益華電腦 (CDNS) 2013 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Cadence Design Systems' third quarter 2013 earnings conference call.

(Operator Instructions)

Thank you.

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

Please go ahead.

Thank you, Dustin, and welcome to our earnings conference call for the third quarter of fiscal year 2013.

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, 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 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 dated October 23, 2013, for the quarter ended September 28, 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.

Our record of strong execution continued, as Cadence delivered solid Q3 financial results.

Total revenue was $367 million.

Non-GAAP operating margin was 24%, and operating cash flow was $98 million.

First let me comment on the environment.

While demands for EDA products has been good this year, the environment remains challenging, with macro uncertainty and softness in semiconductors.

As we mentioned last quarter, most customers continued to innovate and invest in new design activities, but some are facing more challenges.

Now, let us review some of our Q3 highlights.

Q3 was a strong quarter for Palladium.

Palladium has a strong position in over 70% of the top semiconductor companies, and this year, we grew our leading position with 25 major expansions and nine new customers.

More than 40% of our Palladium business is now with system companies, and this figure is growing.

This quarter we announced the new Palladium XP II system, which delivers two times the verification productivity, higher gate density, lower power consumption, and represented one-third of Q3 Palladium innovation orders, including a transaction with Japan's National Institute of Information and Communications Technology.

System Development Suite centered on Palladium was also enhanced, with Broadcomm and NVIDIA reporting orders of magnitude hardware/software verification speed-up.

Q3 Palladium revenue was strong, and is now running ahead of our year-to-date estimates, but is still expected to be down overall for the year.

Our investment in expanding our IP business is producing results.

We are winning new Tier 1 customers at the most advanced nodes, growing the business and gaining market segment share.

Over 200 customers use our Tensilica COS in SoCs such as baseband IP for 4G LTE modems and audio and imaging IP for mobile, home, and automotive application processors.

Cadence has built a strong internal IP development team, focused on providing complete IP solutions for digital, analog, and mixed-signal IP.

We just released a new line-up of high-speed analog and digital data converter IP, and we have already a design win with a key consumer electronic company.

Cadence received a TSMC partner of the year award for our analog and mixed-signal IP, based on the quality of results we deliver.

Since our technology used breakthrough 3D transistor to reduce power and increase performance, and has the potential to significantly expand more [SLA].

Our early and deep investment in FinFET technology and design flow development are beginning to pay off.

We have previously announced FinFET test chips with ARM, IBM, Samsung, and TSMC, and we are working with many Tier 1 customers, as they progress toward production designs at the 14 and 16-nanometer nodes.

Virtuoso is the leading tool for developing FinFET cell libraries and foundation IP, and is used on nearly every design at 14 and 16-nanometers.

The Cadence digital and custom analog platforms have both received TSMC certification for the 16-nanometer two flow, and TSMC recognized Cadence with the Panel of the Year Award for the 16-nanometer FinFET infrastructure.

We recently introduced Spectre XPS, our next generation fast SPICE simulator, which can deliver up to 10 times faster throughput than competing simulators, using two to three times less system memory.

Spectre XPS delivers orders of magnitude improvement in simulation performance for designs that continue to grow in size and complexity.

We already have about 1,000 customers deploying Spectre XPS in active design, including Texas Instruments.

We're extremely proud of our ability to continue to deliver innovative, internally-developed technologies, including Tempus and Virtuoso EAD last quarter, and Spectre XPS and Palladium XP II this quarter.

These products deliver order of magnitude improvement in performance and productivity over competing solutions.

In summary, we continue to drive consistent operational and financial execution as today's results demonstrate.

The introduction of Palladium XP II boosted evolution sales.

We are rapidly integrating our IP acquisitions, releasing new internally-developed IP, and winning new business across the customer spectrum.

We are actively working with many customers and partners on production FinFET designs, and our talented development teams continue to introduce innovative new products like Spectre XPS.

