益華電腦 (CDNS) 2014 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Cadence Design Systems second-quarter 2014 earnings conference call.

(Operator Instructions)

Thank you.

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

Please go ahead.

Thank you, Marvin, and welcome to our earnings conference call for the second quarter of FY14.

The webcast to this call can be accessed through our website, cadence.com, and will be archived through September 12, 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 statements regarding forward-looking statements in the earnings press release issued today.

Note that we also filed a second-quarter 10-Q this afternoon.

In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present certain non-GAAP financial measures today.

Cadence Management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the Quarterly Earnings section of the Investor Relations portion of our website.

A copy of today's press release dated July 21, 2014, for the quarter ended June 28, 2014, and related financial tables can also be found in the Investor Relations portion of our website.

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

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

I am pleased with the strong financial results that Cadence delivered in Q2.

To summarize, total revenue was $379 million, non-GAAP operating margin was 23%, and operating cash flow was $69 million.

To date, we are also making some adjustments to our outlook for the fiscal year, which Geoff will discuss in a few minutes.

Before talking about our Q2 highlights, I want to say a few words about the environment and review the key points of our synergy.

I am happy to report that environment was generally improved since the beginning of the year.

Overall, semiconductor industry is healthier, and the growth of system companies is expanding our opportunities.

As most of you know, system design enablement is our strategy to deliver the technology necessary for the integrated system and SoC design, with the end product in mind.

Core EDA is at the heart of this strategy and is a great business for us.

We are winning with our winning customers because of our increased focus in areas including digital and advance verification.

We are also excited about the high-quality differentiated IP business; we are building, the growth opportunities it offers.

We continue to expand beyond the SoC to provide innovative solutions for system interconnect and analysis, hardware-software core design, and system level IT.

We aim to expand our leadership in system design enablement by focusing on leading semiconductor and system customers and ecosystem partners, developing or acquiring flagship products in key areas to drive growth, and leading at advanced nodes.

The success of our strategy is enabled by hiring and nurturing top talent, providing the industry's best products, and laser focused on customer success.

Our strategy is working, and you can see it in our results.

Based on this result, the underlining strength of our business and the review of our capital needs, cash flow, and capital structure, the Cadence Board of Directors has approved an increase in our stock repurchase plan.

Geoff will give details in a few minutes.

Now, let us review our Q2 highlights.

Overall, we continued to grow in Q2 with new business win in digital and signoff at the most advanced nodes, continued momentum in system design and verification solutions, and progress in our IP business.

We also continue to increase our position with current customers and expand into system markets.

Key growth drivers include the increase in FinFET and 64-bit mobile design activity.

In the digital and signoff space, Cadence continues to make strong advancements with FinFET designs.

We are well established with leading customers and foundries at 16, 14 nanometers for production designs.

In Q2, we had multiple digital wins.

One of our customers using Cadence IP and implementation tools take out one of industry's first production foundry FinFET designs.

In further support of advanced node design, Intel and Cadence announced in June that we are collaborating to support Intel 14-nanometer Tri-Gate process technology to enable customers of Intel custom foundry.

This collaboration includes the delivery of Cadence low-power, high-performance LPDDR4 fine memory IP on Intel's 14-nanometer Tri-Gate process.

Our leading-edge customers are already looking beyond the 16, 14-nanometer node.

Development at these nodes requires even tighter collaboration between process and tools.

We are deeply engaged with multiple foundry partners at an earlier stage than ever before in the development of 10-nanometer solutions with multiple test chips underway.

In the crucial and strategic signoff space, our new products, Tempus and Voltus, are steadily gaining customers in timing and power signoffs.

In Q2, we added five new Tempus customers, including Broadcom, which has deployed Tempus in their sub-20-nanometer flow.

We now have over 30 Tempus customers and over 25 Voltus customers.

And just last week, we introduced another new signoff product for parasitic extraction, Quantus QRC, which will leverage a new, massive, parallel architecture for fast and accurate performance on large digital designs.

Quantus QRC is already foundry certified at advanced nodes.

Now, let us turn to system design and verification, where our solution help customers with one of their top concerns, reducing time to market while ensuring correct functionality.

In Q2, Cadence continued to innovate and invest heavily in this critical space.

