Cadence Design Systems, Inc. (CDNS) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Ginger, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Alan Lindstrom, Group Director of Investor Relations for Cadence Design Systems. Please go ahead.

Thank you, Ginger, and welcome to our earnings conference call for the second quarter of fiscal year 2013. The webcast of this call can be accessed through our website, cadence.com, and will be archived for 2 weeks. With us 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 the 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 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. A copy of today's press release dated July 24, 2013, for the quarter ended June 29, 2013, and related financial tables can also be found in the Investor Relations portion of our website. Now I will turn the call over to Lip-Bu.

Good afternoon, everyone, and thank you for joining us. Cadence delivered solid results in Q2. Total revenue was $362 million. Non-GAAP operating margin was 24%, and operating cash flow was $75 million. This result reflects our ability to support our customers' needs to innovate and invest in new design activities. They also reflect the strength of our organization, our products and our customer relationships. As had been the case for the past 3 years, the environment continues to be challenging, with macro uncertainty and softness in semiconductors. Despite that, most of our customers continue to innovate and invest in new design activities. Now let us review some of the Q2 highlights. Our customers expect Cadence to collaborate with them and their ecosystems as they develop, design and build their great products. They look to us for innovative design solutions. Today, I will highlight 2 of our recent internally developed innovations, one in timing signoff and the other in custom/analog design. I will also highlight our progress in IP as we closed additional acquisitions in Q2 and sign our largest design IP contract to date. Timing signoff is a critical step in the design flow. We introduced Tempus, a breakthrough static timing analysis and closure tool. It will enable system-on-a-chip developers to accelerate timing closure and to move their chip design to fabrication more quickly. Tempus used a massive distributed parallel engine that can scale across hundreds of CPUs to deliver up to 10x faster performance than traditional timing analysis solutions. It can handle designs with hundreds of millions of objects without compromising accuracy and deliver faster and more accurate design closure and signoff. TSMC certified Tempus for signoff on their 20-nanometer processes. Having a powerful timing signoff solution will complement Encounter, our digital design platform. In custom/analog, we are extending our leadership by continuing to invest in more automated solutions and addressing advanced nodes into FinFET. We recently introduced an electrically-aware design capability in the Virtuoso custom design platform. This is a ground-breaking approach to custom/analog design. It provides electrically-aware feedback during layout design. This enables engineers to reduce their design cycle up to 30%, in addition to optimizing chip size and performance. Earlier this month, we announced that TSMC expanded their collaboration with Cadence for custom/analog design. TSMC deployed Virtuoso for advanced nodes into 16-nanometer FinFET designs. TSMC will create and deliver native SKU-based process design kits, also known as PDK. PDKs will provide -- these PDKs will provide the best user experience and the highest level of accuracy for Virtuoso customers. As you know, growing our IP business is a key focus for Cadence. In Q2, we expanded our IP portfolio. In addition to the Tensilica acquisition, we closed the acquisitions of Cosmic Circuits and the Evatronix IP business. These acquisitions add complementary USB and MIPI IP that is silicon proven at advanced nodes. They also bring us talented development teams in India and Poland. We'll begin integrating Tensilica, Cosmic Circuits and Evatronix IP business with earlier acquisitions and our internal development teams. As a result, Cadence now offers a broad IP portfolio that addresses the IP requirements of our customers. We've demonstrated this by signing our largest design IP contract so far, a multimillion dollar deal with an Asian customer. This contract includes a combination of products such as TDR, MIPI, USB IP. The MIPI and USB IP are from Cosmic Circuits. Our Tensilica business is off to a good start with a strong quarter. The transition had been smooth, and the customer interest, engagement and orders are strong. Our verification IP, or VIP, business continues to be strong. We work closely with the standards bodies so that we can introduce new VIP and memory models at or even before the ratification of the newest protocols. New VIP introduced this quarter includes HDMI 2.0, mobile PCI Express and WIO 2.0. Finally, I wanted to provide an update on the acquisition of Sigrity, which we completed a year ago. Sigrity is contributing to the renewed growth of our printed circuit board, or PCB, business. Our PCB business is reaching an inflection point as customers move to high-speed design for mobile, consumer and cloud infrastructure segments. The combination of our Allegro product line plus Sigrity power, signal and thermal analysis gives us a complete solution to address the requirements for development of high-speed products. For the first half of 2013, our PCB and IC packaging revenue was up more than 30% over the first half of 2012. In summary, this quarter, we introduced 2 innovative products in the digital and custom/analog domains. We closed 3 previously announced IP acquisitions and now have the critical mass needed to address more of our customers' IP requirements. We are continuing to attract top talent to Cadence, both through hiring and acquisitions, which keeps strengthening our innovation engine. We continue to drive excellent operational and financial performance, as today's results demonstrate. 