recently closed acquisitions.

Q2 was a solid quarter.

Our guidance was for meaningful growth and we delivered that.

In addition we announced new products and closed several acquisitions, all of which will help us continue our growth into the future.

Total revenue was $362 million compared to $354 million for Q1 and $326 million for the year-ago quarter.

Year-over-year growth was 11%.

Revenue for Tensilica in Q2 was $6 million after adjustments for merger accounting.

Product and maintenance revenue was $338 million and services revenue was $24 million.

The revenue mix for the geographies was 45% for the Americas, 21% for EMEA, 21% for Asia and 13% for Japan.

Total cost and expenses on the non-GAAP basis for Q2 were $277 million compared to $270 million for Q1 and $253 million for the year-ago quarter.

Q2 headcount was 5,767 people compared to 5,312 people for Q1.

The increase was due primarily to acquisitions plus hiring in R&D and technical field support.

Non-GAAP operating income for Q2 was 24% compared to 24% for Q1 and 23% for the year-ago quarter.

For Q2 we recorded GAAP net income per share of $0.03.

Non-GAAP net income per share was $0.21 compared to $0.21 for Q1 and $0.19 for the year-ago quarter.

Operating cash flow for Q2 was $75 million compared to $75 million for Q1 and $67 million for the year-ago quarter.

Total DSOs for Q2 were 24 days compared to 20 days for Q1 and 36 days for the year-ago quarter.

Our DSO target is approximately 30 days.

Capital expenditures for Q2 were approximately $17 million.

Capital expenditures were up from last quarter and mostly due to acquisition-related spending on facilities and IT.

Cash and short-term investments were $678 million at quarter end, with about 40% in the US.

In April we drew down $100 million on a revolving credit facility.

We have approximately $275 million of US cash in short-term investments, which, when combined with expected cash flow for the second half, is more than sufficient to fund operations and retire our 2013 convertible notes in December.

More than 90% of all orders booked in Q2 were ratable.

Weighted average contract life was 2.7 years.

On a weighted average basis run rates on Q2 renewals increased over the prior contracts.

Now let's address outlook for the third quarter and our update for fiscal 2013.

For Q3 2013 we expected revenue to be in the range of $360 million to $370 million.

This includes approximately $9 million for Tensilica, which was net of deferred revenue adjustments due to merger accounting.

For Cosmic Circuits and the Evatronix IP business the Q3 revenue contribution is small as we undergo integration and convert them to US GAAP accounting.

Q3 non-GAAP operating margin is expected to be in the range of 23% to 24%.

Non-GAAP total costs and expenses will be up sequentially, primarily due to acquisitions including Cosmic Circuits and Evatronix IP business.

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

Non-GAAP EPS for Q3 is expected to be in the range of $0.19 to $0.21.

We expect Tensilica to be breakeven on a non-GAAP basis for the quarter after adjustments for merger accounting.

The combination of Cosmics and Evatronix IP business is expected to be slightly dilutive on a non-GAAP basis for Q3.

Now for an update on fiscal 2013.

Bookings are expected to be in the range of $1.53 billion to $1.57 billion, an increase from last quarter's range of $1.48 million to $1.53 billion, both of those are billion, excuse me.

The increase is attributable to organic growth, increased Tensilica bookings and additional Cosmic Circuits and the Evatronix IP business.

We expect weighted average contract life to be approximately 2.6 years for the year and to book at least 90% of our business for the year under ratable arrangements.

We expect revenue to be in the range of $1.445 billion to $1.465 billion; again, repeat that, $1.445 billion to $1.465 billion for 2013, compared to $1.44 billion to $1.47 billion for the last quarter.

This includes approximately $27 million for Tensilica net of deferred revenue adjustments due to merger accounting, which is unchanged from our prior estimate.

For Cosmic Circuits and Evatronix IP business, the Q3 -- the 2013 revenue contribution is small as we undergo integration and convert them to US GAAP accounting.

Non-GAAP operating margin is expected to be approximately 24% on an annual basis for 2013.

