益華電腦 (CDNS) 2014 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 FY14 earnings conference call.

(Operator instructions)

I'll now turn the call over to our host, Alan Lindstrom, Senior 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 the FY14.

The webcast of this call can be accessed through our website, www.cadence.com, and will be archived through March 20, 2015.

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 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 measures, 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 February 4, 2015, for the quarter ended January 3, 2015, 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.

2014 was an excellent year for Cadence, and I'm very pleased to have the opportunity to speak with you today about our company.

I'm thrilled and humbled by the support of our customers and partners who are placing their bets with us, by adopting our innovative solutions to design and build products that change the world.

We are absolutely committed to their success, and we will continue to invest in R&D in support that is critical to meet their needs.

[Strategy], innovation, customer success, and execution are driving strong results for shareholders, and we have great momentum going into 2015.

Guided by our system design enablement strategy we are delivering the technologies necessary for integrated system and SOC design, with the end product in mind.

Our growing core EDA business is at the heart of the strategy.

And we are very excited by the momentum in our emerging IP and system [now our] business.

Not only did we expand our footprint with mobile and consumer customers, but significant [near arrow] and automotive customers are also adopted our solutions.

Now let us review the highlights for Q4 and 2014.

Cadence delivered strong financial results.

Revenue was $423 million for the fourth quarter, and $1.581 billion for the year.

Non-GAAP operating margin was 28% for the quarter, and 25% for the year.

And operating cash flow was $132 million for the fourth quarter, and $317 million for 2014.

Innovation is core to our strategy.

Our talented development teams delivered 11 new products over the past two years, with more innovative products coming this year.

As a result, we are winning over market shipping customers.

For digital and [signoff], there has been a record adoption of 16 nanometer and 14 nanometer FinFET technology, and several customers are already working on 10 nanometer designs.

Our innovative digital solution produced designs with better results for power, performance, and [area].

Along with faster run times.

We had over 10 [full floor] digital [wins] in 2014.

We also had segment share gains, assimilating customers, include a global marquee company, and then most recently [at the] major [fab lab] semiconductor company.

Customers across many market segments including mobile, wireless, automotive, and IOT design with our digital [flow].

Our silicon sign-up tools Tempest, Lotus, and [Quantus] QRC gain strong momentum, and collectively had more than 50 [tip outs] in 2014.

Last quarter, a leading US-based [mix signal] company deployed Tempest and [tip out] its largest design ever.

And a leading supplier of networking equipment switched to Lotus for power analysis and [signoff] because of its superior performance and capacity.

Now let us turn to system design and [votifications].

Increasing design complexity and tighter development schedules drive the need of more [votification].

Our leading system development suite had record bookings for the year.

And was augmented by the Jasper and Forte acquisitions.

A major European system company consolidated under system development suite for its votification needs, including innovation.

It was a very strong year for our incisive simulation, especially driven by demand for mobile customers.

Growing hardware/software challenges drive the circular trend in [emulation], as we added 28 new logos for the years.

Last quarter, media tech double its [in-store Palladium] capacity.

In addition, our top hardware consumer customer placed its largest order to date.

We are very excited about our next generation hardware platform, with its scalable enterprise architecture being at the core of a very compelling hardware (inaudible).

This platform will significantly expand our Palladium family, and we expect to begin shipping in the latter part of this year.

We entered 2015 with strong momentum for our integrated end-to-end verification solutions.

Our IP business had a great year with nearly 40% year-over-year revenue growth.

Our broad design IT product line is led by our DDR, low-power DDR, and PCIe products, and our adoption for FinFET designs is strong.

We have won several head-to-head engagements at the most advanced nodes, including a recent win at 10 nm with the marquee customer.

And we signed our largest design IT contract to date with one of our top customers.

We have supplied multiple IP cores for multiple customer [tipouts], including our DDR4 which is being used by high silicon in the world's first 16 nanometer FinFET [tipout].

Tensilica had a great quarter, with its largest number of new licenses ever in one quarter.

Tensilica also surpassed the mark of 2 billion cores shipping per year in customer products.

For verification IP, we'll lead the market in supporting the newest protocols.

We won significant business at top customers, and had our best booking year ever, with 60% growth.

Moving on, we strengthened our leadership position in analog, custom, and mixed-signal design.

Increasing usage by key customers and strong value proposition for our platform helped drive 9% revenue growth for 2014.

Adoption of our mixed-signal verification solution is increasing.

Liberate, our characterizations product has strong momentum, with increasing penetrations in the ecosystem.

Virtuoso, for advanced node, is growing rapidly with over 40 customers now using it.

And lastly, an integral part of our system design enablement strategy is our packaging and [bot] business, which grew 10% in 2014.

[Security] had a record year, and signal integrity analysis becomes even more critical at advanced nodes for high-speed I/O and for miniaturized consumer packaging.