We completed the acquisition of Jasper Design Automation.

Jasper offers the leading solution for high-level formal analysis.

Formal analysis is a mathematical approach to verification that complements our simulation and emulation solutions.

High-level formal analysis has become a must-have solution for the development of complex SoC and application processes.

Jasper expands the Cadence System Development Suite, which is the most comprehensive suite of verification solutions available.

Our customers love the acquisition, and we have hit the ground running.

In Q2, we became the first EDA partner to get access to the ARMv8 64-bit architecture.

We also introduced the Protium FPGA-based rapid prototyping platform for embedded software developers.

For our hardware business, customer demand for Palladium remains strong, especially in the mobile sector, driven by the move to FinFET and 64-bit design.

Shipments were up in the first half of the year as we continued to add new customers and expand Palladium installations with our largest customers.

However, as we point out on prior calls, competitive pressure has increased in the emulation market and is impacting our gross margin.

Geoff will discuss the impact of this on our outlook in a few minutes.

Palladium is the cornerstone of our System Development Suite, which is the industry-leading solution for addressing the challenges of both verification and hardware-software convergence.

Palladium remains the most advanced and proven product on the market.

We are building on this flagship product to develop new innovative use model that brings tremendous value to our customers, such as Palladium Hybrid, which dramatically reduce time to market.

We are not only proliferating strongly within the top customers, but we are expanding our customer base as well into new verticals.

Another critical components of our system design enablement strategy is our IP, which is a key growth driver for Cadence going forward.

The integration of our 2013 acquisition is progressing well, and our expanded IP portfolio is opening doors to more business with leading systems and semiconductor companies.

In Q2, we continued to introduce new IP and VIP products, including memory models for the 3D hybrid memory cube.

Industry first VIP for PCI Express Gen 4 and silicon-proven DDR4 IP for both the 28-nanometer FD-SOI process and for the TSMC 16-nanometer FinFET process.

So now in summary, Cadence continue to drive growth and innovation in Q2.

Our system design enablement strategy is working and is producing strong results.

We continue to win new business in digital and signoff at the most advanced nodes.

We completed the Jasper acquisition, and it's being very well received by customers.

We continue to innovate new products.

This quarter, we released new products in signoff, system design and verification, mixed-signal simulation, and IP.

Our products and services have strong momentum in both system and semiconductor customers.

I am pleased with our current results and excited about the opportunities in front of us.

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.

Now I will review the results for the second quarter, present our outlook for Q3, and update our outlook for 2014.

Cadence produced strong operating results in Q2.

Total revenue was $379 million, up slightly from the prior quarter, compared to $362 million for the year-ago quarter.

Revenue mix for the geographies was 44% for the Americas, 23% for Asia, 22% for EMEA, and 11% for Japan.

Revenue mix by the product group was 21% for functional verification, 30% for digital IC design and signoff, 28% for custom IC design, 11% for system interconnective analysis, and 10% for IP.

Total cost and expenses on a non-GAAP basis were $290 million, compared to $295 million for Q1 and $277 million for the year-ago quarter.

In Q2, we incurred a $10-million GAAP charge for our voluntary retirement program that will provide cost savings going forward.

Headcount was 6,044, up 209 from Q1, attributable to hiring and R&D in technical field positions and the acquisition of Jasper Design Automation.

Non-GAAP operating margin was 23%, compared to 22% for Q1 and 24% for the year-ago quarter.

GAAP net income per share was $0.08.

Non-GAAP net income per share was $0.21, compared to $0.20 for Q1 and $0.21 for the year-ago quarter.

Operating cash flow was $69 million, compared to $28 million for Q1 and $75 million for the year-ago quarter.

Total DSOs was 26 days, compared to 27 for Q1 and 24 for the year-ago quarter.

Capital expenditures were $11 million.

Cash and short-term investments were $655 million at quarter end, compared to $630 million for the prior quarter.

During the quarter, we used $136 million of cash for acquisitions.

We repurchased 768,000 shares for $12.5 million.

We borrowed $100 million on our revolving credit facility to help fund the Jasper acquisition.

Approximately 16%, or $107 million, of our cash and short-term investments were in the US at the quarter end.

Weighted average contract life was 2.2 years.