This is slightly lower than last quarter's range due to the acquisitions of Cosmic Circuits and Evatronix IP business.

Non-GAAP other income and expenses for 2013 is expected to be in the range of negative $16 million to negative $10 million.

For 2013, we are assuming a non-GAAP tax rate of 26% and a weighted average shares outstanding of 293 million to 300 million shares.

GAAP EPS for 2013 is expected to be in the range of $0.45 to $0.54.

Non-GAAP EPS range is expected to be in the range of $0.80 to $0.89 compared to the prior range of $0.81 to $0.91.

We expect Tensilica to be approximately breakeven on a non-GAAP basis for the second half after adjustments for merger accounting.

The combination of Cosmic Circuits and Evatronix IP business should be approximately $0.01 dilutive on a non-GAAP basis for the second half.

We expect a further $0.01 of dilution from the effect of our current stock price and a fully diluted share count.

This is primarily due to the 2015 convertible notes.

For 2013, we expect operating cash flow in the range of $335 million to $365 million compared to the prior range of $360 million to $390 million.

The reduction is primarily due to merger-related outflows.

DSOs for 2013 are expected to be approximately 30 days.

Capital expenditures for 2013 are expected to be approximately $45 million.

This is up from $40 million we estimated last quarter primarily due to acquisition-related spending.

So in summary, Cadence continued its strong record of execution.

I like the way we are both developing new breakthrough products and making acquisitions that move our strategy forward.

The integration of the IP acquisitions is going well.

While the environment continues to present challenges I am comfortable -- confident in our ability to help our customers design and build great products while generating strong financial performance.

Operator, we will now take questions.

(Operator Instructions)

Your first question is from Jay Vleeschhouwer from Griffin Securities.

Thanks.

Good afternoon.

Geoff, could you break down the increase in the bookings guidance raise for the year?

Sounds like that went up by about $40 million to $50 million from the last guidance.

When you raised guidance for bookings at the end of Q1 by $55 million, $40 million of that was Tensilica, $15 million was organic.

Can you go through the same exercise now for the updated guidance for 2013?

Yes, I think what we are willing to say, Jay, is that it's the issues that we highlighted and raised, generally the duration expanded a little bit, slightly.

Tensilica was a big part of it and then the addition of Cosmic and Evatronix.

We are not going to break out the numbers but each of them contributed and we are quite happy with the strength in Tensilica's bookings.

Also with respect to emulation hardware, normally when your product costs or revenues decline as it did sequentially and even more so year-over-year in the second quarter, we would correlate that to a decline in your hardware verification revenues unless, as you had in Q4 last year, a substantial increase in the gross margin for the hardware.

Could you talk about the margins or just your overall performance that you did see in hardware verification?

Hardware verification was actually up from quarter to quarter.

Several things going into gross -- into COGs, obviously the gross margin impacts us, inventory reserves, et cetera impact us and we won't discuss that in detail, but the hardware business was actually up quarter-over-quarter and we were quite happy with that.

Maybe I can add that, Jay, I think that Palladium hardware is a strong quarter for us.

We have competitive win in Ricoh and Mitsubishi Electric and significant increase our capacity growth in mobile and system customers.

And overall we are the leader in the hardware emulation and we expect that emulation revenue will be off this year from the peak last year so I think pretty much consistent to our expectation.

Just two last ones.

First, you mentioned a couple of Japanese customers.

In your first quarter 10-Q you mentioned that for the remainder of 2013 you expected your business in Japan to decline.

In light of this recent new business, do you still expect that and, if so, when do you think Japan might bottom for you and then finish up on a FinFET question.

Yes, so our Japan business did decline as you look at the supplemental schedules and that's clear.

I mean, obviously the Japanese semiconductor business and overall Japanese environment is challenging.

Certainly there is some impact from exchange rates that are also impacting us and so we saw that in Q2 and we expect that to potentially continue into Q3 and Q4.

Yes, I think on the Japan side just add on a little bit.

I just came back from Japan.

Overall, I think continue to be challenging this year but they are taking a lot of steps in restructuring and then some of the system company are continue to be very strong.