We also had two notable highlights on financial side in 2014.

We initiated our stock repurchase program in January.

Based on the strength of our business, we increased the repurchase program in July.

And in October, we became the first company in our industry to receive an investment-grade rating.

So in summary, our innovative solutions and strong ecosystem partnerships are helping us to first win, and then proliferate our products with market shipping customers.

Our digital and signoff tools are gaining traction, with this market shipping customer at the most advanced nodes.

Our comprehensive verification suite is winning new business, and enters 2015 with strong momentum.

2014 was a breakout year for IP, and we are well-positioned for more growth.

We are going to invest in innovation to [delight] our customers, to further technology development, and high-quality technical support.

At Cadence we are excited by our opportunity as an indispensable part of the vibrant ecosystem that bring so many amazing products to the world.

I will now turn the call over to Geoff to review the financial results and provide our Outlook.

Thank you Lip-Bu.

And good afternoon, everyone.

I will now review the results for the fourth quarter and the year, and then present our Outlook for Q1 in 2015.

Cadence produced strong operating results for Q4 and the year.

2014 bookings totaled $1.778 billion, an increase of 12% over 2013.

Book-to-bill was 1.12, and the year-end backlog was approximately $2.1 billion, up 12% from last year's ending backlog.

Total revenue for Q4 was $423 million, compared to $400 million for Q3, and $377 million for the year ago quarter.

Revenue for the year was $1.581 billion, an increase of 8% over the prior year.

Please recall that Q4 had an extra week because FY14 was a 53 week year for Cadence.

The extra we contributed approximately $15 million of revenue to both Q4 and FY14.

For Q4, products and maintenance revenue was $393 million, and services revenue was $30 million.

Revenue mix for the geographies in Q4 was 47% for the Americas, 22% for Asia, 21% for EMEA, and 10% for Japan.

Q4 revenue mix by product group was 21% for functional verification, 28% for digital IC design and signoff, 28% for custom IC design, 12% for IP, and 11% for system interconnect and analysis.

I would like to highlight the nearly 40% revenue growth for IP for the full year compared to 2013.

Over 90% of the revenue for the year was recurring in nature.

Weighted average contract life for Q4 was approximately 2.3 years, and 2.4 years for FY14.

Total cost and expenses for Q4 on a non-GAAP basis were $304 million, compared to $291 million for Q3, and $282 million for the year ago quarter.

Q4 headcount was 6,106, up 24 from Q3.

Headcount increased by 372 for the year.

Year-over-year increase was primarily attributable to hiring in R&D and technical customer support and acquisitions.

Non-GAAP operating margin for Q4 was 28%, compared to 27% for Q3, and 25% for the year-ago quarter.

For the year, non-GAAP operating margin was 25%, compared to 24% for 2013.

Remember that Q4 operating margin is typically the strongest of the year.

For Q4, we recorded GAAP net income per share of $0.21, compared to $0.13 per share for Q4 2013.

For the year, GAAP net income per share was $0.52, compared to $0.56 for 2013.

For Q4, non-GAAP net income per share was $0.27, compared to $0.26 for Q3, and $0.23 for the year-ago quarter.

For the year, non-GAAP net income per share was $0.94, compared to $0.86 for the prior year, an increase of 9%.

Operating cash flow for Q4 was $132 million, compared to $88 million for Q3, and $119 million for the year ago quarter.

For the year, operating cash flow was $317 million, compared to $368 million for 2013.

Total DSOs for Q4 were 27 days, compared to 25 days for Q3, and 27 days for the year-ago quarter.

Our DSO target is approximately 30 days.

Capital expenditures were $12 million for the fourth quarter, and $40 million for the year.

Cash and short-term investments were $1.023 billion at year end, compared to $633 million from the prior year.

In October, we issued $350 million of 10 year notes.

The notes were rated investment grade by all three rating agencies.

In a quarter, we repurchased 2.1 million shares of common stock for $37.5 million.

For the year, we repurchased 5.9 million shares for approximately $100 million.

Remember that we increased our repurchase plan in Q3, and expect to repurchase $150 million worth of stock per year.

Approximately 55% of our cash and short-term investments were in the US at year end.

Next, I'm going to provide some details on our convertible notes, which mature in 2015.

Our $350 million convertible notes, due on June 1, 2015 will be settled in cash.

Within the last two months, we have received notices of early conversions of approximately $54 million, which will be settled in cash in Q1.

After settling the early conversions, we are now looking at a maximum cash payout on June 1 of $296 million.

When we issued the 2015 notes, we entered into a bond hedge transactions to limit our exposure in case the notes [settle] cash at a premium to their principle value.

The hedge transactions for the early converted notes are now been settled in this quarter.

Hence transactions for the remaining two 2015 notes will settle in April and May of this year, and the cash from the settlement will be used to prepay -- will be used to pay any premium due to the notes on June 1.

