Cadence Design Systems, Inc. (CDNS) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon. My name is Dustin and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems’ Fourth Quarter and Fiscal Year 2014 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 our host, Alan Lindstrom, Senior Group Director of Investor Relations for Cadence Design Systems. Please go ahead.

Thank you, Dustin and welcome to our earnings conference call for the fourth quarter of the fiscal year 2014. The webcast of this call can be accessed through our website, cadence.com, and will be archived through March 20, 2015. A copy of today’s prepared remarks will also be available on our website at the conclusion of today’s call. 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 a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence’s most recent reports on Form 10-K and Form 10-Q, including the company’s future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, 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 February 4, 2015 for the quarter ended January 3, 2015 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. 2014 was an excellent year for Cadence and I am very pleased to have the opportunity to speak with you today about our company. I am thrilled and humbled by the support of our customers and partners who are placing their bets with us by adopting our innovative solutions to design and build products that change the world. We are absolutely committed to their success and will continue to invest in the R&D and support that is critical to meet their needs. Strategy, innovation, customer success and execution are driving strong results for shareholders and we have great momentum going into 2015. Guided by our System Design Enablement strategy, we are delivering the technologies necessary for integrated system and SoC design with the end-product in mind. Our growing core EDA business is at the heart of the strategy and we are very excited by the momentum in our emerging IP and system-level business. Not only did we expand our footprint with mobile and consumer customers, but significant mil-aero and automotive customers also adopted our solutions. Now, let us review the highlights for Q4 and 2014. Cadence delivered strong financial results. Revenue was $423 million for the fourth quarter and $1.581 billion for the year. Non-GAAP operating margin was 28% for the quarter and 25% for the year. And operating cash flow was $132 million for the fourth quarter and $317 million for 2014. Innovation is core to our strategy. Our talented development teams delivered 11 new products over the past 2 years, with more innovative products coming this year. As a result, we are winning over market-shaping customers. For digital and signoff, there has been a rapid adoption of 16-nanometer and 14-nanometer FinFET technology and several customers are already working on 10-nanometer designs. Our innovative digital solutions produce designs with better results for power, performance and area, along with faster run times. We had over 10 full flow digital wins in 2014. We also had segment share gains at several leading customers, including a global marquee company and most recently at a major fables semiconductor company. Customers across many market segments including mobile, wireless, automotive, and IoT design with our digital flow. Our silicon signoff tools, Tempus, Voltus and Quantus QRC gained strong momentum and collectively had more than 50 tape-outs in 2014. Last quarter, a leading U.S. based mixed-signal company deployed Tempus and taped-out its largest design ever. And a leading supplier of networking equipment switched to Voltus for power analysis and signoff because of its superior performance and capacity. Now let us turn to system design and verification. Increasing design complexity and tighter development schedules drive the need for more verification. Our leading System Development Suite had record bookings for the year, and was augmented by the Jasper and Forte acquisitions. A major European systems company consolidated on the System Development Suite for its verification needs, including emulation. It was a very strong year for our Incisive simulation, especially driven by demand from mobile customers. Growing hardware/software challenges drive the secular trend in emulation, as we added 28 new logos for the year. Last quarter, Mediatek doubled their installed Palladium capacity. In addition, our top hardware consumer – customer placed its largest order to-date. We are very excited about our next generation hardware platform, with its scalable enterprise architecture being at the core of a very compelling hardware roadmap. This platform will significantly expand our Palladium family. And we expect to begin shipping in the latter part of this year. We enter 2015 with strong momentum for our integrated end-to-end verification solutions. Our IP business had a great year, with nearly 40% year-over-year revenue growth. Our broad design IP product line is led by our DDR, Low Power DDR and PCIe products and adoption for our FinFET designs is strong. We have won several head to head engagements at the most advanced nodes, including a recent win at 10-nanometer with a marquee customer. And we signed our largest design IP contract to-date with one of our top customers. We have supplied multiple IP cores for multiple customer tape-outs, including our DDR4 which is being used by HiSilicon in the world’s first 16-nanometer FinFET tape-out. Tensilica had a great quarter with its largest number of new licenses ever in a quarter. Tensilica also surpassed the mark of 2 billion cores shipping per year in customer products. For Verification IP, we lead the market in supporting the newest protocols. We won significant business at top customers and had our best bookings year ever, with 60% growth. Moving on, we strengthened our leadership position in analog, custom and mixed signal design. Increasing usage by key customers and strong value proposition for our platform helped drive 9% revenue growth for 2014. Adoption of our mixed signal verification solution is increasing. Liberate, our characterization product, has strong momentum with increasing penetrations in the ecosystem. Virtuoso for advanced node is growing rapidly with over 40 customers now using it. And lastly, an integral part of our system design enablement strategy is our packaging and board business, which grew 10% in 2014. Sigrity had a record year as signal integrity analysis becomes even more critical at advanced nodes for high speed I/O and for miniaturized consumer packaging. We also had two notable highlights on financial side in 2014. We initiated a stock repurchase program in January. Based on the strength of our business, we increased the repurchase program in July. And in October, we became the first company in our industry to receive an investment grade rating. So, in summary, our innovative solutions and strong ecosystem partnerships are helping us to first win and then proliferate our products with market-shaping customers. Our digital and signoff tools are gaining traction with these market-shaping customers at the most advanced nodes. Our comprehensive verification suite is winning new business and enters 2015 with strong momentum. 2014 was a breakout year for IP and we are well positioned for more growth. We are going to invest in innovation to delight our customers, through further technology development and high-quality technical support. At Cadence, we are excited by our opportunity as an indispensable part of the vibrant ecosystem that brings so many amazing products to the world. I will now turn the call over to Geoff to review the financial results and provide our outlook.

