Cadence Design Systems, Inc. (CDNS) Q1 2015 Earnings Report, Transcript and Summary

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’ First Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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, Mike and welcome everyone to our first quarter 2015 earnings conference call. The webcast of this call can be accessed through our website, cadence.com, and will be archived through June 19, 2015. A copy of today’s prepared remarks will also be available on our website at the conclusion of today’s call. With me today are Lip-Bu Tan, President and CEO; and Geoff Ribar, Senior Vice President and CFO. Please note that today’s discussion will contain forward-looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence’s most recent reports on Form 10-K and Form 10-Q, including the Company’s future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures. The reconciliation can be found in the quarterly earnings section of the Investor Relations portion of our website. A copy of today’s press release dated April 27th, 2015 for the quarter ended April 4th, 2015 and related financial tables can also be found in the Investor Relations portion of our website. Our 10-Q for the quarter ended April 4th, 2015 was also filed this afternoon. Now, I will turn the call over to Lip-Bu.

Good afternoon, everyone, and thank you for joining us today. Our first quarter was another excellent quarter for Cadence with more exciting innovation and strong execution. We achieved strong financial results, expanded our relationship with key customers and ecosystem partners. We launched Innovus, our next generation digital implementation system with enthusiastic customer endorsements and were recognized in Fortune magazine 2015 list of 100 Best Companies to Work For. Before I turn to our Q1 results and highlights, let me give a little context by updating you on the progress we are making with our system design enablement strategy. EDA traditionally has focused on automating a development of chips and boards, but to successfully design today more complex end products, a different focus is required. We need to go beyond traditional EDA and provide customers with tools, IP, system integration and software content that enable end product development. Core EDA is still the foundation of our system design enablement strategy and we are now offer the best digital/analog mix signal and advanced modification tools to our customers. Our emerging IP business is growing at a strong pace as we provide high quality differentiated IP to a broad set of customers. We also continue to expand beyond SoC to provide innovative solutions for system interconnect and analysis, hardware/software co-design and verification and system-level IP. To expand our leadership in system design enablement, we are focused on building our relationship with the leading system and semiconductor customers and ecosystem partners, expanding leadership at advanced nodes, developing or acquiring flagship products in key areas to drive additional growth, hiring and nurturing top talent, and maintaining a laser-focused on customer success. With a progress we are making on our strategy and our confidence in the future, I am pleased to announce that we are increasing our ongoing stock purchase program from an annual rate of $150 million to annual rate of $225 million, starting with Q2. This is a total of $450 million over the next two years. This is part of our ongoing focus to drive shareholder returns and make optimal use of our balance sheet. Now, let us review the financial and product highlights for Q1. We delivered another strong quarter even while some customers were facing softer demand. For Q1, revenue was $411 million, non-GAAP operating margin was 23%, non-GAAP EPS was $0.23, and operating cash flow was $47 million. In early March, we launched Innovus, this is our new internally developed product for digital implementation. Innovus delivered 10% to 20% improvement in performance, power and area, used massively parallel computing to provide up to ten times reduction in turnaround time. Innovus joined Tempus, Voltus and Quantus QRC to provide our customers with next generation suite of digital implementation and signoff tools for advanced design. We expect these products to drive strong growth in digital, which is the largest segment in EDA. Several customers have already shared their positive experience using Innovus including ARM, Freescale, Juniper, MaxLinear, Renesas and Spectrum, in fact, ARM used Innovus during the development of the new Cortex-A72 processor achieving 2.6 gigahertz performance. Customer adoption of our silicon sign-off tools remain strong. Tempus, Voltus and Quantus QRC each added more than ten new customers. A leading semiconductor company made a large purchase of Tempus. Voltus and Voltus-Fi are now being used by more than ten of the top 20 semiconductor companies. Strong ecosystem support is essential to our success and we received TSMC 10-nanometer certification for our digital signoff and customer analog tools. IP is key to our system design enablement strategy. IP continued to show strong momentum in Q1. Revenue was up 23% year-over-year. Cadence entered into an agreement with Freescale to provide large portion of its broad IP portfolio across multiple Freescale product lines including automotive, microcontroller and net processors -- network processors. In addition, we entered into a license agreement with Avago for IP relating to TSMC 16-nanometer FinFET Plus process, with Cadence support Avago with a variety of IPs as they continue their strong momentum in rending designs among their top tier OEM customer base. Building upon last year's successful EDA agreements, we signed a strategic IP interoperability agreement with ARM. This provides both companies with access to broad portfolio of each other IP in order to improve interoperability, optimize performance and speed time to market for mutual customers. Our Tensilica products attracted tremendous interest at Mobile World Congress, where we exhibited new solutions for audio, automotive, wearables and IoT. And just last week, we introduced our new Tensilica Fusion DSP, which is a scalable DSP that is ideal for IoT, wearables and wireless connectivity applications, which require specialized computations, ultra-low energy and small footprints. On hardware, we had our strongest revenue quarter over the past year. Top customers expanded their Palladium capacity due to both increasing design complexity and deployment of new used models and we also added several new customers. Our team continues to execute on the next generation hardware platform and earlier adopter customer testing as part of our validation plan is tracking well. So in summary, we are very pleased with our progress as we execute our system design enablement strategy. Our innovative solutions and strong ecosystem partnerships are helping us to first win and then proliferate our products with market-shaping customers. Innovus is the latest addition to our next generation suite of digital and signoff tools and is already in use by our top customers. Successful execution of our sound strategy is driving superior results and we are pleased to be in the position where we can return more capital to our shareholders, while also making critical investments in R&D and high quality customer support to drive continued growth. I will now turn the call to Geoff to review financial results and provide our outlook.