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

Thank you, Lip-Bu, and good afternoon, everyone.

I'll review the results for the third quarter, present our outlook for Q4, and update the outlook for 2013.

Total revenue was $367 million, compared to $362 million for Q2, and $330 million(sic-see press release "$339 million") for the year-ago quarter.

Year-over-year revenue growth was 8%.

Revenue for Tensilica in Q3 was $11 million, after adjustments for merger accounting.

Product and maintenance revenue was $342 million and the services revenue was $25 million.

Revenue mix for the geographies was 48% for the Americas, 20% for EMEA, 20% for Asia, and 12% for Japan.

Total costs and expenses on a non-GAAP basis for Q3 were $278 million, compared to $277 million for Q2, and $257 million for the year-ago quarter.

Q3 headcount was 5,862, up 95 from Q2.

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

Non-GAAP operating margin for Q3 was 24%, compared to 24% for both Q2 and the year-ago quarter.

For Q3, we recorded GAAP net income per share of $0.13.

Non-GAAP net income per share was $0.21, compared to $0.21 for both Q2 and the year-ago quarter.

Operating cash flow for Q3 was $98 million, compared to $75 million for Q2, and $92 million for the year-ago quarter.

Total DSOs for Q3 were 26 days, compared to 24 days for Q2, and 34 days for the year-ago quarter.

Our DSO target remains 30 days.

Capital expenditure for Q3 was approximately $12 million.

Cash and short-term investments were $716 million at quarter end, with about 45% in the US.

During the quarter we paid down $50 million on our revolving credit facility.

We have approximately $310 million of US cash in short-term investments, which, when combined with the expected cash flow for the fourth quarter is more than sufficient to fund operations, and retire our 2013 convertible notes in December.

Approximately 90% of orders booked in Q3 were ratable.

The weighted average contract life was 2.6 years.

On a weighted average basis, run rates on Q3 renewals increased over the prior contracts.

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

For Q4 2013, we expect revenue to be in the range of $370 million to $380 million.

This includes approximately $13 million for Tensilica, which is net of delivered revenue adjustments, due to merger accounting.

The Q3 revenue contribution for cosmic, and the IP business we acquired from Evatronix is small, as we're undergoing integration and convert them into US GAAP accounting.

Q4 non-GAAP operating margin is expected to be approximately 25%.

GAAP EPS for the fourth quarter is expected to be in the range of $0.11 to $0.13.

Non-GAAP EPS for Q4 is expected to be in the range of $0.22 to $0.24.

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

Now for our updated fiscal 2013 outlook.

Bookings are expected to be in the range of $1.56 billion to $1.58 billion, an increase from last quarter's range of $1.53 billion to $1.57 billion.

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 $1.453 billion to $1.4563 billion(sic-see press release "$1.463 billion") for 2013, which is up from the range of $1.44 billion to $1.47 billion, we expected after Q2.

This includes approximately $29 million for Tensilica, which is net of adjustments due to merger accounting.

Like Q4, the 2013 revenue contribution is small for Cosmic Circuits and the IP business we acquired from Evatronix.

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

Non-GAAP other income and expense for 2013 is expected to be in the range of negative $14 million to negative $10 million.

For 2013, we are assuming a non-GAAP tax rate of 26% and weighted average shares outstanding of 293 million to 296 million shares.

GAAP EPS is expected -- for 2013 is expected to be in the range of $0.55 to $0.56.

Non-GAAP EPS is expected to be in the range of $0.85 to $0.86, compared to a prior range of $0.80 to $0.89.

For 2013, we expect operating cash flow to be in the range of $340 million to $360 million.

DSO for 2013 are expected to be approximately 30 days.

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

In Q3, Cadence continued its strong record of operation on financial execution, with key operating metrics exceeding expectations.

While the environment continues to present challenges with some customers adjusting spending, I am confident in our ability to help our customers design and build great products, while delivering strong financial performance.

Operator, we'll now take any questions.