Thank you, Lip-Bu and good afternoon everyone. I will now review the results for the fourth quarter and the year and then present our outlook for Q1 and 2015. Cadence produced strong operating results for Q4 and the year. 2014 bookings totaled $1.778 billion, an increase of 12% over 2013. Book-to-bill was 1.12 and year end backlog was approximately $2.1 billion, up 12% from last year’s ending backlog. Total revenue for Q4 was $423 million compared to $400 million for Q3 and $377 million for the year ago quarter. Revenue for the year was $1.581 billion, an increase of 8% over the prior year. Please recall that Q4 had an extra week, because fiscal 2014 was a 53-week year for Cadence. The extra week contributed approximately $15 million of revenue to both Q4 and fiscal 2014. For Q4, products and maintenance revenue was $393 million and services revenue was $30 million. Revenue mix for the geographies in Q4 was 47% for the Americas; 22% for Asia; 21% for EMEA; and 10% for Japan. Q4 revenue mix by product group was 21% for functional verification, 28% for digital IC design and signoff, 28% for custom IC design, 12% for IP, and 11% for system interconnect and analysis. I would like to highlight the nearly 40% revenue growth for IP for the full year compared to 2013. Over 90% of the revenue for the year was recurring in nature. Weighted average contract life for Q4 was approximately 2.3 years and 2.4 years for fiscal 2014. Total costs and expenses for Q4 on a non-GAAP basis were $304 million compared to $291 million for Q3, and $282 million for the year ago quarter. Q4 headcount was 6,106, up 24 from Q3. Headcount increased by 372 for the year. The year-over-year increase was primarily attributable to hiring in R&D and technical customer support and acquisitions. Non-GAAP operating margin for Q4 was 28% compared to 27% for Q3, and 25% for the year ago quarter. For the year, non-GAAP operating margin was 25%, compared to 24% for 2013. Remember that Q4 operating margin is typically the strongest of the year. For Q4 we recorded GAAP net income per share of $0.21 compared to $0.13 per share for Q4 2013. For the year, GAAP net income per share was $0.52 compared to $0.56 for 2013. For Q4, non-GAAP net income per share was $0.27 compared to $0.26 for Q3 and $0.23 for the year ago quarter. For the year, non-GAAP net income per share was $0.94 compared to $0.86 for the prior year, an increase of 9%. Operating cash flow for Q4 was $132 million compared to $88 million for Q3 and $119 million for the year ago quarter. For the year, operating cash flow was $317 million compared to $368 million for 2013. Total DSOs for Q4 were 27 days compared to 25 days for Q3 and 27 days for the year ago quarter. Our DSO target is approximately 30 days. Capital expenditures were $12 million for the fourth quarter and $40 million for the year. Cash and short-term investments were $1.023 billion at year end compared to $633 million for the prior year. In October we issued $350 million of 10-year notes. The notes were rated investment grade by all three rating agencies. In the quarter we repurchased 2.1 million shares of common stock for $37.5 million. For the year we repurchased 5.9 million shares for approximately $100 million. Remember that we increased our repurchase plan in Q3 and expect to repurchase $150 million worth of stock per year. Approximately 55% of our cash and short-term investments were in the U.S. at year-end. Next I am going to provide some details on our convertible notes which mature in 2015. Our $350 million convertible notes due on June 1, 2015 will be settled in cash. Within the last 2 months, we have received notices of early conversion for approximately $54 million, which will be settled in cash in Q1. After settling the early conversions, we are now looking at a maximum cash payout on June 1 of $296 million. When we issued the 2015 notes, we entered into bond hedge transactions to limit our exposure in case the notes settle in cash at a premium to their principal value. The hedge transactions for the early-converted notes are now being settled in this quarter. Hedge transactions for the remaining 2015 notes will settle in April and May of this year, and the cash from this settlement will be used to prepay – will be used to pay any premium due on the notes on June 1. In a separate transaction, we sold warrants when we issued the 2015 notes. The warrants will mature from September through early December of this year and will be net share settled. Potential dilution from the warrants is already included in our diluted shares outstanding. Now let’s address our outlook for the first quarter of 2015, and fiscal 2015. As a reminder, Q4 2015 included approximately $15 million of revenue attributable to fiscal 2014 having a 53rd week. Another factor to keep in mind is the recent volatility in foreign exchange rates, which increased the risk of our 2015 projected results. While most of our revenue is billed in U.S. dollars, about 10% is exposed to the yen. On the expense side, approximately 70% of our expenses are U.S. dollar based. And in general, a stronger dollar reduces yen-based revenue and reduces non-dollar based costs. A stronger dollar also creates additional risk to our overseas sales volumes. Of course, a weaker dollar would of course have the opposite impact. For Q1, we expect revenue to be in the range of $405 million to $415 million. Q1 non-GAAP operating margin is expected to be in the range of 22% to 23%. The margin is down for Q1 primarily due to seasonally higher payroll taxes and fewer vacations in Q1 as compared to Q4. GAAP EPS for the first quarter is expected to be in the range of $0.08 to $0.10. Non-GAAP EPS for the first quarter is expected to be in the range of $0.20 to $0.22. Now, for fiscal 2015 outlook. Bookings are projected to be in the range of $1.87 billion to $1.93 billion, an increase of 5% to 9%. 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, with approximately 70% of this coming from backlog already in place at the beginning of the year. This translates to 6% to 9% growth in revenue over 2014. Without the extra week in the 2014 baseline, growth would be 7% to 10%. Hardware revenue was down from 2014 to 2013. We do 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 expected to be in the range of negative $24 million to negative $17 million. The increase in net expense is primarily due to interest expense on the 10-year notes issued in October 2014. After a thorough review of our non-GAAP income tax rate which remained unchanged at 26% for a number of years, we are forecasting a non-GAAP income tax rate of 23% for 2015. This is based on forecasted increases in foreign earnings that are expected to lower our long-term non-GAAP effective income tax rate. The change in non-GAAP tax rate adds approximately $0.04 to our expected 2015 non-GAAP EPS. We are assuming weighted average diluted shares outstanding of 306 million to 314 million shares for the year. GAAP EPS is expected to be in the range of $0.49 to $0.61. And non-GAAP EPS is expected to be in the range of $0.94 to $1.06. This represents a 6% growth over last year at the midpoint. We are expecting operating cash flow to be approximately $350 million. Our DSO forecast is 30 days and we expect capital expenditures of approximately $40 million. So, I would like to finish today by summarizing some of our key highlights – financial highlights from 2014. We are proud of our financial performance while building a robust pipeline of innovative new products, winning exciting new business with the world’s best and most demanding companies. In October, we issued $350 million of 10-year investment grade notes at an attractive coupon rate of 4.3/8%. The notes have traded well in the market since they were issued. In January 2014, we initiated a stock repurchase program for $100 million over 2 years. Based on the growing strength of our business, in July, we increased the program to $300 million over 2 years. Cadence enters 2015 with tremendous momentum with strong execution on product development, strong customer and partner relationships, and strong operational and financial management. Operator, we will now take questions.