Thanks, Lip-Bu and good afternoon everyone. I will provide some detail on the first quarter and give our outlook for Q2 and update our guidance for 2015. Q1 was characterized by strong execution. We have put up some good numbers for the quarter in a challenging environment. On the new product front, we have received positive feedback from our customers on Innovus. Total revenue was $411 million, up 9% compared to $379 million for Q1 2014. Revenue mix for the geographies was 47% for the Americas; 24% for Asia; 19% for EMEA; and 10% for Japan. The revenue mix by product group was 23% for functional verification, 28% for digital IC design and signoff, 27% for custom IC design, 11% for IP, and 11% for system interconnect and analysis. Weighted average contract life was approximately 2.5 years. Total costs and expenses on a non-GAAP basis were $315 million compared to $304 million for Q4, and $295 million for the year-ago quarter. Q1 headcount was 6,260, up 154 from Q4 due to hiring in R&D and technical field positions. Non-GAAP operating margin was 23% compared to 28% for Q4, and 22% for the year-ago quarter. As expected, the Q1 operating margin was down from Q4 due to the seasonal impact of payroll taxes and vacation expense. GAAP net income per share was $0.12. Non-GAAP net income per share was $0.23 compared to $0.27 for Q4 and $0.20 for Q1 2014. Operating cash flow was $47 million compared to $132 million for Q4 and $28 million for the year-ago quarter. Total DSOs were 30 days compared to 27 days for both Q4 and year-ago quarter. Capital expenditures were $8 million. Cash and short-term investments were $980 million at the quarter-end compared to $1.023 billion at the end of year. In the quarter, we repurchased more than 2 million shares of common stock for approximately $37 million. Approximately 48% of our cash and short-term investments were in US at quarter-end. We paid $54 million in cash in Q1 for convertible notes that were converted early. We will pay-out the remaining principal of $296 million by June 1. As a remainder, the associated hedge settles [ph] in April and May and outstanding warrants will settle from September through December. Now, let’s turn to the outlook for the second quarter. For Q2, we expect revenue would be in the range of $410 million to $420 million. Non-GAAP operating margin is expected to be approximately 25%. GAAP EPS for the second quarter is expected to be in the range of $0.14 to $0.16. Non-GAAP EPS for the second quarter is expected to be in the range of $0.23 to $0.25. And now, for our fiscal 2015 outlook. Our bookings, revenue and operating margin guidance for the year are unchanged from last quarter. Bookings are projected to be in the range of $1.87 billion to $1.93 billion. We expect weighted average contract life in the range of 2.4 to 2.6 years. And we expect at least 90% of revenue for the year to be recurring in nature. Revenue is expected to be in the range of $1.68 billion to $1.72 billion. This translates to a 6% to 9% growth in revenue over 2014. Without the 53rd week in the 2014 baseline, growth would be 7% to 10%. We continue to expect hardware revenue to increase in 2015. Non-GAAP operating margin is expected to be approximately 25% on an annual basis. Non-GAAP other income and expense is now expected to be in the range of negative $20 million to negative $14 million compared to the prior range of negative $24 million to $17 million. The non-GAAP income tax rate is 23%. We're assuming weighted average diluted shares outstanding of 308 million to 316 million for the year, which is up from our assumption of 306 million to 314 million due to the impact of higher share price on assumed dilution from the warrants that expire later this year. GAAP EPS is now expected to be in the range of $0.60 to $0.70, a $0.10 increase at the midpoint from the prior guidance primarily due to lower estimated GAAP taxes. Non-GAAP EPS is now expected to be in the range of $0.96 to $1.06, which is 1% increase at the midpoint. We expect operating cash flow to be approximately $350 million. Our DSO forecast is approximately 30 days and we expect capital expenditure of approximately $40 million. As Lip-Bu said, thanks to increasing success of our strategy, we are replacing our share repurchase program with a new program with an annual rate of $225 million. This is up from the prior rate $150 million per year. Beginning this quarter, we expect to repurchase $450 million of our common stock over the next eight quarters at our quarterly rate of approximately $56 million. In closing, while there is some uncertainty in the environment, I hope you can tell we're excited about the strength of our execution and opportunities and we are confident in our future. So, with that, operator, we'll now take questions.

