Cadence Design Systems, Inc. (CDNS) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems’ Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence Design Systems. Please go ahead.

Thank you, Mike and welcome everyone to our second quarter 2015 earnings conference call. The webcast of this call can be accessed through our website cadence.com and will be archived through September 18, 2015. A copy of today’s prepared remarks will also be available on our website at the conclusion of today’s call. With me today are Lip-Bu Tan, President and CEO; and Geoff Ribar, Senior Vice President and CFO. Please note that today’s discussion will contain forward-looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence’s most recent reports on Form 10-K and Form 10-Q, including the company’s future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results. The reconciliation can be found in the quarterly earnings section of the Investor Relations portion of our website. A copy of today’s press release dated July 27, 2015 for the quarter ended July 4, 2015 and related financial tables can also be found in the Investor Relations portion of our website. Our 10-Q for the quarter ended July 4, 2015 was also filed today. Now, I will turn the call over to Lip-Bu.

Good afternoon, everyone, and thank you for joining us today. Cadence produced strong operational results for Q2 while continuing to deliver innovative new products. Revenue was $416 million; non-GAAP operating margin was 28%; non-GAAP EPS was $0.27; and operating cash flow was $122 million. Let us start with the environment. Semiconductor business conditions continue to be mixed with some segments performing better than others. Overall, softer sales for the year now appear more lightly. So far there has been no material impact on design activity and demand for our products remains stable. We are also mindful of the customer consolidations in Q2. Long-term impact of this on our industry is complex and difficult to predict. While we do not expect material impact near-term, consolidation could pose a challenge to industry growth over the next few years. Earlier today, we announced a change of our current stock repurchase program. Cadence is committed to driving shareholder value through a balanced approach that drives growth, invest in innovation, and return capital to our shareholders. Our board and management team regularly and thoughtfully review all aspects of Cadence business and capital structure. As a result of such review, we announced a new $1.2 billion stock repurchase program which replaced our current program. Geoff will share more details about this program in a few minutes. Now, let us review Q2 product highlights. We continue to execute on our System Design Enablement strategy. I am pleased with our progress in driving growth in our core EDA business which is at the heart of the strategy, and with our momentum in IP and system inter connect. Innovation is the driving engine of our strategy. In Q2, we introduced two new products, the Genus Synthesis Solution which is our next-generation synthesis engine for digital design; and Indago Debug Platform which will significantly enhance functional debug productivity. With these new products, we have now delivered more than a 1,000 innovative new products in the past two years. Genus is the latest addition to our industry leading advanced digital design and signoff platform which includes Innovus, Tempus, Voltus and Quantus. Genus improves on previous synthesis tool by employing a massive parallel architecture that delivers up to five times fast turnaround and linear scaling of runtimes beyond 10 million instances. This will greatly improve our customer design productivity. TI and Imagination Technologies have endorsed Genus, and we have more than a thousand engagements underway. Innovus, our next generation digital implementation system, continues to rapidly gain traction with market-shaping customers on their most advanced designs. Qualcomm Technologies, NVIDIA, STMicroelectronics, and Faraday Technology have joined ARM, Freescale, Juniper and others in adopting Innovus for production design at the most advanced nodes, benefitting from excellent quality of results and faster turnaround time. Another important part of our System Design Enablement strategy is to bring a vertical orientation to our product portfolio and go-to-market strategy. I’m delighted to report that we are making good progress on several verticals. Infineon Technologies decided to partner with Cadence on a comprehensive Automotive Functional Safety solution, and a major Asian car manufacturer adopted Sigrity for system level analysis for Automotive Functional Safety. Tensilica had two significant automotive wins - one for car-to-car communication and another for an ADAS application. Bosch deployed our new Indago Debug Platform for advanced mixed-signal MEMS sensors and they believe Indago will enable them to continue to deliver for applications including consumer electronics, fitness tracking, wearables and IoT. And, we expanded our business with two major mil/aero customers. IP is the fastest growing part of our business and is essential to the System Design Enablement strategy. The three major parts of our IP business are Tensilica DSP, design IP, and verification IP. Tensilica represents the second most popular instruction-set architecture in the market, and we estimate that around 50 million IoT devices that contain Tensilica IP are already shipping annually. This quarter, we announced a collaboration with TSMC for IoT IP subsystems with our Tensilica Fusion DSP, plus our analog interfaces, and peripheral and sensor interfaces. Demand for high-performance-wired-interface IP cores for servers and datacenters was strong with a major datacenter OEM adopting our PCIe Gen 4 and DDR4 IP solutions. In memory space, we had our first 10-nanometer DDR4 physical interface IP win. On hardware front, Palladium XP won six new logos. One of our newest Palladium use models, Dynamic Power Analysis, is proving to be vital in diagnosing and debugging software-related power issues in mobile applications. Pre-production testing of our next-generation emulator continues, and we remain on track to start shipping later this year. So, now to summarize: Q2 was a solid quarter with strong operational execution; our System Design Enablement strategy is bringing more innovation and a more vertical focus to our business and solutions; we continue to gain traction in digital with the launch of Genus for RTL synthesis and top-tier customer adoption of the Innovus Implementation System; IP growth was strong and we continue to gain new customers; and finally, our new $1.2 billion stock repurchase program will return additional capital to our shareholders. I will now turn the call to Geoff to give you more details on our new stock repurchase program, review the financial results, and provide our outlook.