In a separate transaction, we sold warrants when issued when we issued the 2015 notes.

The warrants will mature from September through early December of this year, and will be net share settled.

Potential dilution from the warrants is also included an our diluted shares outstanding.

Now let's address our Outlook for the first quarter of 2015 and FY15.

As reminder, Q4 2015 included approximately $15 million of revenue attributable to the FY14 having a 53rd week.

Another factor to keep in mind is the recent volatility in foreign exchange rates, which increase the risk of our 2015 projected results.

While most of our revenue is billed in US dollars, about 10% is exposed to the yen.

On the expense side, approximately 70% of our expenses are US dollar-based.

And in general, a stronger dollar reduces yen-based revenue, and reduces non-dollar-based cost.

The stronger dollar also creates additional risk to our overseas sales volumes.

Of course, a weaker dollar would of course have the opposite impact.

For Q1, we expect revenue to be in the range of $405 million to $415 million.

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

The margin is down for Q1, primarily due to seasonally higher payroll taxes, and fewer vacations in Q1 as compared to Q4.

GAAP EPS for the first quarter is expected to be in the range of $0.08 to $0.10, and non-GAAP EPS for the first quarter is expected to be in a range of $0.20 to $0.22.

Now for FY15 Outlook.

Bookings are projected to be in the range of $1.87 billion to $1.93 billion, and an increase of 5% to 9%.

We expect weighted average contract life in the range of 2.4 to 2.6 years.

And we expect at least 90% of revenue for the year to be recurring in nature.

Revenue is expected to be in the range of $1.68 billion to $1.72 billion, with approximately 70% of this coming from backlog already in place at the beginning of the year.

This translates to a 6% to 9% growth in revenue over 2014.

Without the extra week in the 2014 baseline, growth would be 7% to 10%.

Hardware revenue was down from 2014 to 2013.

We do expect hardware revenue to increase in 2015.

Non-GAAP operating margins would be expected to be approximately 25% on an annual basis.

Non-GAAP -- the other income and expense is expected to be in the range of negative $24 million to negative $17 million.

The increase in net expense is primarily due to interest expense on the 10 year notes issued in October 2014.

After a thorough review of our non-GAAP income tax rate, which remained unchanged at 26% for a number of years, we are forecasting a non-GAAP tax income tax rate of 23% for 2015.

This is based on forecast increases in foreign earnings that are expected to lower our long-term non-GAAP effective income tax rate.

The change in non-GAAP tax rate adds approximately $0.04 to our expected 2015 non-GAAP EPS.

We are assuming weighted average diluted shares outstanding of 306 million to 314 million shares for the year.

GAAP EPS is expected to be in the range of $0.49 to $0.61, and non-GAAP EPS is expected to be in the range of $0.94 to $1.06.

This represents a 6% growth over last year at the midpoint.

We are expecting operating cash flow to be approximately $350 million.

Our DSO forecast is 30 days, and we expect capital expenditures of approximately $40 million.

So, I'd like to finish today by summarizing some of our key financial highlights from 2014.

We are proud of our financial performance.

By building a robust pipeline of innovative new products, [winning] in exciting new business with the world's best and most demanding companies.

In October we issued $350 million of 10 year investment grade notes, and attractive coupon rate of 4 3/8%.

The notes have trading well in the markets since they were issued.

In January 2014, we initiated a stock repurchase program for $100 million over two years.

Based on the growing strength of our business, in July we increased the program to $300 million over two years.

Cadence enters 2015 with tremendous momentum, with strong execution on product development, strong customer and partner relationships, and strong operation on financial management.

Operator, we'll now take questions.

(Operator Instructions)

Sterling Auty, JPMorgan.

Thanks.

Hi, guys.

Wanted to hit a couple of different areas.

Looking at the operating margin guidance for 2015, couple things.

One, given the first-quarter guide, should we believe that operating margins would bottom in the first quarter and then continue to improve through the year?

And on a year-over-year basis, the 25% versus what you just put up, where is the extra margin pressure going to come from, is it gross margins or is it headcount and operating expense?

Any color you can give in terms of where those functional investments might be coming from?

On the first part, Sterling, and thanks for the question, the first part, generally what happens in the first half of the year is Social Security taxes kick in, in the US, and that increases our expenses until people meet the Social Security caps.

That's one thing that drives expenses lower in the second half of the year.

The other one is just the vacations and how vacations lay in, in the summer, and of course, in the later half of the year with the holidays, vacations tend to kick in, so that tends to improve operating results in the second half of the year and decrease them in the first half of the year.

As we said -- on the second part, I think as we said in our Q3 earning call, we are winning new business with top customers, and these are the customers that you want us to be winning designs with.

To win and keep these designs, we have to invest in technology, as we mentioned in our last call, and outstanding customer technical support as we ramp these customers.