[Operator Instructions] Our first question comes from the line of Sterling Auty with JPMorgan.

Yes, thanks. Hi, guys. Just wanted to hit a couple of different areas. Looking at the operating margin guidance for 2015, couple of things, one given the first quarter guide, should we believe that operating margins would bottom in the first quarter and then continue to improve through the year? And on a year-over-year basis, the 25% versus what you just put up, where is the extra margin pressure going to come from? Is it gross margins or is it headcount and operating expense? And any color you can give in terms of where those functional investments might be coming from?

So, on the first part, Sterling – and thanks for the question, the first part generally what happens in the first half of the year is Social Security taxes kick in, in the U.S. and that increases our expenses until people meet the Social Security caps. And that’s one thing that drives expenses lower in the second half of the year. The other one is just the vacations and how vacations lay in, in the summer and of course in the later half of the year with the holidays, vacations tend to kick in. So, that tries tends to improve operating results in the second half of the year and decrease them in the first half of the year. I think as we said on the second part, I think as we said in our Q3 earning call, we are winning new business with top customers. And these are the customers that you want us to be winning designs with. And so to win and keep these designs, we have to invest in technology as we mentioned in our last call and outstanding customer technical support. As the ramp these customers, it’s important for us to keep these customers by making this investment and also to hopefully proliferate going forward. So, that’s the thing that’s driving our margins this year versus last.

