益華電腦 (CDNS) 2013 Q4 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, fourth-quarter and fiscal-year 2013 earnings conference call.

(Operator Instructions)

Thank you.

I would 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 fourth quarter of fiscal year 2013.

The webcast of this call can be accessed through our website Cadence.com, it will be archived through March 14, 2014.

A copy of today's prepared remarks will also be available on our website at the conclusion of today's call.

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 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 find in the quarterly earnings section of the investor relations portion of our website.

A copy of today's press release jet dated January 29, 2014, for the quarter ended December 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 today.

2013 was a great year for Cadence.

We introduced six new innovative, internally developed products.

We made three important acquisitions to build out our fast growing IP portfolio.

Financial performance was strong, with revenue up 10% over 2012.

A 24% non-GAAP operating margin.

And operating cash flow up 16%.

For Q4, Cadence delivers solid operating results.

Revenue was $377 million, non-GAAP operating margin was 25% and operating cash flow was $119 million.

While the environment remains challenging with macro uncertainty and softness in semiconductors, we are looking forward to another great year for 2014.

Long-term, our focus continues to be growing revenue, building innovating new products, and driving greater profitability.

Now let us review some of the Q4 highlights.

Starting with our IP business.

Leading off with Tensilica, I am delighted with the performance of this business.

Integration is going well, and revenue was ahead of expectations for both Q4 and the year.

Tensilica delivers a number of vertical solutions, particularly strong by its audio and voice solutions.

These were on display at CES, including technology for hands-free voice activation and voice authentications.

Tensilica high-five DSP was used in the recent launch Microsoft's Xbox One game platform.

Exciting new areas for us include gesture recognition, as well as audio DSP offload, which is now supported in the newest android chip test release.

Cadence designed IP continues to gain strong momentum in the marketplace.

Through acquisitions and internal development, we have built a broad portfolio, and are winning multi-product, multi-license arrangements with a wide range of customers.

We are growing our IP business by delivering high-quality products, based on the newest protocols, at the most advanced process nodes.

Products leading our growth include DDR and PCI Express [finds], and analog IP.

In 2013, we had designed IP wins in over 10, Tier 1 accounts, including head-to-head wins at advanced FinFET nodes.

Palladium had a strong year, and continues to lead the market for emulation.

Existing POD customers continue to add significant capacity, and we added 14 new Palladium customers.

Just in Q4 itself, four of the top five application processor providers for smartphones and tablets added new or expanded capacity.

Q4 revenue was the second highest ever for a quarter.

For the year revenue exceeded our expectations.

For 2014, we expect revenue to be about the same as 2013.

Palladium XP II, the newest emulation system available in the market, contributed nearly half of Q4 orders.

In addition to in-circuit emulation, more customers are choosing Palladium for simulation accelerations.

With these deployments doubling in 2013.

Next I want to talk about progress with some of our exciting new innovating products we introduced in 2013.

Tempus, our new timing signoff solution, is rapidly gaining traction with over 10 customers have adopted it because of its highly compelling performance and accuracy.

And several others are in the evaluation stage.

[A ninja foundry] completed a tapeout of a chip with an embedded processor at 20 nm exclusively using Tempus for timing signoff.

Two additional designs have been signed off exclusively using Tempus.

Voltus, our innovative new power analysis and signoff tool.

It has up to 10 times better performance than competing solutions.

Voltus has already been purchased by multiple customers, including many of the largest semiconductor companies.

Success with Tempus and Voltus will enable additional adoption of EDI, our digital implementation platform.

We introduced our new Spectre XPS FastSPICE simulator, and have integrated it with our outdoor technology for memory, [collectivization's] and customers are realizing 1 times up to 30 times faster than with competing solutions.

Lastly, the highly successful integration of Sigrity with our Allegro platform drove strong 2013 results.

For our silica package board business with revenue up 28% year over year.

In summary, in Q4 results demonstrate Cadence continues to drive consistent operational and financial executions.