It is important for us to keep these customers by making this investment and also to hopefully proliferate going forward, so that's the thing that's driving our margins this year versus last.

And Sterling, this is Lip-Bu.

Just to add on that, clearly we are winning new business with market shipping customer at the most advanced node.

Those are the most demanding customer and they are really leaders in their field.

That means that we have to work hard and meet their exact design requirement.

That will make, over time, our solution to be the best in the world.

This is a very compelling value proposition and other customer will pay attention to it.

So winning, keeping this type of business requires additional customer support, and this is a decision that we make so that we can scale with this customer, proliferating across that customer requirement, and then this will enhance our business with other customers, so this is a very important point I just want to emphasize.

Sure.

As you look at that, do you feel that the incremental investment in 2015 that weighs on margins, does that become leverageable in the future?

In other words, do we get back to, beyond 2015, some margin expansion, or do you think that there's a steady pace of investment so this is where we should think about the more sustainable operating margin being?

Yes, Sterling, first of all, the investments are leverageable across customers.

That will provide the leadership and market share as a key driver for success for our business going forward.

I'm confident if we execute and are successful in the long term in proliferating our product, not only winning customer, marquee customer, and also the next level of customer will be also embraced, that in the end, it will benefit our shareholders.

At this time, we remain, Sterling, committed to sustainable profitability of the Company, but we're not guiding beyond 2015 at this point.

Okay.

One more and I'll get back in the queue.

On the emulation product, thank you for giving us a sense of timing.

It's been something we obviously have been talking about for some time, but if I look historically at the Palladium release schedule, the four-year time frame, this looks like it pushes it more towards the five-year time frame.

Is there a sense this time around why the longer product cycle?

Was there particular challenges in this product version to roll out?

As I mentioned in my remarks, and clearly this is a next-generation hardware platform.

We are very excited about it because it's very scalable enterprise architecture and we are very thoughtfully in our [think through] and architect that way and it going to be the core of the very compelling hardware road map that, over the years, we will have a shorter period of upgrading and significantly expanding our Palladium family.

So we are excited about it.

I know this is a very thoughtful architect in a very scalable way and it took a bit longer, but eventually the customer will benefit a lot and we are excited, in fact, we are engaging with some of the key customers.

They love it.

Great.

Thank you.

Mahesh Sanganeria, RBC Capital Markets.

Thank you.

Just wanted to follow up on the last question, on Palladium.

You gave us an indication that it will be shipping in the second half, so I am assuming, when you are giving revenue guidance, you are assuming that in the second half, you will be recognizing a significant revenue from Palladium or is it more of a 2016 thing?

Yes, Mahesh, two points.

We said in the latter part of the year, and when we give guidance, we include everything we know at the time we give guidance and want to give that guidance.

And, I think it's a very important point, clearly, we will announce details when we are ready to announce, and more important, we sell and we ship what we have.

How has ramp been in the past.

Once you start shipping, does it take a couple of quarters to reach a certain volume and you start with a low volume?

What has been the historical ramp profile of a new product?

Yes, we will announce more details when we're ready to announce those details.

So for this time, we've said we want to.

Okay, that's helpful.

In terms of, again, getting to the margin side, you're guiding to the mid-25% margin and you talked about increasing the expenses.

Are the incremental expenses going only into these new programs, or is there an inflection across the board in the expenses?

Well, of course, every company has focals and those types of things, but the investment that we're making is to support these market-shaping customers.

But on a sustained -- I'm trying to make the distinction as to, on a longer-term perspective, how should we think of your expenses growing if you did not have an event like this where you are making extra investments?

Yes, again, as we said before, everything we know, we include in guidance in what we're doing, and right now we're only guiding 2015.

We have this great opportunity that we are executing on and that's what we're concentrating on.

Okay, thank you very much.

Thank you.

Krish Sankar, Bank of America Merrill Lynch.

Hi, thanks for taking my questions.

I had a couple of them.

Not to harp on the emulation business, but just curious what you think is the market size for emulation?

What was it last year?

What do you think it will be this year?

And, any color on what your market share was last year?

Yes, first of all, clearly, that the hardware emulation become more and more important.

As I mentioned earlier, the complexity of design and also the shorter time to market, and so clearly that's a growing need for the whole verification.

We mentioned quite a lot about our verification development suite, and that's an [entirety in our entumble] and as you recall.

We bought Jasper, we bought Forte, and then we have a very strong Incisive and a very strong VIP.

Then we also have the hardware emulation, we have hybrid, and we have the FPGA for the acceleration.

The entire suite is now really growing very nicely for us.

And so, all in all, overall, the market is strong, at double-digit growth, and because this is a critical part, [bottleneck] of the time to market for a lot of our system companies, a lot of our semiconductor companies, and they really need to really have the best verification suite to provide, and we have the entire suite to support them.

Got you.

