益華電腦 (CDNS) 2015 Q2 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 the Cadence Design Systems second-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you.

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

Please go ahead.

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

The webcast of this call can be accessed through our website, Cadence.com, and will be archived through September 18, 2015.

A copy of today's prepared remarks will be 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 results.

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 July 27, 2015, for the quarter ended July 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 July 4, 2015 was also filed today.

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

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

Cadence produced strong operational results for Q2, while continuing to deliver innovative new products.

Revenue was $460 million, non-GAAP operating margin was 28%, non-GAAP EPS was $0.27, and operating cash flow was $122 million.

Let us start with the environment.

Semiconductor business conditions continued to be mixed, with some segments performing better than others.

Overall, softer sales for the year now appear more likely.

So far, there has been no material impact on design activity, and demand for our products remains stable.

We are also mindful of the customer consolidations in Q2.

Longtime impact of this on our industry is complex and difficult to predict.

While we do not expect material impact near term, consolidation could pose a challenge to industry growth over the next few years.

Earlier today, we announced a change of our current stock repurchase program.

Cadence is committed to driving shareholder value through a balanced approach that drives growth, invests in innovation, and returns capital to our shareholders.

Our Board and management team regularly and thoughtfully review all aspects of Cadence business and capital structure.

As a result of such review, we announced a new $1.2 billion stock repurchase program, which will replace our current program.

Geoff will share more detail about this program in a few minutes.

Now, let us review Q2 product highlights.

We continued to execute on our system design enablement strategy.

I am pleased with our progress in driving growth in our core EDA business, which is at the heart of the strategy.

And with our momentum in IP and system interconnect.

Innovation is the driving engine of our strategy.

In Q2, we introduced two new products, the Genus Synthesis Solution, which is our next-generation synthesis engine for digital design, and Indago Debug Platform, which will significantly enhance functional debug productivity.

With these new products, we have now delivered more than a dozen innovative new products in the past two years.

Genus is the latest addition to our industry-leading advanced digital design and sign-off platform which includes Innovus, Tempus, Voltus, and Quantus.

Genus improves on previous Synthesis tool by employing a massive parallel architecture that delivers up to five times fast turn around and linear scaling of runtimes beyond 10 million instances.

This will greatly improve our customer design productivity.

TI and Imagination Technologies have endorsed Genus, and we have more than a dozen engagements underway.

Innovus, our next-generation digital implementation system, continues to rapidly gain traction with market shipping customers on their most advanced designs.

Qualcomm Technologies, Nvidia, STMicroelectronics, and Faraday Technology have joined ARM, Freescale, Juniper, and others in adopting Innovus for production design at the most advanced nodes, benefiting from excellent quality of results and faster turnaround time.

Another important part of our system design enablement strategy is to bring a vertical orientation to our product portfolio and go-to-market strategy.

I am delighted to report that we are making good progress on several verticals.

Infineon Technologies decided to partner with Cadence on a comprehensive automotive functional safety solution, and a major Asian car manufacturer adopted Sigrity for system analysis for automotive function of safety.

Tensilica had two significant automotive wins, one for car-to-car communication, and another for in-dash application.

Bosch deployed our new Indago Debug Platform for advanced mixed-signal MEMS sensors, and a belief Indago will enable them to continue to deliver for application in consumer electronics, fitness tracking, wearable, and IoT.

And we expanded our business with two major new aero customers.

IP is the fastest-growing part of our business, and is essential to the system design enablement strategy.

The three major parts of our IP business are Tensilica DSP, design IP, and verification IP.

Tensilica represents the second-most popular instruction set architecture in the market, and we estimate that around 50 million IoT devices that contain Tensilica IP are already shipping annually.

This quarter, we announced a collaboration with TSMC for IoT IP subsystems with our Tensilica Fusion DSP, plus our analog interfaces and peripheral and sensor interfaces.