I am delighted with the way our IP business is expanding.

We continue to add new differentiating products to our portfolio, and our customer list and deal size are growing.

The Q3 introduction of Palladium XP II contributed to a strong finish to the year for hardware.

Our talented development teams introduced two more innovative new products in Q4, and our recent released products are gaining traction.

We are excited about EDA growth opportunity with our innovative and scalable products, to meet the design productivity and time-to-market requirements for our customer's increasingly complex designs.

Our broad range of design tools, system analysis, IP and software products across the system, broad and SoC space, we are expanded to become the system designed [enabling] Company.

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

Thank you Lip-Bu and good afternoon everyone.

Before I start I have a bit of housekeeping.

Beginning next quarter, we release earnings on Mondays.

The scheduled date for the Q1 earnings release is Monday, April 21.

Now I will review the results for the fourth quarter and the year and then I will present our outlook for Q1 and 2014.

Cadence produced strong operating results for Q4 and the year.

2013 bookings totaled $1.585 billion, an increase of 19% over 2012.

Book to Bill was 1.09 and the year-ended backlog was $1.9 billion.

Total revenue for Q4 was $377 million, compared to $367 million for Q3, and $346 million for the year ago quarter.

Revenue for the year was $1.46 billion, an increase of 10% over the prior year.

For Q4, product and maintenance revenue was $350 million.

Services revenue was $27 million.

The revenue mix for the geographies in Q4 was 47% for the Americas, 20% for EMEA, 19% for Asia, and 14% for Japan.

Total cost and expenses for Q4 on a non-GAAP basis, were $282 million, compared to $278 million for Q3, and $265 million for the year ago quarter.

Q4 headcount was 5,734 down 128 from Q3, due to reprioritization of resources.

Headcount increased by 545 for the year.

Non-GAAP operating margin for Q4 was 25%, compared to 24% for Q3, and 23% for the year ago quarter.

For the year, non-GAAP operating margin was 24% compared to 23% for 2012.

For Q4, we recorded GAAP net income per share of $0.13, compared to $1.10 per share for Q4, 2012.

For the year, GAAP net income per share was $0.56 compared to $1.57 for 2012.

You may recall that GAAP net income per share for Q4 2012 and for 2012 in total, included $0.90 and $0.91 respectively in tax benefits for the release of a valuation allowance and a settlement of a California income tax audit.

Included in 2013 GAAP net income per share was an $0.11 benefit for the release of a tax reserve that was no longer required.

In Q4 we recorded a restructuring charge of $15 million or $0.05 per share.

The restructuring charge is primarily due to severance costs associated with the re-prioritization of resources.

For Q4, non-GAAP net income per share was $0.23, compared to $0.21 for Q3 and $0.20 for the year ago quarter.

For the year, non-GAAP net income per share was $0.86 compared to $0.77 for the prior year, an increase of 11%.

Operating cash flow for Q4 was $119 million, compared to $98 million for Q3, and $96 million for the year ago quarter.

For the year, operating cash flow was $368 million, compared to $316 million for the prior year.

Total DSOs for Q4 were 27 days, compared to 26 days for Q3 and 27 days for the year ago quarter.

Our DSO target is approximately 30 days.

Capital expenditures were $9 million for the fourth quarter, and $45 million for the year.

After paying $144 million to retire the 2013 convertible debt and paying down $50 million on our revolving credit facility, cash and short-term investments were $633 million at year end, compared to $827 million for the prior year.

The balance of our revolving credit facility year end was $0.

We have $350 million of convertible debt remaining, which is due in June 2015.

About 30% of our cash was in the US at year end.

Approximately 85% of the orders booked in Q4 were ratable which is lower than recent periods.

This is primarily due to strong quarterly hardware orders.

Approximately 90% of Q4 revenue came from ratable arrangements.

Average rate of contract life for Q4 was approximately 2.3 years.

For the year, 90% of orders booked and revenue were ratable.

The weighted average contract life was approximately 2.5 years.