Is there any way to quantify the dollar value of the [first engage] for [2013] and this year?

We don't break out our hardware business, as I think you know.

Again, what Lip-Bu said, this is a secular growing business, as the complexity goes up and people design more complex products and the increasing importance of this business to the system companies.

Got you.

Then follow up is, you did mention about 55% of your cash is onshore.

How much of your cash flow is onshore?

Cash flow pretty much models the percentage of revenue we have in the different places, so that would be about 45% of our cash flow, approximately, is onshore, which is about our US revenue.

Got you.

Thank you very much.

Thank you.

Rich Valera, Needham & Company.

Thanks.

Follow-up question on emulation.

You talked about a lot of gross margin pressure in emulation in 2014.

Do you expect to see an improvement in emulation gross margin in 2015?

At this stage, we don't break out hardware margins and we don't break out our hardware business.

Clearly, we hope our next box will have better margins.

Any more you can say?

I would think it's more than hope at this point.

I would hope it's more than hope.

Yes, we expect it to have better margins, clearly.

Okay.

Fair enough.

Separately, moving on to another topic, China has been making some noise about increasing their investment in the semiconductor industry, in general, and making some funds available to that.

Just wondering if you guys could talk about the opportunity you see there, and when and if that could become material for you guys, if it's not already?

Rich, let me address these questions.

Clearly, China is an emergent opportunity for order players.

Clearly, they are organized.

They have a very big fund set aside to invest.

Clearly, they see semiconductor -- it's a very big market for all of us, 52% of semiconductor are consumed in China and going to be growing to 60%.

So it's a market that we all pay attention to.

Clearly, it's not just noise.

They are already making things happen.

They bought Spectrum, took it private.

They bought RDA, took it private.

They bought Montage, took it private.

They just completed STATS ChipPAC packaging from Singapore public, listed as private.

They already announced OmniVision and more coming.

So clearly, there is opportunity for all of us, make sure that all those designs will be using the flow and the design flow and the complexity.

They are also starting to become very valuable and appreciate the IP business, so it's a great opportunity for all the EDA players, and we are also very excited.

Great.

That's helpful.

Thank you.

Ruben Roy, Piper Jaffray.

This is Shawn Lockman on for Ruben tonight.

I was wondering if you guys could walk us through a little bit, as we think about your 2015 outlook, in terms of the puts and takes around your expectations or planning around foreign exchange impact, how that's impacted, how you're looking at 2015 and maybe even the quarter, as well?

Sure.

Approximately 10% of our revenue is in Japan, and that is mostly denominated in yen.

So that will have potential impact on us.

Of our costs, most of our costs are in the US, but we do have substantial costs in various different currencies around the world, and that would benefit us with the stronger dollar and hurt us with the weaker dollar.

In Q4, essentially FX had a modest impact on our financial results, and that was a pretty big place of pretty volatile results.

The one other caution I always will put out there is, of course, even a dollar-based business internationally can have an impact as the exchange rates change, up or down, so for us relatively modest in Q4.

It is a caution for 2015 for us.

Great, thanks.

If I could just drill down a little bit, as we think about 2015, as far as -- strong year in 2014 for IP, how should we think about that in terms of a sustainability of revenue growth there and what the expectations for 2015 are, in particular markets?

If you could just walk us through what you guys expect to see there for the year?

Let me get started.

This is Lip-Bu.

As I mentioned earlier, IP is a great business for us and is growing very rapidly.

We are very well positioned for further growth.

Clearly, there is opportunity in the whole design IP area, with clearly the DDR, low-power DDR PCIe product.

That is right now moving a lot into the FinFET design in the most advanced node 16, 14, and 10.

Every new node is always a new opportunity for players to compete for.

We are delighted.

We are winning head to head in multiple cases, and in the most advanced 10 nanometer, we won.

In fact, the largest IP contract, we -- to date, with the largest -- one of our largest, top customer.

Beside the design IP, also we have a very strong VIP.

We are clearly the market leader and we provide a very comprehensive verification IP.

Then we also have a very good IP from Tensilica.

Clearly, there's a lot of -- because of this programmable and because the low-power, and there's a lot of opportunity, not just for the baseband, for mobile, for imaging, for our computer vision related area and ADAS for automotive.

So there's a lot of opportunity that we should really go after.

All in all, we are excited.

Right now, the last quarter, Q4, are already 11% of our revenue.

It will continue to grow and we are very excited about this addition.

And a lot of customer embrace us because we have something really unique in terms of our portfolio that we can support them in their design and time to market.

I'd, again, point out, it was 40% growth.

And, in the second half of the year, that growth actually was accelerating.

I'm not saying accelerating over 40%, but we saw stronger growth in the second half, and we do expect strong single-teen growth in IP over the next few years.

Great, very helpful.

Thank you.

Jay Vleeschhouwer, Griffin Securities.