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. I'll review the results for the second quarter, present our outlook for Q3 and update the outlook for 2013, including our recently closed acquisitions. Q2 was a solid quarter. Our guidance was for meaningful growth and we delivered that. In addition, we announced new products and closed several acquisitions, all of which will help us continue our growth into the future. Total revenue was $362 million compared to $354 million for Q1 and $326 million for the year-ago quarter. Year-over-year growth was 11%. Revenue for Tensilica in Q2 was $6 million after adjustments for merger accounting. Product and maintenance revenue was $338 million and services revenue was $24 million. The revenue mix for the geographies was 45% for the Americas, 21% for EMEA, 21% for Asia and 13% for Japan. Total cost and expenses on a non-GAAP basis for Q2 were $277 million compared to $270 million for Q1, and $253 million for the year-ago quarter. Q2 headcount was 5,767 people compared to 5,312 people for Q1. The increase was due primarily to acquisitions, plus hiring in R&D and technical field support. Non-GAAP operating income for Q2 was 24% compared to 24% for Q1 and 23% for the year-ago quarter. For Q2, we recorded GAAP net income per share of $0.03. Non-GAAP net income per share was $0.21 compared to $0.21 for Q1 and $0.19 for the year-ago quarter. Operating cash flow for Q2 was $75 million compared to $75 million for Q1 and $67 million for the year-ago quarter. Total DSOs for Q2 were 24 days compared to 20 days for Q1 and 36 days for the year-ago quarter. Our DSO target is approximately 30 days. Capital expenditures for Q2 were approximately $17 million. Capital expenditures were up from last quarter, and mostly due to acquisition-related spending on facilities and IT. Cash and short-term investments were $678 million at quarter end, with about 40% in the U.S. In April, we drew down $100 million on our revolving credit facility. We have approximately $275 million of U.S. cash and short-term investments, which when combined with the expected cash flow for the second half is more than sufficient to fund operations and retire our 2013 convertible notes in December. More than 90% of all orders booked in Q2 are ratable. Weighted average contract life was 2.7 years. On a weighted average basis, run rates on Q2 renewals increased over the prior contracts. Now let's address our outlook for the third quarter and our update for fiscal 2013. For Q3 2013, we expect revenue to be in the range of $360 million to $370 million. This includes approximately $9 million for Tensilica, which was net of deferred revenue adjustments due to merger accounting. For Cosmic Circuits and the Evatronix IP business, the Q3 revenue contribution is small as we undergo integration and convert them to U.S. GAAP accounting. Q3 non-GAAP operating margin is expected to be in the range of 23% to 24%. Non-GAAP total costs and expenses will be up sequentially, primarily due to acquisitions, including Cosmic Circuits and the Evatronix IP business. GAAP EPS for the third quarter is expected to be in the range of $0.08 to $0.10. Non-GAAP EPS for Q3 is expected to be in the range of $0.19 to $0.21. We expect Tensilica to be breakeven on a non-GAAP basis for the quarter after adjustments for merger accounting. The combination of Cosmics and the Evatronix IP business is expected to be slightly [ph] dilutive on a non-GAAP basis for Q3. Now for an update of fiscal 2013. Bookings are expected to be in the range of $1.53 billion to $1.57 billion, an increase from last quarter's range of $1.48 billion to $1.53 billion -- both of those are billions, excuse me. The increase is attributable to organic growth, increased Tensilica bookings and additional Cosmic Circuits and the Evatronix IP business. We expect weighted average contract life to be approximately 2.6 years for the year and to book at least 90% of our business for the year under ratable arrangements. We expect revenue to be in the range of $1.445 billion to $1.45 billion -- $1.465 billion, again repeat that, $1.445 billion to $1.465 billion for 2013, compared to $1.44 billion to $1.47 billion for the last quarter. This includes approximately $27 million for Tensilica, net of deferred revenue adjustments due to merger accounting, which is unchanged from our prior estimate. For Cosmic Circuits and the Evatronix IP business, the Q3 -- the 2013 revenue contribution is small as we undergo integration and convert them to U.S. GAAP accounting. Non-GAAP operating margin is expected to be approximately 24% on an annual basis for 2013. This is slightly lower than last quarter's range due to the acquisitions of Cosmic Circuits and the Evatronix IP business. Non-GAAP other income or expenses for 2013 is expected to be in the range of negative $16 million to negative $10 million. For 2013, we are assuming a non-GAAP tax rate of 26% and weighted average shares outstanding of 293 million to 300 million shares. GAAP EPS for 2013 is expected to be in the range of $0.45 to $0.54. Non-GAAP EPS range is expected to be in the range of $0.80 to $0.89 compared to the prior range of $0.81 to $0.91. We expect Tensilica to be approximately breakeven on a non-GAAP basis for the second half after adjustments for merger accounting. The combination of Cosmic Circuits and the Evatronix IP business should be approximately $0.01 dilutive on a non-GAAP basis for the second half. We expect a further $0.01 of dilution from the effect of our current stock price and a fully diluted share count. This is primarily due to the 2015 convertible notes. For 2013, we expect operating cash flow in the range of $335 million to $365 million compared to the prior range of $360 million to $390 million. The reduction is primarily due to merger-related outflows. DSOs for 2013 are expected to be approximately 30 days. Capital expenditures for 2013 are expected to be approximately $45 million. This is up from $40 million we estimated last quarter, primarily due to acquisition-related spending. So in summary, Cadence continued its strong record of execution. I like the way we are both developing new breakthrough products and making acquisitions that move our strategy forward. The integration of the IP acquisitions is going well. While the environment continues to present challenges, I am comfortable and confident in our ability to help our customers design and build great products while generating strong financial performance. Operator, we'll now take questions.

