益華電腦 (CDNS) 2015 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to with the Cadence Design Systems first-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you.

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

Please go ahead.

Thank you, Mike, and welcome, everyone to our first-quarter 2015 earnings conference call.

The webcast of this call can be accessed through our website, cadence.com, it will be archived through June 19, 2015.

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

With me 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.

The reconciliation can be found in the quarterly earnings section of the Investor Relations portion of our website.

A copy of today's press release, dated April 27, 2015, for the quarter ended April 4, 2015, and related financial tables can also be found in the Investor Relations portion of our website.

Our 10-Q for the quarter ended April 4, 2015 was also filed this afternoon.

Now I will turn the call over to Lip-Bu.

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

The first quarter was another excellent quarter for Cadence, with more exciting innovation and strong execution.

We achieved strong financial results; expanded our relationship with key customers and ecosystem partners; launched Innovus, our next-generation digital implementation system with enthusiastic customer endorsements; and were recognized in Fortune Magazine's 2015 list of 100 Best Companies to Work For.

Before I turn to our Q1 results and highlights, let me give a little context by updating you on the progress we are making with our System Design Enablement strategy.

EDA traditionally has focused on automating the development of chips and boards, but to successfully design today more complex end products, a different focus is required.

We need to go beyond traditional EDA and provide customers with tools, IP, system integration, and software content that enables end product development.

Core EDA is still the foundation of our System Design Enablement strategy and we are now offer the best digital/analog-mixed-signal, and advanced verification tools to our customers.

Our emerging IP business is growing at a strong pace, as we provide high-quality, differentiated IP to a broad set of customers.

We also continue to expand beyond the SoC to provide innovative solutions for system interconnect and analysis, hardware/software co-design and verification, and system-level IP.

To expand our leadership in System Design Enablement, we are focused on building our relationships with the leading system and semiconductor customers and ecosystem partners, expanding leadership at advanced nodes, developing or acquiring flagship products in key areas to drive additional growth, hiring and nurturing top talent, and maintaining a laser focus on customer success.

With the progress we are making on our strategy and our confidence in the future, I'm pleased to announce that we are increasing our ongoing stock purchase program from an annual rate of $150 million to an annual rate of $225 million starting with Q2.

This is a total of $450 million over the next two years.

This is part of our ongoing focus to drive shareholder returns and make optimal use of our balance sheet.

Now let us review the financials and product highlights for Q1.

We delivered another strong quarter, even while some customers were facing softer demand.

For Q1, revenue was $411 million, non-GAAP operating margin was 23%, non-GAAP EPS was $0.23, and operating cash flow was $47 million.

In early March, we launched Innovus.

This is our new internally developed product for digital implementation.

Innovus delivers 10% to 20% improvement in performance power and area, use massively parallel computing to provide up to 10 times reduction in turnaround time.

Innovus joined Tempus, Voltus, and Quantas QRC to provide our customers with next-generation suite of digital implementation and signoff tools for advanced design.

We expect these products to drive strong growth in digital, which is the largest segment in EDA.

Several customers have already shared their positive experience using Innovus, including ARM, Freescale, Juniper, MaxLinear, Renesas, and Spreadtrum.

In fact, ARM used Innovus during the development of the new Cortex-A72 processor, achieving 2.6 gigahertz performance.

Customer adoption of our silicon signoff tools remains strong.

Tempus, Voltus, and Quantas QRC each added more than 10 new customers.

A leading semiconductor company made a large purchase of Tempus.

Voltus and Voltus-Fi are now being used by more than 10 of the top 20 semiconductor companies.

Strong ecosystem support is essential to our success and we received TSMC's 10-nanometer certification for our digital, signoff, and custom/analog tools.

IP is key to our System Design Enablement strategy.

IP continues to show strong momentum in Q1.

Revenue was up 23% year-over-year.

Cadence entered into an agreement with Freescale to provide large portions of its broad IP portfolio across multiple Freescale product lines, including automotive, microcontroller, and network processors.

In addition, we entered into a license agreement with Avago for IP relating to TSMC's 16-nanometer FinFET plus process, with Cadence support of Avago with a variety of IP, as they continue their strong momentum in winning designs among their top-tier OEM customer base.

Building upon last year's successful EDA agreements, we signed a strategic IP interoperability agreement with ARM.

