益華電腦 (CDNS) 2016 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Cadence Design Systems first-quarter 2016 earnings conference call.

(Operator Instructions)

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

Please go ahead.

Thank you, Shannon, and welcome everyone to our first quarter 2016 earnings conference call.

With me today, are Lip-Bu Tan, President and CEO, and Geoff Ribar, Senior Vice President and CFO.

The webcast of this call can be accessed through our website, Cadence.com and will be archived through June 17, 2016.

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

Before I start, I want to call your attention to our CFO commentary, which was included in our 8-K filing today and is available on our Investor Relations website at Cadence.com.

The CFO commentary should be referenced in conjunction with both today's conference call remarks and the earnings press release issued today.

Next, please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations.

For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission.

These include Cadence's most recent reports on Form 10-K and Form 10-Q, including the Company's future filings and the cautionary statements regarding forward-looking statements in the earnings press release issued today.

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

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

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

Additionally, a copy of today's press release, dated April 25, 2016, for the quarter ended April 2, 2016, 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 today.

Cadence delivered good operating results for Q1.

Revenue was $448 million, up 9% year-over-year.

Non-GAAP operating margin was 26%.

Non-GAAP EPS was $0.28 and operating cash flow was $83 million.

Looking at the environment, conditions have not changed significantly since last quarter.

Semiconductor business conditions remain challenging and we remain mindful of the ongoing consolidation in our semiconductor customer base.

While we do not expect a material impact on our Business in 2016, consolidation could pose a challenge to industry growth over the next few years.

I will begin our Q1 business highlights with system design and verification.

In February, I asked Anirudh Devgan, who has led resurgence of our digital signoff business, to expand his responsibilities to include leadership of our system and verification group.

Anidrudh will bring innovative ideas and drive to our next generation verification solutions.

Cadence offers a holistic verification suite of connected solutions that are based on strong core engines and optimized for total verification throughput.

Rapid growing complexity and time-to-market requirements make emulation more critical than ever for customers, designing chips and systems for mobile, cloud, automotive and other verticals.

Palladium Z1 sales ramped nicely, as customers embrace its advance enterprise class capabilities, while demand for Palladium XP remain strong.

As a result, Cadence achieved its best quarter ever for hardware revenue.

While our primary innovation focus continues to be organic development, we will also consider strategic acquisitions that will bring outstanding technology and talent.

Recently, we announced that we've entered into a definitive agreement to acquire Rocketick Technologies.

Rocketick brings pioneering technology and talented team that will significantly increase the performance of our incisive enterprise simulator using parallel computing on standard multi-core servers.

In custom analog mix signal design war, Virtuoso has been the de facto industry standard for the past two decades, used on the vast majority of designs with thousands of tape-ups.

At our CDN Live Silicon Valley User Conference earlier this month, we announced the next generation Virtuoso platform, including the Virtuoso analog design environment suite and the Virtuoso layout suite.

The new Virtuoso offers designs at an average 10X improvement in performance and capacity across the platform.

The platform includes new technologies to address requirements of automotive safety, medical device, and IoT applications.

IP is an important component of our system design enablement strategy.

I'm very pleased to announce that Pieter Vorenkamp joined Cadence as Senior Vice President and General Manager of our IP group.

Pieter comes to Cadence after 18 successful years with Broadcom, where he held roles of increasing responsibility, most recently as Senior VP, Vice President of Operation Engineering.

Pieter's rich experience will enable us to deliver high quality differentiated products as it drives the refinement of our IP strategy to focus on sustained and scalable growth.

This quarter, I would like to highlight our Tensilica DSP cores, which are a very important strategic component of our IP business.

In Q1, we had key design wins for 5G baseband DSPs, with the leading mobile handset company.

And Spectrum licensed our Tensilica hi-fi audio voice DSP because of its ultra-low power capabilities.

Now, moving on to digital and signoff, the success and momentum we gained with our new flow continues with strong adoption of Full-Flow in Q1, especially with customers in mobile, consumer, automotive, and IoT segments.

In Q1, a leading mobile chip company adopted our digital and signoff floor for its most demanding 10-nanometer projects.