Now let's address our outlook for the first quarter of 2014, and fiscal 2014.

For Q1, we expect revenue to be the range of $373 million to $383 million.

We expect a little less than 90% of first-quarter revenue to come from beginning backlog, due to strong Q1 hardware business.

Q1 non-GAAP operating margin we expect to be approximately 21%.

The margin is down for Q1, primarily due to seasonally higher payroll taxes.

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

Non-GAAP EPS for the first quarter is expected to be in the range of $0.18 to $0.20.

Now for our fiscal 2014 outlook.

Bookings are projected to be in the range of $1.72 billion to $1.77 billion, an increase of 9% to 12%.

We expect weighted average contract life in the range of 2.4 years to 2.6 years, and we expect at least 90% of revenue for the year to be recurring in nature.

Note that we are changing our terminology from ratable to recurring, as we believe it more accurately represents our revenue stream with the addition of royalty revenue.

Our previous metric -- ratable metric was the percentage of ratable bookings of total bookings.

Our new recurring revenue metric is the percentage of recurring revenue of total revenue.

We are making this change because we believe it better reflects how we manage the Company and better accommodates the royalty stream.

Going forward, we will provide annual guidance for the recurring revenue mix, and we will update that annual guidance on a quarterly basis.

We will provide the actual results on an annual basis, but not quarterly.

Since 2014 is a transition year for this new metric, I want to be clear that we do not expect the prior metric, the ratable booking mix to be approximately 90% for 2014 -- we do expect.

Revenue is expected to be in the range of $1.55 billion to $1.585 billion, with approximately 70% of this total from beginning backlog.

This translates to 69% growth in revenue over 2013.

We expect hardware revenue to be up the same as last year.

With Palladium XP now in its fourth full year of product cycle, we are likely to see some decline in gross margins.

Because of our fiscal calendar, 2014 will be a 53 week year, which occurs every 5 to 6 years.

This will add approximately $15 million to revenue for Q4.

With additional expenses attributed to the 53rd week, including payroll, the impact on the bottom line will be immaterial.

I'd also like to point out that, with hardware and IP together now representing a larger share of our revenue mix, quarterly revenue will likely be more variable.

And as a result, quarterly revenue may occasionally decline.

Non-GAAP operating margin is expected to be 26% on an annual basis; up 2 full percentage points from 2013.

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

We are assuming the non-GAAP tax rate of 26%, and weighted average shares outstanding of 299 million to 307 million shares for the year.

GAAP EPS for 2014 is expected to be in the range of $0.55 to $0.65.

Non-GAAP EPS is expected to be in the range of $0.92 to $1.02.

This represents a 13% growth over the prior year at midpoint.

We expect operating cash flow in the range of $335 million to $365 million.

Expected 2014 operating cash flow is slightly below 2013, due to timing of collections and disbursements.

Our DSO forecast is approximately 30 days.

Capital expenditures are expected to be approximately $40 million.

As the result of our regular review of our capital requirements and capital allocation, and based on our near-term outlook and restoring long-term fundamentals of our business, our Board of Directors has approved a stock repurchase program, and we are expected to purchase up to $50 million of our stock during each of the fiscal years 2014 and 2015.

Operator we will now take questions.

(Operator Instructions)

Rich Valera, Needham & Company.

First, I just missed the details of your stock repurchase comment there, Geoff.

Could you repeat that please?

Sure.

And maybe I will give you a little bit more -- a little bit stronger answer.

We regularly review our capital needs, our capital allocation, and our capital structure.

We remain committed to using capital in the most attractive, highest return opportunities available.

Our priorities, in addition to stock returns for the use of cash, have been funding operations, retiring convertible debt and M&A.

We think we have been successful as mentioned -- Lip-Bu mentioned earlier in funding operations with all of the innovative products that we have created, and I also think it has shown up in our operating results.

Our balance sheet continues to get stronger, and when you look at the M&A, we believe our acquisitions there have returned more than the cost of capital.