Demand for high-performance wire interface IP calls for server and data centers was strong, with a major data center OEM adopting our PCIe gen 4 and DDR4 IP solutions.

In memory space, we had our first 10-nanometer DDR4 physical interface IP win.

On the hardware front, Palladium XP won six new logos.

One of our newest Palladium use models, dynamic power analysis, is proving to be vital in diagnosing and debugging software-related power issues in mobile applications.

Pre-production testing of our next-generation emulator continues, and we remain on track to start shipping later this year.

So now to summarize, Q2 was a solid quarter, with strong operational execution.

Our system design enablement strategy is bringing more innovation and more vertical focus to our business and solutions.

We continue to gain traction in digital, with the launch of Genus for RTL synthesis and top tier customer adoption of Innovus implementation system.

IP growth was strong, and we continued to gain new customers.

And finally, our new $1.2 billion stock repurchase program will return additional capital to our shareholders.

I will now turn the call to Geoff to give you more details on our new stock repurchase program, review the financial results, and provide our outlook.

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

Let me start the discussion today with our new stock repurchase program, and then move on to our second-quarter results and outlook.

As Lip-Bu said, we have been and are committed to driving shareholder value through a balanced approach that drives growth, invests in innovation, and returns capital to our shareholders.

We will do this by continuing to invest and profitably grow the business, operating the business effectively and efficiently.

Financing the business with an efficient capital structure that provides the necessary flexibility to meet the investment needs of the business, while maintaining adequate liquidity, and allocating capital to the highest return opportunities that will create value for our customers and for our investors.

With our most recent review of the Cadence capital structure took into account Cadence's capitalization, projected free cash flow, ongoing investment requirements, maintaining adequate liquidity, future acquisition opportunities, and input from investors.

Based on the result of this review, we are replacing our current $450 million stock repurchase program with a new program to repurchase $1.2 billion of our shares over the next six quarters, through the end of 2016.

The actual timing and amount of repurchases will be based on business and market conditions, corporate and regulatory requirements, acquisition opportunities, and other factors.

One such factor is the settlement of our warrants, which begins in September of this year, and extends through early December.

We plan to limit the pace of our repurchase program during that period.

We expect the new share repurchase program will be funded by US cash on hand, future US cash flow, and additional debt.

We also plan to reduce US cash over time to a minimum level that we believe is prudent to operate the business, maintains adequate liquidity, and maintains strategic capacity for investment opportunities.

Now, let's move on to the quarterly review.

Cadence had a strong Q2.

Total revenue was $416 million, up 10%, compared to $379 million for Q2 of 2014.

The revenue mix for the geographies was 48% for the Americas, 23% for Asia, 20% for EMEA, and 9% for Japan.

Revenue mix by product group was 21% for functional verification, 29% for digital IC design and sign-off, 27% for custom IC design, 11% for system interconnect and analysis, and 12% for IP.

The weighted average contract life was approximately 2.4 years.

Total costs and expenses on a non-GAAP basis were $300 million, compared to $350 million for Q1, and $290 million for the year-ago quarter.

Q2 headcount was 6,405, which was up 145 from Q1, primarily due to hiring in R&D and technical field positions.

Non-GAAP operating margin was 28%, compared to 23% for Q1, and 23% for the year-ago quarter.

Product mix, the timing of certain expenses, and the fact that our Fourth of July shutdown week fell in Q2 this year instead of the usual Q3, all contributed to higher than normal non-GAAP operating margin for Q2.

GAAP net income was $0.19.

Non-GAAP income per share was $0.27, compared to $0.23 for Q1 and $0.21 for Q2 2014.

Operating cash flow was $122 million, compared to $47 million for Q1, and $69 million for the year-ago quarter.

Total DSOs were 29 days compared to 30 for Q1, and 26 for our year-ago quarter.

Capital expenditures were $17 million.

This was higher than Q1, due to the timing of facilities investments.