[Operator Instructions] Your first question is from Jay Vleeschhouwer from Griffin Securities.

Geoff, could you break down the increase in the bookings guidance range for the year? It sounds like that went up by about $40 million to $50 million from the last guidance. When you waive guidance for bookings at the end of Q1, by $55 million, $40 million of that was for Tensilica, $15 million was organic. Can you go through the same exercise now for the updated guidance for 2013?

Yes, I think what we're willing to say, Jay, is that the issues that we highlighted and raised, generally the duration expanded a little bit slightly. Tensilica was a big part of it and then the addition of Cosmic and Evatronix. We don't -- we're not going to break out the numbers, but each of them contributed. And we're quite happy with the strength in Tensilica's bookings.

Also, with respect to emulation hardware, normally, when your product cost or revenues declined, as they did sequentially and even more so year-over-year, in the second quarter, we would correlate that to a decline in your hardware verification revenues unless as you had in Q4 last year a substantial increase in the gross margin for the hardware. Could you talk about the margins or just the overall performance that you did achieve in May in hardware verification?

Yes, so hardware verification was actually up from quarter-to-quarter. Several things going into COGS. Obviously, the gross margin impacts us. Inventory reserves, et cetera, impact us. And we won't discuss that in detail, but the hardware business was actually up quarter-over-quarter, and we were quite happy with that.

May be I can add to that, Jay. I think that Palladium hardware is a strong quarter for us. We are competitive in Ricoh and Mitsubishi Electric, and significantly increased our capacity growth in mobile and system customers. And overall, we are the leader in the hardware emulation, and we expect that emulation revenue will be off this year from the peak last year. So I think pretty much consistent to our expectation.

I guess 2 last ones. Because you mentioned a couple of Japanese customers. In your first quarter 10-Q, you mentioned that for the remainder of 2013, you expected your business in Japan to decline. In light of this recent new business, do you still expect that? And if so, when do you think Japan might bottom for you? And then I'll finish up on a FinFET question.