Thank you Lip-Bu, and good afternoon everyone. Let me start the discussion today with our new stock repurchase program, and then move on to our second quarter results and outlook. As Lip-Bu said, we have been, and are committed to driving shareholder value through a balanced approach that drives growth, invests in innovation, and returns capital to our shareholders. We will do this by continuing to invest in, and profitably grow the business; operating the business effectively and efficiently; financing the business with the efficient capital structure that provides the necessary flexibility to meet the investment needs of the business while maintaining adequate liquidity; and allocating capital to the highest return opportunities that will create value for our customers and for our investors. Our most recent review of the Cadence’s capital structure took into account Cadence’s capitalization, projected free cash flow, ongoing investment requirements, maintaining adequate liquidity, future acquisition opportunities, and input from investors. Based on the results of this review, we are replacing our current $450 million stock repurchase program with a new program to repurchase $1.2 billion of our shares over the next six quarters through the end of 2016. The actual timing and amount of repurchases will be based on business and market conditions, corporate and regulatory requirements, acquisition opportunities, and other factors. One such factor is the settlement of our warrants which begins in September of this year and extends through early December. We plan to limit the pace of our repurchase program during that period. We expect the new share repurchase program will be funded by U.S. cash on hand, future U.S. cash flow, and additional debt. We also plan to reduce U.S. cash over time to a minimum level that we believe is prudent to operate the business; maintain adequate liquidity; and maintain strategic capacity for investment opportunities. Now let’s move on to the quarterly review. Cadence had a strong Q2. Total revenue was $416 million, up 10% compared to $379 million for Q2 of 2014. The revenue mix for the geographies was 48% percent for the Americas; 23% for Asia; 20% for EMEA; and 9% for Japan. Revenue mix by product group was 21% for functional verification; 29% for digital IC design and signoff; 27% for custom IC design; 11% for system interconnect and analysis, and 12% for IP. The weighted average contract life was approximately 2.4 years. Total costs and expenses on a non-GAAP basis were $300 million, compared to $315 million for Q1, and $290 million for the year ago quarter. Q2 headcount was 6,405 which was up 145 from Q1, primarily due to hiring in R&D and technical field positions. Non-GAAP operating margin was 28%, compared to 23% for Q1, and 23% for the year ago quarter. Product mix, the timing of certain expenses, and the fact that our fourth of July shutdown week fell in Q2 this year instead of the usual Q3, all contributed to a higher than normal non-GAAP operating margin for Q2. GAAP net income per share was $0.19. Non-GAAP net income per share was $0.27, compared to $0.23 for Q1, and $0.21 for Q2 2014. Operating cash flow was $122 million, compared to $47 million for Q1, and $69 million for the year ago quarter. Total DSOs were 29 days, compared to 30 for Q1 and 26 for year ago quarter. Capital expenditures were $17 million; this was higher than Q1 due to the timing of facilities investments. We expect capital expenditures to remain approximately $40 million for the year. Cash and short-term investments were $744 million at quarter-end, compared to $980 million at the end of Q1. We paid $296 million in cash on June 1st to complete the retirement of our convertible notes. We repurchased 2.9 million shares of common stock for $56.3 million during the quarter. 