So overall I am cautiously optimistic.

Okay.

And then lastly on FinFET which was of course much of the discussion at the Design Automation Conference last month.

Can you say if there are any customers that right now have deployed what you would call a reasonably complete or ideal FinFET enabled flow and more broadly, how are you thinking about the incremental new business revenue opportunity from any FinFET-related retooling?

When we go through that exercise, we come up with affected categories that might be touched by retooling that comprise not much more than a third of industry revenues today including for example [place route] and a few others.

Most of that is already recurring or under maintenance so it would seem that the actual amount of new business potential that could be touched by retooling is relatively small percentage of total industry revenue as it looks today.

Maybe you could share your thoughts on that.

Sure.

Jay, that's a good question.

So let me just talk about this whole FinFET.

Clearly and we are talking quite closely with a couple of customers and partners like ARM, IBM, Samsung, GlobalFoundries, TSMC, there's a whole 16-nanometer, 14-nanometer FinFET.

We are doing couple of test chip and we are working very deeply with our IP partner and the foundry partners and overall it's going to be challenging.

I think the production at best from my personal view is sometime next year, second half.

And so I think the -- the revenue growth and the potential I think is going to be small but over time become very important.

And then also I think some of the customers are pushing the envelope.

Some of the customers I think also look at the -- in the volume and in the 20-nanometer.

And so clearly our encounter, our Virtuoso, our signoff new tool fully qualify the foundry at 20-nanometer.

So some of the customer are engaging in the 20-nanometer such as a test chip we have with ARM, TSMC, Samsung and ST.

So overall I think our tool are ready for both 14, 16 FinFET or the 20-nanometer.

I think in term of the path of the FinFET, in term of volume production, there are still some challenges and I want to be more conservative.

Sometime next year we may see some volume production but I think realistically you're really looking at 2016 for some meaningful contribution.

Back to your question on the tool side.

Most important we get ourself ready and able to scale to those requirements.

And the good news is all this challenge and complex design in FinFET advanced node, a lot of customers lean on us a lot more so the EDA industry, the development, the design tool to enable them is critical for them so that should be a plus for the industry.

Thanks Lip-Bu.

You're welcome.

Gus Richard from Piper.

Yes, thanks for taking my question.

First of all, on the new timing product, can you talk about when you might expect to start to see revenue and how that stacks up against the competition?

Sure.

So I think this is a good question, Gus.

So a couple of things I just wanted to highlight.

The Tempus is our internally developed tool.

This is a very exciting tool for us because it's clearly -- it is a new and exciting timing and it's 10 times -- up to 10 times the performance and compared to traditional timing and so this is a very breakthrough technology that we are excited about and it's very scalable.

You can scale all the way to hundred CPUs and so this is very exciting as I mentioned in my script and we are in the very early stage of engaging with a customer as a beta.

So far the response for our customer are very excited and overwhelming so we -- too early to tell about the revenue projections, but stay tuned and we will -- over time we will progress and update you, but just want to make it clear this is in a beta situations but it's very scalable and we don't compromise on accuracy and then really driving a 10X performance improvement and that is very significant.

And then just sort of an odd question.

Can you talk a little bit about what's going on in Japan?

There's been quite a bit of movement among the companies in Japan and I was wondering if you could talk about market share opportunities or just sort of competitive dynamics in Japan.

Yes.

I think Japan is, as I mentioned, is generally challenging and because they are going through quite a transformation and then some of the Japan companies are going through a challenging time.

They cut back some of their EDA expense and then meanwhile the system company continue to do well in Japan and we are very optimistic about that.

And then meanwhile, some of the Japanese company right now going through restructuring and improving their -- the situation.

We are -- as a trusted partner, we continue to work closely with them and then work with them on their recovery and then our job is to get them the best tool, the best IP, the quality IP to enable them to be successful during the downturn.

That's what a partner is for.

So I think something that we are cautiously optimistic and then hopefully next year will be better for them.

We continue to work deeply with them.

And so can I take this to mean your revenue in Japan is relatively stable at this point?