[Operator Instructions] Your first question comes from Mahesh Sanganeria with RBC Capital Markets. Your line is open.

Yes, thank you, and congratulations on increasing the buyback. Just want to follow up on that, will the buyback rate will be uniformly spread over several quarters or you are going to, I mean monitor and moderate that depending on the situation or the stock price?

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

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

Mahesh, as always, we regularly review our capital structure. We take into account both levels of debt, our business, our capital needs to grow and return on cash to shareholders, including how we return that cash to shareholders, we will continue to evaluate it. Obviously right now we're talking about the share repurchase at this time.

Your next question is from Krish Sankar with Bank of America Merrill Lynch.

Yeah, hi, thanks for taking my question. I have two of them. One is, Geoff or Lip-Bu, in the last quarter, you spoke about some increased investments to potential gain share in the digital side. I'm just trying to figure out, what kind of timeframe would we have to look into to get any quantifiable or tangible results on that share given the digital side? And I also had a follow-up.

Yeah, so I think, Krish, let me start first, this is Lip-Bu. So I think on the digital side, we continue to get very strong momentum with our new suite of digital implementation. And I mentioned, we clearly have advantage in term of performance power area and also the reduction of time and that is very significant. So clearly this is a lot momentum. I mentioned last year we have marquee global accounts, we have large consumer electronics and we have a large semiconductor company. And in this quarter, we mentioned about a leading semiconductor purchase, Tempus. And so I think all in all we have a lot of momentum, but I just wanted to highlight clearly our revenue is recurring ratable model, so booking usually tend to revenue over time and also I think, first of all, you win, then later on you proliferate across all the different product development groups, so there is a time delay, but clearly we see the momentum, we are excited about the new offering we have and we are very focused on customer success.

Got it. That's very helpful. And then as a follow-up, you guys mentioned that you still expect by, towards the end of this year, the newer Malaysian product release. Kind of curious, you did say that you expect hardware revenue to increase through the year, are customers waiting to get the new solution or are they ordering as they see, or is this increase in revenue more a function of the beta size with new emulation products, those customers ordering?

So, let me start answering the question. So first of all as I mentioned earlier, we have a strongest revenue quarter over the past year, so top customer expanding their capacity and also they find new used model, and we add a couple of new customers and so I think overall and in the in-circuit emulation, we are clearly the leader and meanwhile, we have find newer applications use models like simulation acceleration, hybrid verification, system level dynamic power analysis, so I think to grow over the 2014 is what we have and we’re just starting what we have right now and then meanwhile on the new platform, as I mentioned in my remark, we execute well and we are in the validation plan and an early adopter customer testing is tracking well and we continue to say the last quarter that shipping is the later part of the year. So, so far, we are pleased with the progress we made.

Your next question is from Rich Valera with Needham & Company.

Thank you. Lip-Bu, I was hoping you could just give a little more color on the macro environment, you referenced that it sounds like there were some challenges out there, but just wanted to, if you could give some color on how that's affecting EDA purchasing behaviour and how you guys are navigating through this kind of choppy environment?