47% of our cash and short-term investments were in U.S. at quarter-end. As a reminder, our outstanding warrants will settle from September through December. The potential dilution table is in our 10-Q filing. Now let’s turn to our outlook for the third quarter. Note that our outlook includes the projected impact of increased share repurchases and additional debt. For Q3, we expect revenue to be in the range of $423 to $433 million. Non-GAAP operating margin is expected to be in the range of 25% to 26%. As Lip-Business mentioned in his remarks, in Q2 we added several more marquee customers for digital. We are continuing our plan to invest in hiring to support and expand our business with these market-shaping customers in Q3 and Q4. GAAP EPS for the third quarter is expected to be in the range of $0.17 to $0.19. Non-GAAP EPS for the second quarter is expected in the range of $0.25 to $0.27. Now for our fiscal 2015 outlook. The midpoints of our bookings and revenue guidance for the year are unchanged from last quarter. The bookings are projected to be in the range of $1.87 billion to $1.93 billion. We expect weighted average contract life in the range of 2.4 years to 2.6 years, and we expect at least 90% of the revenue for the year to be recurring in nature. Revenue is expected to be in the range of $1.685 billion to 1.715 billion. We continue to expect hardware revenue to increase in 2015 compared to last year. Non-GAAP operating margin is expected to be in the range of 25% to 26%. This is up from our prior expectation of approximately 25% due to favorable expense variances in the first half. While we will not address 2016 until our Q4 earnings call, but as you think about next year, you should be aware of the fact that our costs of investments in hiring for R&D and technical customer support are ramping throughout the year, so we will exit 2015 with a higher expense run rate than where we are at present. Non-GAAP other income and expense is now expected to be in the range of negative $25 million to negative $19 million. Our assumed non-GAAP income tax rate is 23%. We are assuming weighted average diluted shares outstanding of 308 million to 314 million for the year. GAAP EPS is now expected to be in the range of $0.63 to $0.69. Non-GAAP EPS is now expected in the range of $1.00 to $1.06, which is an increase of $0.02 at the midpoint. We expect operating cash flow to be approximately $360 million, up from our prior guidance of approximately $350 million. Our DSO forecast is approximately 30 days, and we expect capital expenditures of approximately $40 million. Now in closing, we believe our new stock repurchase program will enable us to enhance value to our investors by optimizing our current balance sheet to continue delivering mission critical products to our customers, expanding our leadership position in System Design Enablement, and allocating capital efficiently between future investments in the business, maintaining liquidity and returning capital to our shareholders. So with that operator, we’ll now take questions.