Our revenue actually, if you look at the supplemental schedules, you'll be able to see that it was about -- down about $8 million from Q1 to Q2.

Largely that was one of our larger customers in Japan reduced their overall EDA spend and one of our competitors gained some share there.

We also are impacted obviously by more complex things like the yen and the foreign exchange rates and the overall semiconductor business.

Again, we continue to do good business with that customer.

It's just that overall as they have restructured we have lost a little bit of market share there.

We expect that trend to continue into Q3 and Q4 in Japan.

Okay.

All right.

Thanks so much.

Thank you.

Sterling Auty from JPMorgan.

Yes, thanks.

Hi, guys.

Hi, Sterling.

First, want to talk about the duration.

Notice that you've gone to the 2.6 year which was the high end of the previous range.

Are you seeing a broader based increase in terms of where customers want to go with their contract links or is this just bigger contracts moving longer that's skewing the range?

Yes.

Obviously, Sterling, you saw that we took the bookings guidance up, right, as we continue to do quite well from a bookings perspective.

Obviously some of that is going to be bigger customers and bigger customers generally want a little bit longer duration and I think that's probably the overwhelming reason why the duration is at the high end of the range.

Again for us it's within the noise level but it is something that we did want to point out.

And because of that duration now going to the upper end of the previous range, that also has an impact on what the revenue contribution for this year will look like, correct?

Yes, it does, right.

As you notice, the bookings went up but the revenue didn't go up and that's largely for a couple of reasons -- the duration going a little bit longer, the addition of strong performance out of Tensilica in addition to the Cosmic and Evatronix, which don't immediately impact revenue but will impact revenue over time.

So we like the trend.

Is there any impact on collections and cash flow from the duration change?

Very little.

As you know, we work very hard to match cash flow with revenue recognition and we don't try to collect cash up front.

So there's very little impact on the cash flow from the increase in duration.

Okay.

Can you walk us through -- you changed the cash flow guidance, you brought it down and you pointed to some acquisition impacts.

Could you be more specific in terms of both quantitatively and qualitatively what those impacts are?

Sure.

The two big chunks are in M&A.

The first is the addition of Cosmic and Evatronix and their operating expenses, right?

They are -- as we said they have -- are slightly dilutive for the year of about $0.01.

That's all expenses, right?

So that's the first part.

The second part is largely M&A-related expenses that flow through operating cash like these -- like transactions costs, those type of things.

Those don't flow per GAAP through investments.

They flow through operating cash and that's the vast majority of the $25 million reduction in cash flow.

Okay.

Thank you.

Mahesh Sanganeria from RBC Capital Markets.

Thank you.

Lip-Bu, you talked about IP business getting to a critical level.

Do you have a target in mind in terms of product portfolio or the revenue level where you want to see stabilize at?

I'm assuming you're still looking for more acquisitions, so can you give us some of the targets you are looking at for the IP business?

Yes, I think, Mahesh, first of all I think with the breakdown on the IP in the revenue but I think through this couple acquisitions I think we clearly have the critical mass in term of a broad IP portfolio to support our customers.

As you recall, we have a very strong leading in the verification IP and this acquisition and four actually plus the Evatronix IP and our [Process 30 IP] is really trying to [and out] to strengthen our design IP portfolio.

I think we have a lot to integrate, a lot to optimize and then providing a really good silicon-proven quality portfolio.

So I think overall we are very optimistic and the response from our customer is very, very positive.

They really like our portfolio, we are ably engaging and then clearly the Tensilica we have a very strong quarter and we have a lot of engagement with our customer.

You know, Cosmic Circuit, Evatronix just completed.

We are already able to demonstrate in terms of big design IP win that contract that we -- that I referred to.

And so all in all, I think we are continuing to do well, focus on integration, focus on drive efficiency and engaging heavily with our customer and meanwhile we continue to look out for the right acquisition in terms of its fitting to our portfolio that can strengthen our team and the talents and continue to drive the footprint.

So all in all we are happy with what we have and very focused on execution and drive quality and drive customer engagement.