This provides both companies with access to broad portfolio of each other's IP in order to improve interoperability, optimize performance, and speed time to market for mutual customers.

Our Tensilica products attracted tremendous interest at Mobile World Congress, where we exhibited new solutions for audio, automotive, wearables, and IoT.

And just last week, we introduced our new Tensilica Fusion DSP, which is a scalable DSP that is ideal for IoT, wearables, and wireless connectivity applications which require specialized computations, ultra-low energy, and small footprint.

On hardware, we had our strongest revenue quarter over the past year.

Top customers expanded their Palladium capacity due to both increasing design complexity and deployment of new use models, and we also added several new customers.

Our team continues to execute on the next-generation hardware platform, and earlier adopter customer testing as part of our validation plan is tracking well.

So in summary, we are very pleased with our progress as we execute our System Design Enablement strategy.

Our innovative solutions and strong ecosystem partnerships are helping us to first win and then proliferate our products with market-shaping customers.

Innovus is the latest addition to our next-generation suite of digital and signoff tools and is already in use by our top customers.

Successful execution of a sound strategy is driving superior results and we are pleased to be in the position where we can return more capital to our shareholders, while also making critical investments in R&D and high-quality customer support to drive continued growth.

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

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

I will provide some detail on the first quarter, then give our outlook for Q2, and update our guidance for 2015.

Q1 was characterized by strong execution.

We put up some good numbers for the quarter in a challenging environment.

On the new product front, we have received positive feedback from our customers on Innovus.

Total revenue was $411 million, up 9% compared to $379 million for Q1 2014.

Revenue mix for the geographies was 47% for the Americas, 24% for Asia, 19% for EMEA, and 10% for Japan.

The revenue mix by product group was 23% for functional verification, 28% for digital IC design and signoff, 27% for custom IC design, 11% for IP, and 11% for system interconnect and analysis.

Weighted average contract life was approximately 2.5 years.

Total costs and expenses on a non-GAAP basis were $315 million, compared to $304 million for Q4 and $295 million for the year-ago quarter.

Q1 headcount was 6,260, up 154 from Q4, due to hiring in R&D and technical field positions.

Non-GAAP operating margin was 23% compared to 28% for Q4 and 22% for the year-ago quarter.

As expected, the Q1 operating margin was down from Q4, due to the seasonal impact of payroll taxes and vacation expense.

GAAP net income per share was $0.12.

Non-GAAP net income per share was $0.23 compared to $0.27 for Q4 and $0.20 per Q1 2014.

Operating cash flow was $47 million, compared to $132 million for Q4, and $28 million for the year-ago quarter.

Total DSOs were 30 days, compared to 27 for both Q4 and of the year-ago quarter.

Capital expenditures were $8 million.

Cash and short-term investments were $980 million at the quarter end, compared to $1.023 billion at the end of the year.

In the quarter, we repurchased more than 2 million shares of common stock for approximately $37 million.

Approximately 48% of our cash and short-term investments were in the US at quarter-end.

We paid $54 million in cash in Q1 for convertible notes that were converted early.

We will pay off the remaining principal, $296 million, by June 1. As a reminder, the associated hedge settles in April and May, and outstanding warrants will settle from September through December.

Now let's turn to the outlook for the second quarter.

For Q2, we expect revenue to be in the range of $410 million to $420 million.

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

GAAP EPS for the second quarter is expected to be in the range of $0.14 to $0.16.

Non-GAAP EPS for the second quarter is expected to be in the range of $0.23 to $0.25.

And now for our FY15 outlook.

Our bookings, revenue, and operating margin guidance for the year are unchanged from last quarter.

Bookings are projected to be in the range of $1.87 billion to $1.93 billion.

We expect weighted average contract life in the range of 2.4 years 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 $1.68 billion to $1.72 billion.

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

Without the 53rd week in the 2014 baseline, growth would be 7% to 10%.

We continue to expect hardware revenue to increase in 2015.

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

Non-GAAP other income and expense is now expected to be in the range of negative $20 million to negative $14 million, compared to the prior range of negative $24 million to negative $17 million.

The non-GAAP income tax rate is 23%.

We are assuming weighted average diluted shares outstanding of 308 million to 316 million for the year, which is up from our prior assumption of 306 million to 314 million, due to the impact of higher share price on assumed dilution from the warrants that expire later this year.