The Innovus implementation system added more than 50 new customers in Q1, while our Genus RTL synthesis solutions added more than 25 new customers.

TSMC certified our digital and signoff tools for seven-nanometer design and 10-nanometer productions.

And Samsung Foundry certified our tools for its 14 LPP process.

Finally, we also announced today, that Geoff Ribar decided to retire from Cadence in March 2017.

Geoff had been a great partner to me and the Company over the 5.5 years.

As an integrated member of my leadership team, he has made long lasting contributions to the Company.

During Geoff's tenure, we have consistently met or exceeded our financial objectives, improved both our operating margin and cash flow, strengthened the balance sheet and optimized our return on capital.

Geoff has done an outstanding job of executing on the strategy and the management philosophy that my Board and I have put in place and built strong financial team.

We have initiated a comprehensive search to identify our next CFO.

Geoff is working with me in the search process.

While a new CFO is appointed, Geoff will work collaboratively on the transfer of responsibilities and will remain active, involved with us through the retirement dates.

While Geoff's retirement is bittersweet, we all congratulate him on a successful career as CFO, and wish him well in the next chapter of his professional life.

In summary, Cadence once again delivered good results in challenging environment.

Our portfolio of solutions across chip, package, board, system and software and IP guided by our system design enablement strategy best positions us to drive new business in verticals, including automotive, aerospace, medical and across IoT application.

Strong broad-based demand for the new Palladium Z1 contributed to our best hardware revenue quarter ever.

The innovative new Virtuoso platform strengthens and solidified our position in custom, analog and mix signal designs.

And our digital signoff solutions are proliferating with current customers and gaining new customers.

Now, I will turn the call over to Geoff, to review the financial results and provide our outlook.

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

It has been an honor for me to serve as CFO of Cadence for the past 5.5 years.

I'm extremely grateful for the support of my colleagues and our talented extended team.

I will work with Lip-Bu in the process and I am fully committed to ensuring a smooth transition and look forward to maintaining our strong momentum through the transition process.

I'm confident that with our strong CEO, Lip-Bu Tan, executive team and finance team, we'll continue to successfully execute on the strategic initiatives and drive shareholder value just as we have over the past 5.5 years.

Now, moving on to our results, please note that the CFO commentary we posted on the Investor section of our Company website should be referenced in conjunction with both my remarks and earnings press release issued today.

As Lip-Bu discussed, Q1 was a good quarter in what remains a challenging environment.

Innovative new products and strong execution continued to distinguish us in the market.

Total revenue was $448 million, up 9% year-over-year.

Non-GAAP operating margin was 26%, compared to 23% for Q1 2015.

The timing of revenue and expenses contributed to a higher than expected margin for Q1.

We are maintaining our revenue and margin outlook for the year.

GAAP net income per share was $0.17.

Non-GAAP net income per share was $0.28, up 22% over the year ago quarter.

Operating cash flow was $83 million.

Cash and short-term investments were $907 million, compared to $711 million at the end of Q4 2015.

Recall, that in January, we entered a three-year $300 million term loan and drew $50 million on a revolving credit agreement.

At quarter-end, we had $700 million of debt outstanding.

Approximately 45% of cash and short-term investments were in the US at quarter-end.

DSOs were 32 days, down from 35 days in Q4.

We repurchased 11.6 million shares of stock for $240 million, which represents a little less than 4% of shares outstanding.

Before turning to our outlook, let me call your attention to the following items.

As Lip-Bu mentioned, we believe Rocketick will help accelerate our innovation and functional verification to address increasing challenges of system design complexity.

This acquisition is expected to close in Q2, and is not expected to have a material impact on our 2016 financials.

We have not disclosed the terms of the transaction.

We undertook a restructuring in Q1 as part of our ongoing efforts to optimize resource allocation and operate the business efficiently and effectively.

The restructuring charge was $14 million.

Now, let's turn to our outlook.

There are no changes to our FY16 outlook for bookings, revenue, operating margin, non-GAAP EPS or cash flow.

We continue to expect bookings in the range of $2 billion to $2.1 billion, which equates to 8% growth at the midpoint.