And Sterling, this is Lip-Bu. Just to add on that, clearly, we are winning the new business with shaping, market-shaping customer at the most advanced node. Those are the most demanding customer and they are really in the appeal. That meant that we had to work hard and meet their exact design requirement and that will make over time our solution to be the best in the world. And this is very compelling value proposition and that I think other customers will pay attention to it. So, I think winning, keeping this type of business require additional customer support and this is a decision that we make so that we can scale with this customer proliferating across that customer requirement. And then this will be enhanced and our – invest in our business with other customers. So, I think this is a very important point I just want to emphasize.

Sure. And as you look at that, do you feel like the incremental investment in 2015 that kind of weighs on margins? Does that become leveragable in the future? So, in other words, do we get back to beyond 2015 some margin expansion or do you think that there is a steady pace of investment, so this kind of is where we should think about the more sustainable operating margin being?

Yes, I think that – Sterling, I think – first of all, I think the investments are highly leveragable across customers. That will provide the leadership and market share as a key driver for success for our business going forward. And I am confident if we execute and then successful in the long-term and are proliferating our product more in the winning customer, marquee customer and also the next level of customer will be also embraced, that in the end, it will benefit in our shareholders.

And at this time, we remain, Sterling, committed to sustainable profitability of the company, but we are not guiding beyond 2015 at this point.

Okay. One more and I will get back into queue. On the emulation product, thank you for giving us a sense of timing, it’s been something we obviously been talked about for some time, but if I look historically at the Palladium release schedule kind of I think the 4-year timeframe. This looks like it pushes it more towards the 5-year timeframe. Is there a sense of this time around why the longer product cycle was their particular challenges in this product version to rollout?

Yes. As I mentioned in my remarks and clearly this is next-generation hardware platform, we are very excited about it, because it’s very scalable enterprise architecture and we are very thoughtfully and I will think through an architect that way and is turning out to be the call of the very compelling hardware roadmap that over the years we will have a shorter period of upgrading and significantly expanding our Palladium family. And so we are excited about it. And I know this is very thoughtful architect in a very scalable way and it took a little bit longer, but I think eventually the customer will benefit a lot. And we are excited, in fact we are engaging with some of the key customer they love it.

Great. Thank you.

Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Yes, thank you. Just I wanted to follow-up on the last question on Palladium, you gave us indication that it will be shipping in the second half, so I am assuming – when you are giving guidance you are assuming that in the second half you will be recognizing significant revenue from Palladium or is it a more of a 2016 thing?

Yes. Mahesh, I guess two points, we said in the later part of the year and when we give guidance we include everything we know at that time we give guidance and want to give that guidance.

And I think it’s very important point, clearly we will announce details when we are ready to announce and more important we sell and we ship what we have.

And how has the ramp been in the past, I mean once you start shipping, does it take couple of quarters to reach a certain volume and you start with low volume, what has been the historical ramp profile of a new product?

We will announce more details when we are ready to announce those details. So for this time I think we have said what we want to.

Okay, that’s helpful. In terms of again getting to the margin side, you are guiding to the mid-25% margin and you talked about increasing the expenses, are the incremental expenses going only into these new programs or is there inflation across the board in the expenses?

Well, of course every company right has focus in those types of things, but the investment that we are making is to support these market shaping customers.

But on a – I am just trying to make the distinction as to on a longer term perspective, how should we think of your expenses growing if you did not have an event like this where you are making these extra investments?

Yes. So again, as we said before everything we know we include in guidance on what we are doing. And right now we are only guiding 2015, right. We have this great opportunity that we are executing on and that’s what we are concentrating on.

Okay. Thank you very much.

Thank you

Our next question comes from the line of Krish Sankar with Bank of America Merill Lynch.

Hi, thanks for taking my question. I had a couple of them. Not to harp on the emulation but just kind of curious what do you think is the market size for emulation, what is it last year, what do you think will be this year and other than what your market share was last year?

Yes. I think first of all I think that clearly hardware emulation become more and more important as I mentioned earlier the complexity of design and also the shorter time to market. And so clearly there is a growing need for the whole verification. We mentioned prior a lot about our verification development suite and entirety in terms of as you recall we bought Jasper, we bought Forte. And then we have very strong incisive and very strong VIP. And then we also had the hardware emulation, we have hybrid and we have the FPGA for the acceleration. This entire suite is really growing very nicely for us. And so I think all in all, I think overall the market is strong is a double-digit growth and because this is a critical part bottleneck of the time to market for a lot of system company, a lot of semiconductor company and they really need to really have the best verification suite to provide and we have entire suite to support them.