Yeah, Rich. This is a good question. So a couple of pointers. One, clearly, we all know that the macro level concern slowed down growth in China and then the Greece, we see a situation and then the foreign exchange volatility, political unrest, those are concerned, we always have to look at that and then meanwhile, I think, clearly, there are some areas of strength and some area of challenges. So like for example in the video, wearable, IOT, cloud, infrastructure, automotive, those are really exciting and a lot of increasing design at the advanced nodes and IP area, but clearly in the PC side, there are some challenges. I think all in all, it's kind of a mix environment. You heard some of the earnings call from our customer and so clearly is mix and depend on what are the sector focused product leadership they have, so those are the challenges. But meanwhile seeing that, we clearly see a lot of system company engagement and then system service related company are doing really well and we see very strong design activity among the system company and also the leading semiconductor company and so this is exciting. There is a lot of new products, end products, amazing products coming up and we are delighted to be their trusted partner, to work with them and with our ecosystem partner, by foundry, IP vendor to help them be successful to tape-out that chip and so that they can win in the marketplace. That is our job and we are very delighted to be part of that.

And we think we had a really nice quarter, right, nice revenue growth, operating profit growth, cash growth, year-over-year too. So we think we’re operating well in a not perfect environment.

That's great colour. Thank you. And just wanted to follow up on the emulation question, I didn't want to sort of put words in your mouth, but would you say now that you have beta units in the field and you are kind of in the beta part of the process for the new emulation box?

Yes. So I think first of all as I mentioned, execute well, I have the weekly update on the team and I'm happy with the progress they make and I mentioned earlier adopter in customer testing is tracking well and we remain the same position that shipping in the later part of the year. We will tell you more in detail when we’re ready to announce.

Your next question comes from Ruben Roy from Piper Jaffray.

Thank you. Lip-Bu, I want to follow-up on Rich’s question on just a macro and whether or not you’ve seen any significant or material shift in at the leading edge, so, FinFET design 16-nanometer and below and trying to what your assessment is on where some of the leading-edge folks are when it comes to 10-nanometer? Thank you.

Thank you. Those are good questions. And so, I think clearly, we’re working with our customers and our IP partners and also with the foundry partners very deeply and clearly, the FinFET is progressing very rapidly and not just at 20-nanometer, now the 16-nanometer, 14-nanometer are in the productions and we’re excited about working very closely with our partners on the 10-nanometer and in the other area, we’ve already started in the 7-nanometer and 8-nanometer. So, there is a lot of challenges in term of optimize our tool -- earlier optimizing our tool and engaging with our foundry partners to make sure that it’s ready and optimize to our customer to yield. So, we work very closely with our leading customers, very closely with our IP partners, and work very closely with our foundry partners. And so, a lot of challenge in the double patterning, triple patterning and we keep an eye very closely with the Lithography dynamics, like EUV and others. And so, we want to make sure that our tool be ready when the customer ready to deploy and design and then we will be there to support them. So, I think, all in all, I am saying that we want to be the leader in the FinFET and advanced node. This is something that we determine to try that.

Thank you for that, Lip-Bu. And then a quick follow-up on Innovus. I think that your market share and implementation in physically place-and-route [indiscernible] has lagged your larger competitor and it’s good to hear that some of the customers are excited about the new products. Can you talk about your placement on the market share and sort of how you expect Innovus to roll out into the customer base? When are we going to start to see this in terms of potential market share shifts on the digital side? That’s it, thank you.

Thank you for bring up the subject and I think clearly, Innovus, we are extremely excited about this new offering. In earlier March, we launched the products with a very exciting enthusiastic customer support and clearly is internally developed products and something that we are very proud of the culture of the innovation we put in place at Cadence and the product clearly have a good advantage in term of 10% to 20% improvement in the perform and power area that is very important to the customer and then the other part is up to ten times reduction in turnaround time and as you know, time to market is critical to the success for our customer. This is very important and also the partition in term of the 5 million to 10 million instances and that is very significant to our customer. So, tying with our 10% Voltus and Quantus that is a new suite of digital implementation using massive parallelism and I think we’re very excited and clearly, customer recognized that. We are heavily engaging with our customer. Six of our customer already announced. I mentioned earlier, ARM, Freescale, Juniper, MaxLinear, Renesas and Spectrum and many more are coming and working with us. So, clearly, they see a value and it’s a best-of-class and we’re delighted to be able to provide a solution to our leading customers.