Revenue in the range of $1.79 billion to $1.84 billion, should be a 7% growth at the midpoint.

Non-GAAP operating margin of approximately 26%, GAAP EPS in the range of $0.71 to $0.81, non-GAAP EPS of $1.15 to $1.25 and operating cash flow in the range of $380 million to $420 million.

For Q2, we expect revenue to be in the range of $445 million to $455 million, non-GAAP operating margin of approximately 25%, GAAP EPS in the range of $0.17 to $0.19, and non-GAAP EPS in the range of $0.27 to $0.29.

Approximately 90% of revenue is expected to come from beginning backlog.

You'll find guidance for additional items in the CFO commentary.

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

(Operator Instructions)

Your first question comes from the line of Krish Sankar from Bank of America.

Yes, hello.

Thanks for taking my question.

I had a couple of them.

First and foremost, Lip-Bu, could you just talk a little bit about the toll you're getting from your customers given that there are some concerns on near-term demand and longer-term consolidation?

Just curious what your point is what you're hearing from your customers either in terms of what they are telling you and with regarding EDF purchases?

Okay, so let me start.

First of all I think as I mentioned, semiconductor business conditions remain challenging.

Little or no growth expecting for 2016 according to other various analyst reports.

But clearly, we are about position in terms of long-term growth opportunity, in terms of the mobile, crowd, (inaudible) IoT, vision, machine learning and automotive related area.

So those will be driving some of these advanced node growth and system in IP.

So to answer to your question, clearly, we don't see any much changes, but actually, we see a lot more design opportunity in terms of proliferating our tool and solution on various vertical market.

In terms of consolidation, clearly, last year's a big consolidation year.

More than 100 billion consolidation was a major deal like Avago Broadcom, Intel, Alterra, and many others.

So we are mindful of the ongoing consolidation to our semiconductor customer base.

But meanwhile saying that, and then clearly I mentioned earlier, about the opportunity we see and in terms of proliferating our new solutions.

And in terms of the long term impact, it's very hard to predict, but we don't expect any material changes to our business.

And I think in the longer-run, with some of this consolidation may pose a challenge to the industry growth over the next few years.

Got it.

That's very helpful.

And in terms of R&D, I think is a question I've asked in past.

Just curious any updated thoughts regarding the five video customers are getting more cognizant of their cost and complexity.

So along that, is there an opportunity for you guys to be more efficient with your R&D or do you think that the mid-30% you're seeing is going to be the predictable mix of R&D for the intermediate future?

Let me try to answer your questions, if I hear correctly.

I think clearly, the complexity and the time-to-market pressure is increasing tremendously, especially in the advanced nodes and the 14 and 16, and 10 and 7. And I should note, the mass cost very pretty high so first time pass is critical.

And so, that's why we see a tremendous growth into our emulations and also the growth in terms of Full-Flow in the digital and custom mix signal releases.

And then our relationship with the foundry partner become very critical and we mentioned we have a deep partnership with the foundry partners that include TSMC, Samsung and many others.

And I think clearly all this relationship and also with our ARM IP ecosystem are critical for the success.

And so we continue to drive R&D efficiency and we continue to drive, I think Geoff mentioned about the restructuring to drive more efficiency and we double triple down in some of the area and then also with some of the key customers support.

And so, we want to make sure that the customer design based on our two unsuccessful in implementing in the most advanced nodes.

Got it and then just two quick housekeeping questions.

One was, I think last earnings call, Geoff, you mentioned that most of the OpEx is front offloaded so it should slowdown in the second half.

Is that still true?

And the second question is what is the number left in the buyback?

So I'll answer the second question first.

We have $720 million left on the buyback for the remaining part of this year.

As far as OpEx, yes, in the first half of the year, you tend to have less vacation and more social security tax.

Those things roll off in the later half of the year, offset by the fact that we continue to invest in key R&D people and key technical salespeople.

So that will counteract the other trend a little bit.

So OpEx should be similar in the second half as in the first half?

Yes, approximately similar.

Because we have more shutdowns and less social security tax impact but more talented engineers and talented salespeople.

Got it.

Thank you very much, guys.

Your next question comes from Gary Mobley from Benchmark.

Hello, everyone.