Yes, so our Japan business did decline, as you look at the supplemental schedules. And that's clear. I mean, obviously, the Japanese semiconductor business and overall Japanese environment is challenging. Certainly, there are some impact from exchange rates that are also impacting us. And then, yes, we saw that in Q2, and we expect that to potentially continue into Q3 and Q4.

Yes, I think on the Japan side, just to add on a little bit, I just came back from Japan. Overall, I think it will continue to be challenging this year, but they are taking a lot of step in the restructuring. And then some of the system companies continue to be very strong. So overall, I'm cautiously optimistic.

Okay. And then lastly on FinFET, which was, of course, much of a discussion at the Design Automation Conference last month. Can you say if there are any customers that right now have deployed what you would call a reasonably complete or ideal FinFET-enabled flow? And more broadly, how are you thinking about the incremental new business revenue opportunity from any FinFET-related retooling? When we go through that exercise, we come up with effective categories that might be touched by retooling that comprise not much more than 1/3 of industry revenues today, including, for example, a place and route and a few others. Most of that is already recurring or under maintenance. So it would seem that the actual amount of new business potential that could be touched by retooling is relatively a small percentage of the total industry revenue, as it looks today. Maybe you could share your thoughts on that.

Sure, Jay. That's a good question. So let me just talk about this whole FinFET. Clearly, we are talking quite closely with a couple of customer and panels like ARM, IBM, Samsung, GLOBALFOUNDRIES, TSMC. These are whole 16-nanometers, 14-nanometer FinFET. We're doing a couple of test chips, and we're working very deeply with our IP partner and our foundry partners. And overall, it's going to be challenging. I think the production at best from my personal view is sometime next year, second half. And so I think the revenue growth and the potential I think is going to be small but over time become very important. And then also, I think some of the customers are pushing the envelope. Some of the customers I think do also look at the volume and now in the 20-nanometer. And so clearly, our Encounter, our Virtuoso, our signoff new tool, fully qualify that foundry at 20-nanometer. So some of the customers are engaging in the 20-nanometer such as the test chip we have with ARM, TSMC, Samsung and ST. So overall, I think our tools are ready for both 14, 16 FinFET or the 20-nanometer. I think in terms of the part of the FinFET, in terms of volume production, there are still some challenges. And I want to be more conservative. Sometime next year, we may see some volume production, but I think realistically, you're really looking at 2016 for some meaningful contribution. Back to your question on the tool side, most important, we get ourselves ready, and at most we're now able to scale to those requirement. And the good news is all these challenging complex design in FinFET, advanced nodes, a lot of customers lean on us a lot more so that EDA industry, the development, the design tool to enable them is critical for them. So that should be a plus for the industry.

Your next question is from Gus Richard from Piper.

First of all, on the new timing product, can you talk about when we might expect to start to see revenue and how that stacks up against the competition?

Sure. So I think this is a good question, Gus. So a couple of things I just want to highlight and note. The Tempus is our internally developed tool. This is a very exciting tool for us because it's clearly a new and exciting timing and it's 10x -- up to 10x the performance compared to the traditional timing. And so this is a very breakthrough technology that we are excited about. And it's very scalable. You can scale all the way to 100 CPUs. And so this is very exciting, as I mentioned in my script. And we are in the very early stage of engaging with the customer at the beta. So far, the response from our customer are very excited and overwhelming. So it's too early to tell about the revenue projections, but stay tuned and we over time will progress and update you. But I just want to make it clear, this is in a beta situation. But it's very scalable, and we don't compromise on accuracy. And it's really driving a 10x performance improvement, and that is very significant.

And then just sort of an odd question. Can you talk a little bit about what's going on in Japan? There's been quite a bit of movement among the companies in Japan. And I was wondering if you could talk about market share opportunities or any -- just sort of competitive dynamics in Japan.