This was lower than our expected range of 2.4 to 2.6 for the year, due to customer mix.

We expect weighted average contract life to be 2.4 to 2.6-year range for the year.

In June, we completed the Jasper acquisition.

The final purchase price was approximately $168 million, after adjustments for transaction costs and working capital.

The total net cash outlay will be approximately $140 million.

We expect Jasper to have an immaterial impact on non-GAAP EPS in 2014 due to merger accounting and to be accretive in 2015.

Now, let's address our outlook for the third quarter of 2014, which includes Jasper Design Automation.

Overall for the year, we now expect stronger software revenue and weaker hardware revenue compared to our initial guidance for 2014.

As we pointed out in our prior earnings calls and again today, hardware margins are under competitive pressure, and this is impacting our outlook.

For Q3, we expect revenue to be in the range of $390 million to $400 million.

Non-GAAP operating margin is expected to be approximately 26%.

GAAP EPS is expected to be in the range of $0.13 to $0.15, and non-GAAP EPS is expected to be in the range of $0.23 to $0.25.

Now for our FY14 outlook.

Bookings are projected to be in the range of $1.75 billion to $1.8 billion, compared to our prior outlook of $1.725 billion to $1.775 billion.

This increase is largely due to the addition of Jasper and secondarily due to stronger software bookings.

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

Revenue is expected to be in the range of $1.57 billion to $1.59 billion, compared to the prior outlook of $1.55 billion to $1.59 billion.

This increase is also primarily due to the addition of Jasper.

Non-GAAP operating margin is expected to be 25% to 26% on an annual basis.

This is down from our previous expectation of approximately 26%, primarily due to lower hardware gross margins.

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

We're assuming a non-GAAP tax rate of 26% and weighted average shares outstanding of 304 million to 310 million shares for the year.

GAAP EPS is expected to be in the range of $0.48 to $0.56.

Non-GAAP EPS is expected to be in the range of $0.90 to $0.98.

This is down from our previous range of $0.92 to $1.02 due to lower hardware gross margins and higher expected diluted share count resulting from the impact of a higher share price on the dilution from our 2015 convertible notes.

We expect operating cash flow to be in the range of $305 million to $335 million.

This is down from our previous range of $335 million to $365 million, primarily due to the impact of the voluntary retirement program, the deferred revenue impact from Jasper, and lower hardware gross margins.

Our DSO forecast is approximately 30 days.

Capital expenditures are expected to be approximately $40 million.

You saw in our earnings press release today, our Board of Directors made an important decision which reinforces our commitment to deliver value to shareholders.

Our Board of Directors has approved an increase in the rate of repurchase under our stock repurchase program.

The new plan, which replaces the old plan, authorizes the repurchase of $300 million over two years.

Cadence expects to repurchase approximately $37.5 million of common stock per quarter under the new plan, beginning with the third quarter of 2014.

The Board made its decision based on the underlying strength of the business, a review of the Company's capital needs, cash flow, and the capital structure.

So with that, Marvin, we'll now take any questions.

(Operator Instructions)

Jay Vleeschhouwer, Griffin Securities.

Thanks.

Good afternoon.

Question first about the Jasper acquisition.

When you bought Tensilica a year ago, you were providing then for 2013 the incremental revenues and bookings you were expecting from Tensilica were helping out.

And perhaps for Jasper, you'll do something similar for 2014 in terms of incremental bookings and revenue contribution.

Also, with respect to the duration of only 2.2 years, that's unusually low.

Could you elaborate at all on the customer mix in terms of any geographic or product component that weighed on the duration?

So Jay, on Jasper, as we said, the majority of the bookings increase and revenue increase was related to Jasper I'm pretty sure.

You can do the math on that.

Happy to help, but I think you've got the basic components.

The 2.1 to 2.2 is really just a mix in the current quarter.

We don't expect any change for the year, and nothing unusual happened from our perspective.

Okay.

For Lip-Bu, over the last couple of years, the Company has had some good momentum in a number of areas, including system interconnect or PCB, custom IC, and hardware, including the last quarter, albeit at the expense of margin.

When you look out over the next couple of years or beyond, what do you think might be, from a product perspective, the next big thing or things as incremental growth drivers?