Thanks.

Good afternoon.

I'd like to ask about your bookings guidance for 2015.

The range is suggesting an increase of about $90 million to $150 million for the year versus 2014.

Could you talk about the variables that go into where you would land in that range?

Is it fair to assume that, given the timing of the emulation release, later in the year?

The current base of that business, which by our calculation, is around $100 million or so, that the predominant part of the increase in bookings would have to come from software and IP?

Jay, obviously, we don't break out the details of where our bookings come from or not.

Again, everything we know, we put into our bookings guidance.

We've had a couple of great bookings years in a row and the book-to-bill in 2015 is 1.12, so we are pretty happy with how that sets us up.

Backlog, when we leave the year, will grow at approximately 9% at mid-point of both the revenue growth and the bookings growth, and as you know, strong backlog leads to revenue growth in the future.

Let me ask you about where you can most likely gain share based on new products.

You've got quite a few things in the pipeline now with Novus, Tempus, Voltus, but they're addressing markets of considerably different size.

When you look at Novus, with the implementation market, that's one of the biggest markets in EDA, over $0.5 billion a year, but it's also tended to be one where it's harder to shift share.

On the other hand, the sign-off tools address a smaller market, but it's perhaps somewhat easier to shift share and get some incremental business that way.

So how are you thinking about the likelihood or ease of share gain in these somewhat different categories?

Jay, good question.

A couple points.

Clearly, from the customer engagement, we are heavily engaged, clearly indicate that the digital implementation, as you correctly point out, is the biggest [end] market.

Clearly, we have a very good -- better solutions in terms of power perform in an area and then faster run times and that's why you've reflect a lot of success we've have.

We are going continue to drive success and proliferate some of the win so that we can gain more shares.

Then also across all the different vertical.

Mobile, we are making tremendous progress on that, wireless, automotive, IoT.

You mentioned earlier, not just in the sign-off tool, we already have another engagement with a deep, important customer, the new place and route in synthesis.

Over time, we're going to be announced, when it is ready to announce, but we are already engaged.

They see what we have.

They are extremely excited.

Clearly, when you move down the geometry to 14, 16, and 10, and beyond, they are always looking for anything that's better power performance area, and the run time is critical for them.

So all this is exciting for us.

Then the other part is, clearly, the whole system design enablement strategy, part of that important strategy is the IP and also our PCB system-level, in terms of analysis and that's why the [circuitry] is come in handy and really helpful in terms of engaging with a system company because they really care about time to market, they care about the optimized, the power performance.

So all in all, going to be exciting for us.

Then in term of IoT and the others fast-growing area, and our mixed-signal come in really handy and because of our analog, our uniqueness and performance and scalability, and this becomes -- that's why we highlight the mixed-signal, the analog side we are growing at 9%.

That is very significant growth and we see a lot of excitement on that.

So all in all, this whole system design enablement, look at it from the system level, how to design a product, and then from all the way from [tool], IP, to packaging, and the whole system enablement, the analysis is critical for them.

We are in a unique position to drive success here and that is why we have a lot of success and a lot of momentum.

Stay tuned, I think we will continue to execute.

Just a couple last things, if I may.

Going back to the earlier discussion, the earlier questions regarding your incremental investing in the business, how are you thinking about that in terms of market share strategy by geography?

What I mean is there are some parts of the world, like Japan, where your market share is relatively low, and there parts of the world, like Europe, where your market share is actually rather good versus your overall average.

So would it be your intent to double-down in those areas where you're strong to gain even greater share in the strong areas?

Or, would you see yourselves investing incrementally in those markets, geographically speaking anyway, where you're relatively weaker to try to improve your position, or both?

Jay, that is a good question.

Our job is basically provide the best tool for the customer win and then they have a differentiation.

We work with all the customer from geographic customer to the leading customer in the vertical market they are in.

But saying that, clearly we see couple big trends happening.

One is the system company becomes more and more important, in terms of our revenue and our business.

Many of them decided to go vertical, integrated, moving to the silicon level to optimize [the upper] level.

We are heavily engaging and we are very well positioned on that.

Then, secondly, clearly, we are paying attention to the company that have the unique offering, and then how can we help them to really amplify that unique offering or the design that they have.

So we are heavily engaging in their design methodology and the design capability and what [their] uniqueness so we can really engage and help them to shine.

So across the board -- and there are some great companies in Japan, and I love some of those customers, and likewise in Korea, and same thing in China, in Taiwan, and in Europe.

Some of the European companies, and we mentioned the one system company, depending on us on the whole verification, that is critical for them.

Automotive is really strong in Europe.

And so, all in all, we work with every company, big and small, and they are all important for us.

Lastly, on pricing, for Geoff, over the last few years, you have on occasion, increased your prices.

If you could talk about any price increases you put in place for 2014 or are planning in your guidance for 2015?