Yes, I think Japan is, as I mentioned, is generally challenging because they're going through quite a transformation. And some of the Japan companies are going through a challenging time. They cut back some of their EDA spend. And then meanwhile, the system companies continue to do well in Japan, and we are very optimistic about that. And then meanwhile, some of the Japanese companies right now are going to restructuring and improving their situation. We are, as a trusted partner, we continue to work closely with them and then work with them on their recovery. And then our job is to get them the best tools, the best IP, the quality IP, to enable them to be successful during that downturn. That's what a partner is for. So it is something that we are cautiously optimistic, and then hopefully next year will be better for them. We continue to work deeply with them.

And so can I take this to mean your revenue in Japan is relatively stable at this point?

So our revenue actually, if you look at the supplemental schedules, you'll be able to see that it was about -- down about $8 million from Q1 to Q2. Largely that was one of our larger customers in Japan reduced their overall EDA spend, and one of our competitors gained some share there. We also are impacted, obviously, by more complex things like the yen and the foreign exchange rates and the overall semiconductor business. Again, we continue to do good business with that customer. It's just that overall, as they've restructured, we've lost a little bit of market share there. We expect that trend to continue into Q3 and Q4 in Japan.

Your next question is from Sterling Auty from JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: First, I want to talk about the duration. I noticed that you've gone to the 2.6-year, which was the high end of the previous range. Are you seeing a broader-based increase in terms of where customers want to go with their contract length? Or is this just bigger contracts moving longer that's skewing the range?

Yes, so obviously, Sterling, you saw that we took the bookings guidance up, right, as we continue to do quite well from a bookings perspective. Obviously, some of that's going to be bigger customers, and bigger customers generally want a little bit longer duration. And I think that's probably the overwhelming reason why the duration is at the high end of the range. Again, for us, it's within the noise level. But it is something that we did want to point out. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And because of that duration now going to the upper end of the previous range, that also has an impact on what the revenue contribution for this year will look like, correct?

Yes, it does, right. As you noticed, the bookings went up but the revenue didn't go up. And that's largely for a couple of reasons: the duration going little bit longer, the addition of strong performance out of Tensilica, in addition to the Cosmic and Evatronix, which don't immediately impact revenue but will impact revenue over time. So we like that trend. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Is there any impact on collections and cash flow from the duration change?

Very little. As you know, we work very hard to match cash flow with revenue recognition. And we don't try to collect cash upfront. So there's very little impact on the cash flow from the increase in duration. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay. Can you walk us through -- you changed the cash flow guidance. You brought it down and you pointed to some acquisition impacts. Can you be more specific in terms of both quantitively and qualitatively what those impacts are?

Sure. So the 2 big chunks are in M&A. The first is the addition of Cosmic and Evatronix, and they're operating expenses, right? They are -- as we said, they are slightly dilutive for the year of about $0.01. That's all expenses, right? So that's the first part. The second part is largely M&A-related expenses that flow through operating cash, like fees, like transaction costs, those types of things. Those don't flow per GAAP through investments They're through operating cash. And that's the vast majority of the $25 million reduction in cash flow.

Your next question is from Mahesh Sanganeria from RBC Capital Markets.

Let me talk about the IP business getting to a critical level. Do you have a target in mind in terms of product portfolio or the revenue level where you want to see stabilize at? I'm assuming you're still looking for more acquisitions. So can you give us some of the targets you're looking at for the IP business?

Yes, I think, Mahesh, first of all, I think we don't break down on the IP in the revenue. But I think through these couple of acquisitions, I think we clearly have the critical mass in terms of our broad IP portfolio to support our customers. As you recall, we have a very strong leading in the verification IP. And then these 3 acquisition -- 4 actually, but Evatronix IP and our [indiscernible] IP, is really tied to strengthen our design IP portfolio. I think we have a lot to integrate, a lot to optimize and then providing a really good silicon-proven quality portfolio. So I think overall, we are very optimistic. And the response from our customer is very, very positive. They really like our portfolio. We are heavily engaging, and then they're clearly -- the Tensilica, we have a very strong quarter. And we have a lot of engagement with our customer. Cosmic Circuits, Evatronix just completed. We're already able to demonstrate in terms of a big design IP win, the contract that I referred to. And so all in all, I think we're continuing to do well, focus on integration, focus on driving efficiency, engaging heavily with our customer. And then meanwhile, we continue to look out for the right acquisition in terms of its fit into our portfolio that can strengthen our team and the talents and continue to drive the footprint. So all in all, we are happy with what we have and very focused on execution and drive quality and drive customer engagement.