Thanks for taking my question.

So if I'm not mistaken, Cadence has a policy of raising prices or try to implement a price increase every two years or so.

I'm curious if that is an across the board price increase for all products or whether or not that's staggered across the various product lines?

And could you remind us of when we may be hitting that biannual price increase?

Our fundamental purpose, of course, is to deliver great innovative products to our customers.

And when we do that, we believe we can capture value from our customers.

We do focus on the quality of our deals and pricing, but the key thing is we deliver value, we'll get paid for it.

Okay.

You mentioned that the hardware sales are at record level and I believe that might be emulation related.

I'm curious how those hardware sales are impacting your gross margin, and operating margin for that matter?

And how it may create some lumpiness in the bookings backlog figures that you guys are striving for 2016?

Well, emulation, like our hardware business, our emulation business is certainly lumpy like our IP business is going to be lumpy.

What we've said as we've introduced and released the Z1 and started shipping and selling the Z1, is that we expect revenue to go up in a hardware business and margin to go up with the new product.

And I think we're happy with that and you saw we had a record hardware quarter.

So we're doing quite well so far.

Any notable change between EDA and system design enablement?

Is it still roughly a 55/45 mix, respectively?

Our system side is about 40% of our business.

60% is the traditional semiconductor business.

Okay, great.

Thank you, guys.

Your next question comes from the line of Rich Valera of Needham & Company.

Thank you.

With regards to the restructuring, Geoff, is that a business as usual more of a reallocation of resources bringing pruning in areas that are less strategic and adding in more strategic areas?

It was planned as part of our guidance and certainly, we're trying to optimize our resource allocation between different parts of the business.

So, yes.

Got it.

And then, I'm guessing you said what you want to say on emulation, but I'll try anyway.

You talked about a very strong demand for XP boxes in the quarter, which helped drive this record quarter.

Can you help us understand why folks would buy an XP when a Z1 is out there?

Maybe other than the obvious, which is maybe they can't get a Z1 yet because you can't make them as fast as people would like them?

Let me start first and then Geoff can fill in.

Clearly, we want to highlight that in the XP platform still continues to remain strong and Z1 is the best launch for us and is the enterprise class, the 5X, the throughput and very scalable and customers love it.

And we ship as we built and have been very well-received and we are delighted with that.

The combination of both that makes the quarter the best quarter ever and Geoff, you can expand more.

Obviously, I think both product lines were very strong and there's different purposes for each product and different customer needs.

So people are going to buy what they need and we're happy to sell them either one.

Got it.

So, it sounds like you've hired a new Head of IP, which is great.

Anymore color you can give on the trajectory of that business?

I think what you've said so far is you expect it to grow less this year than it has in the past, which I think had been kind of a mid-teens rate.

Can you talk about what you would expect that to grow at once this restructuring is done and you've shifted some of the portfolio towards more sustainable profitable businesses you intend to do?

Rich, I'm happy to highlight here.

So clearly, we are excited about that Pieter Vorenkamp joined us with his rich experience and highly qualified.

And then to deliver the high-quality and differentiating product as you drive the refinement of our IP strategy and focus on sustainable and scalable model going forward in terms of growth.

And Pieter came from Broadcom, as I mentioned.

At the last job he had at the Broadcom, he's a Senior VP, operation engineering.

And that is in charge of, not just the design, and also global worldwide manufacturing technology that includes all of the hardware program.

He personally is very strong in the analog RF-related area.

He's an inventor that actually holds more than 100 issue and patent pending patents in the US.

So, he's a very accomplished innovator himself.

We are excited for him.

And then, as we grow the business over 10% of revenue and right now, it's about time to refine our IP strategy for the next part of growth.

So we mentioned in the past, the moderate growth in 2015, and that already built into our guidance.

Longer-term, IP revenue grew expect to be above corporate average and that is our expectation in terms of growth.

So we are excited about the IP portfolio we have, especially in the Tensilica-related area and the VIP-related area has been strong for us.

And now, we also double down on some of the design IP.

Clearly, he will bring some differentiating product going forward.

And we have a couple successes.

Clearly, we highlight, we have this 5G baseband DSP win with the leading mobile handsets.

