益華電腦 (CDNS) 2018 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Cadence Fourth Quarter 2018 Earnings Conference Call.

(Operator Instructions)

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

Please go ahead.

Thank you, Gigi, and I would like to welcome everyone to our fourth quarter 2018 earnings conference call.

I am joined today by Lip-Bu Tan, CEO; and John Wall, Senior Vice President and CFO.

The webcast of this call is available through our website, www.cadence.com, and will be archived through March 15, 2019.

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

Please note that today's discussion will contain forward-looking statements and that 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 we issued today.

In addition to 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 review 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 reconciliations are available at the Investor Relations section of cadence.com.

Copies of today's press release dated February 19, 2019, for the quarter ended December 29, 2018, related financial tables and the CFO commentary are also available on our website.

And now I'll turn the call over to Lip-Bu.

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

We are pleased to report that Cadence achieved excellent operating results for 2018, delivering 10% year-over-year revenue growth and 30% non-GAAP operating margin with broad-based strength across our product lines.

While the overall macro environment remain mixed, we remain confident in the technology trends, including AI, machine learning, cloud data center and 5G that continue to drive strong design activity.

Our System Design Enablement strategy is to continue growing our core EDA and IP business; broaden our reach in system companies and targeted verticals; and importantly, expand into newer adjacent areas.

I'm delighted to report that we have continued to make significant progress in all these areas.

We achieved strong growth across our product lines in our core business, which included a breakthrough, wide-ranging win with a marquee U.S. semiconductor company.

In Q4, we expanded our relationship with Samsung through their broader adoption of our digital, custom and verification products.

We expanded our long-term partnership with Analog Devices for their development of mixed-signal solutions for IoT, automotive, medical and industrial applications, including the adoption of several of our new digital and verification products.

We made good progress in vertical segments such as the data center cloud, automotive and particularly in aerospace and defense.

We have won business with some of the top companies in this space, including GE Aviation and BAE Systems, and we finished the year with major core EDA and IP contract with a major aerospace and defense contractor.

Earlier in the year, we won a significant research contract with DARPA and have made very good progress developing advanced machine learning technologies to enhance automation and productivity.

And as we look at expanding beyond EDA, I'm very excited about our new strategic partnership with Green Hills Software.

Cadence invested about $150 million in Green Hills, representing our ownership interest of approximately 16%.

Our investment is important because safety and security are some of the greatest concerns in the increasingly hyperconnected world, especially in the critical industries such as aerospace and defense, automotive and medical.

Green Hills is the leading player in the embedded safety and security software space, with its INTEGRITY-178B real-time operating system having been certified to EAL6+, the highest Common Criteria security level achieved for an operating system.

Green Hills' products are broadly deployed across multiple application domains, particularly in aerospace and defense, with customers include Boeing and Lockheed Martin, and in automotive, with many top OEM and Tier 1 customers, including Toyota and Ford.

We expect to leverage the strength of both companies to drive embedded system security and safety, open up new market opportunities and accelerate growth for both companies.

I will now review other highlights for Q4 and 2018, beginning with Functional Verification, which remains the fastest-growing challenge for our customers.

Cadence Verification Suite had a good 2018 with revenue growth in the high teens, led by strong demand for Palladium Z1.

Palladium Z1 won 22 new customers during the year, with significant expansions at several existing customers.

And Protium, our FPGA based prototyping solution, also grew steadily.

Growing adoptions of our Xcelium simulator was highlighted by several market-shaping customers, expanding their commitment to our technology during the year.

The IP outsourcing trend continued, and strong execution of our refined IP strategy delivered double-digit growth for our IP business in 2018.

Tensilica had a good year with strong royalty growth, and we maintained our lead in audio applications, with growing adoption in vision and key wins in automotive, surveillance and augmented reality applications.

We have engaged with several customers for our new Tensilica DNA 100 Processor, which is ideal for embedded inferencing applications, and will be generally available to customers in the first half of the year.

For the cloud/datacenter market, earlier in the year, we announced the first DDR5 test chip.

And in Q4, we began selling our new 112-gig long reach SerDes IP in 7-nanometer technology.

On Digital and Signoff, we are particularly pleased with the growing proliferation of our solutions at the most advanced nodes, with market-shaping customers.