And I'll give you just a couple quick numbers again as we said last quarter and this quarter, Tensilica is about $27 million of revenue for this year, and that's after merger accounting, and includes the fact that we didn't acquire them for the full year.

Cosmic and Evatronix IP business is essentially minimal for this year as we do the -- go through merger accounting and get them on US GAAP.

Okay.

That's helpful.

And, Geoff, you mentioned in your prepared remarks something about the run rate at the customer better than the historical.

Can you elaborate a little bit more on that one?

Sure.

Run rate is a surrogate for revenue and what happens is when we say the -- when we get -- close out an old contract and start a new contract, when the revenue projection or the run rate number actually goes up, that implies that we are getting a better contract or more revenue out of that contract on a going-forward basis and that was the point of that.

Again, that focuses on continuing working on deal quality, continued expansion of number of engineers, continued expansion of market share at some of these customers.

Can you give us a ballpark growth in that run rate overall?

No, we don't give that number out.

It's a confidential metric.

Okay.

That's -- I understand that.

And just one last question.

Lip-Bu, you talked about the Virtuoso win at TSMC.

Can you explain a little bit more what is TSMC employing that Virtuoso platform?

What's the purpose of that?

Sure.

A couple of things that I just highlight.

One is they deploy our Virtuoso for the advanced nodes including the 16-nanometer FinFET design.

That is very significant.

And then, secondly, TSMC also will create and deliver native SKILL-based PDK and that is also very significant achievement from our side and then partnering with them in a very deep fashion so that they can provide the user the experience, the level of accuracy.

And also I mentioned about our exciting improvement on the Virtuoso and in term of electrically aware design and that give a very strong [quick fix back] improve the integration that the cycle time more than 30%.

So continue taking the leadership even further on the automation of Virtuoso and then TSMC, their support is critical for our customer success.

Okay.

Thank you.

Thank you very much.

Thank you.

Rich Valera, Needham & Company.

Thank you.

Just wanted to circle back to the prior question about the increase in bookings but no increase in revenue.

Understanding that the duration effect, it would still feel like there would be some contribution there from the increased bookings and it sounds like you've already got a sizable order from Cosmic that I would think maybe you would see some revenue in the current year.

So just wondering is there something in the base business, perhaps the Japan effect that you've alluded to earlier, that's causing lower revenue at the margin than you had expected previously that's going to be offsetting some of the contribution from some of the acquisitions or the higher bookings?

Yes.

So Cosmic and the Evatronix IP business are both largely done on completion, right, of a transaction so we don't get revenue along the way so even though we get bookings from them, it's largely at a completion that we can recognize revenue.

And so that is over time.

We also have done better with Tensilica.

A portion of that was a contract extension for a large customer and so that would obviously have revenue in the future.

And then the duration going up is largely the impact.

There's not a particular impact besides what we already talked about in Japan that's affecting revenue elsewhere.

Got it.

And then in the prepared remarks you talked about the PCB business seeing some -- I think you said 30% half-on-half growth and I'm just wondering how sustainable or how anomalous that is and how do you think about that business going forward?

Is it something that you see as a solid double digit grower going forward or is there anything you'd be willing to say about the sustainable growth rate of that PCB business now.

I think, Rich, that is a good question.

I highlight that because in the one year ago we acquired [Siquity].

It's a very good acquisition for us that provide the power, signal integrity and terminal analysis.

That give us -- customer really like that.

That is very important for them in the very early design to be able to identify some of the issue in power and certainly integrity.

And that helped tremendously our PCB offering, make it more complete and that's why you see a big jump on that, 30%.

And then the other part is because of some of these feature and performance and analysis is very critical for the high-speed design, especially in the high-end mobile consumer-related and also some of the infrastructure segment.

That's what drive the growth and this is just a result for this quarter.

We don't indicate in the future how it going to look like but we are cautiously optimistic and we are very encouraged by the vertical market that driving and they see the value of that acquisitions.

Great.

Thank you for that.

And you mentioned emulation a few times but -- and I guess it was -- something was up sequentially.