Is there anyway to quantify the dollar value as a percentage for 2014 then this year?

Yes. I mean we don’t breakout our hardware businesses, I think again I think what Lip-Bu said this is a sector of growing business. As the complexity goes up and people design more complex products and the increasing importance of this business to this system companies.

Got it. And then follow-up is I think you guys mentioned about 55% of your cash is onshore, how much of your cash flow is onshore?

Cash flow pretty much models the percentage of revenue we have in different places. And so it would be about 45% of our cash flow approximately is onshore which is about our U.S. revenue.

Got it. Thank you very much.

Thank you.

Our next question comes from the line of Richard Valera with Needham & Company.

Thanks. A follow-up question on emulation, you talked about a lot of gross margin pressure on emulation in ‘14, do you expect to see an improvement in emulation gross margin in ‘15?

So at this stage, we don’t breakout hardware margins and we don’t breakout our hardware business. Clearly we hope our next box will have better margins.

Anymore you can say, I mean I would think it’s more than hope at this point, I would hope it’s more than hope?

Yes. We expect it to have better margins clearly.

Okay. Fair enough. I guess moving on to another topic, China has been making some noise about increasing their investment in the semiconductor industry in general and making some funds available to that, I am just wondering if you guys could talk about the opportunity you see there and when and if that could become material for you guys if it’s not already?

Yes. So, Rich let me address these questions. So clearly China is emerging opportunity for order players and clearly they are organized, they have a very big fund set aside to invest. Clearly they see semiconductor as a very big market for all of us, I mean 52% of semiconductor are consumed in China and going to be growing to 60%. So it’s the market that we all pay attention to. And clearly its not just noise they already made things happen. They bought Spectrum took it private. They bought RDA took it private. They bought Montauk took it private. They just competed [indiscernible] packaging from Singapore publicly stood as private. They already announced omni-visions and more coming. And so clearly there is opportunity for all of us. Make sure that all those designs will be using the flow – design flow and the complexity and they are also starting to become very valuable and appreciate the IP business. So it’s a great opportunity for all the EDA players and we are also very excited.

Great. That’s helpful. Thank you.

Our next question comes from the line of Ruben Roy with Piper Jaffray.

Hi, this is Shawn Lockman for Ruben tonight. I was wondering if you guys could walk us through a little bit as we think about your 2015 outlook in terms of sort of the puts and takes around your expectations or planning around foreign exchange impact, how that’s impacted, how you are looking at 2015 and maybe even the quarter as well?

Sure. So approximately, 10% of our revenue is in Japan and that’s mostly denominated in yen. So that will have impact – potential impact on us. Of our costs, most of our costs are in U.S. But we do have substantial cost in various different currencies around the world. And that would benefit us with the stronger dollar and hurt us with the weaker dollar. In Q4 essentially, FX had a modest impact on our financial results and that was a pretty big place or pretty volatile results. I think the one other caution always we put out there is of course, even the dollar base business internationally can have an impact right as the exchange rates change right up or down. So for us relatively modest in Q4, it is the caution for 2015 for us.

Great. Thanks. And if I could just drill down a little bit as we think about 2015 as far as strong year in ‘14 for IP, how should we think about that in terms of sustainability of revenue growth there and what sort of the expectations for 2015 are in sort of particular markets. And if you could just walk us through what you guys expect to see there for the year?

So let me get started, this is Lip-Bu. And as I mentioned earlier IP is a great business for us and is growing very rapidly. We are very well positioned for further growth. Clearly, there is opportunity in the whole design IP area with clearly the DDR, low-power DDR, PCIe product and that’s why we are now moving a lot into the FinFET design in the most advanced node 16-nanometer, 14-nanometer and 10-nanometer. Adding new nodes is always a new opportunity for player to compete for. We are delighted. We are winning head to head in multiple cases. And in the most advanced 10-nanometer we won and in fact the largest IP contract to-date and with the largest – one of our largest top customer. And then beside the design IP also we have a very strong VIP. We are clearly the market leader. And we provide a very comprehensive verification IP. And then we also now have a very good IP from Tensilica. And clearly there is a lot of because of this programmable and because of the low-power and there is a lot of opportunity not just for the baseband, for mobile, for imaging, for computer vision related area and ADAS for automotive. So there is a lot of opportunity that we should really go after. And so I think all in all, we are excited. Right now the last quarter Q4 already 11% of our revenue, it will continue to grow. And we are very excited about this addition. And a lot of customers embrace us, because we have something very unique in term of our portfolio that we can support them in their design and time to market.

And I think I would again point out it was 40% growth and in the second half of the year that growth actually was accelerating, I am not saying accelerating over 40%. We saw a stronger growth in the second half. And we do expect strong single-teen growth in IP over the next few years.