We grew our relationship with MediaTek to include the full digital flow from synthesis through signoff.

Customers taped out more than 80 7-nanometer designs in 2018 using our digital solutions, and we had 23 full flow wins.

We are actively engaged with very early adopter customers on their 5-nanometer designs, and we delivered 2 3-nanometer test chips in 2018.

On the Custom/Analog front, we have growing adoptions of both our Virtuoso RF and photonic solutions.

And one of the very last remaining large customers that was not using our flagship Virtuoso layout solution, committed to adopting it.

Last June, we introduced Cadence Cloud in collaboration with major cloud industry players, Amazon Web Services, Microsoft Azure and Google Cloud.

We are pleased with the adoption momentum as we continue to lead the industry transition to the cloud.

Now before turning it over to John, let me quickly summarize my comments.

Continued execution of our System Design Enablement strategy led to a broad strength across our product lines, and particularly in aerospace and defense vertical.

I'm very excited about our new strategic partnership with Green Hills Software, the leader in embedded safety and security software.

And it was a good year for our Verification Suite products and as well as our IP business.

With that, I will now turn the call over to John to review the financial results and provide our outlook.

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

Cadence exceeded all of its key operating metrics and delivered strong financial results for the fourth quarter and fiscal year 2018.

Before we get into Q4 results, let me remind you that Cadence adopted the new revenue accounting standard known as ASC 606 for fiscal 2018.

The numbers I present today for our fourth quarter and 2018 are based on these new rules unless otherwise stated.

2018 was our transition year to ASC 606.

And to provide a more direct comparison against our 2017 results, we show our quarterly and annual results under both sets of rules for 2018.

Now let's go through the key results for the fourth quarter and the year, starting with the P&L.

As reported, total revenue was $570 million for the quarter and $2.138 billion for the year.

Q4 and 2018 both benefited from the shift in timing of revenue recognized on some hardware systems that we previously expected to deliver in 2019.

As a result, non-GAAP operating margin was just over 31% for the fourth quarter and just over 30% for the year.

GAAP EPS was $0.35 for the quarter and $1.23 for the year.

And non-GAAP EPS was $0.52 for the quarter and $1.87 for the year.

For the old rules, which can be directly compared to 2017, total revenue for the fourth quarter was $579 million and $2.146 billion for the year, and also benefited from the earlier-than-expected delivery of hardware systems in Q4 2018.

As a result, non-GAAP operating margin was just over 30% for both Q4 and the year.

GAAP EPS was $0.36 for the quarter and $1.25 for the year.

Non-GAAP EPS was $0.51 for the quarter and $1.88 for the year.

The recurring revenue mix for the full year was approximately 90%.

The mix for Q4 was approximately 85%, slightly lower than usual due to the extra hardware systems delivered in Q4.

Now turning to the balance sheet and cash flow.

Cash totaled $533 million at year-end.

Toward the end of December, we drew down $100 million on our revolving credit facility to fund the investment in Green Hills Software.

As a result, debt outstanding at quarter-end was $450 million.

Operating cash flow in Q4 was $132 million and $605 million for the full year.

DSOs were 48 days.

Under the old rules, DSOs were 46 days.

Our DSO target for 2019 remains 45 days.

And during Q4, we repurchased $100 million of Cadence shares.

Now for our guidance.

Note that we have completed the transition to the new revenue accounting rules, so going forward, all numbers will be reported on an ASC 606 basis.

For fiscal 2019, we expect revenue in the range of $2.27 billion to $2.31 billion, representing growth of approximately 7% at the midpoint compared to 2018.

We expect non-GAAP operating margin of 30% to 31%; GAAP EPS in the range of $1.33 to $1.43; non-GAAP EPS in the range of $1.97 to $2.07.

We expect operating cash flow to be in the range of $640 million to $690 million.

And we expect to use approximately 50% of our free cash flow to repurchase Cadence common stock during 2019.

For Q1, we expect revenue in the range of $565 million to $575 million; non-GAAP operating margin of approximately 30%; GAAP EPS in the range of $0.36 to $0.38; and non-GAAP EPS in range of $0.48 to $0.50.

You will find guidance for additional items as well as further analysis in the CFO commentary available on our website.

In conclusion, I am pleased with our execution, financial performance and progress across all of our businesses.