Are your expectations unchanged relative to your initial guidance of the year where you said it would be down and I think most of us inferred down low double digits.

Any changes in your emulation expectations relative to that initial guidance?

Obviously we can't comment on a double digits but we guided this year as being down from last year after a couple of very strong years in a row.

We are still with that guidance that it would be down for this year over the past two strong years.

Got it.

And I've tried this before and I suspect I'll get the same answer but anything you're willing to say about the development of the successor to Palladium 2 at this point?

Yes, I think, Rich, first of all clearly the Palladium XP continued to do well.

We are continuing to be the leader in this space and clearly we -- as a strong quarter for us, we have significant capacity growth in the mobile [and] system.

Overall we continue to do well on that.

Like any business we are always focused on the R&D development for the next generation and then at the moment in time that the product is ready to announce and we will announce that.

And we are still convinced we have the best product out there and so are our customers.

Fair enough.

Thank you for that, gentlemen.

Thank you.

(Operator Instructions)

Krish Sankar from Bank of America Merrill Lynch.

Yes, hi.

Thanks for taking the questions.

Just a couple of them.

If I remember right historically your bookings have had a seasonally strong Q4.

Is that still the case or has something changed with all the acquisitions?

Yes.

We generally talk about bookings on a yearly basis and don't talk about seasonal periods anymore.

I think some of our competitors who have a different business model sometimes talk about that.

But we really just talk about the year and I think if you looked in from Q1 to Q2 and then with the guidance we are giving here, each time we raise the booking guidance for the year and I think that's what we are comfortable with.

Got it.

All right.

Fair enough.

And then on emulation business, what do you think is the growth rate for emulation for the industry over the next couple of years?

Yes, I think it's very hard to get those data but I think so far we see from the customer patent anything that are in the advanced node complex design and then more and more system company driving some of these hardware emulation because earlier [that identified the box] we have the time to market and also the complexity verification become more and more important.

So I think we continue to see the continued interest from our customer to deploy and scale massively.

And so I think we see a growth business, continue growing business and then meanwhile we continue to really serve the customer well and provide the capacity that they need and the performance they need and continue to serve them and support them in an effective way.

So it's a good quarter for us and we are cautiously optimistic.

Like always the hardware business is always more challenging and hard to predict.

We just want to make sure that we continue to provide the value to our customer that I think is the key thing for us as a discipline.

Got it.

So along the same lines is there is still growth left.

Is it fair to just assume that the emulation business starts growing again next year for you guys?

We are not guiding 2014 yet, Krish, but again we do believe overall for the whole industry that this is clearly a secular growing business over the foreseeable future again.

For us we will guide 2014 when we do our Q4 earnings call in January.

Got it.

And then a final question is, I understand how FinFET is very difficult and the foundries need to do a lot of investment and R&D on that.

Just curious from your guys' viewpoint if FinFET gets pushed out from next year into 2015, how would it impact Cadence or the EDA industry in general?

Yes.

First of all I think that FinFET is, as I mentioned, is not as easy and it's challenging and that we all -- a lot of -- couple of key leading customers and our foundry partners, we work very close with them and now we have couple of test chip and I especially name ARM and TSMC, Samsung, we are heavily working with them, GlobalFoundries, and then try to get the test chip working and production in a very cost-effective and economic way for our customer that is still out there and still need challenges to work.

Saying that, clearly customer need us to really design around that and then -- and also drive some of the efficiency that they need and that's why you see a tremendous growth from the EDA players because customer need us to help him.

That's why the collaboration, the partnership, work closely with the customer is critical for our success.

And last few years we have been very focused on that and then deliver the value, the solution they need to design the complex chip, either it's an advanced node 20-nanometer or FinFET 14,16 or beyond and I think just more and more needed for our service.

Got it.

Thank you, guys.

Thank you.

Jay Vleeschhouwer from Griffin Securities.

Thanks.

Just a couple of follow-ups.

One referring to a very interesting customer presentation by Samsung last month at the conference.