We expect capital expenditures to remain approximately $40 million for the year.

Cash and short-term investments were $744 million at quarter-end, compared to $980 million at the end of Q1.

We paid $296 million in cash on June 1 to complete the retirement our convertible notes.

We repurchased 2.9 million shares of common stock for $56.3 million during the quarter.

47% of our cash and short-term investments were in US at quarter end.

As a reminder, our standing warrants will settle from September through December.

The potential dilution table is in our 10-Q filing.

Now let's turn to our outlook for the third quarter.

Note that our outlook includes the projected impact of increased share purchases, repurchases, and additional debt.

For Q3, we expect revenue to be in the range of $423 million to $433 million.

Non-GAAP operating margin is expected to be the range of 25% to 26%.

As Lip-Bu mentioned in his remarks, in Q2, we added several more marquee customers for digital.

We're continuing our plan to invest in hiring to support and expand our business with these market shaping customers in Q3 and Q4.

GAAP EPS for the third quarter expected to be in the range of $0.17 to $0.19.

Non-GAAP EPS for the [third] quarter is expected in the range of $0.25 to $0.27 (company corrected after call).

Now for our FY15 outlook.

The midpoints of our bookings and revenue guidance for the year are unchanged from last quarter, though 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 $1.685 billion to $1.715 billion.

We continue to expect hardware revenue to increase in 2015, compared to last year.

Non-GAAP operating margin is expected to be the range of 25% to 26%.

This is up from our prior expectation of approximately 25%, due to favorable expense variances in the first half.

While we will not address 2016 in our Q4 earnings call, but as you think of about next year, you should be aware of the fact that our cost of investments in hiring for R&D and technical customer support are ramping through the year.

So we will exit 2015 with a higher expense run rate then where we are at present.

Non-GAAP and other income expenses is now expected to be in the range of negative $25 million to negative $19 million.

Our assumed non-GAAP income tax rate is 23%.

We are assuming the weighted average shares, diluted shares outstanding of 308 million to 314 million for the year.

GAAP EPS is now expected to be in the range of $0.63 to $0.69.

Non-GAAP EPS is now expected to be in the range of $1 to $1.06, which is an increase of $0.02 at the midpoint.

We expect operating cash flow to be approximately $360 million, up from our prior guidance of $350 million.

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

Now in closing, we believe our new stock repurchase program will enable us to enhance value to our investors by optimizing our current balance sheet to continue delivering mission-critical products to our customers, expanding our leadership position in systems and design enablement, and allocating capital efficiently between future investments in the business, maintaining liquidity, and returning capital to our shareholders.

So with that, operator, we will now take questions.

(Operator Instructions)

Krish Sankar, Bank of America.

Thanks for taking my question.

I had a couple of them.

First one, on the buyback, Geoff, you mentioned that you're going to use US cash, cash flow, and also some debt.

I'm curious what kind of debt load are you talking about?

What are you comfortable with?

If you could help quantify that in terms of leverage, or any kind of number, that will be very helpful.

And then I had a follow-up.

Sure, Krish.

Our review took into account Cadence's capitalization, our projected free cash flows, ongoing investment requirements, maintaining adequate liquidity, and future acquisition opportunities.

When we're ready to let you know, though, on the amount, we will you know.

It's hard for us to speculate at this time, based on market conditions, and securities laws.

Got it.

Fair enough.

And then a question for Lip-Bu.

You mentioned how the consolidation is really a complex situation, tough to quantify how it's going to impact the design out of your EDA budget.

I'm curious, are you seeing any changes yet, either positive or negative from the consolidation that has happened so far?

And along the same path, some of your customers seem to be pushing out or slowing down the 10-nanometer RAM.

I'm curious how that impacts design activity?

Thanks you for the questions.

First of all, I think clearly, we see the pace of consolidation has increased, and clearly, I think from the design point of view, we don't see any material impact.