Our investments are paying off and our System Design Enablement strategy is driving results and creating value for customers and shareholders.

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

(Operator Instructions) Your first question comes from John Pitzer from Crédit Suisse.

John, I just want to go through the gross margin for December and then how we should think about it in March.

For the December quarter, was that all just the impact of having higher hardware sales?

Or was there anything else going on in there?

And as you look at the mix towards the March quarter, I know you gave us op margin guidance, but how do we -- how should think about gross margin sequentially into March?

Yes.

John, I mean, gross margin's consistently been like 90% or 91% every quarter and it dropped to 88% for Q4.

That was entirely due to the shift in Palladium Z1 hardware shipments that shifted from 2019 into 2018.

For Q1 and for 2019, we'd expect to go back to normal.

That's helpful.

And then, Lip-Bu, maybe I can ask you the question.

You guys continue to put up solid results.

And I think one of the strengths of your model in the EDA industry is just the lack of volatility despite some of the volatility that your customers are enjoying -- or going through right now.

If you look at the guidance for growth for this fiscal year of about 7% year-over-year, how do you think that's being impacted by the macro, by some of the uncertainties in China?

What could it be if you think some of these macros kind of resolve themselves?

And what end markets that you participate in are you thinking being most impacted by the macro backdrop right now?

Yes.

Thanks, John, for the questions.

And clearly, we have less volatility because we are very focused on the design front-end of the development.

And even though the environment's kind of mixed, but we remain confident that some of these AI, machine learning, cloud/datacenter, 5G, autonomous driving, they are driving a very strong design activity, and especially, we are very focused on the market-shaping customer and then also the SDE strategy that we put in place that provide not only the opportunity into the system and the vertical markets that we serve and that open up a tremendous opportunity for us so that we can drive better success in engaging with our deep leading (sic) [learning] customer.

And in terms of the end-market impact, clearly, Asia Pacific is a very good opportunity and good growth for us.

We can continue to benefit that.

And then -- so some of these challenges that we see, we are much more in the design front-end, so we don't see some of this manufacturing impact some other company will have.

And John, it's John Wall here.

You'll see some revenue mix by geography information on Page 4 of our CFO commentary.

On that, you'll see that Asia ticked up to 28% for 2018.

Of that 28%, just under 10% of that was from China.

I know you asked that in the last call.

Our next question is from Mitch Steves from RBC Capital Markets.

I just really had 2. The first one is actually just focusing on the hardware.

So obviously, you guys gave out a very, very good full year guide, but what is embedded in terms of hardware assumptions there?

I'm not looking for exact numbers, but, I mean, it's been kind of 3 or 4 years in the cycle now, and so what's kind of the expectation of that business relative to the rest of the core EDA?

Yes.

So let me get started first.

Clearly, the Functional Verification is very challenging for our customers, as I mentioned.

And then we're really providing the Cadence Verification Suite, and that's providing a very nice platform for our customer providing the whole Verification Suite, not just the hardware and also the Xcelium, the Jasper, the VIP.

So the whole package turns out to be very compelling for our customer.

And on the hardware side, we have a great 2018 and we won 22 new customers.

The demand is very strong from our existing customer to increase their capacity.

And for the advanced node design, customer just love that scale, and more predictable and find the bat earlier.

And that's critical for their design.

Yes, and Mitch, in relation to your question with regard to what's included in guidance for 2019.

I mean, 2018 was a very strong year for Functional Verification and, of course, it benefited from that shift of hardware revenue that we felt -- we were originally expecting to deliver in 2019 and we delivered it in 2018.

So that's going to give -- make 2019 a tough compare for Functional Verification.

Got it.

And then secondly, in terms of the margins here, I mean, you guys have been above 30% now twice in a row.

I guess, you've kind of had a longer-term target of being around this range.

So I mean, is that essentially coming up now if you guys get a higher revenue base, let's say, 3 or 4 years out?

Yes, Mitch.

It's -- we're very pleased with our results for 2018.

I feel very confident and happy with our guidance for 2019.

Naturally, there was an operating margin impact of that shift in hardware revenue from 2019 into 2018 on both years.

But we're very pleased with the progression we're making.

Our next question is from Rich Valera from Needham & Company.

Understanding, Lip-Bu, that we've seen really good demand in the AI and I think autonomous and electrified vehicle areas, both of those areas have had a lot of start-ups that have emerged over the last few years.