(Operator Instructions)

Our first question comes from the line of Sterling Auty with JPMorgan.

The announced emulation product in the earnings release, is that enough to prop up emulation revenue growth until the next generation is released, or should we expect declines until the new platform?

Thanks.

Yes.

This is Lip-Bu.

First of all, as I think I mentioned in my remarks, Q3 was a strong quarter for Palladium XP, and this is a new product in Palladium XP II.

These are very good products and clearly improve, the verification productivity and gate density and the lower power.

And so far it's been very well received, and clearly as I mentioned in the Q3, significant percentage, one-third of the percentage of our revenue come from Palladium II.

So it's a very good product, and currently, we are developing our next generation, but we will let you know when we are ready to announce the products.

Great, thanks.

The next question comes from Mahesh Sanganeria with RBC Capital Markets.

This is Shawn Yuan sitting in for Mahesh.

Thank you for taking my questions.

Lip-Bu, can you comment about the competitive environment in the emulation business?

Specifically what your market share there, and have you seen any shift in market share in the hardware business?

Yes.

So, first of all, as I mentioned in my remarks, and clearly 70% of the top semiconductor companies are using Palladium.

And then about 40% of our revenues come from the system company.

So we're very well-positioned in terms of the marketplace.

Clearly the code design, code verification requirement, time to market challenges, a lot of these custom customers really love our products.

And we have 25 expansions on this key account.

Meanwhile, we have nine new customers out with us on this year.

And so I think overall we are holding well.

Meanwhile, as we guided, and that is ahead of our year-to-date estimates for the year.

But the whole year, we still want to make sure that we still are guiding down for the -- overall for the year.

Okay.

Thanks.

And a follow-up.

So, considering that most of the semi companies are missing their guidance this quarter, have you seen any cautions from your customers?

Yes.

I think we get into this whole environment, clearly the macro economics in semiconductor is clearly quite uncertain.

Many of our customers are doing quite well, but there are a few having softer demand and clearly reduce their visibility.

Three years soft semiconductor environment.

Some of the customers are clearly facing some challenges and are now restructuring and reducing their EDS spending.

As I mentioned earlier, Japan continues to be very challenging.

And also in Q3, we have a few customers in the region reducing their spending.

And so overall definitely have some impact to our growth rate.

That is not just Cadence alone, I think it's for the industry also.

But saying that, clearly we are really excited about long-term trends.

I think that EDA can continue to grow very positively.

And then on the Cadence side, we are excited about the tremendous progress we made the last few years in terms of innovation, technology, customers, and ecosystem partners engagement.

Clearly, we want to make sure that we deliver highest value to our customers.

Great.

Thank you very much.

Our next question comes from the line of Rich Valera with Needham.

In light of the current challenging environment you described in some detail, I am wondering how you're thinking about the overall growth rate of EDA, core EDA over the next couple of years?

I mean, I think historically, you have talked about that being maybe a mid-to-upper single digit type of growth rate.

I am wondering if you can give us any color on how you are thinking about core EDA growth over the next couple of years?

Rich, that's a good question.

Clearly, from Cadence's point of view, we are very focused on getting the value to our customers, and also they can design the most challenging incredible products that can change our lives.

So we very much focus on providing the EDA tools and the mixed-signal SoC IP-related solution to them, so they can do very innovative stuff.

And then saying that, the last few years, we have been very focused on building the innovative product internally.

In the long run, I think it will be growing our opportunity here.

And then clearly, I think the investment we make in the IP side, and most of the SoC right now, IP becomes very important in terms of IP blog building up their complex chip.

And then the other part we see also tremendous growing in the system companies, going vertical.

And so I think all in all, I think long term I'm bullish.

In terms of growing the EDA requirement, because the chip design is getting more and more complex, when you move down the geometry, it is going to be even more challenging.

And EDA, too, I think it's a really critical part of the design.