And a week or two ago you introduce some new products under the Sigrity brand for the PCB market, where you had some segmented pricing, and I'm wondering if that pricing technique could be applied to other parts of the product line?

Jay, our focus is always on value, first and foremost on value.

Value gives you opportunities to capture more value for us, and to provide more value to the customers.

We use a variety of techniques, including some you mentioned, and we're focused on that.

But, it fundamentally come down always to us is, if we are provided the value, the pricing environment will be good for us.

Thank you.

Thank you.

(Operator Instructions)

Gus Richard, Northland.

Yes, thanks for taking my question.

I was wondering if you could just talk about your expectations for the growth of your core EDA business and the overall market in 2015?

Yes, let me start first.

Clearly, the core EDA is very important for our system design enablement strategy, and this is fundamentally very important, like digital, like analog, custom.

Clearly, this whole tool and suite and now, in the design, also the verification that I highlight quite a lot is very critical for our customers' success, so that part is something that is a foundation.

We put a lot of our effort, make sure that we provide the best tool, the best solution for our customer in the application market that they are going after.

With that, maybe Geoff can add more.

Sure.

We believe, overall, that the EDA industry can grow faster than economy can grow generally.

We also believe we can outgrow the industry over time.

This is especially true as we build our leadership position in some of the innovative products that we are working on.

Of course, you can have all the caveats about economic conditions and those types of things, but again, we believe EDA can grow faster than the economy and we can grow faster than EDA.

So would, based on the guidance you provided, would it be fair to assume that you're thinking the EDA business is going to grow 5% next year, overall?

You can look at what our competitors have already guided to, but we believe our numbers are going, we believe, faster than they are growing.

Again, they are great competitors, but we are growing quite well and doing quite well.

Okay.

Then just on the 10-nanometer digital design flow, you've got some wins there, and I was hoping you could just give a little bit more color as to what sorts of circuits are you working with your customers?

Is it mobile-phone based, microprocessors, just any color you can provide as to what kinds of end markets your customers are working on?

Gus, the advanced node is very important for us in order to take the leadership, in terms of product offering, the advanced node is critical.

So we're putting a lot of effort, not only the tool, the IP side, to make sure that we really optimize for this 14, 16, and then now 10.

10 is going to be a big nodes, and clearly, it's an area that a lot of mobile players and other key players are driving that 10 nanometer.

Then later on, the whole cloud data center will be also driving that because of some of the performance requirements they need to get there.

So in all, we are putting a lot of resources to drive leadership on the 10 nanometer across the board and not really concentrate on one or two customers.

We want to make sure that our tools are optimized, ready, when the customer ready to [port] and then we can be very stable, scalably provide them the best tool that they need.

Saying that, we are heavily engaging with all the key leading foundry partners and make sure our tool supports and drives [under] the leading customer, they are driving that 10 nanometer.

There's a lot of challenges, the double patterning, triple patterning There's a lot of power issues and a lot of cost issues.

Those are the things, the yield issues, we all work together with the leading partners to drive success because if everybody is able to solve a problem, able to [begin] in the last volume in good quality yield, good for everyone, and good for the industry.

And, we take that as an industry issue that we should really drive and contribute to the success of the 10 nanometer and beyond.

Okay.

Thank you.

Thanks for answering my questions.

Thank you.

Suji De Silva, Topeka.

Hi guys.

Lip-Bu, in the last question, you said that 10 nanometer would be a big node.

Can you talk about the dynamics from 20, 16, 14, down to 10, that might make 10 nanometer bigger?

Is it because FinFET is mature at that point or what are the other dynamics?

Couple of points.

Clearly, the 14 and 16 is very important.

If you look at TSMC, in terms of their forecast, it is very important, a lot of volume there.

But clearly, the 10 nanometer, the main reason I said they are going to be a long node, because 7 and 5 is unclear and EUV timing is unclear.

The complexity is unclear and also the benefit is unclear.

So, clearly, the leading customer for us, we really want to work with the leading customer.

When leading customer telling us 10 nanometer is important to them, we are all out to help them to make sure our tools are optimized and then drive the 10 nanometer success.

All in all, what I'm trying to say that is 14, 16 will have a lot of volume, but 10 nanometer will be longer, because when you reach under 10, when you see the 7 nanometer is unclear, the timetable, and that's going to be long.

Just like 28, clearly, it's a long node because not many applications are able to derive the benefit when you move down to 14 and [6] because some of the cost reduction may not happen, so you really need to see what application really needs it.

That's why we work very close with our customer, understanding what they need, and we recommend then what the process nodes should be focused on, so that they can plan for the next generation put out, should they stay in this node or should they go one more node in advanced.

Those are facing all our customers.

They all in the debates nodes and that's why we need to be way in advanced to advise them, as a trusted partner to helping them to succeed.

Okay.