And I'm just wondering, with some of the market turmoil and weaker demand, particularly in China, have you seen any of those start-ups experience stress or potential attrition in the current environment?

Yes.

So I think that, Rich, it's a good question.

AI/machine learning is very dear to my heart because I think we are moving into this data-driven economy and its very broad application to medical, to the data center, to the intelligent and energy management and across all the vertical, and so the impact is significant.

And we're addressing not just for the start-ups.

I think start-up, I think you saw some of them raise a lot of money, the Graphcore, Habana Labs and many others.

And so I think they continue to do well.

We haven't seen any shakeout yet and then -- because the application market is so big.

And on the other hand, some of the very big company then in the hyperscale player and also some of the system player, they are deploying massively into the AI/machine learning R&D development.

We are delighted to support them with our tool and IP.

And clearly, we have a lot to offer.

Beside our tool, EDA tool, we actually apply the AI/machine learning into our tool.

We see significant improvement on that and customer love it and encouraging us continue to [put down] on it.

And then the other part is clearly our Tensilica, they turned out to be very, very important for the embedded inference applications and also for the augmented reality applications.

So the DNA 100 have been very well received.

We are excited about it.

So I think, overall, stay tuned.

I think this AI/machine learning impact is going to be a new compute not only the training, and also the inference side.

Got it.

And then, maybe this is for you, John.

I wonder if you could give us the growth rates for the Functional Verification and IP segments in 4Q.

And then if you'd be willing to say, with respect to 2019, where you'd expect them to grow relative to the 7% that you've put out as sort of the corporate bogey?

Sure, Rich.

The -- yes, I mean, for -- let me see, for Functional Verification, it was high teens.

But for -- actually, it was high teens for Functional Verification and mid- to high teens for IP for the year in 2018.

Let me see, for the -- and then in relation to next year, I think keeping the point out here is that we've pretty much an inline quarter for Q4 with the addition of that hardware shift that came out of '19 into '18.

So therefore for '19, I think the knock-on impact there is we think it's a tough compare for Functional Verification, but we think the rest of the businesses should all perform strongly to get us to average at 7%.

Our next question is from Tom Diffely from D.A. Davidson.

So first, a quick question for John.

When I look at the guidance, the non-GAAP guidance, it looks like there's an unusually high impact from taxes going from GAAP to non-GAAP.

Curious what was behind that?

I'll have to get back to you on that, Tom, it's -- yes.

Okay.

All right.

And then maybe, Lip-Bu, it sounds like you had some nice wins in the aerospace/defense market.

How big is it that market for your core products?

And what is it behind your products or what enabled you to gain some share in that space?

Yes, so, I think, clearly, we are excited in aerospace and defense space area.

This is a vertical that we have targeted.

And we don't have the breakdown in term of the market potential, but you can see that there's a lot of activity, especially in the AI machine learning development.

That's why we are excited about our contract with DARPA and also, we have a couple of very significant customer.

They are working with us, and we mentioned a couple of them that we are successful.

And then also, we signed a very big major aerospace and defense contractor with a full significant EDA and IP contract.

So I think, overall, we're excited about this vertical.

We kind of focus on 3 verticals: cloud data center; automotive; and aerospace and defense, and so this is the one that we have a very good 2018.

And Tom, just to come back to you on the difference between GAAP and non-GAAP tax impact.

It's mainly to do with share-based compensation, but with the share price doing so well this year, we picked up a lot of share-based comp expense that we could use in our tax return.

That's not in our non-GAAP results, but it's in our GAAP results.

Okay.

No, that's helpful.

And finally, when you look at the Green Hills acquisition, it sounds like their initial focus is on the aerospace defense market as well.

It sounds like it's your belief that with this technology kind of developed for this really security-critical space that you're moving over into the cloud and to other automotive sectors is where retail goes eventually?

Yes, Tom, I think, first of all, this is not an acquisition, and this is a strategic investment that we're making of $150 million investment for 16% of the company and I will join the board.

And I think this is something that we are very excited.

First of all, it tie in very well with our System Design Enablement strategy.

And that we try to expand beyond our core business.

This embedded software is the nearest adjacency, and this is a next level up to the system stack being close tied to the underwriting hardware, and then this is exploring the new opportunity for us that's about $3 billion estimate, $3 billion embedded system safety and security.