We have built a strategic business in IP and we have strengthened our core.

So in addition to that, we are pleased to note that given the strength of our balance sheet, our near-term outlook, the strong long-term fundamentals of the business, that our Board of Directors has approved $100 million in stock repurchases.

We expect to purchase up to $50 million of stock in each of 2014 and 2015.

Our year-end balance of cash and short-term investments was $633 million, of which $190 million was in the US.

With the $190 million of cash in the US on hand, the liquidity being provided by our $250 million revolving credit facility and the US cash we expect to generate over the next year and a half, we believe we have the right amount of US liquidity to support our operational strategic needs to retire our $350 million convertible debt, and to fund the $50 million in both 2014 and 2015, totaling $100 million in stock repurchases.

Sorry for the long answer.

That's helpful, and I appreciate the color.

Seems like you anticipated that question.

Moving on to the business, I wanted to talk about the -- obviously the pretty strong hardware contribution in Q4.

And if you kind of do the math on the increase in cogs, one would -- it would look like the rest of the business, which I would say I guess is software and royalties was down quarter over quarter.

And I don't know if this is some of the volatility you referenced in your prepared remarks about the higher software -- sorry, higher royalty emulation, I just wanted to talk about that -- what went on in the fourth quarter in terms of the rest of the business besides emulation, if it was in fact down quarter over quarter?

Thanks.

So I think, Rick, let me start first and then Geoff will give you more color.

So first of all as I mentioned earlier, we have a very strong and growing IP portfolio, and clearly the portfolio is getting stronger, Tensilica is doing really well, and it's ahead of plan, and a lot of success in our design IP even against the head-to-head in the advanced FinFET.

So we continue to do well in the IP side.

And I mentioned also earlier because of the cyclicality in Allegro, that businesses is growing about 28% year-to-year, so it is a very strong growth for us.

And then meanwhile on our core EDA, two related area, as I mentioned earlier, clearly our success in Tempus and our [zorro] acquisition we make, we making a lot of inroads into the digital front.

We have multiple customer success, and our commitment investment into the advanced nodes in the 14 and 16 and already engaging in 10, in the thinset side, and of course with (inaudible) we are winning a lot of customer business.

So I think across the board, I would say our product has been doing well.

And overall, Rich, our software IP business also grew, right, it was not just the hardware business.

Okay.

Thanks for that.

And then I wanted to ask about -- one a geographic question, one sort of a segment question.

But in Japan, I think you had your first positive comp and five quarters.

I just wanted to get a sense of your feeling there.

Do you think you have seen some stability there?

Do think that will stop being the headwind it has been as we move into 2014?

So I can chip in first, and then Geoff will give you more color.

So clearly we are seeing recovery on Japan, especially in the system companies that have been doing very well, e ither in the consumer related area or in the automotive side, we are seeing strong recovery.

And then secondly, even in some of more restructuring company we are also starting to see signs of improvement, and clearly they are investing in the future in terms of new products while engaging heavily with them.

So I think clearly we see the stabilization, we're seeing improvement in certain, especially in the system company side.

And obviously Rich, the currency impact remains unknowable for us.

Clearly, we take our best estimate of how that looks going forward.

Fair enough.

One final one for me on emulation.

I don't believe you actually said if emulation did finish down for the year in 2013 it sounds like it exceeded your original plan which was to be down, but did it end up finishing down and just less than you originally thought?

Is that accurate?

Yes, it was better than we originally thought but it was still down.

And again, as we said also, 2014 we expect to be essentially flat from 2013.

Okay, very good.

That's it for me.

Thanks, gentlemen.

Jay Vleeschhouwer, Griffin Securities.

Geoff, a quarter ago on the call you talked about certain instances of customer adjustments or what you called ask back in some cases.

And as best we could tell, there were only about three significant customers that might have done that, one each in Japan, the US and Europe.