Then my other question is around the customer base, the ones that are systems versus semis companies.

Are you seeing more and more systems companies bring semis in house and is there a different opportunity for you to sell your product set to systems companies versus pure semis companies, just remind us of that?

The systems companies become more and more important for us, and also tie in very well with our system design enablement strategy.

We are engaging with them in the very earlier part of their decision.

And as you know, most of them are very good friends of mine.

So in the way we can listen to them, see what they need.

Many of them, from mobile to cloud data center and to the e-commerce and even to the social media, clearly, the traffic and the volume they need is tremendous to manage.

So at some point in time, they need to really optimize for their own architecture and that's where the part -- and how to connect those platform into their big either e-commerce payment platform, so then we need to know what they're looking for and what are their bottleneck and their pinpoint.

And, how can we be helpful as a partner to provide them the solution so they can optimize all levels, and so that is what trusted partner for, and we want to be their partner.

Great, thanks, guys.

Sure, thank you.

Monika Garg, Pacific Crest Securities.

Hi.

Thanks for taking my question.

The first question is on the operating margin side.

Geoff, if I assume to a flat tax rate year over year, then the EPS growth is only 4.3%, whereas you guided your revenue growth, mid-[7.5%], that means you're assuming operating margin going lower year over year by 50, 60 basis points.

Given the complexity of increasing in semiconductors, maybe could you walk us through why the margins will take a hit?

Actually, the margins are -- the operating margin we guided at 25%, right?

So that's the major issue.

It actually isn't down.

Again, as we said, we are focused on winning these key customers and sustaining -- now that we've won these customers, again, we already have the proof points that we won them.

We want to invest to have the best technology and the best technical support going forward.

There is a little bit of impact by share count on EPS year over year, but the operating margin is actually unchanged from year to year.

Okay.

Then, last time, when you had a new emulation tool, we saw a significant growth at that time, 100% year over year.

I understand there was a lower base, but even on dollar amount, could $60 million, $70 million grow to -- do think when we have a new tool, we could see something similar number in the dollar amount next year?

We are not going to give any details right now on emulation.

When we're ready, we will talk about it then.

Right.

Then, last year, you had guided 26% of margin, right?

Then, the new emulation tool became a headwind to the operating margins.

So fair to think that when we have a new tool, we should at least could go back to where the 2014 guidance was?

Obviously, we're not guiding margin, any change on margin.

Everything that we know is included in the numbers already when we guide 2015.

And you were correct on last year.

Last one, maybe I missed it, did you give operating cash flow guidance for 2015?

We did.

It is $350 million, up from $319 million year.

Okay.

Then, last one, why is it lower from 2013 levels?

It's up from 2014 to 2015.

It is a little bit less than we had in 2013.

Biggest reason is going to be cash taxes over the period of time.

Again, we're quite happy with the progress from 2014 to 2015, up from $319 million to $350 million.

Okay, thanks so much.

Tom Diffely, D.A. Davidson.

Yes, good afternoon.

You talked about increasing investments to support some of your large customers.

Curious, though, is this investment purely headcount or are there facilities or some other costs associated with that?

This is headcount.

These are engineers, technical salespeople, those types of people.

That is our investment.

We don't have material investments in facilities.

The $40 million we spent in capital expenditure covers everything in that.

These are people.

It looked like in the quarter, the headcount just went up a tiny bit.

Do you expect that to ramp or are there some puts and takes involved?

This is Lip-Bu.

Let me highlight couple of points.

Clearly, some of these customers are very demanding customers and then clearly, when they are shifting the tool, there's a lot of hand-holding and [permutalize], so a lot of engineering support to make sure they can convert effectively, and that also we can proliferate across their account.

Then the other part is, clearly, we continue to drive efficiency, productivity, that's something that, Geoff and I, we have been driving as an Organization, continue to drive efficiency.

So overall, the net increase, now we are going to be managing according to our budget and plan that the forecast that we put together.

Okay.

Then, Geoff, you talked about the taxes coming down about 300 basis points.

That's a pretty big move.

I wonder if you could give us more detail on what's driving that?

Sure.

As I said, it's largely the mix between foreign and US income on a going-forward basis.

Our -- with the exception of Japan, our foreign business continues to grow and become a more important part.

We hadn't actually looked at that tax rate for a number of years.

Again, if you look at our cash taxes, which you can see in our Qs and Ks, they are materially less than even this tax rate we're projecting here.

Okay.

So it's not necessarily the new businesses that you're entering in, it's just your overall business is becoming more international --?

Yes, the mix of our business is the major driver.

Okay, thank you.

I will now turn our conference back 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 result we have achieved, and thank all our shareholders, customers, and partners for their support.

Thank you all for joining us this afternoon.

Thank you for participating in today's Cadence Design Systems fourth-quarter and FY14 earnings conference call.

This concludes today's call.

You may now disconnect.