And also the Spectrum.

And now, we're starting to move into some of this machine learning, ADAS, vision processing, genomic sequencing.

So that's a lot of great application, yet Tensilica can be the key heart of the IP design platform, the engine for it going forward.

So I think we have some of the good asset portfolio and now we like to have our new leader.

He just joined April 1, and now have time to refine his strategy as a new leader, new sheriff onboard.

So he will be refining and come up with the strategy going forward and we are excited about that.

Thanks for taking my questions.

Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities.

Thank you.

Good evening.

Lip-Bu, Geoff, I'd like to start with a couple of product segment questions.

First, when you think about your IC implementation business, that is to say at Novis, to what extent would you say your incremental bookings in that business are coming from upgrading your own base versus adoption in competing or incumbent environment?

Perhaps for new products?

In short, some of each.

How would you think about that divide between just upgrading your own base implementation versus effectively share gain in other bases?

Similarly, in terms of what you call system interconnect, that area from 2012 through most of 2015, had pretty good growth.

It looked like there was pretty good reinvestment cycle there going on and for you and for Mentor.

But the last couple of quarters, the system interconnect percentage of revenue has been coming down and it looks like maybe even revenues have been under some pressure year-over-year.

So would you say that the three or so yield reinvestment cycle in PCB has largely run its course or do you think that perhaps this is just a temporary pause and you don't see some rebound there?

These are good questions and let me address one at a time.

So first of all on the digital and signoff area.

As you know, we revolutionized that whole digital flow with some of the new tool and I think you mentioned a couple of them.

Innovus for the implementation placed in route, synthesis Genus for synthesis and we also have Tempus for signoff, Voltus for power, Quantus and Joules.

Overall, we have been very good last year and now we are proliferating in the end of Q1, strong adoption in proliferation and for some of our Full-Flow digital and signoff, especially in the area of mobile, consumer, automotive and IoT-related area.

So overall, I think Q1, I think I mentioned in my script, leading mobile chip company adopting Full-Flow digital signoff for their most demanding 10-nanometer projects, output volume.

And then, Innovus, I think I mentioned, we have 15 new customers in Q1, and some of them is successful competing and we win.

In Genus, 25 new customer.

When I say new, I meant that we are winning.

And Tempus 15, Vodus is four, Quantus is six, Joules, about three.

So, we continue to proliferate nicely.

And of course, very deep important partnership with the ecosystem like TSMC, Samsung and ARM.

And very critical in some of the most advanced node 10 and seven-nanometer that will bring us success.

And then beside the company, I mentioned a leading mobile chip company adopting for 10-nanometer.

In fact, today this morning, we are now set Toshiba adopting our Innovus implementation for production mobile memory control that achieved 16% area reduction and 25% power-saving.

Those are very remarkable in the real case because of the much better product and the solution they look for.

And in the numbers a little bit.

The digital revenue was up substantially year-over-year, and some of that was a benefit from a completed contract in Q1.

But generally, our digital business has been quite strong.

On the system interconnect business, I would take it as nothing more than a pause.

We sometimes have fluctuations a little bit in revenue accounting due to MEAs or due in payable contracts.

So we just view it as nothing more than a pause right now.

And also that the PCB-related area, Q1 is overall solid quarter with a number of good size renewal.

And renewal from both system and semiconductor company.

And then, we continue to expand our collaboration with TSMC on the integrated design flow for TSMC in the integrated fan out, I call it info packaging technology.

And also, we're clearly driving some of the foundry proven IC packaging and analysis solutions.

And then, our (inaudible) for the power signal integrity analysis system level, and we have a 2016 technology portfolio that improved the product creation time and then ends a PCB design analysis technology for multi-gigabit interface like USB 3.1.

So overall, we continue to drive success.

With respect to your earlier comments on restructuring, there was a question about that and your margin expectations for the year and as well your comments about your R&D, let me ask you this.

We've noticed just doing a quick spot check on your website, an unusually large increase in the number of job openings that you're posting.

Probably the largest we've counted to date in the several years we've been looking at this data.

And that included, not surprisingly, a particularly large increase in R&D then virtually none for sales.