As I indicated earlier, I think the consolidation in the longer-term may have some impact to the overall growth of the industry.

So far, we don't see any positive or negative impact.

Clearly, some of this consolidation is also a great opportunity for us, when we see in our product continue to innovate, better product, better solution, and when they go into the more complex, more advanced node, clearly there is opportunity for us to win.

The other part -- and also we can proliferate.

And then the other part, we see a new breed of system and service provider that have decided to go vertical integrated and aggregated, and that is a great opportunity for us.

I think we stick to our game plan in term of system design enablement.

Really focus on executing our core EDA business, our IP business, our PCB, and then go beyond some of the vertical focus that we have.

We highlight some of the success we have.

We are going to continue to execute and then be truly a trusted partner for them.

That's very helpful.

Just as a final follow-up, in the prepared comments, you mentioned you added some digital customers.

Our these customers actually using Cadence blocks and actual design flow, or they just in the evaluation phase today, and how are you penetrating these customers?

Are you able to give any fee services as a part of it, or is it more purely based on merit?

Good question.

We are delighted, I announced in February, very pleased with our progress, in terms of our innovation and the new product that we are offering.

Clearly the customers see the benefit of the massive parallel architecture, faster runtime, five-time is significant and also the scale to 10 million instances, that is significant for them.

We highlight some of the key names like Qualcomm Technology, Nvidia, STMicroelectronics, Faraday to join ARM, Freescale and Juniper.

They are not just evaluating.

Actually they are design -- adopting our Innovus for production design for the most advanced node, based on the excellent quality of result and faster turnaround, and they are clearly seeing the benefit of the delivery that we mentioned earlier.

Right now, we have a good design win, and now we are really focused on proliferating to various product groups, so that they can be comprehensively using us as the platform of choice.

By the way, Krish, we get paid for these too.

Got it.

Thanks, Lip-Bu.

Thanks, Geoff.

Appreciate it.

Rich Valera, Needham & Company.

Thank you.

Geoff, just wanted to clarify your comments with respect to being not in the market, while you're settling the warrants.

Was that, you said, the month of September through December, you would expect minimal buybacks?

Is that correct?

Yes.

What we said is we will constrain the pace of our repurchase program during that period.

Obviously, as those are being settled, we don't want to interfere with the warrant settlements, Rich.

Okay.

We will be in the market to during that period of time, but the amount will be constrained.

Got you.

I just wanted to understand the level of commitment to the full $1.2 billion over the six quarters.

I'm assuming there is a pretty high level of commitment there, but the qualifying language you put right after that seems to suggest that maybe you would, maybe you wouldn't repurchase depending on market conditions.

I wanted to make sure, just try to understand from you better, what is that level of commitment for the $1.2 billion over that timeframe?

Rich, that's a very good question, and so I think a couple of points I'll make.

This is a serious process that we go through with our Board and our management team, to look at capital allocation.

And by the way, review our business and capital structure at the same time.

As a result, we approved the $1.2 billion plan.

Second, if you look at our past commitments, we have met those as far as the repurchases in the marketplace.

Again, of course there's business conditions, M&A, and those types of things, which may impact us going forward, but it is a commitment that we've made.

Just to add on, this is Lip-Bu.

Cadence is committed to driving shareholder value in a very balanced approach, and drive growth, invest in innovation, and then return capital to our shareholders.

The Board and the management review regularly, and integrally all the aspects of our business and capital structure, and as a result of this review, and we put in place a new plan.

And so we take it seriously with our Board, with the management, and really focus on driving shareholder value.

Great.

One more, Geoff.

When do you think you might be able to talk about any debt or notes that you might use to finance the buyback, any sense on the timing of when we might get more clarity?

Yes.

As you know, in this world, there's a lot of uncertainty.

We will let you know if and when we decide to do the offering.

As you probably also noticed, we filed an S-3 today, which gives us some flexibility.

It's difficult for us to speculate right now.