[Operator Instructions] Your first question comes from Krish Sankar from Bank of America.

Yes, hi. Thanks for taking my question. I had a couple of them. First one on the buyback, Geoff you mentioned that you’re going to use U.S. cash, cash flow and also some debt. Just kind of curious what kind of debt level are you talking about; what are you comfortable with seeking the help quantify that is in terms of leverage or any kind of number that would be very helpful? And then I had a follow up.

So our review we took into account Cadence’s capitalization, our projected free cash flows, ongoing investment requirements, maintaining adequate liquidity and future acquisition opportunities. When we are ready to let you know the amount, we will let you know; it’s hard for us to speculate at this time, based on market conditions and securities laws.

And then question for Lip-Bu. You’ve kind of mentioned how the consolidation is really a complex situation, tough to quantify how it’s going to impact your -- the design activity of the EDA budget. I am kind of curious, are you seeing any changes yet either positive or negative from the consolidation that has happened so far? And along the same path, some of your customers seem to be pushing out or slowing down the 10-nanometer ramp, kind of curious how that impacts design activity.

So first of all, I think clearly that we see the pace of consolidations to increase. And so clearly, I think from the design point of view, we don’t see any material impact. And as I indicated earlier, I think the consolidation in a longer term may have some impact to the overall growth of the industry. But so far, we don’t see any positive or negative impact. But clearly, some of this consolidation is also a great opportunity for us. When we see our product continue to innovate better product, better solution and when they go into the more complex, more advanced node, clearly the opportunity for us to win and also we can prove for it. And then the other part, we also see a new split of system and service provider that is either to go vertical integrated and aggregated and that’s a greater opportunity for us. So I think we stick to our game plan in terms of System Design Enablement, really focused on executing our core EDA business, our IP business, our PCB and then go beyond some of the vertical focus that we have, we highlighted some of the success we have. We are going to continue execute and then be truly a trusted partner for them.

And then just as a final follow up. Lip-Bu, in the prepared comments, you mentioned you added some digital customers. Are these customers actually using Cadence blocks on actual design flow or are they just in their evaluation phase today? And how are you penetrating these customers; do you have to give any free services as a part of it or is it more purely based on merit?

Yes, good question. So, we are delighted, in fact we are very pleased with our progress in terms of our innovation and then the new product that we are offering. And clearly, the customers see the benefit of the massive parallel architecture faster run time, 5 times is significant and also the scale to 10 million instances that is significant for them. So we highlight some of the key names like Qualcomm Technology, NVIDIA, STMicroelectronics; Faraday to join ARM, Freescale and Juniper. They are much not just evaluating, actually they are designing, adopting our Innovus for production design for the most advanced node based on the excellent quality or results and then faster turnaround and they are clearly seeing the benefit of the delivery that we mentioned earlier. So right now, we have a good design win and now we are really focused on perforating [ph] to various product groups so that they can be comprehensively using us as a platform of choice.

And by the way Krish, we get paid for these too.

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

Thank you. Geoff, just wanted to clarify your comments with respect to being sort of not in the market while you are settling the warrants. So is that you said the months of September through December you would expect minimal buybacks; is that correct?

Yes. What we said is we will be -- we will constrain the pace of our repurchase program during that period. Obviously as those are being settled, we don’t want to interfere the warrant settlements, Rich. We will be in the market during that period of time but the amount will be constrained.

And I just wanted to understand that the level of commitment to the full $1.2 billion over the six quarters is going to be -- I’m assuming there is a pretty high level of commitment there but sort of qualifying language you put right after that seems to suggest that maybe you, maybe you wouldn’t purchase it depending on market conditions. I just wanted to make sure that -- just trying to understand from you better, what is that level of commitment for the $1.2 billion over that timeframe?

Richard, that’s a very good question. So I think a couple points I’ll make. This is a serious process that we go through with our board and our management team to look at capital allocation and by the way, review our business and capital structure at the same time. As a result, we improved the $1.2 billion plan. Second, I think if you look at our past commitments, right, we have met those as far the repurchases in the marketplace. Again, of course there is business conditions, M&A and those types of things which may impact us going forward but it is the commitment that we’ve made.

Just to add on, this is Lip-Bu. Cadence is committed to driving shareholder value and in a very balanced approach and drive growth, invest in innovation, and then return capital to our shareholders. And the board and the management review regularly and thoroughly, all the aspects of our business and capital structure. And as a result of this review and we put in place a new plan and so we take it seriously with our board, with the management and then really focus on driving shareholder value.

When do you think you might be able to talk about any debt or notes that you might use to finance the buyback and any sense on the timing of when we might get more clarity?

As you know in this world there is a lot of uncertainty. We’ll let you know if and when we decide to do the offering. As you probably also noticed, we filed an S3 today which gives us some flexibility. But it’s difficult for us to speculate right now. We’ll let you know as soon as we can.

The next question comes from Ruben Roy from Piper Jaffray.

My first question Lip-Bu, I want to return to the discussion you’re having around the digital tools. In terms of some of the customer traction, you said it’s new customers for Innovus for instance. Is there a way to think about what kind of traction you’re seeing with customers with this round of products, specifically Innovus versus maybe your previous implementation system and counter and perhaps from a maybe a little bit of longer term perspective, two or three years where you think your digital market share can get to as your customers seem to be using these tools for new generation designs. Thanks.