But given your comments now about the strength of the business, not just for hardware but looking into 2014, would you say that looking back a quarter ago those comments or those experiences were somewhat anomalous, and you have not seen that since or you are not expecting that going into this year?

Jay, thank you for the question.

First of all, you are right.

The environment kind of still remaining challenging and uncertain, but we feel much better with our business.

Clearly in the Q2 and Q3, while working our way through some of the specific customer issues, we did not have any of those in Q4.

Q4 was a strong quarter, as we introduced a couple of new products, and very excited about our IP in hardware and also our new products.

And so I think the outlook for 2014, we are comfortable with our guidance.

Clearly in the longer-term, as you know, I'm very passionate about system design and implement.

Clearly we see a lot of traction in terms of [readable], internet of things, automotive, [cloud], video and big data.

So I think overall, I think you are correct and we are more positive.

I think clearly those issues that are isolated, we don't have it in Q4, and we're comfortable looking forward into 2014 and beyond.

Okay.

Since you mentioned systems a number of times, that anticipates my second question which is, we have heard often from EDA companies, not just yourselves, over the last year or so about the importance of systems companies and the customer base, but we have not really heard much about how they're different from the more traditional semi or IC customers, so perhaps it is too broad a question.

But could you talk about in what way the systems customers do in fact differ if at all from your traditional customers in terms of tool mix or capacity, how demanding they are or not with respect to discount (inaudible)?

Anything in terms of some general profiling you could make about the systems customers that make them in some way better for you than the semi-companies that struggle from time to time?

Sure.

Jay, this a good question.

First of all I think we mentioned system quite a few times in our call and I think we are defining the system design enablement as a Company going forward.

Clearly I think that traditional EDA as you know, very well-known is more on the automation for chip design.

But the system enablement, I think it goes beyond the traditional EDA by taking the system view.

So clearly, not only supplying customers with two IP software content and then the design with the end product in mind.

And then clearly, besides just developing for the SoC, we are talking about design, integration, analysis, verification of system-level components such as port, packaging, software, system IP, and mechanical, terminal aspect of the system.

And so it is really kind of more top-down system approach.

And clearly the traditional EDA is a very big focus, and that the core of our system design and enablement strategy.

And also, clearly it is really the foundation of the strategy.

And then clearly our growing highly differentiated portfolio, live packaging, broad design, system analysis, system-level IP, system and hardware, software, co-design, co-modification and software product, we are kind of moving towards that.

And then clearly I think the system company is a much bigger, and become an increasing part of our business.

And as a new way for system companies they are going vertical integration to optimizing the SoC and system altogether.

So this clearly is playing to our strength, and then clearly the EDA true automations I mentioned earlier, and software and the whole entire ecosystem in a partnership, and that is where the growth opportunity is for Cadence.

Okay.

Just one more about the market for you and then a follow-on on emulation for Geoff.

On the market, according to the latest industry data, the big three EDA companies together would seem to have in excess of 85% of the total spend going on in the Asia Pac region, which is the fastest-growing market in EDA for the last decade, and in your proportion of spending in other regions is lower, particularly in Japan.

My question is, in Asia Pac, does that very high concentration already of the EDA companies, including with IP, limit your growth, given how concentrated you are or not?

And then similarly, do think there's significant opportunity for you to gain more share of spending in the other regions?

And then lastly for Geoff, kind of following on Richard's question on the emulation cost of revenue, we had a few million of upside, versus our model anyway, on emulation hardware but substantial upside on cogs.

Is it the case that you have to absorb substantial incremental expenses due to mix or building material or anything like that, as we sometimes see in emulation, just to get product out the door?

So let me answer the first portion and then Geoff will answer the second portion.

The first portion, I think if I hear correctly, you are talking about the EDA opportunity in Asia-Pacific, and that opportunity for us.

So clearly, as you can see from our results, US is still a very important market for us, 47%, and we continue to gain market share, continue to work very closely with our customers to enable them in the complex design.

Clearly, Europe is also very important market for us, especially in the automotive and industrial areas.