And we are very well positioned to support some of this complex design from system level, all the way to the semiconductor design capability.

So I think it's important we continue to drive innovation, keeping the order of magnitude improvements so that customers can count on us as a trusted partner to design the products.

So all in all I think the industry order that I can get is single digit, mid single digit growth.

As you can tell, we are outgrowing that.

And I think, just to add on a little bit, obviously after an extended period of time where our semiconductor customers have had some challenges, and we've talked about some specific challenges in Japan, we have also had some customers come back to us and touch us for adjustments or restructuring deals going forward.

There are a small number of customers doing that.

So we are increasingly cautious, I think, overall on the business.

Again, I don't want to overstate it.

We don't believe it's a long-term trend, but it isn't something that could have impact on EDA in 2013 and 2014.

Okay.

My next question, sort of related is with respect to Japan, which you've called out multiple times as being a pretty big headwind, and certainly you had a big negative year-over-year comp there in this quarter.

I was wondering when you think that might stabilize?

Your comps certainly get easier as you move into 2014.

Do you think there is a stable plateau we can reach there?

Maybe in 2014 or back half of 2014?

I am wondering how you are thinking about that Japan business, which has been going down quite a bit over the last few quarters.

That's a good question.

This is Lip-Bu.

Clearly, we are watching the Japan environment very closely.

Clearly, there is a lot of challenges in Japan semiconductor industry.

There is a lot of big corporations going through restructuring.

Saying that, there is some very exciting bright spots.

It's a system company.

They are doing quite well.

Especially in the automotive side and also some of the consumer, the imaging companies are doing extremely well.

We are well positioned to work with them and enable them with the tools and IPs and the Palladium to help them to design the quickest products.

But saying that, we are very cautious.

This can not be a short term.

It may be a little bit longer period of restructuring, repositioning.

And I think I'm encouraged.

I think clearly, the Japanese customer, and they are starting to make the right changes, and then refocus the area that they are good at.

And they are we are, as a trusted partner, we work very closely with them.

Make sure we provide them the best tools and best IP to support them.

Great.

And then, Geoff, just a question on your tweak-up in your bookings.

Was that related to duration, or is that sort of a real sort of apples-to-apples increase in bookings?

And if so, can you talk about where that came from with any color on sort of the area that strength that generated that?

Yes.

So it didn't have any impact.

Duration wasn't the cause of this.

This is just a general increase in the general strength of bookings across the board.

So bits and pieces here and there.

So nothing material to report.

And finally, one more.

It sounds like emulation was or is ahead of plan for the year, but you're not changing -- at least you're not changing your revenue guidance.

I am wondering, is this strength in emulation somewhat an offset to perhaps some of the incremental weakness you are seeing in Japan, or any color on that would be helpful?

Sure.

I think you got it exactly right.

Hardware is ahead of our expectations for the year, but we are still guiding down in the year.

It is helping to offset some challenges in other places, clearly.

Okay.

That's it for me.

Thank you.

Our next question comes from the line of Gus Richard with Piper Jaffray.

A couple quarters ago, you introduced Tempus, new timing closure product.

I was wondering if you could give us an update on how that is progressing?

Yes.

Gus, this is a good question.

I am delighted to share with you.

First of all, I think the final timing, as you know, it's a very critical piece of the design process.

And this product that we announced have a massive analysis engine that can scale up to about 100 CPU, and then clearly we also can drive up to 10 times faster performance.

And this is what we announced.

And we are working with dozens of customers and we are delighted.

We have a couple of paying customers.

And it clearly the product and shows orders of magnitude of improvement in performance and the scalability.

This is just one of the examples of our innovation culture at Cadence that we very strongly embrace and encourage.

And then a quick one for you, Geoff.

I noticed that SG&A was down sequentially, and I -- or flat.

Sorry.

I am looking at the wrong line.

Could you just talk about trends in SG&A, and what to expect going forward?

Yes.