And I'll give you just a couple of quick numbers. Again, as we said last quarter and this quarter, Tensilica is about $27 million of revenue for this year, right? And that's after merger accounting, right? And it includes the fact that we didn't acquire them for the full year. Cosmic and the Evatronix IP business is essentially minimal for this year as we go through merger accounting and then get them on U.S. GAAP.

Okay, that's helpful. And Geoff, you mentioned in your prepared remarks something about the run rate at the customer better than the historical. Can you elaborate a little bit more on that one?

Sure, run rate is a surrogate for revenue, and what happens is when we say the -- when we get -- close out an old contract and start a new contract, when the revenue projection or the run rate number actually goes up, that implies that we're getting a better contract or more revenue out of that contract on a going forward basis. And that was a point of that. So again, that focuses on continuing working on deal quality, continuing expansion in the number of engineers, continuing expansion of market share of some of these customers.

Can you give us a ballpark growth in that run rate overall?

No, we don't give that number out. It's a confidential metric.

Okay, I understand that. And just one last question. Lip, when you talked about the Virtuoso win at TSMC, can you explain a little bit more what is TSMC employing that Virtuoso platform, what's the purpose of that?

Sure. A couple of things that I just highlighted. One is they deploy our Virtuoso for their advanced nodes, including the 16-nanometer FinFET design. That is very significant. And then secondly, TSMC also will create and deliver native SKU-based PDK, and that is also a very significant achievement from our side and then partnering with them in a very deep fashion so that they can provide the user the experience, the level of accuracy. And also I mentioned about our exciting improvement on the Virtuoso in terms of electrically-aware design. And that gave our very strong feedback, improved the integration, the cycle time, more than 30%. So we continue taking the leadership even further on the automation of Virtuoso. And then the TSMC, their support is critical for our customer's success.

Your next question is from Rich Valera from Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: I just wanted to circle back to the prior question about the increase in bookings but no increase in revenue. Understanding that the duration effect, would have still thought there would be some contribution there from the increased bookings, and it sounds like you already got a sizable order from Cosmic, and I would think maybe you'd see some revenue in the current year. So I'm just wondering, is there something in the base business perhaps the Japan effect that you alluded to earlier that's causing lower revenue at the margin than you'd expected previously that's going be offsetting some of the contribution from some of the acquisitions or the higher bookings?

Yes, so Cosmic and the Evatronix IP business are both largely done and completion, right, of a transaction. So we don't get revenue along the way. So even though we get bookings from them, it's largely out of completion that we can recognize revenue. And so that's over time. We also have done better with Tensilica. A portion of that was a contract extension for a large customer. And so that would, obviously, have revenue in the future. And then the duration going up is largely the impact. There's not a particular impact besides what we already talked about in Japan that's affecting revenue elsewhere. Richard Valera - Needham & Company, LLC, Research Division: Got it. And then in the prepared remarks, you talked about the PCB business being some -- I think you said 30% half-on-half growth. And I'm just wondering how sustainable or how anomalous that is. And how do you think about that business going forward? Is it something that you see as a solid double-digit grower going forward? Or is there anything you'd be willing to say about the sustainable growth rate of that PCB business now?

Yes, I think Rich, that is a good question. I highlight that because 1 year ago, we acquired Sigrity. It's a very good acquisition for us that provided the power, signal, integrity and thermal analysis. That gave us -- our customer really like that. That is very important for them. And a very early design to be able to identify some of the issue in power and so many -- integrity. And that's helped tremendously our PCB offering, making it more complete. And that's why you see a big jump on that, 30%. And then the other part is because of some of this feature and performance and analysis is very critical for the high-speed design, especially in the high-end mobile, consumer-related, and also some of the infrastructure segment. That's why they drive the growth. And this is just a result for this quarter. We don't indicate in the future how it's going to look like. But we are cautiously optimistic, and we are very encouraged by the vertical market that's driving, and we see the value of the acquisitions. Richard Valera - Needham & Company, LLC, Research Division: Great. And you mentioned emulation a few times, and I guess it was -- something was up sequentially. Are your expectations unchanged relative to your initial guidance for the year, where you said it would be down and I think most of us have heard sort of down -- sort of low double digits? Any changes in your emulation expectations relative to that initial guidance?