For instance, last month at DAC, we heard in various Cadence presentations, frequent references to pre-silicon and [front-end] as technical areas of interest for you.

You've mentioned signoff a number of times today.

So what do you think, aside from the areas we already talked about, might be the next particularly incremental areas for you for revenue?

Jay, good questions.

A couple of point to just highlight.

First of all, as you mentioned that we are moving toward a system design enablement approach.

And basically, is really driving the system design approach based on view on CDA on the system-level view providing the tool, IP software, packaging board, assembly and the system-level IP, so really, looking at entire system's end product in mind.

With that, EDA is really the heart of it, and we are double down and laser focused on that.

We have a whole series of good products coming up in the signoff area, like Tempus, Voltus, and now we announced the Quantus.

And then clearly, we continue to drive in our significant improvement in the digital front.

And then likewise, we also double, triple down on the verification side because that is where the time-to-market challenge is, and that's also the complexity of the design.

And then we have that whole development verification suite that include all the way from hardware in the formal analysis like Jasper that is very relevant to us, a lot of complex SoC and processor related.

That design is a must have.

We really strength that, and we also have a very significantly improving the incisive part.

In fact, this Q2 is one of the best quarter for us.

And all in all, it tie in to the design and verification approach.

And then with that, clearly, we have a really strong foundation, especially in the digital front.

We have a lot of design win along the directions, and meanwhile, mixed-signal is a digital and analog combined, and optimized for that, we're making great progress with the EAD, a lot of momentum.

Customer sign up for it, and have continued to drive differentiation in the mixed-signal.

As you know, most of the SoC are mixed-signal related, and that really play into our strength.

So all in all, I think our IP also is the driving engine for us.

So all in all, I think clearly, we are excited about EDA industry growing faster than overall semiconductor industry.

We believe we can outgrow the industry based on our leadership position in various EDA products and also extend into the system-level verification.

So overall we are optimistic in the product offering.

All right.

One last one if I may.

As I'm sure you know, Synopsys, with IC Compiler II, is introducing the idea of node-based pricing, range of functionality and capacity according to the node usage by their customers.

Is that node-base pricing, perhaps only in digital IC if not elsewhere, something that might be of interest for you as well?

So first of all, we pay a lot of attention on the ICC II and the announcement, and they are very strong competitors.

We'd always respect them.

And meanwhile, we continue to focus on our offering, especially in the digital front.

Clearly, we're making great progress in the digital front, our commitment into the FinFET design, and clearly we have multiple win in the digital front.

And then we mentioned about one customer using the Cadence IP and implementation tool to drive the industry first production foundry FinFET design.

And currently, we have over 25 new FinFET design projects underway in Q2, and then we are already starting with multiple foundry partners on 10 nanometer.

And then clearly, the final, as I mentioned in my script, Tempus at more than 30 customers sign up for it, and Voltus 25, and then Broadcom and a few others, and then with the Quantus coming up.

So all in all, we are focused on innovation, focused on customer win, and then focused on the advanced node, and then we continue just focus on execution and then make our customer successful.

Tom Diffely, D.A. Davidson.

Yes, good afternoon.

So first, Geoff, you talked about the midpoint of the EPS guidance for the full year going down, say it's going from 97 to 94.

You talked about the hardware margins being a little impactful there, the share count, but I didn't necessarily hear you say Jasper was -- what part Jasper plays in that.

Jasper is immaterial on the results for 2014, and it's immaterial because of the merger accounting and the deferred revenue impact on the merger accounting.

So the two issues are mostly the gross margin on hardware, and secondly, the increased share count related to the calculated dilution on the convertible notes.

Okay.

How long do you think it typically takes from a quarter basis to get to the full operating model from Jasper?

Is that a three, four-quarter trend?

Yes, it depends on the particular acquisition and the particular makeup of their deferred revenue, so it will take some time.

We said 2015 will be accretive for Jasper.

I think that's probably the most important factor.

Okay.

And then maybe just a quick thought process on why you increased the share repurchase versus maybe the initiation of a dividend, what were the pros and cons?

Yes, so our Board and our Management Team goes through a process of looking at our capital needs, our cash flow, and basically, we decided that we were going to do the stock repurchase.