So we, as I said when we talked about headcount being up, that the head count, the 95 people, the headcount was up, was largely R&D, and really the technical side of sales.

I think that's where we continue to make our investment, is in those areas.

SG&A in particular where we're managing, I think, well, and appropriately under the circumstances.

And then last one.

Geoff, I think this is your three-year anniversary at Cadence this week.

And Lip-Bu, you have been for about four years, and I was just wondering --.

Five for Lip-Bu.

Five, sorry, my mistake.

If you look back and look at the progress you have made so far and then where you need to put more effort, and what has gone a little bit better than planned, and give us some thoughts on what the strategy is going forward?

That's a very good question.

Let me start first.

Clearly it's quite a journey for the last five years.

We made tremendous progress as a company and we put the financial strength back, and then focus on the products in the advance node, in the most critical area, and also in the IP.

And our business has become more and more important with a couple of acquisitions.

Right now we are integrating quite well, and we are starting to have a series of innovation, new products coming up on the IP.

Very capable IP development team.

So I think going forward, clearly we are going to continue to double down in term of innovation and R&D.

I think the industry, looking forward for the innovation to help solve the most challenging design, either in the advanced node or the mixed-signal in terms of performance, low power and some of the system-level time to market pressure.

That's why I think our Palladium continues to do well.

And then so I think all in all, I think the we continue to drive execution, continue to drive innovations, and continue to improve the quality, and I think that is our challenge, and we're looking forward to that and to support the industry.

The most important to support our customers, to make sure that they can really continue to innovate, creating some of the greatest incredible products that we all can enjoy.

Great.

That's it for me.

Thanks so much.

(Operator Instructions)

Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Geoff, for you first, could you talk about the considerations that went into narrowing your cash flow expectation for the year, rather than raising expectation for cash flow for the year?

And back on the subject of Palladium and emulation, you announced XP II relatively late in the quarter.

I could understand how it would have had an effect on orders, but you also talked about it having had an effect on revenues.

Normally emulation products have fairly long lead times unless they are largely software upgrades.

Could you talk about how you were able to convert XP II to revenues so quickly, that late in the quarter?

And in the context of your expectation that emulation will be down for the year as a whole, would it be fair to say, however, that Q1 will have proven to be the bottom in absolute revenue?

So first on the cash flow.

We didn't change the range at all.

It was $340 million to $360 million last quarter.

So we've kept the range unchanged.

We narrowed it a little bit because we are, obviously, getting closer.

But the midpoint stayed unchanged just because we're getting closer to it.

As far as P XP II, of course we had that in development for a period of time beforehand, and we had product when we announced it.

We announce things when product is ready, and so that's why we are able to take the orders and ship some product in the quarter.

When Lip-Bu was talking about the better performance, that was largely on orders, not just on shipments.

And we tend to talk about emulation still as a year.

We are running ahead of plan.

Clearly, we had a nice quarter in emulation, but we still expect to be down for the year.

We're not really talking about individual quarters, though.

All right.

One other area where you have had some growth on a year-over-year basis is system interconnect.

A lot of that over the last year was helped by the Sigrity acquisition, which you have now gone past the one-year anniversary of that.

Could you talk about the performance you see now in PCB or system interconnect generally, and what your thoughts are there for the next year?

Yes.

So let me start on that one, Jay.

First of all, the PCB business continues to do well.

Clearly, customers are looking to end to end design.

We are in a very unique position able to provide that end to end in term of design capability, so that you can really address the power signal integrity, while you are developing, before you do the really hard PC board.

And that Sigrity turned out to be a very good acquisition for us, and able to provide that power analysis, signal integrity analysis.

We are in the beginning of the design, and the customer loves it, and they continue to really welcome and embrace our offering.

And then, clearly, that is very important for the high-end consumer system company.

Also very important for some of the infrastructure customers, that they see a tremendous value for providing that hardware PC board, and make sure that whatever you design is still within that power envelope, and system integrity challenges that they may have.