Obviously, we can't comment on the double-digits, but we guided this year as being down from last year after a couple of very strong years in a row. We're still with that guidance that it will be down for this year over the past 2 strong years. Richard Valera - Needham & Company, LLC, Research Division: Got it. And I've tried this before, and I suspect I'll get the same answer. But anything you're willing to say about the development of sort of the successor to Palladium II at this point?

Yes, I think, Rich, now first of all, clearly the Palladium XP continues to do well. We are continuing to be the leader in this space. And clearly, it's a strong quarter for us. We have significant capacity growth in the mobile end system. Overall, we continue to do well on that. Like any business, we always focus on the R&D development for the next generation. And then the moment in time that the product is ready to announce, and we will announce that.

And we're still convinced we have the best product out of there and so are our customers.

[Operator Instructions] Your next question is from Krish Sankar from Bank of America Merrill Lynch.

Just a couple of them. Geoff, if I remember right, historically, your bookings have had a seasonally strong Q4. Is this still the case? Or has something changed with all the acquisitions?

Yes, we generally talk about bookings on a yearly basis and don't talk about seasonal periods anymore. I think some of our competitors who have a different business model sometimes talk about that. But we really just talk about the year. And I think if you look from Q1 to Q2 and then with the guidance that we've given here each time we break the booking guidance for year, and I think that's where we're comfortable with.

Got it. All right, fair enough. And then on the emulation business, what do you think is the growth rate for emulation for the industry over the next couple of years?

Yes, I think it's very hard to get those data, but I think so far, we see from the customer pattern anything that are in the advanced node, complex design and then more and more system companies driving some of this hardware emulation because earlier that identified the box, you have the time-to-market. And also the complexity verification becomes more and more important. So I think we'll continue to see the continuing interest from our customer to deploy and scale massively. And so I think we see our growth business, continue growing business. And then meanwhile, we will continue to really serve the customer well and provide the capacity that they need and the performance they need and then continue to serve them and support them in an effective way. So it's a good quarter for us, and we are cautiously optimistic. But always -- the hardware business is always more challenging and hard to predict. We just want to make sure that we continue to provide the value to our customer. That I think is a key thing for us as a discipline.

Got it. So along the same lines, if there's still growth left, is it fair to just assume that the emulation business starts growing again next year for you guys?

We're not guiding 2014 yet, Krish, but again we do believe overall for the whole industry that this is clearly a sector of growing business over the foreseeable future. Again, for us we'll guide 2014 when we do our Q4 earnings call in January.

Got it. And then the final question is, I understand like how FinFET is very difficult and like the foundries need to do a lot of investment in R&D on it. Just kind of curious from your guys' viewpoint, if FinFET gets pushed out from next year into 2015, how would it impact [indiscernible] or the EDA industry in general?

Yes. Now first of all, I think FinFET, as I mentioned, is not as easy and it's challenging. And then we are -- a lot of -- a couple of key leading customers and our foundry partners, we work very close with them. And we have a couple of test chips and I'm especially naming ARM and TSMC, Samsung. We are heavily working with them, GLOBALFOUNDRIES, and then in time we'll get test chip working. And then production in a very cost-effective and economically way for our customer, that is still out there and still need challenges to work. So in that, clearly, customers need us to really design around that and then also drive some of the efficiency that they need. And that's why you see a tremendous growth from the EDA players because customers need us to help them. That's why the collaboration, the partnership, work closely with the customer, is critical for our success. And in the last few years, we have been very focused on that, and then deliver the value, the solutions they need to design the complex chip, either it's an advanced node, 20-nanometer or FinFET, 14, 16 or beyond. And I think we just are more and more needed for our service.

Your next question is from Jay Vleeschhouwer from Griffin Securities.