Okay.

We will let you know as soon as we can.

Thank you very much, gentlemen.

Ruben Roy, Piper Jaffray.

Thank you.

My first question, Lip-Bu, I want to return to the discussion you were having around the digital tools.

In terms of some of the customer traction, you said it's some new customers for Innovus, for instance.

Is there a way to think about what kind of traction you're seeing with customers, with this round of products, specifically Innovus, versus maybe your previous implementation system, Encounter?

And perhaps from maybe a little bit of a longer-term perspective, two or three years, where do you think your digital market share can get to, as your customers seem to be using these tools for new generation designs?

Thanks.

Ruben, thank you so much for the question.

I think overall, we are very pleased with our offering in the digital and sign-off area.

We mentioned about Genus.

This is our latest additions, and we mentioned about TI and Imagination and a dozen others we are engaging.

And then Innovus, we are very delighted.

This is completely rewritten, and it's massively parallel architecture, and clearly see the benefit on the faster runtime and scalable up to 10 million instances.

And then we are delighted to highlight some of the key customers that are selecting us, Qualcomm Technologies, Nvidia, STMicro, and Faraday, and then joining Freescale, ARM and Juniper, and clearly they see the result.

Clearly, they see the faster turnaround.

And saying that, we also have this sign-up tool, Tempus, Voltus, Quantus.

They all add on additional ten new logos each.

So we are delighted with all this Tier 1 customer winning, and meanwhile, we continue to really focus on their tape-out and their design win, and proliferate across all their product groups.

That is our job.

We are continuing to invest in the engineering side, in terms of the few organizations, so we can support the customer win, and that is the most important focus on us.

What we're saying is we are earlier deployment success, and right now, we are rapidly proliferating across product groups in those leading customers.

And if I can add one thing, we are showing strong revenue growth year-over-year in digital, if you look at our supplementary schedule.

You can see the revenue growth, so.

And then in terms of two years from now, clearly we'll continue to execute, and I think the opportunity is great.

But we take one thing at a time.

Right.

That's very helpful.

Thank you, both Lip-Bu and Geoff.

And then, Geoff, a quick follow-up.

I may have missed it, I think you were going through the discussion around OpEx exiting this year a little quickly, and I may have missed it.

It sounded like you were saying that you were exiting 2015 at a higher rate than you are now, which is not surprising, but were there any specific areas that you are investing in, if you look at 2016 or any other color, as to how to think about OpEx as either percentage of revenue or a percentage of growth versus revenue, as we look ahead to 2016?

Yes, Ruben.

The fundamental reason we are investing is some of the strategic wins that Lip-Bu talked about with our digital flows, and those types of things, and our customer wins.

We are investing in R&D and technical salespeople to support those wins, and of course, as we announce those wins, we want to make sure we support our customers fully, on both deploying these wins, but then enhancing these wins and proliferating these wins going forward.

That's why our expenses are going up from now to the end of the year.

We'll talk about 2016 when we talk about 2016.

Okay.

Last one then for me.

You're reiterating your expectation for hardware revenue to increase in 2015.

Any update on timing of the new platform shipping?

Yes, this is Lip-Bu.

As I mentioned, pre-production testing on our next generation emulation continues.

We remain on track to start shipping later this year, and we will provide more details when the new product formally launches.

Thank you.

Jay Vleeschhouwer, Griffin Securities.

Geoff, first for you.

I would like to get better sense of the moving parts inside the second-quarter numbers, and as well, your guidance for the year.

For the quarter, your total product and maintenance revenue was hardly up sequentially, but your hardware cost revenues, as per the 10-Q, were down pretty materially year-over-year, and sequentially.

So would it be fair to say that your emulation revenues were also down pretty significantly from Q1 and year-over-year, but you were able to offset that with outperformance on the services revenue?

And the services revenue in turn would have correlated to the strength of IP?