And then with this hyperconnected world, the safety and security become a critical challenge for many of the industry, especially the critical industry like the aerospace, automotive, industrial and medical.

They are very well positioned, as I mentioned in my script, that they have been certified at the highest EAL6+ security level, and so we are very excited.

This will open up a lot of door for us in terms of combining the Green Hills and the Cadence expertise, and thus providing that very unique differentiating value to our customer and shareholders.

Our next question is from Jay Vleeschhouwer from Griffin Securities.

Lip-Bu, could you talk about the evolution of your mix of semiconductor and systems customers over the last couple of years?

And perhaps, more importantly, talk about any discernible differences in how you serve those customers or how they behave as customers in terms of buying patterns; what they select in terms of their total mix, one versus the other.

We also noticed that over the last year, you have been significantly increasing your openings for AEs, which is always the case in EDA, but especially so for you over the last year.

Would that, for instance, be largely connected to your systems business, particularly domestically?

Or is that a broader requirement for AEs globally?

And then a follow-up.

Yes, thanks so much, Jay, for the 2 very important questions.

So first question you have about the semiconductor to the system company and even service provider, the differences of supporting them.

Clearly, they are all demanding customer.

We love them.

And in terms of system companies, there are some differences.

They are looking at the total, the performance power envelope and a system modeling requirement.

And we are very well positioned for providing that.

Beside the EDA tool, we also have the packaging, PC board layout and system modeling and system simulation.

That is very, very compelling for them to come to us.

And then the other part, we also understanding their requirement better in terms of how to serve them and support them.

And then -- and they are very much -- time-to-market is more important to them.

And then we're able to meet their schedule, meet their timetable and then deliver the product from the system now where they are more comprehensive and that they are satisfying the requirement, that is critically important to them.

And then also, as you can tell, many of our service provider, they're also building up their silicone and subsystem ASIC model to meet their requirement and we are excited about doing that.

So I think, overall, and then with both semiconductor and systems side, we are doing very well.

The semiconductor side, I highlight a couple of them.

Samsung, clearly broader adoptions of our tool; MediaTek, adopting our full digital flow from synthesis to sign off; and of course, we are really, really excited about our marquee semiconductor U.S. company.

And that explain to you why we have increased the rec for the AE because the demand requirement to support this iconic, game-changing opportunity for us, we have to support them and in a very timely fashion.

And we have to meet their requirement on performance and scalability.

And that's why we're increasing our AE support that we need to drive the success here.

As follow-up, you mentioned Protium and Xcelium, but could you speak more broadly about the momentum you're seeing with the 'us and 'um portfolios, for instance, Genus, Pegasus, Tempus, Voltus, is the momentum you're seeing in digital largely Innovus for PnR?

Or are you, in fact, seeing broad adoption of the other newer products in digital that you've introduced over the last few years?

Yes, so I think it's a good question.

And clearly, we mentioned earlier the hardware emulation and the Protium also is steadily increasing adoptions.

We are very pleased with that.

In terms of the digital flow, clearly, I think you point out our Innovus place and route is very successful.

Very many leading market-shaping customer are adopting them.

And then we're also excited about -- like, for example, MediaTek from Synthesis Genus all the way to Tempus, and also same thing with Samsung, broader adoption for our full digital flow and that we are excited about.

So I think that we kind of want to be the best of tool in every category and beside the place and route and sometimes it takes time to the maturity, and now our Synthesis Genus starting to take off.

And now our signoff are starting to take off because this is very critical in terms of production; signoff is very critical.

It took a little bit longer time.

Finally, I think we've turned the corner.

We have 23 full flow win for 2018, stay tuned.

We are working very hard on 2019.

We have more exciting to share with you as the time go by.

Our next question is from Gal Munda from Berenberg Capital Markets.

The first one, I'd just like to expand a bit on what Jay said and be a bit more specific just in terms of the contribution and the growth of each semi versus systems.

How have you seen that developing in 2018?

And maybe if you can kind of share, maybe John, what proportion of revenue today it represents versus maybe the last few years?

Yes.

I think, as I mentioned earlier, both are doing very well for us.

The semiconductor side, as you can tell, over time, we will share with you some of the marquee and market-shaping customer.