So I guess the question is, to what extent is that increase in R&D positions your posting a function of having to compensate perhaps for attrition or turnover versus real organic investment or net capacity additions that you're looking to make in R&D?

I think it shows a lot of confidence in our future for sure that we have these positions.

We do tend to hire or concentrate our hire on technical positions in R&D and in technical sales.

And I think you'll generally see most of those positions as being in that area.

The restructuring is of course the concentrated in efficiency and effectiveness and making sure we're using the resources where we need to use the resources.

And of course as you're well aware, we are in a great place to work, very highly ranked and a great place to work.

And I think it's a good time for us to attract talented people.

Lastly, Geoff, could you comment on the increase in services revenue in the quarter?

Was that largely related to IP engagement and is there anything to extrapolate there for the rest of the year?

We recognized revenue in a completed contract in Q1 and that drove the services revenue up uniquely in Q1.

Thank you.

Your next question comes from the line of Monika Garg from Pacific Crest Securities.

Thanks for taking my question.

The first question on the emulation side, one of your peers, Mentor, they were talking about that they think -- you guys had a very good quarter in emulation, but they were saying that the evaluation times are looking to be stretched from three months to seven to nine months and there is some pricing, especially in the market.

So how to reconcile any commentary on that?

We don't how to comment our competitors.

So far, we have been very focused on our business.

And as I mentioned earlier, especially in the most advanced node, the complexity and the time-to-market, emulation is a must have.

And clearly, our XP platform and Z1 have been doing really well and the customer is putting orders and they have many repeated orders.

So overall, we see a tremendous opportunity for us because time-to-market is so critical for the semiconductor company and system company.

And our Z1, we had been -- the sales have been very nice and we have repeat orders already.

The other thing is you need to realize we introduced the product in late Q4 and Lip-Bu talked about this being the fastest ramp for an emulation platform we've had.

I think those two things clearly show what we believe the cycle time is.

And on the operating margin side, your Q1 Op margins are better year-over-year and Q1 is the lowest revenue quarter, so likely margins go up from here.

But in your 2016 Op margin guidance, they are slightly lower year-over-year.

So are you just being conservative?

I think the Q1 outperformance was largely related to the timing of revenue and expenses between the quarter.

But we are expecting to hire, as Jay asked in his question, in both R&D and technical sales, which will increase spending in the later part of the year.

We're quite comfortable in maintaining our revenue and operating guidance for the year.

Thanks, last one.

Intel announced a big layoff, almost 10-11% workforce reduction.

Do you see an impact from that?

First of all, clearly, Intel is a great company and I have a lot of respect for them, but we're not going to comment on any specifics on the company.

I meant an impact on the ED expense as due to the reduction of headcount.

We just don't comment on individual companies and anything that's going on with them.

Again, they're a great company, as Lip-Bu said.

Okay.

Thank you so much.

Your next question comes from the line of Sterling Auty from JPMorgan.

Thanks.

Hello, guys.

I wanted to start with the comment about the hardware revenue record in the quarter.

How did that deliver relative to your expectations?

In other words, had you factored in that revenue, that record revenue in your guidance?

And also, how did the margins stack up versus what you were expecting, especially in the new Z1 platform?

Everybody's saying, when we give guidance, we always include everything we know at the time when we give guidance.

So obviously, it's hard for us to comment specifically on that.

As we've said also, when we were introducing the Z1 and talking about the Z1 coming out, that we would see higher revenue this year and higher margins as a result of transferring to the Z1 platforms.

And of course, as you know for sure, our hardware is a lumpy revenue piece for us along with IP.

If I can add a little bit more.

Clearly, we have a really outstanding team and they are driving the business and so far, we are very comfortable to meet the customer demand.

Relative to the IP business, I didn't quite get -- I understand lumpiness, but what's impacting the growth rate in terms of the seasonality for this year?

So I think that it's really the change in our focus.

As we've said in the last call, we're focused on sustained scalable growth and we're really concentrating on delivering that.

I think more than anything else that's driving our business.

As we've said, we expect more modest growth this year than last year, where it was, as somebody said, are in the upper teens.

In the long-term, we expect IP growth to be above corporate average.