Just a couple of follow-ups. One referring to a very recent customer presentation by Samsung last month at the conference. They spoke about changes in their EDA vendor relationships, specifically in the area of license management, where they talked about some levels of license access with usage monitoring. They make it sound like a meaningful change, that this was something that haven't been done much before. So I'm wondering if this is a potentially new phenomenon in EDA vendor relationships, where the customers agree to more usage monitoring from your side than might have been the case. And if so, what the implications of that might be? And then following up on Richard's earlier question, to try to pin you down on emulation, when you began the year, you have talked about cumulative emulation revenues 2011 through 2013 being 90% higher than 2008 through 2010 cumulative revenues. Is that still a number that you're looking at?

Okay, so let me try to answer the first question, and then Geoff will answer on the second question. So I think the first question, I'm not quite aware of this Samsung license and usage things. But more important for us is that we focus on providing the value. And Samsung is a very important partner and customer for us in the foundry and also their business side. We're heavily engaging with them, providing the best value and the tool and IPs with them. And so this thing that you've just described, I'm not up to date on that. So we will look into it and see if there are any changes so far. We're working with a test chip with them. There's no changes as far as I know. I just came back from Korea a few days ago. We don't see any changes. The engagement level have been increasing. And so we are happy with that arrangement, and we'll continue to drive value to them and help them to be successful.

And I think over a period of time, Jay, we have been creative and experiment with business models. We're not specifically commenting in that specific comment there, but we do an experiment and we do, do things. As far as emulation business, we are at or slightly ahead of our plan when we guided down for the year. So the business has been good. We still stand by the communication we did on earlier on the cumulative growth over a period of time. We're quite happy with how the emulation business has gone, basically as per plan.

Okay. And then maybe one more for Lip-Bu on new vertical markets. We heard from at least one of your competitors over the years the growing well of automotive as a market for EDA. And I was wondering if you could comment on your thoughts or your positioning at least in the automotive. And again, in light of the recent Reeko [ph] announcement, plus your own announced business with Cannon I think earlier in the year, could you talk about the whole imaging market or video and technology and the like as a new opportunity on the systems level for EDA?

Sure. I will try to answer your questions. So I think if I hear it correctly, you have 2 questions, one is automotive and then the second one with imaging, the video-related area. So clearly, as I mentioned in the past, application-driven design is really growing. And also the mixed-signal application are growing. And we are paying a lot of attention to the vertical market. Automotive is one of the targets that we also focus on. Clearly, automotive has also moved into a lot of connectivity and infotainment-related area. And a couple of our customers, key customers, have been supporting that, and especially in the mix signal related area, sensor-related area. And so some of our key customers without naming the name, we are very deep -- the primarily EDA vendors to them. And so clearly, we are heavily engaging in this automotive connectivity and infotainment audio-video related. Specifically, on the imaging and audio-related, video-related, this is very important. Clearly, the display and anything related to the display sensor and also some of the -- beautiful, all that related display we're heavily engaging with that with some of the customer. Video is something that I'm personally very passionate about in terms of video compressions, video -- high quality video on the consumer video surveillance and then all the way to the video applications to sports. And then all these are heavily -- Cadence are very well positioned for addressing that. This is going to be even more moving to the Internet of Things, writables [ph], the cloud, the big data related area application. We're very well positioned to support our customer to reach out to get this huge opportunity in the 50 billion units and above in this massive, massive big data analytics I think are going to be huge for the industry. We are very well positioned to capture them.

This was our last question. I will now turn the call over to Cadence's President and Chief Executive Officer, Lip-Bu Tan, for his closing remarks.

In closing, Cadence continues to deliver great technology to our customers, and our business result reflects this. Our IP business has developed critical mass, and we expect to be a strong contributor for future growth and profitability. We've made great progress over the past several years by investing in improving our products and technology, customer relationships, ecosystem alliances and financial performance. While the macro environment remain uncertain, with some customer continuing to face challenges, Cadence is well positioned to execute and be successful. Thank you, everyone, for joining us this afternoon.

Thank you for participating in today's Cadence Design Systems Second Quarter 2013 Earnings Conference Call. You may now disconnect.