Great, very helpful. Thank you.

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

Thanks, good afternoon. I would like to ask about your bookings guidance for 2015, the range is suggesting an increase of about $90 million to $150 million for the year versus ‘14. Could you talk about the variables that go into where you would land in that range, is it fair to assume that given the timing of the emulation release later in the year and the current base of that business which by our calculation is around $100 million or so that the predominant part of the increase in bookings would have to come from software and IT?

Yes, so Jay, obviously we are not – we don’t breakout the details of where our bookings come from or not. Again everything we know, we put into our bookings guidance. We have had a couple of great bookings years in a row and the book to bill in 2015 is 1.12. So we are pretty happy with how that sets up. Backlog when we leave the year we will grow at approximately 9% at midpoint of both the revenue growth and the bookings growth and as you know strong backlog leads to the revenue growth in the future.

Lip-Bu, let me ask you about where you can most likely gain share based on new products. So you’ve got quite a few things in the pipeline now with Novus, Tempus Voltus, but they were addressing markets of considerably different size. So when you look at Novus, the implementation market that’s one of the biggest markets in EDA over $0.5 billion a year, but it’s also tended to be one where it’s harder to shift share. On the other hand signoff tools address a smaller market, but it’s perhaps somewhat easier to shift share and to get some incremental business that way, so how are you thinking about the likelihood or ease of share gain in these somewhat different categories?

Jay, good questions and so a couple of points, I think clearly from the customer engagement, we are heavily engaged, clearly indicate that the digital implementation as you currently pointed out is the biggest 10 market. Clearly we have a very good, better solutions in terms of power performance area. And then faster runtimes and that’s why you reflect a lot of success we have. And we will now continue to drive success and then proliferate and some other wins and so that we can gain more shares. And then also across all the different verticals, in mobile we are making tremendous progress on that wireless, automotive, IOT. And so you mentioned earlier not just on that signoff tool, we already have to engage with a deep, important customer, the new place and route in synthesis. Over time, we are going to be announced when it’s ready to announce, but we are already engaged. And they see what we have, they are extremely excited. And clearly, when you moved on the geometry to 14, 16 and 10 and beyond, they are always looking for anything that’s better power performing area. And the run time is critical for them. And then, so all of this is exciting for us. And the other part is clearly the whole system design enablement strategy part of that important synergy is the IP and also our PCB system level in term of analysis. And that’s why the Sigrity has come in handy and really helpful in term of engaging with the system company, because they really care about time to market. They care about to optimize the power performance. And so I think all-in-all, it’s going to be exciting for us. And in terms of IOT and the others, fast growing area and our mixed signal come in really handy and because of our analog, the uniqueness, performance and scalability and this become – that’s why we highlight the mixed signal, at the analog side we are growing at 9%. That is very significant goal. And we see a lot of excitement on that. So, all-in-all, I think this whole system design enablement, look at it from the system level, how to design the product and then from all the way from tool IP to packaging and the whole system enablement, the analysis is critical for them and with our unique position to drive success here and that’s why we had a lot of success and a lot of momentum. Stay tuned, I think we will continue to execute.

Just a couple of last things, if I may. Going back to the earlier discussion, the earlier questions regarding your investing – or incremental investing in the business, how are you thinking about that in terms of market share strategy by geography? What I mean is there are some parts of the world, like Japan where your market share is relatively low and there are parts of the world, like Europe, where your market share is actually rather good versus your overall average. So, would it be your intent to double down in those areas where you are strong to gain even greater share in the strong areas or would you see yourselves investing incrementally in those markets, geographically speaking anyway where you are relatively weaker to try to improve your position or both?

Yes, Jay, it’s a good question. Our job is basically to provide the best tool for the customer win and then they have a differentiation. So, we work with all the customer from geographic customer to the leading customer in the vertical market, they are in. By saying that clearly, we see couple of big trends happening. One is the system company become more and more important in term of our revenue on our business and many of them decided to go vertical, integrated, moving to the silicon level to optimize other level. We are heavily engaging and we are very well-positioned on that. And then secondly clearly, we are paying attention to the company to have the unique offering and then how can we help them to really amplify that unique offering or the design that they have. So, we are heavily engaging in their design methodology, in the design capability and what their uniqueness, so that we can really engage and help them to shine. And so across the board – and there are some great companies in Japan and I love some of those customer and likewise in Korea and same thing in China, in Taiwan and in Europe, some of the European company. We mentioned one system company depending on us on the whole verification that’s critical for them. And so I think automotive is very strong in Europe. And so I think all-in-all, we work with every company big and small and they are all important for us.