We are heavily engaging, not just on the EDA side, but also in the system packaging related area, and they are very, very strong in that.

And then Asia-Pacific is a emerging growth area.

We are very excited and we are very well positioned, as you know, in that market, and clearly you see a bunch of company coming up from Spectrum, IDA, High Silica, Galaxy 4 just filed IPO in Hong Kong and a suite of companies coming up.

We are so well-positioned engaging with them, providing the tools and also increasingly IP, IP blocks, and we have a very broad portfolio able to provide them a very good silica proven IP, so that enable them to fast to market.

And clearly we also see tremendous growth on the Palladium hardware emulations because it is a must-have when they have a complex chip design, especially in the advanced node.

So I think we see good opportunity and we are very well-positioned not just for tool, not just for IP, but also for the system packaging related area, and we are very well-positioned.

And Jay, as far as emulation and emulation margins and costs of sales, we were quite happy with the margins in the business.

But this is the fourth year, right, that Palladium has been out there in the marketplace, ad so we do anticipate margins, although quite good, being a little bit more of a challenge.

Again, generally as Lip-Bu just said, we love this business, we love the opportunity it provides for us, and by the way our competitors, too.

Thank you.

Monika Garg, Pacific Crest Securities.

Geoff, you gave 26% margin guidance, previously you had talked about 25% of margin business.

Is that 26% is a good number to think about going forward, or do you think there could be a leverage in the model?

So I think what we said obviously, we continue to focus on growth for this business, and we do think here continues to be operating margin improvements going forward.

We're very happy that we are up 2% year-over-year, from 24% for the full-year 2013 to 26% for the full-year 2014.

Then could you provide what was Tensilica's revenue last year, and what do you expect Tensilica revenue for 2014?

I'm sorry, I didn't hear you.

Tensilica revenue for 2013, and your expectation for Tensilica in 2014?

Yes, because Tensilica is now fully integrated into our IP business, we are stopping the break out of Tensilica, again they did exceed our expectations for both Q4 and for the year as we said earlier in the call.

Okay.

Then I have one question on we are hearing that Intel's plans of trying to become (inaudible) right.

As there has been talk about for the next loan being trying to go to Intel for that, or they will go to Intel for that, so my question here is do you think that all your [IP libraries] will have to be recharacterized with now [MPL's libraries], so will it add kind of more OpEx if you have to do that, and how much effort and time you think it will take?

Monika I think clearly it's a very good question.

[Foundry] and enablement is very important in our business.

And so, we work with multiple foundries in the advanced nodes, and not just for our total optimize their foundry, and clearly it's a different camp, and clearly you have a common platform, you have a TSMC and clearly you have MPL.

Each foundry they have their own unique specific requirement.

But we work with all of them and so it's very important to continue to support and clearly to optimize.

So we are engaging with all of them and also some thing with our IP ecosystems.

It is very important that kind of collaboration, deep collaboration.

At the end of the day they support our customer time-to-market and win in the marketplace.

And Monika, that is one reason why the IP business is so exciting for us.

Good.

And then just the last one for me.

You have talked about in the past that you are willing to pass on some price increase to customers, especially given the very high R&D expense of EDA, almost like 40%, 50% of core going from one generation to another generation.

Could you maybe talk about, do you think going forward that opportunity is there, and how the EDA industry can be paid better, given the R&D which you have to put to support your customers?

Yes, that's a very good question, and we clearly believe that the EDA industry provides tremendous value to our customers.

Especially the mass cost, the design, the [tapeout[ is getting more and more expensive when you [move] down the geometry.

And clearly a deep relationship with our customer and provide value they need to build their products in a timely fashion and it is a scalable production is critical.

That is why you notice some of our new products we emphasize not just high-performance, market for time performance, and also scalability, can scale to multiple, hundreds of calls, is critical.

And then time-to-market, you do have to go through second and third (inaudible) that may cost you a lot of money.