GAAP EPS is now expected to be in the range of $0.60 to $0.70, a $0.10 increase at the midpoint from the prior guidance, primarily due to lower estimated GAAP taxes.

Non-GAAP EPS is now expected to be in the range of $0.96 to $1.06, which is a 1% increase at the midpoint.

We expect operating cash flow to be approximately $350 million.

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

As Lip-Bu said, thanks to the increasing success of our strategy, we are replacing our share repurchase program with a new program with an annual rate of $225 million.

This is up from the prior rate of $150 million per year.

Beginning this quarter, we expect to repurchase $450 million of our common stock over the next eight quarters at our quarterly rate of approximately $56 million.

In closing, while there's some uncertainty in the environment, I hope you can tell we are excited about the strength of our execution and opportunities and we are confident in our future.

So with that, operator, we'll now take questions.

(Operator Instructions)

Mahesh Sanganeria, RBC Capital Markets.

Congratulations on creating the buyback.

Just want to follow up on that.

Will the buyback rate be uniformly spread over several quarters, or you're going to monitor and moderate that depending on the situation or the stock price?

Mahesh, this is Geoff.

We expect to repurchase approximately $56.25 million per quarter starting this quarter through Q1 of 2017 -- so on a regular, consistent rate, as we have in the past.

And since we're talking about capital trends, Geoff, any updated thoughts on anything you're considering on the dividend side?

Mahesh, as always, we regularly review our capital structure.

We take into account levels of debt, our business, our capital needs to grow, and return on cash to shareholders, including how we return that cash to shareholders.

We'll continue to evaluate it.

Obviously, right now, we're talking about share repurchase at this time.

Krish Sankar, Bank of America Merrill Lynch.

I had two of them.

One is Geoff or Lip-Bu, in the last quarter you spoke about some increased investments to potentially gain share on the digital side.

I'm just trying to figure out, what time frame would we have to look into to get any quantifiable or tangible results on that share, given the digital side?

And I also had a follow-up.

Yes, Krish, let me first start.

This is Lip-Bu.

On the digital side, we continue to get very strong momentum with our new suite of digital implementation.

As I mentioned, we clearly have an advantage in terms of performance power area and also the reduction of time; and that is very significant.

So clearly, this is a lot of momentum.

I mentioned last year we have a marquee global account; we have large consumer electronics; and we have a large semiconductor company.

Then this quarter, we mentioned about our leading semiconductor purchased Tempus.

So all in all, we have a lot of momentum.

But I just want to highlight, clearly our revenue is a recurring ratable model; so booking usually turns to revenue over time.

Also I think first of all you win; then later on you proliferate across all the different productive [element] groups.

So there's a time delay, but clearly we see the momentum.

We're excited about the new offering we have, and we are very focused on customer success.

Got it.

All right.

That's very helpful.

Then as a follow-up, you mentioned that you still expect by towards the end of this year the new emulation product release.

I'm curious.

You did say that you expect hardware revenue to increase through the year.

Are customers waiting to get the new solution, or are they ordering SVC?

Or is this increase in revenue more a function of the beta sites for the new emulation product those customers are ordering?

Let me start to answer the question.

First of all, as I mentioned earlier, we had the strongest revenue quarter over the past year.

So top customers expanding their capacity, and also [they find] new use model; and we add a couple of new customers.

So overall, in the in-circuit emulation, we are clearly the leader.

And meanwhile, we find newer applications use model, like simulation, acceleration, hybrid verification, system-level dynamic power analysis.

So the growth over the 2014 is what we have, and we're just selling what we have right now.

And then meanwhile, on the new platform, as I mentioned in my remarks, we executed well.

And we are in the validation plan.

And an earlier adopter customer testing is tracking well; and we continued to see that last quarter, that shipping is the later part of the year.

So far, we are pleased with the progress we've made.

Rich Valera, Needham & Company.

Lip-Bu, I was hoping you could just give a little more color on the macro environment.

You referenced that it sounds like there are some challenges out there.

But if you could give some color on how that's affecting EDA purchasing behavior and how you are navigating through this choppy environment.

Rich, that's a good question.

A couple of pointers.

One, clearly, we all know that the macro level concern, slow down growth in China and then the Greece (inaudible) situation.