Your next question comes from Jay Vleeschhouwer with Griffin Securities.

Thanks, good afternoon. Lip-Bu, I’d like to follow-up on the comments you just made around implementation. Are you at the point now where you are able to take a multi-product orders where customers will buy any or all of Innovus, Tempus, Voltus, Quantus, the products with other Latin names altogether, are you at that point now, where rather than doing single-point products such as when you alluded to for Q1, you’re starting to see multi-product orders for your various new tools?

To answer to your question, yes, and this tools are all in production ready and in fact many customers are using our tool for the tape-out of their most advanced process node, and now we’re starting [ph] next generation suite of digital implementations and we are delighted and able to provide them in the most advanced nodes for them to tape-out. And so we are ready, we are very excited and much as a place in realm and the timing and products sign-off, and I am working very close with our leading foundry partners and so that will be available to them and so it is something that they are excited, they are something new and better performance. And this is a biggest turn market for EDA and that’s why we are very excited for the future growth.

As a follow-up, I would like to ask about the difference that you have observed in buying behavior between systems customers and semiconductor customers with a more traditional part of the customer base. Specifically, is it more common for systems customers to do inter-contract expansion business that even well before the contract expires, they will come back and add tools and capacity? For instance, would that large customer you alluded to back in the third quarter have already come back for more or is this a common thing for systems customers to do than traditional IC customers?

Yeah, I think there are a couple of challenging opportunity for us, so clearly the system companies is very important for our System Design Enablement strategy and because they decided to vertically integrate it and optimize and all the way from the silicon level, to the Board level, to the software content. And we are uniquely positioned to provide all three, so not just the tool, not just the IPs and also the PC board, the system analysis, and they’re developing the chip, they look at the entire board, entire system in term of the power, signal integrity, thermal analysis and that is critical for their success. And then their objective is time to market with best product development. And so to them, the critical point for them is time to market and also quality. And so those I think, they’re treating very well with our value driven approach to preserve the value and increase value and provide the solution rather than just a point tool. So this is something that’s very important. We continue to be very disciplined in term of whether it’s a system company or semiconductor company, we drive the value and we drive quality. And then we look deeply at partnership collaborating for their success, and it’s something that is very important for them and also for us. So I think in terms of differentiating pretty much the same and we just had to be very disciplined. But the system guy, they are also not just looking at the semiconductor, they look at the entire board, entire system, the software stack and that’s why we need to provide that solution that System Design Enablement solution all the way to the interconnect and then the content and the integration that they need and that’s why we are in unique position to provide that solution to them.

And one of the things, Jay that we have been concentrating on with our customers is, we want to allow as many opportunities for add-ons as possible. Again, it varies from customer to consumer, but that’s certainly been a focus for us to allow for deals to be structured in between the other deals and increase revenue over a period of time. So we generally try to aim that way. Again, it varies from customer to customer.

Your next question comes from Gus Richard with Northland.

Thanks for taking my question. I was hoping you can give a little more color on the IP dealership you have with Freescale and Avago, is that IP specific to them or is this new developing product IP for all your customers?

Yeah, Gus, this is a good question. We are very delighted and our IP becomes a very important business and also key to our whole System Design Enablement strategy. And as I mentioned, it’s a great quarter for us, 23% year-to-year increase in the revenue, more specifically on the Freescale. This is a very important milestone for us. We provide a large portion of the broad IP portfolio across multiple Freescale product lines from automotive, they are very strong in that, microcontroller, network processor, so across product line. And then the other part is, in a way exciting, which able to provide the license -- IP license agreement for Avago as you know is a very successful company, we're providing the most advanced TSMC 16-nanometer FinFET Plus and then for a variety of IP they need so that they can broaden their wins with their OEM customers. So those two, we're very, very pleased with that. And as of cost, I just add-on, we also have that IP interoperability with ARM, deeper our relationship even further so that we can really access through each other's IP and the most important, it provides that efficiency, the interoperability, the performance, the speed for the best for our mutual customer to be successful.

And just to be clear, is the IP you’re developing for Freescale just for Freescale or you’re going to offer that IP, this portfolio to all of your customers that are doing similar products?