So, I think overall we are very pleased with our offering in the digital and signoff area. We mentioned about Genus; this is our latest addition and we mentioned about TI and Imagination and a dozen of other we are engaging. And then the Innovus, we are very delighted; this is a completely re-written and it’s massively parallel architecture and clearly see the benefit on the faster runtime and then scalable to 10 million instances. And then we are delighted to highlight some of the key customers; they are selecting us Qualcomm Technologies, NVIDIA STMicro and Faraday and then joining Freescale, ARM and Juniper and clearly they see the result. Clearly they see the faster turnaround. And then seeing that we also have some of this signoff tools Tempus, Voltus, Quantus, they all add on additional 10 new logos each. And so, we are delighted with all this tier 1 customer winning and then meanwhile, we continue to really focus on the take out and the design win and then proliferate across all their product groups that is our job. And so that we will continue to investing in the engineering side in terms of the few organizations so that we can support the customer win. And that’s a most important focus on us. So I think all we are saying is we have earlier deployment success and right now we are rapidly proliferating across product group in those leading customers.

If I can add one thing, we are strong revenue growth year-over-year in digital. If you look at our supplemental schedule, you can see the revenue growth. So, we’re seeing the results.

And then in terms of two years from now, I think clearly, we continue to execute. And I think the opportunity is great but I think one thing at a time.

And then Geoff, a quick follow-up. I may have missed it, I think you’re going through sort of discussion around OpEx exiting this year little quickly and I may have missed it. But it sounded like you’re saying that you’re existing 2015 at a higher rate that you are on now, which is not surprising. But were there any specific areas that you’re investing in if you look at 2016 or any other color as to how to think about OpEx as either percentage of revenue or percentage of growth versus revenue as we look at 2016?

So, the fundamental reason we’re investing is, is some of the strategic wins that Lip-Bu talked about with our digital flows and those types of things and our customer wins. So we’re investing in our R&D and technical sales people to support those wins. And of course as we announce those wins, we want to make sure we support our customers fully on both deploying these wins but then enhancing these wins and proliferating these wins going forward, so that’s why our expenses are going up from now to at the end of the year. And we’ll talk about 2016 when we talk about 2016.

Last one then for me, you’re reiterating your expectation for hardware revenue to increase in 2015. Any update on timing of the new platform shipping?

As I mentioned, preproduction testing of our next generation emulation continues. We remain on track to start shipping later this year. And we will provide more details when the new product formally launched.

The next question comes from Jay Vleeschhouwer with Griffin Securities.

Geoff, first for you; I would like to get a better sense of the moving parts inside the second quarter numbers and as well you guidance for the year. For the quarter, you were total product and maintenance revenue was hardly up sequentially but your hardware cost of revenues as per the 10-Q were down pretty materially year-over-year and sequentially. So would it be fair to say your emulation revenues were also down pretty significantly from Q1 and year-over-year but you were able to offset that with outperformance on the services revenue and services revenue in turn would have correlated to the strength of IP?

So Geoff, I can rephrase the question a little bit but I’ll get to all different parts. Our software mix as a percentage of total was better than it had been, partially that was because hardware was down, but the material part was because software is up. Services was up slightly but the biggest part was actually on the software side of the business for some of the wins and some of the reasons that Lip-Bu gave earlier. So hopefully that got your question.

For hardware to be up year-over-year, for the year, would it be fair to say that you would probably need to have a record fourth quarter? The influence is that you’re in the hold in the first half of the year, down in Q1, down in Q2, it looks like your revenues for the first half in the hardware maybe the lowest in about four, five years. So again to be up, would it be fair to say that you would just need to have an usually strong or record Q4?

So couple of things: First, we had a good Q1 in hardware, Q2 was down from Q1 but we had a good Q1 in hardware one of the best quarters we had in the previous four quarters before that; hardware will clearly be up in the second half of the year as I think we’ve consistently said and will be up for the year as a whole. I think you can probably do the math from where that is.

I think clearly from customer interface, customer interest in emulations remains high. And then secondly, I think clearly we indicate that Palladium XP, we won six new logos and also the newest application Dynamic Power Analysis turned out to be very good and very vital for some of the key customers in some of software related power issues for mobile applications. So overall, I think the demand is strong. And so far, I think we couldn’t not be happier for 2015.