And then the foreign exchange volatility, political unrest; so those are our concerns.

We always have to look at that.

And then meanwhile, clearly, there are some areas of strength and some areas of challenges.

So for example in the video, wearable, IoT [crowd], infrastructure, automotive -- those are really exciting and a lot of increasing design in Advanced Nodes and IP area.

But clearly, in the PC side, there are some challenges.

All in all, it's a mixed environment.

You heard some of the earnings call from our customers.

So clearly it's mixed and depends on whether the sector focused (audio break) the product leadership that they have, so those are the challenges.

But meanwhile, saying that, we clearly see a lot of system company engagement and then system service-related companies are doing really well.

We see very strong design activity among the system company and also the leading semiconductor company.

And so this is exciting.

There's a lot of new end products, amazing products, coming up.

And we are delighted to be their trusted partner to work with them and with our ecosystem partners, like foundries, IP vendors, to help them be successful to [take] out that chip and so that they can win in the marketplace.

That is our job, and we are very delighted to be part of that.

And we think we had a really nice quarter -- nice revenue growth, operating profit growth, cash growth year over year too.

So we think we're operating well in a not-perfect environment.

That's great color.

Thank you.

And wanted to follow up on the emulation question.

And didn't want to put words in your mouth, but would you say now that you have beta units in the field and you're in the beta part of the process for there to be an emulation box?

Yes.

First of all, as I mentioned, execute well.

I have the weekly update on the team, and I'm happy with the progress they make.

And I mentioned earlier, the adopter in the customer testing is tracking well.

And we remain in the same position; that's shipping in the later part of the year.

We will tell you more in detail when we're ready to announce.

Ruben Roy, Piper Jaffray.

Lip-Bu, I wanted to follow up on Rich's question on the macro and whether or not you've seen any significant or material shift at the leading edge, so FinFET design 16-nanometer and below.

And what your assessment is on where some of the leading-edge folks are when it comes to 10-nanometer.

Thank you.

Those are good questions.

Clearly, we are working with our customers and our IP partners and also with the foundry partners very deeply.

Clearly, the FinFET is progressing very rapidly -- not just the 20-nanometer, now the 16-, 14-nanometer are in production.

We're excited about working very closely with our partners on the 10-nanometer.

In other areas, we are already started in the 7- and 8-nanometer.

So there are a lot of challenges in terms of optimizing our tools, earlier optimizing our tool and engaging with our foundry partners to make sure that it's ready and optimized for our customers to use.

So we work very closely with our leading customers, very closely with our IP partners, and work are very closely with our foundry partners.

And so a lot of challenges in the double patterning, triple patterning.

And we keep an eye very closely with the lithography techniques, like EUV and others.

We want to make sure that our tool will be ready when the customer is ready to deploy and design, and then we will be there to support them.

All in all, I'm saying that we want to be the leader in the FinFET and Advanced Node; that is something that we turn determine to try that.

Thank you for that, Lip-Bu.

A quick follow-up on Innovus.

I think that your market share and implementation, and specifically place and route, historically has lagged your larger competitor.

And it's good to hear that some of the customers are excited about the new product.

Can you talk about your place and route in market share and how you expect Innovus to roll out into the customer base?

When are we going to start to see this in terms of potential market share shifts on the digital side?

That's it.

Thank you.

Thank you for bringing up the subject.

Clearly, Innovus, we are extremely excited about this new offering.

In earlier March, we launched the products with very exciting, enthusiastic customer support.

And clearly, it's internally developed products and something that we are very proud of the culture of the innovation we put in place at Cadence.

The product clearly has a good advantage in terms of 10% to 20% improvement in the performance power area.

That is very important to the customer.

And then the other part is up to 10 times reduction in turnaround time.

And as you know, time to market is critical to the success for our customers.

This is a very important.

Also the partition, in terms of the 5 million to 10 million instances; and that is very significant to customers.

So tied in with our Tempus, Voltus, and Quantus, that is a new suite of digital implementation using massive parallelism.

And we are very excited; and clearly, customers recognize that.

We are heavily engaging with our customers.

Six of our customers already announced.

I mentioned ARM, Freescale, Juniper, MaxLinear, Renesas, and Spreadtrum; and many more are coming and working with us.

So clearly, they see a value.