Yeah, this is more in our industry standard, IP and clearly we provide that industry standard IP for all the different customers at the most advanced-node and so that is our goal and our vision and clearly more and more customers are outsourcing their IPs to provide this silicon proven high-quality, differentiating IP, we're delighted, we have more than 1,000 people on our team to working on the IP and we have a very broad IP portfolios that we can serve our customer well.

Your next question comes from Monika Garg from Pacific Crest Securities.

Thanks for taking my question. First one is, one housekeeping question, if I look Q-over-Q, the IP revenue seems to be down close to 11%, is it just seasonality, any particular season for that?

So the biggest reason why our revenue is down from Q4 to Q1 is we had an extra week remember in Q4 that's the biggest reason why our revenue is down. And without that, we believe revenue would have actually been up.

Got it. Okay, thanks. Then, you talked about like ten new customers in you know Tempus, Voltus, like all of these new digital products but your bookings guidance has remained unchanged. So is it you were expecting these customer wins or is that bookings guidance would be just conservative?

Yeah, whenever we do bookings, we take into account the things that we know at the beginning of the year, of course, we were in you know we were well aware that most of the things are going to happen, so yes, we knew it back then too.

And also just to add on, usually we win first and then proliferate. So, I think because of ratable model and so over time, you’re going to see the growth.

[Operator Instructions] Your next question comes from Sterling Auty with J.P. Morgan.

Thanks for squeezing me in, couple of questions. One, can you give us a sense of what you think the anticipated impact of a lot the mergers and consolidations will be on your business, granted not a lot are talking about cost cuttings, but I would think, putting some of these companies together, being much larger they're going to watch [ph] a bigger volume discount the next time they come around.

Sterling, good questions. And so, first of all, I think this consolidation M&A will continue, actually it will be even accelerating because of this growth and also the scale to the advanced-nodes. And so this is kind of unavoidable, but I think clearly after the consolidation, they'd really drive more efficiency and more reducing the combining G&A. But clearly the number of engineer, the design actually increased and so we're delighted to work with them and clearly we continue to drive very disciplined and value driven in terms of working with them. And also I think, when they down to the geometry, to the 16, 14, and 10, they did collaboration even more actually they need us even more and so the partnership, the requirement even deeper and that's why we've been consistently mentioned about being a trusted partner, so they can count on us to really drive the true performance and that's why we have created this innovating culture, so that we can continue to drive innovation, continue to driven efficiency for them. And in saying that, because of some disconsolidation, actually it's really exciting for me is that more start-up company coming up with great team and great innovations. And so that’s how we also support some of the really top-notch engineer coming out and do really disruptive innovation and we are also part of that to provide them the tool and solution to drive new creation and new innovation. And then, as also mentioned earlier, new breed of system and service company are coming up to drive the whole vertical integrations. And we are so well positioned to provide them the solution from tool, IP, PCB and system analysis to drive access for them. So I think all in all I think the environment is net positive for us.

And again, Sterling, remember, we have well-diversified customer base with no customers approaching even close to 10% and our top-40 is maybe 50% or 60% of our customers, so well-diversified.

Okay. And then on the digital implementation and Signoff growth little [Technical Difficulty] this quarter. Do you think that was due to the anticipation of the Novus release and should we see acceleration in the coming quarters?

Sterling, we can't hear you. Can you repeat your questions?

I wondered if the Novus release drove any orders on the digital side in anticipation of the release.

No, I think, again, you need to remember, Q4 was a 14-week quarter, so that had some impact. We are very happy with momentum in digital and Signoff. It does take time for bookings to become revenue, but we don't believe the Novus held back any of our prior business.

Your next question comes from Jay Vleeschhouwer from Griffin Securities.

Yeah, thanks. Just a couple of follow-up questions. Geoff, in the 10-Q which came out this evening for the first quarter, it mentions that your hardware cost of revenues were down $4.5 million year-over-year. If all historical cost calculations are correct for emulation for last year, including Q4, then it seems to suggest that your hardware cost to revenues might have been up sequentially from Q4. And so if we assume a more or less constant margin, should we infer that in fact your emulation revenues were up sequentially from Q4? And if that was the case, was that mostly a function of shipping out of backlog as you did Q1 a year ago or did you in fact do a decent amount of organic new business in Q1?