We don't want to discuss, obviously, the details of that calculation, but again, we're quite comfortable with our cash flow, quite comfortable with our business, and so comfortable with proceeding with what we did.

And Tom, just to add on -- this is Lip-Bu.

Clearly, as you can heard from us that system design enablement, the strategy we have, and we are executing towards that, we have a lot of momentum.

And like Geoff mentioned earlier, we looked at the capital requirement, looked at the cash flow.

We have a very strong cash flow going forward, and we felt and we discussed with our Board we felt that this is right thing to do in term of buy back more shares and then serve the shareholders well, and that's our [positions].

It's obviously very positive.

I'm just trying to get inside your head a little bit.

Also, Geoff, when you gave the $37.5 million per quarter number, does that mean you're going to try to be fairly linear with this spend, or are you still going to be optimistic?

Yes.

Going to be optimistic?

Yes.

We are.

Okay.

And then Lip-Bu --

You're stock pickers.

Not us.

(Laughter)

Lip-Bu, you talked about how the environment has improved since the beginning of the year with a couple different customer sets.

It looks like that hasn't really translated into the guidance for the full year at all.

Maybe you could talk about that., just how these trends play out over time and when you think you'd see some kind of an increase to your bottom line?

Good question.

I think couple of things.

I mentioned earlier in the environment, overall is good because of mobile, video, wearable, Internet of Things, and [cloud], and also the design complexity.

And then the other part because of our much-improved product portfolio, and we are excited, looking forward.

And also, we have a lot of momentum and wins in the digital verification, and also Jasper is a wonderful acquisition.

Great talent has come onboard.

It's a must have.

And so overall, we are positive on the overall view.

And meanwhile, as you know, this is a ratable business, and sometimes hardware and IP are a little bit lumpy, but overall, we continue to execute the plan.

We like what we see, and we just have to be very focused on execution and win the customer and support them in their success.

And Tom, just to be clear, our software is ahead of our plan for the beginning of the year to now.

Okay.

Thanks.

And then maybe finally, just an update on Japan.

It's been a bit of a headwind over the last many quarters.

It sounds like it's stabilized a bit, but maybe a little more color?

I mean Japan is going to fluctuate, as I think we've said a couple quarters in a row.

It's bumping along on the bottom, and we've seen it stabilize, but there's going to be some fluctuations from quarter to quarter with us for Japan.

Okay.

Thank you.

Monika Garg, Pacific Crest Securities

Hi, thanks for taking my question.

My first question is on the hardware side.

Your [demolition] tool is in the fifth year of the business.

It is impacting the growth -- your operating --

Monika, we're having a really hard time hearing you.

Can you speak up or get closer?

Okay, I'll try.

Hello?

Monika, maybe you want to -- we lost you totally now.

Operator, can you take the next call?

Monika, you can call back in.

Sterling Auty, JPMorgan.

A couple questions.

One, just start off administrative wise.

Geoff, can you repeat the cash flow guidance that you gave and the rationale behind it?

The cash flow guidance is down about $30 million at midpoint.

About -- the three major items that are playing into that is Jasper is certainly playing in.

Again, we have deferred revenue.

We collected the cash up front, but we have expenses.

Secondly, the voluntary retirement program.

And then third is the gross margin impact on the hardware business.

And what was the voluntary part of that again?

We did a voluntary retirement program here in the US to allow people to take a voluntary retirement.

It will benefit our expenses on a going-forward basis.

Okay.

Okay.

Let's revisit the gross margin on the hardware side.

How much of this is just where you are in the product cycle?

And is there anything to read into here that you're talking about lower gross margins for the back half?

Does that suggest that either the timing of the next upgrade has shifted or that you would expect hardware gross margins to continue to be under pressure at whatever time the new version does come out?

Yes, so I'll start, and Lip-Bu will take the rest of the question.

Our hardware business has actually continued to be pretty strong.

We've taken some deals that we think make a lot of sense to us from top customers, important customers, and we've actually shipped more volume than we've done previously in the first half of the year when we expect to ship more the second half of the year.

But the businesses is competitive, and we've seen some pricing pressure, and that is impacting overall revenue for hardware, which will be down slightly this year, and margins.

Lip-Bu will take the second part of that.