Okay. Lastly, on pricing, for Geoff, over the last few years, you have on occasion increased your prices. If you could talk about any price increases you put in place for 2014 or are planning in your guidance for 2015? And a week or two ago, you introduced some new products under the Sigrity brand for the PCB market, where you had some segmented pricing and I am wondering if that sort of pricing technique could be applied to other parts of the product line?

Jay, our focus is always on value, first and foremost, on value. Value gives you opportunities to capture more value for us and provide more value to the customers. We use a variety of techniques, including some you mentioned and we are focused on that, but it fundamentally comes down always to us. If we are providing the value, the pricing environment will be good for us.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of line of Gus Richard with Northland.

Yes, thanks for taking my question. I was wondering if you could just talk about your expectations for the growth of your core EDA business and the overall market in ‘15?

Yes, let me start first. I think clearly that core EDA is very important for our system design enablement strategy. And this is fundamentally very important like digital analog custom, clearly this whole tool, suite and then knowing that the design, also the verification highlight quite a lot. It’s very critical for our customer success. So, that part I think is something that is the foundation. We have put a lot of effort to make sure that we provide the best tool, the best solution for our customer in the application market that they are going after. And with that, maybe Geoff can add more.

Sure. And we believe overall that the EDA industry can go faster than economy can grow generally. And then we also believe we can outgrow the industry over time. This is especially true as we build our leadership position in some of the innovative products that we are working on. And of course you can have all the caveats about the economic conditions and those types of things. But again, we believe the EDA can grow faster than the economy and we can grow faster than EDA.

So would, based on the guidance you provided, would it be fair to assume that you are thinking the EDA business is going to grow 5% next year, overall?

I think you can look at what our competitors have already guided to, but we believe our numbers are going we believe faster than they were going and are great competitors, but we are growing quite well and doing quite well.

Okay. And then just on the 10-nanometer digital design flow, I think you have got some wins there and I was hoping you could just give a little bit more color as to what sorts of circuits are you working on with your customers? Is it mobile phone based, microprocessors, just any color you can provide as to what kinds of end markets your customers are working on?

Yes. So, I think Gus I think the advanced node is very important for us in order to take the leadership in term of product offering. The advanced node is critical. So, we are putting a lot of effort, not only the tool, the IP side to make sure that we really optimized for the 14, 16, and then now 10, 10 going to be our big nodes. And clearly, it’s an area that a lot of mobile player, the key player are driving the 10-nanometer. And then later on, the whole cloud data center will be also driving that because of some of the performance requirement they need to get there. And so in all, I think we are putting a lot of resources to drive across the board and not really concentrate on one or two customers. So, we want to make sure that our tools are optimized, ready, when the customer ready to port and then we can be very stable, scalably provide them the best tool that they need. And saying that, we are heavily engaging with other key leading foundry partners and then make sure that our tool support and drive some of the leading customer they are driving the 10-nanometer. And that’s a lot of challenges, the double-patterning, triple-patterning, there is a lot of power issue and a lot of cost issue. I mean, those are the things, the yield issue. So, we have all worked together with the leading partners to drive success, because if everybody able to solve the problem, able to begin in the last volume, in good quality yield, good for anyone and good for the industry. And we think that as industry issue that we should really drive and contribute to the success of the 10-nanometer and beyond.

Okay. Thank you, all. Thanks for answering my questions.

Great, thank you.

Our next question comes from the line of Suji De Silva with Topeka.

Hi guys. Lip-Bu, in the last question, you said that 10-nanometer would be a big node. Can you talk about the dynamics from 20, 16, 14, down to 10 that might make 10-nanometer bigger? Is it because FinFET is mature at that point or what are the other dynamics?

Yes. Couple of points clearly the 14-nanometer and 16-nanometer is very important. If you look at TSMC in terms of their forecast I think it is very important, a lot of volume there, but clearly the 10-nanometer, the main reason as it is going to be a long node because 7 and 5 is unclear and EUV timing is unclear. And the complexity is unclear and also the benefit is unclear. And so I think clearly the leading customer for us, we really want to work with the leading customer, when leading customer telling us 10-nanometer is important to them. We are out to help them to make sure that our tool are optimized and then drive the 10-nanometer success. I think what I’m trying to say is 14, 16 will have a lot of volume, but 10-nanometer will be longer because when you restart to 10 when you see the 7-nanometer is unclear the timetable and that is going to be long, just 20, 18 clearly it’s a long node because not many application are able to drive the benefit when you moved out of 14 and 6 because some of the cost reduction may not happen. So you really need to kind of see what application really needed. And that's why we work very close with the customer understanding what they need. And we recommend then what the process nodes should be focused on. So that they can plan for the next generation product, should they stay in this node, or should they go one more node in advance. So they are facing all our customer, they are in the debates nodes and that's why we need to be well in advance to advice them as a trusted partner to helping them to succeed.