So I think, as Lip-Bu said during his prepared remarks, we actually had the best quarter in Q1 in hardware that we had over the last four quarters. So we did quite well. Revenue was clearly up as a result from Q4 to Q1. The rest of the detail assumptions are your model and your question, but yeah, we had a very nice quarter. Came out of backlog, came out of a good business, came out of our current generation of products, so we are quite happy.

Okay, thanks. Another one for either of you. Again, back to the focus on systems customers, particularly given the investments you are making to support them, are you using as an internal metric to keep an eye on that business, the notion of accounts profitability? Synopsis, for example, brought this up a number of years ago as a metric for themselves, particularly for larger account. Is this something that you in fact manage to particularly for the larger accounts?

Yeah, of course we look at account profitability and we pay attention to that. Our goal is of course to provide value to all of our customers and make sure that that's working. We are also quite comfortable that investments that we are making here are going to pay off and are value-enhancing to shareholders and so we are quite happy.

Your next question is from Suji Desilva from Topeka.

Hi, guys. Can you talk about on the emulation side, you had a good quarter here, how the backlog is forming there versus prior few quarters?

Yes, Suji, we don't guide individual segments of our business on a going forward basis. We have said, for the year, that hardware – we expect hardware to be up from last year and we will stick with that.

Great. Thanks, Geoff. And then what kind of -- you talked about the increasing complexity going from 2016, ‘14 over ’10, do you think there is less likelihood that the competitors can – that people can switch out to competitors versus prior generations? Is that a phenomenon that would be happening with the increased complexities you are seeing in the greater interaction with your customers? Is that a fair conclusion?

Yeah, I think that clearly every process node is an opportunity for us from the tool and IP point of view, and SINA came on board six years ago, we have been very determined to drive leadership in the advanced nodes and so clearly, the 14, 16, 10, 7, 8 is very much in our roadmap and we're heavily engaging with our IP partners and foundry partners and so this is something that we have to work closely with them and also with our customers and again that deep collaboration and partnership with our customer and IP vendor and also the foundry partner are critical for success and that part, we feel, are very solid foundation to build on top of that and then they view us as a trusted partner going forward and that's something when you move on the geometry, that clearly they want to have a partner that can come on to continue to drive innovation, so that they can lean on us to drive the success on the development.

Our final question will be from Monika Garg of Pacific Crest Securities.

Hi. Thanks for letting me ask the follow up here. Geoff, I just wanted to understand the foreign exchange movement’s impact on your business, if I understand correctly the revenue, only yen -- you have exposure to yen on the revenue basis, but could you walk through the impact on AVAX for the currency movements?

Yeah. So there is, the yen is the only other currency that we sell any material amount of dollars in, so of course that impacts revenue. There is another indirect revenue impact that related to the fact that we do sell for a lot of multinational companies who have currency other than dollars as their functional currency. So of course, their prices are increasing as the dollar, euro exchange rate or the dollar-RMB exchange rate changes. So there is an indirect impact. On the cost side, most of our costs are employee related. As you would expect, our largest employee bases are in US, India, Europe and China. So we do get some benefit there based on the stronger dollar and of course if it has some cost, the dollar becomes materially weaker. Overall net was the slight positive for us.

Just another one from me, if we look at Intel and PSM, they cut the CapEx this year and what we’re seeing is all the companies are talking about reduced benefit of moving to advanced geometries, the benefit of cost of transistor is not coming down as much as it used to in the previous years. So do you see any impact on EDA spend as we move to advanced geometries, do you see a negative impact to EDA spend, because of this?

No, I don’t see that and clearly, when you move down the geometry, first time pass is critical because the mass cost is very high for the advanced node. Actually, the foundry and customer, they reach out to us even earlier and because they want to make sure that our two are optimized for them and certified for them. So I think all in all, actually a lot of proof on the customer, want to have a deeper partnership with us and we’re delighted to be partner with them and their success is our success. So that’s something that we’re really proud of about being a trusted partner for all of them and then to try to differentiating product.

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

In closing, I’m very proud that Fortune magazine has recognized Cadence and our hard working employees by including Cadence in their 2015 list of 100 best companies to work for. I would like to thank all our employees, shareholders, customers and partners for their support. Thank you all for joining us this afternoon.

Thank you for participating in today’s Cadence Design Systems first quarter 2015 earnings conference call. This concludes today’s call. You may now disconnect.