Overall, I would say this is a very good business for us, and we will continue to invest in the area and Sigrity acquisition has been very good, well integrated to our Allegra product lines, and have been very well received by our customers.

Lastly for you, Lip-Bu, could you talk about the management changes that you made over the summer, in terms of changing assignments and roles and so forth?

What are you thinking in terms of the kind of technology or measurable business results that you would like to see ensue from those changes that you might not have had, had you kept the old structure in place or the old management arrangement in place?

Yes.

So, I think a very good question.

Last quarter, we made some of the management reorganization with an objective.

One is clearly better alignments of our product groups.

Secondly, to accelerate our growth, and then increase focus on the key opportunities we're addressing.

And then, thirdly, is to leverage the unique strength of Cadence's team to compete more effectively against our competitor, and also can serve our customer better.

So I think we can clearly break down to four groups.

One is the digital signal signoff group.

That is really focused on the digital.

That's a lot of challenges from the customer [fit back].

Secondly is the system verification group that really puts the hardware, software, all verification related into one umbrella, and can really service and focus on the customer needs.

And then the third group is IP from design to verification, how can we tie and provide a silicon proven solution to our customer?

And then, finally, custom and packaging, PCB packaging into one group.

And then it is very important custom, analog mixed signal and then all the way through IC, and four, packaging, very related.

This is a very important group for us.

So I think all of them, all four of them are really focused on growth, focused on focus, and focused on getting the best solution to the customer, as it can be more effectively competing in the marketplace.

Thanks, Lip-Bu.

Next question comes from the line of Monika Garg with Pacific Crest Securities.

First question is on the digitalized design segment.

If I look at the segment from Q1 to Q2 year-over-year, which slacked in Q3, is there any particular reason or seasonality in contracts or something?

Yes.

So let me address that first.

First of all, clearly this primary timing of the contract renewals and also associated revenue recognition.

And we also have -- the other thing is clearly we have a lot of the new product coming up, like we mentioned earlier in Tempus sign-off.

Also now heavy investing into our digital floor in the advanced nodes.

So clearly we are getting much stronger in terms of product line and clearly EDA -- EDI is a very competitive situation.

A lot of investment needed on the 16 nanometer and 14 nanometer.

We are delighted to be certified by TSMC, and also supporting us on the 16-nanometer, the panels of choice and panel of the year award.

But saying that, it continues to be very competitive and continues to be challenging in terms of EDA budget.

So you may have some seasonal impact, because of timing of some of the contracts.

Good.

Thanks.

And Lip-Bu, you talked about softness in the Japanese semi industry.

Could you talk about trends for Q4 that you are seeing in other geographies?

Yes.

So I think Japan we kind of single out that is challenging.

We also mentioned a few customers in the other regions, also facing some challenges.

And then they also request for EDA spend reductions.

We work with them and we continue to support them and then give them the solution that they can turn around and be successful again.

So I think all in all, it's continuing to be uncertain and challenging environment, that is not only to Cadence.

This is pretty much known when you hear all the earnings calls.

A lot of mixed results from various of our customers.

Okay.

And then ESML on their earnings call, they talked about the thing that customers could likely follow like dual track at 10 nanometer, which means the customers have prepared both for EUV and multiple packaging at the 10 nanometer node range.

So the question is do you think this dual track strategy will benefit the EDA industries?

And if yes would you be able to quantify some of the benefits?

Yes.

So I think the EUV is more further out.

And clearly ESML and a few others are working on it.

It's a very heavy investment that's needed.

And clearly that is very challenging.

But it's going to be a few years out.

In the shorter term it I think most of the customers, Tier 1 customers we support, and then try to get them into the production next year is more on the FinFET advanced node 14, 16, double, triple patterning, so that they can extend it more SLA.

Saying that, we also engage with some customers and foundry partners at the 10-nanometer discussion, but it's in the early stage of engagement.

Thank you.

I have a question for Geoff.