They are the leader in their sector and we are winning and we are broadly proliferating in the most advanced nodes.

And then clearly, because of the performance, the scalability, the PPA and run time, and they are very happy to see the performance we have using the parallelism and also using our AI machine learning approach and now moving to the cloud.

And that they can see significant improvement in the scalability they look for.

On the system and service provider, we are very excited.

We have a lot of opportunity in front of us and we are engaging heavily and stay tuned.

From time-to-time, we will highlight our success.

Stay tuned.

And Gal, the mix of our business that comes from systems companies is approximately 40%.

That's been pretty consistent in the last 2 or 3 years.

That's because the systems business is growing, but so is our semiconductor business.

That makes sense.

And then just as a follow-up, I'd like to focus a bit on the cloud.

Obviously, it's growing probably very fast.

If you can tell me maybe how fast from a lower base.

And just like to understand where the base is now, and how do you think this opportunity to grow maybe in the midterm, how big the addressable market is?

Yes.

We mentioned earlier, last June in that deck, this is the largest industry conference and exhibition.

And we launched our Cadence Cloud with 3 major leaders: Amazon, Microsoft and Google.

We are excited about that partnership and collaboration.

We have adoption momentum, we are very pleased with that.

And clearly, we're taking the lead in terms of industry transition to the cloud.

And it's not just for the sake of cloud, it's really focused on driving the performance and the productivity for our customer.

And we work very close with our customer, with the selected cloud enabler, and so that we're providing and really focused on driving the performance and productivity of our customer and provide them the security that they can scale within their own organizations.

Do you maybe have an idea of what proportion of the workloads could in the future kind of move on to the cloud for those customers?

Or is that kind of we'll have to wait and see?

I think you have to wait and see because it's still early, like only last June.

And we have the growing momentum of adoptions.

And we want to make sure that we really drive the performance and productivity from the customer.

And then clearly, the simulation characteristics, workload is now quite broadly adopted by some of the customer to the cloud and then the Palladium Cloud is also happening.

So we kind of doing 2 by 2 and then driving the performance and just make sure that our customers see the benefit of having that.

Our next question is from Gary Mobley from Benchmark.

A couple of questions about your IP business.

The first one relates to, well, it was just really more of a verification of growth in the IP business.

That roughly $8 million revenue haircut from ASC 606, was almost all of that in the IP business, and hence, with the growth of the IP business, it's been more like 13% versus 12%?

So Gary, the IP business grew 16% in 2018 -- approximately 16% in 2018.

The -- and in terms of the shift from 605 to 606, that's the $8 million -- the reason that it's $8 million and not $40 million, as we thought earlier in the year was because we kind of underestimated our ability to write business under the new rules in a very, very consistent revenue timing way.

So we ended up with very much the same revenue timing.

So the $8 million difference was kind of spread across all businesses, it wasn't all IP in the end.

Okay.

All right, that's helpful.

And with respect to the proliferation of the open source processor, IP, how is that impacting the ability to license the Tensilica cores with RISC-V and MIPS now being open architected options out there?

And how, from a strategic standpoint, do you guard against or invest in this adoption of open source?

Yes, I think clearly, Tensilica is a very strong position in the audio, as I mentioned, and have now moved into vision and also automotive, surveillance and augmented reality.

So it really depend on the applications.

And in some cases, we coexist.

And in some cases, we shine.

And so, clearly, we are excited about our IP.

It's a double-digit growth for us.

And then the Tensilica, DNA 100 is very well received and for the embedded processing.

And then RISC-V is another architecture.

And I want to support all the different architecture and so we are coexisting very well.

We support them.

And then the IP, we embrace open source and clearly, we support any different architecture.

But more, really, right now, we are moving towards, I call it, domain-specific, workload-specific processor and application.

And so we open with that.

And then also, I think the other big opportunity is the high-speed connectivity.

So the high-speed SerDes, 112 gig SerDes and the 7-nanometer for the long reach, that is very well received.

And in the data center and cloud, this is a must-have and it's silicon proven.

We're excited about that opportunity also.

Our next question is from Monika Garg with KeyBanc Capital Markets.

First, I'm looking for more details on your partnership with Green Hills.

What are you looking to achieve with the partnership?

Could you talk about products, what you're looking to develop with them?