So, I may finish with just couple of product questions. When you think about your principal segments, starting with custom, that’s had a pretty good run here for about three years, PCB as a category for the whole industry meaning for you and for Mentor has been good for the last two to three years. So the question there is, do you think that the kind of multiyear momentum you’ve seen and throughout your largest categories can continue? On the other hand, when we look at implementation or pricing around that’s been pretty much sideways to the industry for the last year or more, do you think that both you and Synopsys can grow in implementation that this isn’t necessarily as zero sum gain in implementation; they can grow with their neutral, you can grow with yours as customers reinvest or grow their spending for your respective tools and implementation?

So let me address one by one. First of all you mentioned about the custom analog and SPB side. And IoT and consumer electronics actually driving tremendous growth demands for our tools like Virtuoso. We have this electrical aware design that turned out to be very helpful for them. And then the other part is, if you recall, we acquired Sigrity that integrated together with our Allegro that provide a whole system analysis from power, signal and a whole PCB side. And a couple of thing I just want to highlight, Asian major car manufacturers adopted Sigrity for their system level analysis. And in fact customer actually pushing for the 10-nanometer and with more and more customer using Virtuoso on the most advanced 10-nanometer design stub. And so I think the 10-nanometer is ramping faster and broader than a lot of people expected. Advanced packaging technology for IoT and mobile is also another drive for our growth. And so I think overall I think mixed-signal, analog and then the whole IoT is helping us a lot. We’re collaborating very deeply with major advanced foundries for the most advanced nodes to support our customer. And then with that that I think there’s a lot of system on the chip design SOC are analog mixed-signal with our strength with our digital and in fact digital we’re seeing 8% [ph] revenue growth year-over-year. That is a very significant and so we are very delighted. And then with the new suite of digital flow with our most advanced and our custom analog and that will drive a lot SOC, mixed-signal in the IoT and consumer product and also in the automotive side and I highlighted couple of them. And then also the other part is that whole system and service providers they are looking and we are very uniquely positioned not only our tool and IP, plus our packaging that can do the system analysis become a tremendous value for them. So I think to answer your question, we continue to be cautiously optimistic in terms of the growth potential that we see.

And not just for us but for the industry as a whole, we don’t view this industry as a zero-sum game. We’re certainly very happy with our progress but the whole industry we think is a good industry to be in.

The next question comes from Gus Richard from Northland.

Yes, thanks for taking my question. Just a quick follow-on. When you think about your core EDA business and thinking about the consolidation, what do you think the growth of that business would be over the next three to five years, the overall market?

I think clearly the core EDA and then consolidation is happening right now. It’s very hard to predict what will the growth look like. I think you can look at the EDAC survey and then you can get the projection from that but all in all, I’m trying to hear from the customer. When you move down to geometry and in all this vertical application like cloud, data center and also some of the consumer like IoT and machine to machine, power going to be critical, massive parallelism will be critical, and so I think you know the complexity of the chip design will be very important to have the EDA and foundry and IP all collaborate closely together to have a customer success. So, we have been working really hard to be the trusted partner for our customer and partner. And I think slowly over time, people will see that we are very collaborative and we are pushing the envelope helping to solve their most challenging design and the complexity, the scalability, the low power and time to market with all the offering we have. So, I think going forward that partnership closely with the customer will be the key to success. So I think that’s something that we really believe in it and we really work hard with our customers.

And then secondly, when I look at some of the folks working on 10 nanometers have announced that they’re going to delay implementation; 7 and 5 look even more challenging; there’s been sort of a slowdown in the Cadence as Moore’s law. Can you talk a little bit about how that might affect your business in terms of EDA tools or will people pivot to other processes like FD-SOI that’ll give you a new opportunity. Again, how do you think that will affect the growth of the overall business?

Yes, very good question, very insightful questions. So I think couple of things. One, clearly, we work closely with our customer and also our foundry partners and we want to make sure that tools are optimized for various process that the customer demand them. And so clearly 10-nanometer, there some are slowing down, some are not slowing down. So, it really depends on some of the key applications they are driving. So clearly on some of the mobile and some of the graphic and computer vision related area, advanced node is critical. So, we work very close with our customer and foundry and 10 and 7-nanometer. When you move down to 5-nanometer, clearly double, triple patterning may not be enough. Then you’re starting to really look at the EUV for 5-nanometer from my humble experience in a critical to have EUV. And I’m very pleased to see the ASML, the EUV are making progress. They can go upto 80 watts now and they go upto 500 wafer per day; that is extremely encouraging. Then you’re starting to look at TSMC NTR progress on the EUV side and also some the photo-resist related development. So we keep a very close eye on this whole group maps and the process technology and we also work closely with equipment, semiconductor equipment company to make sure ready. And in terms of FD-SOI and various version of the process, we work closely with our foundry partners and it’s going to be driven by customers. So, we work closely with the customer understanding which process node, which foundry they are using; our tool will be optimized, ready for them; that is our job.