So, Jay, if I can rephrase the question a little bit, but I will get to all different parts.

Our software mix as a percentage of total was better than it had been.

Partially, that was because hardware was down, but the material part was because software was up.

Services was up slightly, but the biggest part was actually in our software side of the business for some of the wins and some of the reasons that Lip-Bu gave earlier.

Hopefully that got to your question.

Okay.

For hardware to be up year-over-year, for the year, would it be fair to say that you would probably need to have a record fourth quarter?

The inference is that you're in the whole in the first half of the year, down in Q1, down in Q2.

It looks like your revenues through the first half in hardware may be the lowest in about four or five years.

Again, to be up, would it be fair to say that you would just need to have an unusually strong or record Q4?

So, a couple things.

First, we had a good Q1 in hardware.

Q2 was down from Q1, but we had a good Q1 in hardware, right?

One of the best quarters we had in the previous four quarters before that.

Hardware will clearly be up in the second half of the year, as I think we've consistently said, and will be up for the year as a whole.

I think you can probably do the math from where that is.

I can chip in a little bit, Lip-Bu here.

I think clearly, from my customer interface, customer interest in emulations remains high, and secondly, I think clearly we indicate that Palladium XP, we won six new logos and the newest application, dynamic power analysis turned out to be very good and very vital for some of the key customers, in terms of software-related power issues for mobile applications.

Overall, I think demand is strong, and so far, I think we are going to have an up year for 2015.

Okay.

If I may finish with just a couple product questions.

When you think about your principal segments, starting with custom, that's had a pretty good run here for about three years.

PCB as a category for the whole industry, meaning for you and for Mentor, has been good for the last two or three years.

So the question there is, do you think that the kind of multi-year momentum you've seen in two of your largest categories can continue?

On the other hand when we look at implementation or pricing around, that's been pretty were sideways for the industry for the last year or more.

Do you think that both you and Synopsys can grow in implementation?

That this isn't necessarily a zero-sum gain in implementation?

They can grow with your tool?

You can grow with yours, as customers reinvest or grow their spending for your respective tools, and implementation?

Good questions, Jay.

Let me address them one by one.

First of all, you mentioned about the custom analog and SPB side.

IoT and consumer electronics are actually driving tremendous growth demands for our tool like Virtuoso.

We have this electrical aware design.

That's turned out to be very helpful for them.

The other part is, if you recall, we acquired Sigrity, that integrated together with our Allegro, that provides a whole system analysis from power signal and a whole PCB side, and a couple of things I want to highlight.

Asian major car manufacturers adopted Sigrity for their system-level analysis, and in fact the customer actually is pushing for the 10-nanometers with more and more customers using Virtuoso on the most advanced 10-nanometer design start.

I think 10-nanometer is ramping faster and broader than a lot of people expected.

Advanced packaging technology for IoT and mobile is also another driver for our growth, and so I think overall, I think mixed-signal, and then the whole IoT is helping us a lot.

We are collaborating very deeply with a major advanced foundries for the most advanced nodes to support our customer.

And with that, I think there's a lot of system on the chip design, SOC, interlock and mixed-signal, with our strength with our digital, and in fact, digital, we are seeing 8% revenue growth in our year-over-year.

That is very significant, and we are delighted.

With the new shift of digital flow with our most advanced and our custom analog, and that will drive a lot of SOC mixed-signal in the IoT and consumer product, and also in the automotive side, and I highlighted a couple of those.

The other part is the whole system and service provider.

They will be looking, and we are very uniquely positioned on the IP, plus our packaging, and that can do the system analysis to become a tremendous value for them.

I think to answer your question, we continue to be cautiously optimistic in terms of the growth potential that we see.

And not just for us, but for the industry as a whole.

We do not view this industry is zero-sum game.

We're certainly very happy with our progress, but the whole industry, we think, is a good industry to be an.

Thank you.

Gus Richard, Northland.

Thanks for taking my question.