And when do you expect revenue contribution from this?

Yes, so Monika, first of all, I'm very excited about this, and I call it a world-class for the security and safety embedded system.

And clearly, they have a lot to offer.

It's a real-time operating system and also software development tools.

And either way, and then with this very proprietary partitional architecture, that protecting what you really need to protect in a very highly reliable security and performance.

And we're excited about it, and we take ownership in it.

I just joined the board, and we are exploring a couple of area of collaborations.

First of all is the go-to-market.

And this is a very good software and then how do we proliferate into some of the different vertical, defense and aerospace clearly is their stronghold.

And then besides that, clearly, in the automotive and medical, there's many area that we can explore how to go-to-market.

And then secondly, the technology collaborations in term of, clearly, we are the industry leader in providing the end-to-end EDA and semiconductor IP solution.

They are very strong in embedded safety and security software solution that each one bring in something really unique, and we can leverage our respective strength and collaborate in multiple fronts.

In term of the technology collaborations, clearly, we can explore a collaboration with our verification suite, our IP and others so that we can serve our system vertical markets together in a more effective way.

And also we can also look at some of the joint core marketing activity in the future.

So all this is now we just have this agreement finalized and we have a multiple meeting to explore how can we do and how do we prioritize that, so that we can really increase the revenue from both companies.

And I'm excited about it.

And then the customer that we are exposed to, they can't wait to get us together to work on it.

And so something that we stay tuned and then we will be report as we go.

Got it.

Then John, you just posted 10% growth for 2018, but you're guiding 7% midpoint for '19.

Are you being conservative?

I mean, even if I adjust for $15 million revenue from emulation from '18 to '19, you're still kind of there like 9% plus on '18 and guiding like 7.5-ish percent for '19.

Yes, Monika, I think the thing to remember there is that shift in hardware revenue from 2019 to 2018, while it benefits 2018, has double the impact on 2019.

Like I say, it was an inline quarter with the exception of that, so you're talking about a $20 million shift from 2019 into 2018.

It's got like a 1% impact to revenue growth for 2018.

So without it, we'd be closer to 9% revenue growth in 2018, but it has double the impact; it's like a $40 million swing on 2019.

2019 would be 9% revenue growth if that $20 million of hardware revenue had fallen into '19 instead of '18.

Got it.

And then if I look, generally, CapEx for Cadence has been somewhere around $60-ish million range but you are guiding to $90 million, 9-0, for 2019.

Kind of any specific higher expenses for '19 you're thinking about?

Yes, that's correct, Monika, that we are investing in R&D and field engineering resources to support expansion of our footprint at market-shaping customers and that's what you're seeing flow through there on the CapEx side.

Does it -- should it normalize back to $60-ish million range by 2020 then?

Well, it's hard to say.

We're not guiding 2020 right now.

Got it.

Then the last one.

I mean, we have seen very strong operating margin improvement last 2 years, almost 400 bps.

You are guiding to 50 to 100 bps for '19.

Is that the way to think about longer-term margin expansion?

Again, we're not guiding beyond 2019 and everything we know is included in our guidance.

Our final question comes from Sterling Auty from JP Morgan.

Just a couple of questions here.

One of the questions I still get a lot from investors is helping them understand as they go through the earnings season and see the differing results, whether it'd be AMD on one end or NVIDIA on the other end, can you help give a sense as to your exposures across the semi landscape?

And how they should put that into context?

Yes, Sterling, that's a good question.

And as I mentioned earlier, it is a very mixed environment.

Clearly, we are supporting the customer and are clearly the leader in the industry, and so far, we are very happy with our engagement with them.

And they are the leader in the sector, so we kind of highlight to you, that is our high priority to support that.

In term of the exposure, I think we're heavily engaging with some of this leading sector.

AI, machine learning, as I mentioned earlier, the cloud/datacenter infrastructure that we are very well positioned there.

And clearly, in automated driving and on the Tier 1 and OEM, and then also the 5G, some of the leading customer and we are engaging and ranging from cell phone all the way to the infrastructure provider.

And so, overall, I think we are well positioned.

We are very diversified, very broad in term of our customer base.

And clearly, we -- sorry, the new area that we are excited is the whole SDE, System Design Enablement, that we are increasing our system companies and also some of the vertical market like the aerospace, defense.