So just a few things to add.

First of all, the Palladium XP II release less than one year ago shipping in volumes -- high volumes, and XP II has significant -- better performance and productivity advantage.

And then we continue to drive success in our top customer and also system and also some of the new verticals, and so I think we'll continue to do well.

In fact, the first half is up.

And then we put together a really top talent and driving this whole complex supercomputer platform.

And then our new platform is on the way, and we're excited about it.

But meanwhile, we are focused on selling our Palladium XP II, and when the time come, we will announce our new product.

But so far, we have been laser focused on selling and supporting our customer.

Clearly, the top-tier customer will continue to increase, and we add on.

And so overall, it's a very important platform, and it tie in very well into our system development suite, and that has continued to clearly proliferating towards the system and also some of the new verticals.

Lip-Bu, you mentioned a number of times some digital design wins as well as both power -- so both Tempus and Voltus, and just wondering if you could describe what you think the market share dynamics in those segments are looking at.

In other words, are you picking up incremental new customers, or are these expansions within existing customers?

Good question.

Digital is very important focus for us, and clearly, some of the new product we are announcing, the signoff, Tempus is very well received, Voltus is very well received.

And we just announced Quantus in the QRC side, and clearly, we have a lot of adoptions, Tempus at over 30, and then Voltus is over 25.

And then clearly, we mentioned last quarter, we had one big win in term of the design flow in the digital.

We continue to have that.

And then we have multiple new design win, and because clearly, our product is coming really, really strong, and then also tie in with our advanced nodes and in the 16, 14, now moving to 10 nanometer, and then so clearly, it's an area that we are really focused on, and then also tie into the custom analog mixed signal, and that's why I think, too, we're playing to our strength, and then the most of the SoC mixed signal.

And then the other part of the equation that help us a lot is in the ARM relationship.

Clearly, the 64-bit deployment and a lot of customer engaging, and that give us a lot of window into our performance and leading to some of the digital displacements.

Okay.

Great.

Thank you.

Monika Garg, Pacific Crest Securities.

Sorry about the last time.

Thanks for letting me ask again.

My first question is, we heard the Broadcom this season to sell the base band unit.

Could you maybe talk about it that has any impact on your business?

Monika, clearly, we are not going to comment on any of our specific customer business or strategy, and so I think we stop right there.

Okay.

Then Lip-Bu, you talked about FD-SOI models and design in your comments.

Could you maybe talk about the design activity you are seeing in the FD-SOI area?

And then, does it impact in any positive way your business?

If I hear correctly, talking about FD-SOI?

Yes.

So clearly, we are engaging with our foundries, and then based on the customer requirements, so we work very intensively with our customer.

If customer decided to go advanced node in FinFET, we support them through FinFET with the foundry partners.

If they decided to move on to the FD-SOI, we clearly support that.

In my remarks, I mentioned about the DDR4 because of customer requirement moving to the FD-SOI process, and we definitely support and enable that.

Okay.

The last one for me, if I heard it correctly, you talked about Palladium Hybrid product on your earnings -- in your comment.

That's correct.

Could you maybe talk about what is that product?

Sure, happy to share with you.

This is the newest user models to help the customer more.

It basically provided our Palladium engine and platform extending to the hybrid.

That basically able to impact the processor software development, so in a way, while your silicon is still in development, you can start using our Palladium model to apply into the OS, the firmware, the software stack and so in a way, you save a couple of months.

One of the customer highlight saved them six months in term of the core design hardware and software together, and that is a huge, huge, huge, huge time-to-market advantage for the customer And we introduced that, and couple of key customer love it.

We embrace and are helping them support them, anything to save them on time to market is huge for them.

Thank you so much.

Mahesh Sanganeria, RBC Capital Markets.

Thank you very much.

I just had a follow-up on your Tempus and Voltus wins.

Can you give us more color as to what are the accounts where you are getting the wins?

What's the driver in terms of is it new evaluation, or you're displacing a competitor?

Thanks.

Okay.

Mahesh, I tried to -- if I hear correctly, you are asking about Tempus and Voltus and how is that deployment in the win front, in the customer front.

So couple of things.

One, these are the very new product we announced in the later part of last year.

This is a massive parallelism in a scale all the way to 100 CPU.