And it's the best-of-class, and we are delighted to be able to provide that solution to our leading customers.

Jay Vleeschhouwer, Griffin Securities.

Lip-Bu, I'd like to follow up on the comments you just made around implementation.

Are you at the point now where you are able to take multi-product orders, where customers will buy any or all of Innovus, Tempus, Voltus, Quantus -- the products with other Latin names -- all together?

Are you at that point now where rather than doing single point products, such as the one you alluded for Q1, you're starting to see multi-product orders for your various new tools?

I'll answer your question, yes.

And these tools are all in production ready.

In fact, many customers are using our tool for their tape out of their most advanced process note; and it's a next-generation suite of digital implementations.

We are delighted and able to provide them in the most Advanced Nodes for them to tape out.

And so we are ready.

We are very excited and much as a place and route, and the timing and products signoff, and then working very close with our leading foundry partners.

So that will be available to them.

So it is something that they are excited.

It's something new and better performance.

And this is the biggest [ten] market for the EDA, and that's why we are very excited for the future growth.

As a follow-up, I'd like to ask about the difference that you've observed in buying behavior between systems customers and semiconductor customers, where they are a more traditional part of the customer base.

Specifically, is it more common for systems customers to do intra-contract expansion business?

That even well before the contract expires, they'll come back and add tools and capacity?

For instance, would that large customer you alluded to back in the third quarter have already come back for more?

Or is this a more common thing for systems customers to do than traditional IC customers?

There are a couple of opportunities for us.

Clearly the system companies are very important for our System Design Enablement strategy.

And because they decided to vertically integrate and optimize, and all the way from the silicon level to the board level to the software content.

We are uniquely positioned to provide all three -- not just the tool, not just the IPs, and also the PC board, the system analysis.

So when they are developing their chip, they look at the entire board, the entire system in terms of the power, signal integrity, thermal analysis; and that is critical for their success.

Their objective is time-to-market with the best product development.

And so to them, the critical point for them is time-to-market and also quality.

So those fit in very well with our value-driven approach to preserve the value and increase value and provide the solution rather than just a point tool.

So this is something that's very important.

We continue to be very disciplined in terms of, whether it's system company or semiconductor company, we drive the value.

And we drive quality.

And then we work deeply in partnership, collaborating for their success.

That's something that is very important for them and also for us.

So in terms of differentiating, pretty much the same; but we just have to be very disciplined.

But the system guys, they are also not just looking at the semiconductor.

They look at the entire board, entire system, the software stack.

And that's why we need to provide a solution, the System Design Enablement solution, all the way to the interconnect and then the content and the integration that they need.

That's why we are in a unique position to provide that solution to them.

And one of the things, Jay, that we've been concentrating on with our customers is we want to allow as many opportunities for add-ons as possible.

Again, it varies from customer to customer.

But that's certainly been a focus for us, to allow for deals to be structured in between the other deals and increase revenue over a period of time.

So we generally try to aim that way.

Again, it varies from customer to customer.

Gus Richard, Northland.

I was hoping you could give a little more color on the IP deals you have with Freescale and Avago.

Is that IP specific to them, or is this you developing product IP for all your customers?

Gus, this is a good question.

We are very delighted, and our IP becomes very important business and also key to our whole system Design Enablement strategy.

As I mentioned, it's a great quarter for us, 23% year-to-year increase in revenue.

More specifically, on the Freescale, this is a very important milestone for us.

We provide the last portion of their broad IP portfolio across multiple Freescale product lines from automotive -- they are very strong in that-- microcontroller, level processor, so across product lines.

And then other part is very exciting.

We're able to provide the IP license agreement for Avago.

As you know, it's a very successful company.

We're providing the most advanced TSMC 16-nanometer FinFET plus, and then for a variety of IP they need, so that they can broaden their wins with their OEM customers.

Those two, we are very, very pleased with that.

And, so of course, I'd just add on we also have that IP interoperability with ARM, deepened our relationship even further, so that we can really access to each other's IP.

The most important, it provides that efficiency, the interoperability, the performance, the speed for the best for our mutual customer to be successful.

Just to be clear, is the IP you're developing for Freescale just for Freescale?

Or are you going to offer that IP, this portfolio, to all of your customers that are doing similar products?

Yes, this is more in our industry standards IP.