And then, clearly, in the automotive side, we have a lot of success there.

And then -- and also, clearly, one thing that over time we're going to be also expanding is the medical related; that's another big area of opportunity to us.

So overall, I think we are very broad.

We don't expose to any specific sector or specific company.

And then the design activity remain very strong across semiconductor system and vertical market.

All right, great.

The other hot topic in terms of conversations is when Synopsys reported their fourth quarter, they came out and gave a 3-year margin target.

And I think one of the earlier questions on the call was alluding to it.

I just want to hit it head on.

You guys were one of the first ones to give a margin target back when you started your subscription transition all the way back in 2008.

Given the success that you've had, and over 30% operating margins as you pointed out, is there a thought in when, if you decide to, might we expect you to come out and kind of give an update to a new long-term target, whether it be 3 years in the future or 5 years, et cetera?

Yes, Sterling, very good question.

If you are following me for the last 10 years, I will continue to guide you at the time that we see it.

If you recall, we're initially guiding you from a very disaster year, 2008 and '09, and then we're starting to point to 13 and then point to the mid-20 and then now we are reaching 30.

And then stay tuned.

And at the right time, we will highlight to you where we are going.

We continue to drive efficiency, R&D, G&A in every sector, and meanwhile, we also continue to invest for the success for the long-term shareholder.

And clearly, you can see that we have been investing in the right place, and you can see that our digital implementation side is a lot of success right now.

Our custom/analog continue to be -- have the leadership.

And we're investing in the future, in the 5-nanometer, 3-nanometer with a leading customer.

We're moving to the cloud and we're moving to the SDE, and we also focus on some of the vertical systems and service provider and those take investment.

And so we continue to drive efficiency and drive success, and then with the AE support, stay tuned.

When the right time comes, we will guide you the longer-term operating margin that we like to shoot for.

Excellent.

Just one last little housekeeping question for John.

The Green Hills investment, I didn't catch.

How does this actually get accounted for?

What will we actually see in the non-GAAP income statement in terms of where it's accounted?

And any just general sense of the revenue run rate at Green Hills at the moment?

So Sterling, we're not disclosing anything about revenue run rate at Green Hills; they're a private company.

But we'll account for the investment in Green Hills using the equity method of accounting.

So you'll see our portion of Green Hills' results flow through the other income and expense line for GAAP only.

So it won't be in our non-GAAP results.

Green Hills is profitable, has a broad base to top customers, and is especially proliferate in industries where the highest levels of safety and security are required such as aerospace and defense and automotive.

But, yes, there'll be nothing in our non-GAAP results.

It'll show up in GAAP only on our other income and expense line.

And we have a follow-up question from Mitch Steves from RBC Capital Markets.

Just really quickly, one of the other topical items has been the kind of U.S.-China trade dynamics.

Have you guys seen any change in terms of your sales there or any sort of differing negotiations, or is it still essentially business as usual?

Yes.

So I think -- Mitch, good question.

We have done well in China and we continue to representing -- it's continued to representing a growing opportunity.

And then China remain committed to build out on domestic semiconductor industry.

And so we are well positioned there and we are supporting our global customer throughout.

And so I think stay tuned.

Business as usual, and we continue to support our customers.

And Mitch, we've seen steady growth in revenue in China.

If you -- I'll refer you to Page 4 of our CFO commentary.

There you'll see, in Asia, Asia drove 24% of our revenue in 2016, 27% in 2017, 28% in 2018, but of that, roughly 8% of 2016 revenue was China, 9% of 2017 revenue was China and now it's just under 10% in 2018.

I would now like to turn the call back over to Lip-Bu Tan, CEO, for closing remarks.

Thank you.

In closing, through continuous innovation and execution, our System Design Enablement strategy has positioned us to capitalize on multiple technology ways and further proliferating our solutions with a broader base of consumers.

We are proud of the innovative and inclusive culture we are building at Cadence.

The strength of our culture is highlighted by the recognition we've received from Fortune Magazine a few days ago as we are proud that for the fifth year in the row, we made the list of Fortune Top 100 Best Companies to Work For.

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

Thank you all for joining us this afternoon.

Thank you for participating in today's Cadence Fourth Quarter 2018 Earnings Conference Call.

This concludes today's webcast.

You may now disconnect.