We introduced them in the later part of last year.

The response had been overwhelmingly positive.

And on the Tempus side, we have over 30 customer in our -- paying customer, and engaging heavily on the signoff.

The same thing with Voltus.

If I recall correctly, we introduced that in Q4 of last year, and we already have 25 -- more than 25 customer are using it.

This is very significant.

And then thirdly, we just announced our QRC.

This is the extraction offering on the signoff, and it's also a massive parallel architecture.

This is a very important customer, and right now are evaluating it.

And so we are really focused on the digital platform, initially focused on signoff, and then now, we are working on the next generation in the digital implementation place and route and synthesis.

Stay tuned, and we're going to have a lot more exciting coming up, and we double, triple down on the digital implementation side, and customer love it.

And we highlight one of the Tempus user is Broadcom, and in their sub-20-nanometer flow, and this is very significant.

So I think we're making great inroad into the digital front.

If I can just follow up on that one.

If I look at the timing signoff, PrimeTime [dominates], and I don't know what the market size is.

Can you give us a sense of, are you talking about for the power signoff and timing signoff, what the market sizes are and where you -- what part of a market can you have in, let's say, a couple of years?

I'm sure that from the timing signoff, you're starting from a very low basis, and some sense of the dollar number will be very, very helpful.

So I think clearly, it's a big 10.

And digital and the mixed signal also impact into the whole mixed-signal design.

And so all in all, we only provide right now the 2014 guidance, but clearly, it's a big opportunity, and that's why we recruit all the best talent we can find in the marketplace, and this is very critical in term of the digital design implementation, and it's a big-10 market, as I can say.

All right.

Thank you very much.

Krish Sankar, Bank of America.

Hi.

Thanks for taking my question.

I had a couple of them.

Number one, Geoff, you mentioned that the gross margins are down due to hardware.

Is it over a couple of customers, or is it more than one or two customers is bringing down the hardware gross margins?

We just said generally that the business is competitive in the gross margin perspective.

Again, we're quite happy with the deals we're taking.

We think the deals make sense, then they're with great customers.

But the market is competitive.

We haven't given specifics on which customers, et cetera.

Got it.

It's not a complete surprise that hardware is dilutive to gross margin, but if I take a longer-term view, if you're going to get more footprint in systems, how will your gross margin and operating margins trend over the next few years as you get more systems footprint?

We're only guiding 2014 right now.

We'll give you more view when we guide 2015 in the January timeframe.

All right.

And then one final question.

I think you guys highlighted how emulation is being used by the software guys.

Looks like it's being used to [wrap] software.

Is the primary requirement for emulator to be used to bring software up, is it primarily just throughput, or is it something else too?

A couple of points.

Clearly, the hardware emulation is very good for verification, finding bugs in the design in a very effective way.

And then meanwhile, we mentioned this Palladium Hybrid actually is helping out the software side, so we can develop software on that.

And then we also just announced our Protium.

This is the FPGA offering.

And so I think this is something that all tie in very well with our entire System Development Suite.

And this is critical in term of time to market for our customer.

It's a fast-growing area.

We want to make sure that we provide -- Jasper is a great acquisition for us because of all the complex SoC are processor related, and it's a must have.

Customer request us to buy that.

And so I think we tie that altogether on the whole verification suite offering.

Got it.

That's very helpful, Lip-Bu.

And then just a final question if I can squeeze in.

Early in the year, it seemed like there was quite a bit of challenges with FinFET, and if you talk to different folks, it seems like, depending on whom you speak to, it's either improving or it's still status quo in terms of performance.

Can you help characterize over the last six months, how do you like describe the progress in FinFET and the progress in FD-SOI?

I'm just trying to get a sense of are they mutually exclusive, or if FinFET gets delayed more, is there going to be more focus on FD-SOI?

It's a very good question, and in fact, you will get different a answer from different customer.

But I think we very much focus on working our leading customer, the winning customer, and clearly FinFET is the way to go in the advanced nodes and in the 14, 16, and 10 nanometer, and so a couple of our key customer request us to support them, and that's why we of more than 25 new FinFET design projects with our leading customer in Q2.

We see the development activity increase a lot on that.