Clearly, we provide that industry-standard IP for all the different customers at the most Advanced Node.

That is our goal and our vision.

And clearly, more and more customers are outsourcing their IPs to -- provided it's silicon-proven, high-quality, differentiating IP.

We are delighted.

We have more than 1,000 people on our team working on the IP, and we have a very broad IP portfolio that we can serve our customers well.

Monika Garg, Pacific Crest Securities.

First one is one housekeeping question.

If I look Q-over-Q, the IP revenue seems to be down close to 11%.

Is it just seasonality?

Any particular reason for that?

The biggest reason why our revenue is down from Q4 to Q1 is we had an extra week, remember, in Q4.

That's the biggest reason why our revenue is down.

Without that, we believe revenue would have actually been up.

Got it.

Okay.

Thanks.

Then you talked about 10 new customers in Tempus, Voltus -- all these new digital products; but your bookings guidance has remained unchanged.

So is it you were expecting these customer wins or that bookings guidance could be just conservative?

Yes.

Whenever we do bookings, we take into account the things that we know at the beginning of the year.

Of course, we were well aware of most of the things that were going to happen.

So, yes, we knew it back then too.

And also, just to add on, usually we win first and then proliferate.

So because of ratable model, over time you're going to see the growth.

(Operator Instructions)

Sterling Auty, JPMorgan.

Couple of questions.

One, can you give us a sense of what you think the anticipated impact of a lot of the mergers and consolidations will be on your business?

Granted, not a lot of talking about cost-cutting.

But I would think putting some of these companies together, being much larger, they are going to want a bigger volume discount the next time they come around.

Yes, Sterling, good questions.

First of all, this consolidation M&A will continue -- actually will be even accelerating because of the growth and also the scale to the Advanced Nodes.

This is unavoidable.

But clearly, after the consolidation, they will really drive more efficiency and more reducing the combined G&A.

But clearly, the number of engineered designs actually increase.

So we are delighted to work with them.

Clearly, we continue to drive very disciplined and value-driven in terms of working with them.

And also when they move down to the geometry -- to the 16, 14, and 10 -- that deep collaboration even more, actually they need us even more.

And so the partnership requirement is even deeper.

And that's why we've consistently mentioned about being a trusted partner.

So they can count on us really drive the true performance.

And that's why we have created this innovating culture, so that we can continue to drive innovation, continue to drive efficiency for that.

And then saying that, because of some of this consolidation, actually it is really exciting for me is that most start-up companies coming up with great teams and great innovations.

So that part, we also support some of the really, really top-notch engineers coming out and to do really [disruptive] innovation.

And we are also part of that to provide them the tools and solutions to drive new creation and new innovation.

And then I also mentioned earlier, new breeds of systems and service companies are coming up to drive the whole vertical integrations.

And we are so well-positioned to provide them the solution from tool, IP, PCB, and system analysis, to drive access for them.

So all in all, the environment is a net positive for us.

And again, Sterling, remember, we have a well-diversified customer base, with no customers approaching even close to 10%.

And our top 40 is maybe 50% or 60% of our customers -- so well diversified.

Okay.

And then the digital implementation and signoff growth, a little sluggish this quarter.

Do you think that was the anticipation of the Innovus release, and should we see acceleration in the coming quarters?

Sterling, we can't hear you.

Can you repeat your questions?

I wondered if the Innovus release froze any orders on the digital side in anticipation of the release.

No.

Again, you need to remember Q4 was a 14-week quarter; so that had some impact.

We're very happy with our momentum in digital and signoff.

It does take time for bookings to become revenue, but we don't believe Innovus held back any of our prior business.

Jay Vleeschhouwer, Griffin Securities.

Just a couple follow-up questions.

Geoff, in the 10-Q, which came out this evening for the first quarter, it mentions that your hardware cost of revenues were down $4.5 million year over year.

If our historical cost calculations are correct for emulation for the last year, including Q4, then it seems to suggest that your [hardware] cost of revenues might have been up sequentially from Q4?

And so if we assume a more or less constant margin, could we infer that in fact your emulation revenues were up sequentially from Q4?

And if that was the case, was that mostly a function of (inaudible) of backlog, as you did Q1 a year ago?

Or did you in fact do a decent amount of organic new business in Q1?