You talk about 25% operating margin target and you are close to that.

Next quarter you are guiding to 25% op margins.

The question is, do you think there is operating leverage beyond 25% of the model and could you talk about how you think about it, provide some guidance on that?

Yes.

So one of the achievements that we have been quite proud of is getting to the mid 20%s.

We never said 25%, but getting to the mid 20%s.

We did that this year in an environment, we did a couple acquisitions and with merger accounting, it provided some headwinds, but we still managed to get there.

We do believe there is leverage in the model going forward.

But with the acquisitions and with growth potentially being slower, we are going to pay attention to that, and so we do expect to have leverage.

We do understand the growth.

We'll give you a better read on future growth when we give guidance in 2014, and the impact on any new targets for operating profitability when we guide 2014.

Okay.

And then just the last one for me.

Given the challenges in manufacturing, double packing, triple quad, EUV, some customers are really looking at the 3D designs, making stacking the chips, right.

FinFET, of course, I mean 3D NAND or HID Memory cube and DRAM.

Are you seeing some customers start to talk about the 3D stacking dies, so maybe could you talk on a high level how it could be beneficial to ED, if you think it could be?

Yes, very much so.

And we are investing in the 2.5D, 3.5D, and 3D capability.

We clearly are working with our foundry partners, driving some of this 3D technology.

It clearly can benefit in terms of scalability, and clearly the challenge, really is the design cost and then how to bring the cost down, and we are working with some of our customers to work on that.

When is going to be massive deploy, very hard to tell.

But I think we are working very closely with our foundry partners, driving some of the 3D development, and make sure that our tool is ready to support that.

It's very challenging, and I think the timing of the deployment is really dependent on the costs.

And if we can bring the cost down, then it will be a more production in term of volume and more massively scale.

So those are the challenges facing.

But we are very much on top of it, just like FinFET.

Thank you.

That's all for me.

Our next question comes from the line of Tom Diffely with D.A. Davidson.

Geoff, first a question on the revolver.

Maybe a little detail on the activity over the last quarter or two in light of a pretty big cash balance you have?

Tom, you broke up, but I think you were asking on the revolver, the line of credit?

Yes.

We paid that down about $50 million.

So we're down -- we took it from $100 million to $50 million outstanding at the end of the quarter.

Okay.

I mean, just in light of the cash that you have on hand, I was wondering what the need of the revolver is in the first place?

Oh, the revolver always provides a certain amount of assurance and security, right?

And I think the other thing is, obviously, the interest rate environments are very attractive.

And having a revolver in that type of situation, with the rates kind of locked in, is only a good thing for the flexibility for the corporation.

Okay.

Understood.

And then, Lip-Bu, I was hoping for more of a kind of big picture for you of emulation, and how you've seen that -- your view of that market has changed over the last few quarters or year, and what you what you believe the actual size of the market is, and the growth potential?

Yes.

I think continue to note the discussion that I have.

The hardware emulation becomes more and more important in terms of time to market challenges.

And clearly, Palladium is very well received, and clearly we see growth in the system companies, more than 40% are supporting that.

And then clearly 70% of our top semiconductor companies are using Palladium.

Clearly, the XP II, the new product that we announced, is a very good product.

[Put time] to the verification activity.

And then clearly, we have more and better software built into it.

We also increase the gate density.

So the substantial improvement there.

And we are also starting to work on, rapidly into the simulation acceleration, which have been traditionally strong for our competitor.

And so we are also moving in.

So I think all in all, we are excited about the hardware emulation, hardware/software co-design co-verification has become really challenging for our customer.

That's why we put that whole verification system group under one roof, under one leader, and then driving the hardware/software incorporation more effectively, and also beside during the emulation, we are also moving into simulation accelerations.

So, that will be double down on that effort.

In general, going forward, do you see that as more of a -- obviously it's a bigger space, but is it a more stable space than it used to be?