Then this way I think the relationship between the customer and the EDA vendor become very critical in terms of collaboration and a trusted partnership become critical, and the last five years we have gradually earning the trust from our customer to provide and deliver the scalable products to them.

Thank you, that's all for me.

(Operator Instructions)

Tom Diffely, D.A. Davidson.

Good afternoon, one more question here, first on Palladium.

You talked about 14 wins -- new customers during the year, I was curious, are those competitive wins where you are displacing another vendor?

Or are those new customers to the industry that are just adopting emulation for the first time?

Yes, I think first of all we are very happy with the 14 new customers.

And as you can tell, in every product there will be definitely be competing, and then win based on performance.

And also the support to the customer.

And then secondly, clearly, it is a must-have for advanced node complex design, faster to find the box so that you can fix it.

Time-to-market is critical.

So it is a very good internal market growth and the customers need that, and we just want to support them in the most efficient way and scalable way to support them, and so that it can be winning and then find the [box earlier] so that it can get to market quicker.

So it is a must-have, it is a nice market and it is a growing market, and we love it.

Okay.

And I was wondering if you could just give us a little more on the relationship right now between simulation and emulation?

Is emulation taking some simulation share, or are they still independent?

How do you view those two markets?

I think that's a very good question.

Clearly, on the emulation side we are the market leader.

In terms of the, as I mentioned in my remarks, clearly many of our customers are also using that and accepted that as simulation accelerations.

And in fact, in 2013 we doubled that and in terms of the growth and so we are excited.

But we are not sitting still, and we continue to heavily investing to scale that more in the emulation accelerations and the prototyping.

Okay.

What is your view of just the marketplace for simulation?

Is that a positive growth market in 2013 as well?

Absolutely.

Okay.

And then Geoff, you talked about how your business is becoming a little bit more volatile on a quarterly basis, based on the hardware side.

I was wondering if you have an early view of what you think the linearity in 2014 looks like, if there's any anomalies coming up?

Again I don't want to overstate this, but we did want to let people know that there may be volatility from quarter to quarter in revenue, and that is kind of where we see it.

We're not going to give specifics, obviously.

Okay.

So there's no order book of a big slug or trough coming that we should try to model in early on?

Yes, we gave guidance for the year in Q1, and I think you can figure out kind of how you need to model it from there.

Okay.

And then you gave us nice detail on the cash and cash usage.

I'm curious though, on a go-forward basis, when the cash flow comes in, what is the relative mixture of US, or onshore versus offshore of the --?

So onshore and offshore is approximately 50-50, it obviously varies from period to period, but it's approximately 50-50.

Very similar to our revenue split as you would expect.

Okay good.

And then last thing, tax rate in 2014, what you think the long-term rate will be in the years ahead?

So when we guide the 26% non-GAAP tax rate, that is kind of the long-term rate that we expect over time.

Our cash tax rate has traditionally tended to be lower, as we have tax attributes and NOLs to help offset some of that.

Okay, good.

That's it, thank you.

Sterling Auty, JPMorgan.

It's Scott here for Sterling.

Thanks for taking my questions.

A few here, if I may.

First, it sounds like the new version of Palladium XP is helping that business kind of turn in 2014.

So I guess the question is, what was sort of the major changes with that latest version of the product to enable that turn?

And then, I guess do you foresee any other changes in 2014 that could potentially make that part of the business grow?

Yes, Sterling, let me start first.

I think clearly, our Palladium XP tool is a second emulation family, and a significant improvement in terms of capacity, performance, and also the software improvement.

And clearly, improved a lot in terms of the productivity and customers love it.

So that's why you can see, more than 50% of our orders in Q4 come from Palladium XP tool.

So it's very well received and it is very scalable, and we will continue in a very comprehensive game plan in terms of continuing to improve and expand our capacity and growth.

And then more important, I think we mentioned earlier, in Q4, we have four out of five application processor companies are using that.

And also, the increasing using from the system company that is very exciting for us, and to see a tremendous beneficial for them in terms of building up the system up, and so I see a growth in the system companies.