And in saying that, we also had a couple of customer decided to use the FD-SOI for the 28 and 20, and then some go beyond that.

So I think we are open-minded, and we don't have any bias on one way or the other.

Our optimal objective is to serve our customer in term of the most complex design and then make it optimize for the foundry that they select, and then we work with the foundry partners to make sure we provide the most high-yield performance based on our design tool and the IP.

That's the most important.

Got it.

Got it.

And nice to see that increase in buyback.

Thank you very much, guys.

(Operator Instructions)

Rich Valera, Needham & Company.

Hi, good evening, gentlemen.

Geoff, just wanted to clarify that you said that the mix had actually shifted toward software and away from revenue, broadly speaking, in your business.

Is that correct?

It shifted to software revenue from hardware revenue.

Hardware revenue will be a little bit down this year.

Right.

So all things equal, that should have a positive impact on margins, but obviously, you're guiding the other way.

So I guess the pricing pressure in hardware is actually more than offsetting that mix shift.

Is that a fair statement?

That's correct.

And then just a lot of questions around the hardware margin, and I think as I understand it in emulation, it's pretty straightforward, that the cost per gate in emulation is directly tied, generally speaking, to the silicon in the box, so if you come out with a next-generation box, generally, you have much higher density silicon, and I don't want to put words in your mouth, but it's something just substantially higher density.

That brings down the cost per gate quite a bit, and so mathematically, your margin should improve significantly based on that.

Is that a fair way of looking at it?

Just wanted to get your thoughts on that.

We're obviously not guiding 2015 at this stage, but yes, that's the general Moore's Law benefit of semiconductors as you move to one node to another.

Is there any reason to think that -- you're going to have a next-generation box.

You have acknowledged that.

You're going to have next-gen chips and that, that the margins on that shouldn't be materially better than the margins you are getting today on hardware.

I know you don't want to get too specific, but it just seems axiomatic that it should be.

Rich, we'll talk about that in the future.

Okay.

That's it for me.

Thank you.

Ruben Roy, Piper Jaffray.

Lip-Bu, I want to follow up on the FinFET FD-SOI discussion.

It sounds like your design projects accelerated in Q2.

I think you said 25 new FinFET projects.

And I was wondering, in listening to some of the equipment companies recently, it sounds like foundry ramps of 16, 14-nanometer nodes are a little bit slower than previously anticipated but that you haven't seen that yet an actual design activity.

You think at some point this is something that could cause some short-term impact, or is this just a longer-term trend that plays itself out and the longer-term trend is up and to the right?

Would love to hear your thoughts on that.

Ruben, these are good questions.

We watch that very closely.

Clearly, we heard that some of the foundry announcement in term of delay.

And then meanwhile, on the design front, it's always ahead enough that in manufacturing, we see the increase in the design activities, especially in the 64-bit related area, and also the FinFET customer engagement has increased.

I think over time, clearly the volume production will be sometime next year.

And clearly, the leading foundry are very focused on getting that done, and a lot of customer depend on that, so I'm optimistic the thing will work out.

And then clearly, the foundry partners are very, very focused on that, and I mentioned the yield and performance.

The test chip in our involvement in the design and other activity increased, at least from our visibility.

Okay.

Thank you for that, Lip-Bu.

And just a quick follow up.

On the FD-SOI side, you talked about 28 nanometer, obviously, and some of the IP that you're bringing to market.

You talked about 20 nanometer.

I'm wondering, recently, with some of the activity that you're seeing out there, has there been discussions or requests to you to start thinking about and creating libraries for 14-nanometer FD-SOI?

The answer to you is yes, we have customer request that.

We are working with them, and so clearly, supporting the customer success is the most important for us, make sure that our tool in IP optimize for that process approach.

And clearly, the customer have demand us for doing it.

Clearly, we are supporting that.

And so answer your question, yes, there's increasing activity in FD-SOI.

Great.

Thank you.

And that was our final question.

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

In closing, I would like to recognize our hard-working employees for the results we have achieved.

And thanks all of our shareholders, customers, and partners for everyone's continued support.

Thank you all for joining us this afternoon.

Thank you for participating in today's Cadence Design Systems second-quarter 2014 earnings conference call.

This concludes today's conference call.

You may now disconnect.