As Lip-Bu said during his prepared remarks, we actually had the best quarter in Q1 in hardware that we had over the last four quarters; so we did quite well.

Revenue was clearly up as a result, from Q4 to Q1.

The rest of the detailed assumptions are your model and your question.

But, yes, we had a very nice quarter.

Came out of backlog, came out of good business, came out of our current generation of products.

So we're quite happy.

Okay.

Thanks.

Another one for either of you.

Again, back to the focus on systems customers, particularly given the investments you're making to support them.

Are you using, as an internal metric to keep an eye on that business, the notion of account profitability?

Synopsys, for example, brought this up a number of years ago as a metric for themselves, particularly for larger accounts.

Is this something that you, in fact, manage to -- particularly for the larger accounts?

Yes.

Of course we look at account profitability, and we pay attention to that.

Our goal is, of course, to provide value to all of our customers and make sure that's working.

We're also quite comfortable that the investments that we're making here are going to pay off and are value-enhancing to shareholders, and so we're quite happy.

Suji De Silva, Topeka.

Can you talk about -- in the emulation side, you had a good quarter here -- how the backlog is forming there versus the prior few quarters?

Yes.

Suji, we don't guide individual segments of our business on a going-forward basis.

We have said, for the year, that we expect hardware to be up from last year; and we'll stick with that.

Great.

All right.

Thanks, Geoff.

Then you talked about the increasing complexity, going from 20 to 16, 14 over to 10.

Do you think there's less likelihood likely that people can switch out to competitors versus prior generations?

Is that a phenomenon that would be happening with the increased complexity you're seeing and the greater interaction with your customers?

Is that a fair conclusion?

Yes.

Clearly, every process node is an opportunity for us from the tool and IP point of view.

Since I came on board six years ago, we've been very determined to drive leadership in the Advanced Nodes.

Clearly, the 14, 16, 10, 7, 8 is very much in our road map.

And we are heavily engaging with our IP partners and foundry partners.

So that's something we have to work closely with them and also with our customers.

Again, that deep collaboration and partnership with our customers and IP vendors and also the foundry partners are critical for success.

And that part, we've built a very solid foundation to build on top of that.

And then they view us as a trusted partner going forward.

That's something, when you move down the geometry, clearly they want to have a partner they can count on to continue to drive innovation so that they can lean on us to drive the success on the development.

Monika Garg, Pacific Crest Securities.

Thanks for letting me ask the follow-up here.

Geoff, I just want to understand the foreign exchange movements impact on your business.

If I understand correctly, the revenue, only yen -- you have exposure to yen on the revenue basis.

But could you walk through the impact on the OpEx (multiple speakers)?

Yes.

The yen is the only other currency that we sell any material amount of dollars in, so of course that impacts revenue.

There is another indirect revenue impact that is related to the fact that we do sell to a lot of multi-national companies who have currency other than dollars as their functional currency.

So of course their prices are increasing as the dollar/euro exchange rate or the dollar/RMB changes.

So there is an indirect impact.

On the cost side, most of our costs are employee-related.

As you would expect, our largest employee bases are in US, India, Europe, and China.

So we do get some benefit there based on stronger dollar and, of course, would have some costs if the dollar became materially weaker.

Overall, net, it was a slight positive for us.

Just another one for me.

If we look Intel and PSM, they cut CapEx this year.

And what we are seeing is all the companies are talking about reduced benefit of moving to advanced geometries because the benefit of cost of transistor is not coming down as much as it used to in the previous years.

Do you see any impact on EDA spend as we move to advance geometries?

Do you see a negative impact with your spend because of this?

No.

I don't see that.

And clearly, when you move down the geometry, first-time path is critical because the [mass cost] is very high for the Advanced Node.

Actually, foundry and customer, they reach out to us even earlier because they want to make that our tools are optimized for them and certified for them.

So all in all, actually have a lot more proof from the customer want we have a deeper partnership with us.

And we are delighted to be a partner with them.

And their success is our success.

So it's something that we are really proud of, being a trusted partner for all of them, and then to drive the differentiating product that they need.

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

In closing, I'm very proud that Fortune Magazine has recognized Cadence and our hard-working employees by including Cadence in their 2015 list of 100 Best Companies to Work For.

I would like to thank all our employees, 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 First-Quarter 2015 Earnings conference call.

This concludes today's call.

You may now disconnect.