Just a quick follow-on.

When you think about your core EDA business, and thinking about the consolidation, what do you think the growth of that business will be over the next three to five years?

The overall market.

Yes, Gus I think clearly the core EDA and consolidation is happening right now.

It's very hard to predict what does growth will look like.

I think you can look at a [EDAC] survey, and you can get a projection from that.

All in all, I trying to look at it out here from the customer.

When you move out the geometry and in all these vertical applications like cloud, data center, and also some of the consumer, like IoT and machine to machine, power will be critical.

Massive parallelism will be critical.

I think the complexity of the chip design will be very important to help the EDA and foundry and IP all collaborate closely together to have customer success.

We have been working really hard to be the trusted partner for our customer and partner, and I think slowly over time, people will see that we are very collaborative, and we are pushing the envelope, helping to solve their most challenging designs.

And the complexity, the scalability, the low power and then time to market with all the offerings we have.

I think, going forward, that partnership close with the customer will be the key to success.

That is something we really believe in, and we really will have with our customers.

Thanks.

Thank you for that.

Secondly when I look at some of the folks working on 10-nanometers, have announced that they will delay implementation, 7 and 5 look even more challenging.

There's been a slow down in the cadence of Moore's Law.

Can you talk a little bit about how that might affect your business in terms of new EDA tools, or will people pivot to other processes like FD-SOI that will give you a new opportunity?

Again, how do you think that will affect the growth of the overall business?

Very good question.

Very insightful questions.

I think a couple things.

One, clearly we work closely with our customers and also our foundry partners, and we want to make sure that our tools are optimized for various process that our customer demand them.

Clearly, 10-nanometer, some are slowing down, some are not slowing down.

It really depends on some of the key applications they are driving.

Clearly on some of the mobile and some of the graphic and computer mission related areas, advanced node is critical.

We will work very close with our customer and foundry on 10 and 7 nanometers.

When you move down to 5 nanometers, clearly that patterning may not be enough.

Then you're starting to really look at the EUV.

For 5 nanometer, from my humble experience, it's critical to have EUV, and I'm very pleased to see that [EFMAO], the EUV are making progress.

They can go up to 80 watts now, and they can go up to 500 wafers per day.

That is extremely encouraging.

Then you starting to look at TSMC Intel progress on the EUV side and also some of the photo-resist-related development.

So we keep a very close eye on this whole road map and process technology, and we also work closely with the equipment, semiconductor equipment company, to make sure they are ready.

And in terms of FD-SOI and the various version of the process, we work closely with our foundry partners, and that will be driven by customers.

We work closely with the customer, understanding which process node, which foundry they are using.

Our tool will be optimized, ready for them.

That is our job.

Great.

Thank you so much.

Monika Garg, Pacific Crest Securities.

Geoff, could you remind us how much of your cash is generated in the US and how much is offshore?

And I think you give us a number, how much is the cash currently is in the US?

Monica, in cash, the current cash balance is about 45% are in the US.

Our cash split is about equal to our revenue split, approximately 50% of it is generated in US over time.

Thank you.

Is there any -- if I look at service revenue in the first half of 2015 it ends up almost 25%, 30% year-over-year from the first half of last year.

Is there any reclassification of revenue in that?

No, Monika.

There is no reclassification on revenue in our services.

We've had some nice services business.

Part of the services, of course, is IP also.

But it's been a very nice business for us so far this year.

Got it.

Okay.

You've talked about the new customer wins on the digital side, but you have not changed your bookings guidance.

Were you already expecting these customers?

Or could there be any upsides on the bookings numbers here?

Monika, again, this is Geoff.

As always, when we guide, we put everything we know into our guidance.

We certainly had some indication along the way that we were going to be successful with these customers.

I think we mentioned it on a prior calls, that we are looking positive at more than just the customers we had previously announced.

Those businesses largely came to fruition, as we anticipated.