They spoke about changes in their EDA vendor relationships, specifically in the area of license management where they talked about certain levels of license access with usage monitoring.

They made it sound like a meaningful change, that this was something that hadn't been done much before.

So I'm wondering if this is a potentially new phenomenon in EDA vendor relationships where the customers agree to more usage monitoring from your side than might have been the case and if so, what the implications of that might be?

And then following up on Rich's earlier question to try to pin you down on emulation, when you began the year you had talked about cumulative emulation revenues, 2011 through 2013, being 90% higher than 2008 through 2010 cumulative revenues.

Is that still a number that you're looking at?

Okay.

So let me try to answer the first question and then Geoff will answer on the second question.

So I think the first question, I'm not quite aware of this Samsung license and usage things but more important for us is that we focus on providing the value.

And Samsung is a very important partner and customer for us in the foundry and also their business side.

We are heavily engaging with them, providing the best value and the tool and IPs with them.

And so this thing that you just described, I'm not up to date on that so we will look into it and see that any changes.

So far we are working [in relationship] with them.

There are no changes as far that I know.

I just came back from Korea a few days ago.

We don't see any changes the engagement level have been increasing and so we are happy with that arrangement and we continue to drive value to them and help them to be successful.

And I think over a period of time, Jay, we have been creative and experiment with business models.

We are not specifically commenting on that specific comment there but we do experiment and we do things.

As far as the emulation business, we are at or slightly ahead of our plan when we guided down for the year so the business has been good.

We still stand by the communication we did on -- earlier on the cumulative growth over a period of time.

We are quite happy with how the emulation business has gone, basically the per plan.

Okay.

And then maybe one more for Lip-Bu on the vertical markets.

We have heard from at least one of your competitors over the years the growing well of automotive as a market for EDA and I was wondering if you could comment on your thoughts or your positioning vis-a-vis automotive.

And again in light of the recent Ricoh announcement plus you also announced some business with Canon I think earlier in the year, could you talk about the whole imaging market or video and technology and the like as a new opportunity on a systems level for EDA?

Sure.

I will try to answer your question.

So I think if I hear correctly, you have two questions.

One is automotive and then second one, the imaging, the video-related area.

So clearly, as I mentioned in the past, application-driven design is really growing and also the mixed signal application are growing and we are paying a lot of attention to the vertical market.

Automotive is one of the targets that we also focus on.

Clearly automotive is also moving to a lot of connectivity and infotainment-related area and a couple of our customer, key customer, have been supporting that and actually in the mix-signal related area, sensor-related area.

And so some of our key customer, without naming the name, that we are very deep [in the] primary EDA vendors to them and so clearly we are heavily engaging in this automotive connectivity and infotainment audio/video related.

Specifically on the imaging and audio-related, video-related, this is very important.

Clearly the display and anything related to the display sensor and also some of the beautiful -- all that related display we are heavily engaging with that with some of the customer.

Video is something that I personally very passionate about.

In some video compressions, video -- high-quality video on the consumer video variance and then all the way to the -- and video applications through sports and then all these are heavily -- Cadence have a very well position for addressing that.

This is going to be even more when you move into the internet of things, wearables, the cloud and the big data related area application we are very well positioned to support our customers to reach out to get this huge opportunity in the 50 billion units and above.

And that's massive, massive big data analytics I think going to be huge for the industry.

We are very well positioned to capture them.

Okay.

Thanks again.

Thank you.

This was our last question.

I will now turn the call over to Cadence President and Chief Executive Officer, Lip-Bu Tan, for his closing remarks.

In closing, Cadence continues to deliver great technology to our customers and our business result reflect this.

Our IP business has developed critical mass and we expect it to be a strong contributor for future growth and profitability.

We make great progress over the past several years by investing and improving our products and technologies, customer relationships, ecosystem alliances and financial performance.

While the macro environment remains uncertain, with some customer continue to face challenges, Cadence is well positioned to execute and be successful.

Thank you, everyone, for joining us this afternoon.

Thank you for participating in today's Cadence Design Systems' second quarter 2013 earnings conference call.

You may now disconnect.