Last question, if you look at the OpEx.

The OpEx dropped in the first quarter for sales and marketing.

It's more than I think historical, at least for the last few years.

And the OpEx drop in R&D was actually less.

Didn't know if that was indicative of what you guys did in hiring in the quarter or if there's something else going on?

Yes, we're not going to comment on the details of our restructuring or number of positions impacted.

Obviously, we focused on effectiveness and efficiency with the restructuring and obviously, that had some impact on spending in the quarter.

Just to add a bit color.

Clearly, as Geoff mentioned earlier, we are doubled down on R&D and field support engineering FAE, because a couple of big customer proliferating and we are working with them.

And then we support them in the tape-up successfully in the most advanced nodes.

So it's more to support technically and continue the innovation for the flow that we are focused on.

Great.

Thank you, guys.

(Operator Instructions)

Your next question comes from the line of Tom Diffely from D.A. Davidson.

Yes, good afternoon.

I was curious, are you at what you would consider full production right now for the emulation business or are you still in the process of ramping the new tool?

We are in production and not the -- clearly, we're meeting the customer demands.

Okay.

Sometimes cycles pass.

It's taken awhile to get that to full levels.

And then Geoff, when you look at your commentary, it looked like the GAAP margin was down a little bit.

What was the driver of the GAAP margin decreasing but the non-GAAP staying constant?

We expect a higher tax rate this year than we did last year on a GAAP basis.

Okay, but cash tax rate stays the same?

It should stay the same, maybe slightly up.

Okay, and is that just location of where you are getting your revenue?

I think every government in the world needs more money.

When you look at your full-year guidance, I'm curious how much of the buyback was in that?

Were you assuming buyback through the year or just the buyback through the quarter?

How much buyback --?

When we guide, we're guiding through the buyback as authorized through the board, through the end of the year.

Okay, that's helpful.

Alright, that's it.

Thank you.

Our final question today comes from the line of Suji Desilva from Topeka.

Hello, guys.

Thanks for taking the question.

First of all, on the emulation products.

Z1, would you expect a natural sort of initial uptake of products as the products launched and then a pause to digest those or would it be a steady ramp?

So the business is going to be lumpy obviously, for emulation.

Customers are going to buy the product when they need it based on their designs.

They weren't waiting.

They were buying what they needed and they are going to continue buying what they need.

Okay, that was the answer to my question.

And the other question is around the system customers versus semis.

Would you expect that mix to shift over the next several quarters or years?

And then more importantly, for systems customers, are they more likely to take bundles of your products versus the semis customers given that they -- of course, I've seen more help to get into the semis business themselves?

Suji, I assume that you're talking about the broad product rather than emulation, right?

Correct, exactly.

I think clearly we are excited about this whole system design enablement and this is exactly about the addressing, not just the silicon player and also into the silicon moving to the system company and even the service provider.

And clearly, we are embarking aggressively and it's very exciting because we have not just a tool, we not only have the IP, we also have packaging and system design and analysis related.

And that becomes very compelling to work with them ranging from automotive sector like ADAS, function safety related and then to the crowd infrastructure, hyperscale web services, infrastructure that they want to drive.

And then to the vision into the search and machine learning and with the Tensilica and our tools.

And also the IoT, and you saw the announcement we have with Silicon Lab in terms of the low power mix signal and then Realtech in the Tensilica on the ultra-low power and it's just going on.

And we are just excited about a whole medical, aviation, automotive, the crowd and IoT-related.

So I think the system level we are going to grow significantly over the years and we are excited about the opportunity.

Okay.

Thanks again, guys.

It is now my pleasure to turn the call back to Cadence President and CEO, Lip-Bu Tan for closing remarks.

In closing, I'm proud that for the second year in the row, Fortune Magazine had recognized Cadence and our hardworking employees by including Cadence in their list of the 100 Best Companies to Work For.

I would like to thank all our shareholders, customers and partners, Board of Directors, employees for their continued support.

Thank you all for joining us this afternoon.

This concludes today's conference call.

You may now disconnect.

Thank you for participating in today's Cadence Design Systems first quarter 2016 earnings conference call.