That's helpful.

And then secondly, kind of along the lines of the emulation business, it sounds like the pricing there might be getting a bit more competitive.

Can you just talk about how that impacts kind of overall gross margins in 2014, Geoff?

Well, obviously the biggest driver for gross margins is always going to be the hardware business.

Of course, there's a service business that also shows up, but it's largely driven by the gross margin in the hardware business.

And as I said earlier, right, we expect the gross margin to be a little bit challenged going forward.

Again, we don't want to overstate it, it's a great business for us and great margins, but fourth year in the business, there will be some impact.

Absolutely, right.

And then one question on the revenue guide.

If you look at the bookings guide of 9% to 12% growth, that builds in a nice finish to 2013, I think at 19% growth.

But I think the revenue for the year, at least the midpoint of the guide is for about 7% growth, and that is with less of a headwind from emulation it sounds.

So could you just maybe help us reconcile that a bit?

Is that just sort of the ratability?

Or is there anything else to kind of consider in those moving parts?

Yes, so obviously as you look at some of our newer businesses like the IP business, and you look at some of the strength that Lip-Bu talked about with our innovative products, those are going to first show up in bookings, and in the future show up in revenue.

I think more than anything else, you are seeing that.

Okay, got it.

All right, that was it for me.

Thanks very much.

Mahesh Sanganeria, RBC Capital Markets.

Thank you for taking the questions.

I just have a quick question on the systems --.

Mahesh, can you speak up?

We're having hard time hearing you.

Yes, can you hear me better?

Yes, better.

This is Shawn in for Mahesh.

Oh, hi Shawn.

Hi.

Just a quick question on the systems design and implement business, it sounds like a very exciting opportunity for Cadence.

I just wonder do you guys have any -- have done any work around market size?

And what is a sustainable growth rate in that market?

And how does that compare to the traditional, the core EDA market growth of --?

Can I try to repeat it again, Shawn, you are kind of hard to hear.

But to make sure what you asked, you asked about the systems design enablement and kind of what we see as the market opportunity?

Yes.

And what is the sustainable growth rate for the market?

And what is the growth rate in the market?

Okay, so let me try to answer that, and earlier I mentioned about the (inaudible) of the system design enablement, and then how to look at it from the end product and then the system view, and also the suite of portfolios, we have from packaging system analysis, system IP to hardware.

And then also I think I mentioned earlier, the system companies, the market we are addressing is much bigger.

And now we are talking about a whole system area is almost like $2.6 trillion.

That area I think will become an increasing part of our business, and I also mentioned earlier because of system companies, the new wave of system companies, they are differentiating themselves by going vertical integrations.

So they come from all the way from silicon to SoC, to the system-level, and so in the way we are engaging heavily with them in terms of driving not just the silica and also the IP requirements, the analysis of the board, the system-level and also the software, the entire ecosystem requirements.

And so there's a whole suite of opportunity for us providing a solution to them.

So clearly, in terms of the market potential is much bigger.

And then secondly, clearly the system companies, they are starting to grow rapidly in terms of building the requirement from silica up.

And to SoC, to the board, to the system, and there are all kinds of problems and challenges that they need help from us, in terms of addressing each one of them, knowing the power and the signal integrity and the entire board of than just silica alone.

And then also the system-level, how do you address that requirement in the most power efficient way.

And then those are the requirements and challenges they face, and we can be a great partner for them to do that.

Thank you.

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

So let me summarize the remarks, first of all, in closing.

And I just want to mention that clearly this was a great year, and Cadence continued to deliver great technology to our customers, and our business results reflect this, while the macro environment remains uncertain, and Cadence is well-positioned to continue executing and supporting our customers by introducing great new products.

Lastly, I would like to recognize our hard-working employees for these results, and thank all of our shareholders, 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 fourth quarter and fiscal year 2013 earnings conference call.

This concludes today's call.

You may now disconnect.