That's why the bookings isn't really changing.

Got it.

Thank you.

That's all for me.

(Operator Instructions)

Sterling Auty, JPMorgan.

Thanks for squeezing me in.

Just want to start, in terms of the quarter, you mentioned the timing of the shutdown, but just wondering if there was any other variable expense savings in the quarter that also contributed to the upside in margin?

Yes.

Sterling, this is Geoff.

Yes, the shutdown was one.

There were two other issues.

Certainly the mix of hardware and software favored software in the quarter, as we mentioned, hardware was down, so that certainly helped us.

And then we did benefit from the timing of certain expenses, and we don't anticipate that benefit carrying forward into Q3 and Q4.

Okay.

And then, you also mentioned, in terms of the hardware, that you're already in testing on the new platform.

I didn't quite catch what is the feedback on the testing done, and what are the next steps before general availability?

Sterling, this is Lip-Bu.

As I mentioned, preproduction testing of our next-generation emulator continues, and we remain on track to start shipping later this year.

We will provide you more details when the new product formally launches.

Okay, sounds good.

In terms of the duration, the 2.4 years, any sense there what the mix driving that?

Is it a lot of additional one your stuff that you're seeing, or what's leading to -- coming down to the 2.4?

Yes, Sterling.

We kept it the year unchanged at 2.4 to 2.6.

We would are going to have fluctuations from quarter to quarter, and those are just the natural fluctuations in business.

I don't think there's any particular trend there that's material.

Thanks, guys.

Mahesh Sanganeria, RBC Capital Markets.

Thank you, Geoff and Lip-Bu.

It looks like you had a pretty detailed review on the capital structure, and found that, looks like the dividend is not on the table for now, so it least it's not going to be there for a year or two.

Can you talk a little bit about what was discussion around dividend in our discussion on capital structure?

Sure, Mahesh.

It's a good question.

Our process of going to the capital allocation review with our Board and the management team is a regular event for us.

We look at all alternatives in front of us, but our focus remains on what is our capitalization, what are our projected free cash flows, the ongoing investment requirements, the necessity to retain adequate liquidity, future acquisition opportunities, and advice from both shareholders and advisors.

So we took that all onto account and came up with our conclusion.

We obviously can't talk at a level underneath that, but I'm sure you understand.

Right.

Also, I wanted to follow up on the OpEx commentary you have had.

On the upside, you are guiding pretty much for the full year EPS, it looks like the upside in Q2, but shutdown should not impact that.

Within your guidance model we have a run rate exiting 2015, so I'm wondering what message you are conveying on 2016 that the increase is likely to be a similar level as 2015, or what's tied behind that OpEx commentary?

Yes.

The commentary about our ramp and expenses through 2015 is a reflection of the success we've had in many different parts of our business, and as we support those customers, we're continuing to add engineering headcount and technical sales headcount.

All we want to be clear is that when we leave 2015, we are going to be at a higher expense rate than we were during the beginning of the year.

We're quite happy with the results we've had in Q1 and Q2.

Just to follow up, so 2016 will be a nominal increase whatever you normally -- will your additional support personnel and everything will be in place by the end of 2015?

Or will continue a little bit into 2016?

Yes.

We're really not guiding 2016 at this point.

All we want to do is make clear that our expense run rate is going to be higher than it is at present.

Again, we're investing to support the wins that we've had.

It's very important for us to sustain and proliferate within these customers, and so we're making the R&D investment and the technical sales investment to ensure we do that.

We just want you to be aware that our run rate will be higher on expenses than when we leave, than we started.

Thank you very much.

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

In closing, I am proud of what we are accomplishing together at Cadence.

And I want to thank all our hard-working employees, shareholders, customers, and partners for their continued support.

Thank you all for joining us this afternoon.

Thank you for participating in today's Cadence Design Systems second-quarter 2015 earnings conference call.

This concludes today's call.

You may now disconnect.