Okay. And then my other question is around the customer base that are ones that are systems versus Semis companies, are you seeing more and systems companies bring semis in house and is there a different opportunity if you sell your product set to system companies versus to your semis companies, just remind us?

Yes. I think the systems company become more and more important to us and also tying very well with our system design enablement strategy. We’re engaging with them in the very early part of the decision and as you know most of them are very other good friend of mine and so in the way we can listen to them, see what they need and then many of them from mobile to cloud data center and to the e-commerce and even to the social media clearly the traffic and the volume they need is tremendous to manage. And some point in time they need to really optimize for their own architecture and that’s where the part and how to connect those platform into the big either e-commerce payment platform. And so that we need to know what they're looking for and what are their bottleneck and their pinpoint and how can we be helpful as a partner to provide them the solution so they can optimize all levels. And so that is what a trusted partner for and we want to be that partner.

Great, thanks guys.

Thank you.

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

Hi, thanks for taking my question. The first question is on operating margin side, Jeffrey if I assume to a flat tax rate year-over-year then the EPS growth is only 4.3% where are you guiding your revenue growth midpoint 7.5 that means you are assuming your operating margin is going lower year-over-year by 50 to 60 basis points, so given the complexity of increase in some conductors maybe could you walk us through what the margins will take a hit?

Actually the margins are the operating margin we guided at 25% right so I think that’s the major issue, its actually isn’t down, again as we said we are focused on winning these key customers and sustaining now that we have won these customers again we already have the proof point so we want to invest to have the best technology and the best technical support going forward. There is little bit impact by share count on EPS year-over-year, but the operating margin is actually unchanged from year-to-year.

Then kind of last time when you had a new emulation tool we saw a significant growth at that time 100% year-over-year I understand that was a lower base, but even on dollar amount $60 million to $70 million growth do you think when we have a new tool we could see something similar number in the dollar amount next year?

We are not going to give any details right now on emulation when we are ready we’ll talk about it then.

Alright. And then last year, you have kind of had guided 26% of margin right and then the new emulation tool became a headwind to the operating margins. So fair to think that when we have a new tool we should at least could go back to where the 2014 guidance was?

Obviously, we are not guiding margin, right, any change on margin. Everything that we know is included in the numbers already when we guide 2015. And you are correct on last year.

Okay. Just the last one, maybe I missed it, did you give operating cash flow guidance for 2015?

We did. It’s $350 million, up from $319 million last year.

Okay. Then last one, why is it lower from 2013 levels?

So, it’s up from 2014 to 2015. It is a little bit less than we had in 2013. Biggest reason is going to be cash taxes over the period of time. Again, we are quite happy with the progress from ‘14 to ‘15, up from $319 million to $350 million.

Okay, thank you so much.

Our last question comes from the line of Tom Diffely with D.A. Davidson.

Yes, good afternoon. So, you talked about increasing investments to support some of your large customers. Curious so, is this investment purely headcount or are there facilities or some other cost associated with that?

This is headcount. These are engineers, technical salespeople, those types of people. That is our investment. We don’t have material investments in facilities, the $40 million we spend on capital expenditure, it covers everything. So, these are people.

Okay. So, it looks like in the quarter, the headcount just went up a tiny bit, do you expect that to ramp or there is some puts and takes involved?

This is Lip-Bu. Let me highlight couple of points. I think clearly some of this customer are very demanding customer. And then clearly when they are shifting their tool, that’s a lot of handholding and familiarize and then so a lot of engineering support to make sure that they can convert effectively. And then also we can proliferate across the account. And then the other part is clearly, we continue to drive efficiency productivity, that’s something that Geoff and I would have been driving as an organization continue to drive efficiency. And then so overall the net increase we are going to be managing according to our budget and plan that the forecast that we put together.

Okay. And then Geoff, you talked about the taxes coming down about 300 basis points, that’s a pretty big move-out, I am wondering if you can give us more detail on what’s driving that?

Sure. I mean, as I said, it’s largely the mix between foreign and U.S. income on a going forward basis. With the exception in Japan, our foreign business continues to grow and become a more important part. We haven’t actually looked at that tax rate for a number of years. And again, if you look at our cash taxes, which you can see in our Qs and Ks, they are materially less than even this tax rate we are projecting.

Okay. So, it’s not necessarily the new businesses that you are entering, it’s just your overall business is becoming more international going forward?

Yes, the mix of our businesses is the major driver.

Okay, thank you.

I will now turn our conference back over to Cadence President and CEO, Lip-Bu Tan, for closing remarks.

In closing, I would like to recognize our hardworking employees for the results we have achieved and thank all our shareholders, customers and partners for their support. Thank you all for joining us this afternoon.