In the past, you had some pretty big swings up and down through the cycles for EDA?

Yes.

Clearly, this is a hardware product, always will be lumpy.

That's why even though we are ahead of the year-to-date estimates, we are still expecting to be down for the year.

Because in this very challenging environment, the hardware is always very lumpy, and we continue to drive value, continue to drive success with the leading top semiconductor company and also leading system company, to make sure that we provide the solution for them, addressing the time to market challenges.

But in saying that, I think we continue to be cautious.

Yes.

Okay.

Thank you.

Oh, go ahead.

Tom, again, as I think Lip-Bu said earlier, and I said earlier, this is certainly a challenging environment, and is increasingly challenging, and we are increasingly cautious.

We're proud of our emulation performance, and we are proud of our financial results in those.

Clearly, in this environment, we can see some impact on our revenue for 2013, and likely into 2014 also.

Okay.

From the challenging environment.

Right.

Understood.

Thank you.

Our final question comes from the line of Sterling Auty with JPMorgan.

I apologize.

Lots of companies reporting simultaneously.

I want to zero in on some of the comments that you have made here late in the Q&A, around the tougher environment.

So first question, I guess, would be looking at the R&D budgets for semiconductor companies, I think they have been set, and it doesn't sound like anybody has asked for budget back.

So do you think that your end customers will use the budgets that are currently authorized, so we should see a decent finish to the year, or are you concerned that maybe there is an ask-back where they don't completely spend the budgets they have currently authorized?

So two points.

Certainly the guidance we give takes into our best view of the environment for Q4.

Having said that, we have had some ask-backs from customers, who are restructuring some customers.

Again, we care a lot about our customers, and we're responsive when they are in a situation where they need that.

That is clearly had some impact on Q3 results and Q4 results.

We are very proud of what we've done so far.

But those restructurings and things that have already happened will likely impact 2014.

And Lip-Bu, as you look and have your conversations with customers, do you think whatever we see in terms of the budget and the spending is being either hampered or constrained by a lack of headcount growth, because we haven't seen a pick-up in bookings?

Or that lever versus the additional licenses per engineer for certain products maybe not going through, again because of the environment?

Yes.

I think hard to generalize.

Clearly as I mentioned, some of the companies are doing quite well.

Especially in the -- some of the leaders in the mobile smartphone area and also in the automotive area.

And clearly the PC-related is kind of a challenging time, and is now declining.

And then the server and the infrastructure are actually doing quite well.

And so I think it's customer to customer.

Some of the budget, they have reductions, because they are restructuring.

And then some of them are actually growing and they are engaging quite heavily in the new innovation and the new development, and then some of the new products comes out, and some of the system company are moving in to do vertical integration.

We are excited about that.

So I think in some areas, they have engineering reduction.

I think you can tell which of the companies.

Some of them are growing, and they're hiring.

And we're heavily engaging with those that are hiring and are winning.

We are on a mission that we provide the tools for them to make sure that they can do all the incredible development, innovation product that's going to come out.

And so all across the board I'm kind of cautious, optimistic, and clearly, some of the challenging ones we work through with them.

It will have some impact in Q4, and then some in 2014.

Some of them, we are growing with them.

We are working closely with them.

You may not see the revenue jam right away, but they are well positioned for the future, in the longer term we grow with them.

Okay.

Thank you.

We are very proud of our performance under a challenging environment, right, through Q1, Q2, and through Q3.

Got you.

Thank you.

And that was our final question.

I'll now hand the call back over to Cadence President and CEO, Lip-Bu Tan, for closing remarks.

Thank you.

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

While the macro environment remains uncertain, with some customers continuing to face challenges, Cadence is well-positioned to continue executing and supporting our customers, by introducing great new products.

Lastly, I would like to recognize our hardworking employees for these results, and thank all of our shareholders and customers and partners for their continued support.

Thank you, everyone, for joining us this afternoon.

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

This concludes today's call.

You may now disconnect.