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

Geoff, could you remind us how much of your cash is generated in U.S. and how much offshore? And I think you gave us a number, how much of the cash currently is in U.S.?

So in cash, the current cash balance is about 45% are in U.S. And our cash split is about equal to our revenue split, approximately 50% of it is generated in U.S. over time.

Then is there any recalling -- if I look at service revenue, in first half 2015 is up almost 25%, 30% year-over-year from first half last year. Is any -- there is any reclassification of revenue in that?

No Monika, there is no reclassification in revenue and our services. We’ve had some nice services business, part of the services of course is IP also but it’s been a very nice business for us so far this year.

Then you’ve talked about the new customer wins in the digital side but you have not changed your bookings guidance. So, were you already expecting these customers or they could be any upside on the bookings numbers here?

So as always, when we guide, we put everything we know into our guidance. We certainly had some indication along the way that we were going to be successful with these customers, I think we mentioned it on the prior calls that we are looking positive at more than just the customers we had previously announced. Those businesses largely came to fruition as we anticipated. So that’s why the bookings isn’t really changing.

[Operator Instructions] Next question comes from Sterling Auty with JPMorgan.

So just want to start, in terms of the quarter, you mentioned the timing of the shut down but just wondering if there was any other variable expense savings in the quarter that also contributed to the upside margins?

Yes, the shutdown was one, there were two other issues, certainly the mix of hardware and software favored software in the quarter. As we mentioned, hardware was down. So that certainly helped us. And we did benefit from the timing of certain expenses and we don’t anticipate that benefit carrying forward into Q3 and Q4.

And then you also mentioned in terms of the hardware that you are already in testing on the new platform. I didn’t quite catch what’s the feedback on the testing done and what are the next steps before general availability?

As I mentioned, preproduction testing of our next generation emulator continues. And we remain on track to start shipping later this year. And we will provide you more details on the new product formerly launched.

And then in terms of the duration, the 2.4 years, any sense there, what -- the mix driving that is there a lot of additional one-year stuff that you are seeing or what’s kind of leading to coming down to the 2.4?

So, we kept the year unchanged at 2.4 to 2.6. We are going to have fluctuations from quarter-to-quarter and those are just kind of the natural fluctuations in business. I don’t think there’s any particular trend there that’s material.

Our final question comes from Mahesh Sanganeria from RBC Capital Markets.

Geoff or Lip-Bu, so it looks like you had a pretty detailed review on the capital structure and some of that -- that looks like dividend is not the table for now, so at least it’s not going to be there for a year or two. Can you talk a little about what was discussion around dividend and your discussion on capital structure?

Our processes are going through the capital allocation review with our board and the management team; it’s a regular event for us. We look at all the alternatives in front of us but our focus remains on what is our capitalization; what are projected free cash flows; the ongoing investment requirements; necessity to retain adequate liquidity; future acquisition opportunities; and advice from both shareholders and advisors. So, we took that all into account and came up with our conclusion. We obviously can’t talk at a level underneath that but I am sure you understand.

Right. And also I wanted to follow up on the OpEx commentary you’ve had. So, the upside you are guiding putting much for the full year EPS is -- looks like the upside in Q2 but shutdown should not impact that. And within your guidance if we model, we have a run rate exiting 2015. So, I’m wondering what message you’re conveying on 2016 that the increase is likely to be of the similar level as 2015 or what’s thought behind that OpEx commentary?

So, the commentary about our ramp in expenses through 2015 is I think a reflection of the success we’ve had in many different parts of our business. And as we support those customers, we’re continuing to add engineering headcount and technical sales headcount. All we want to be clear is that when we leave 2015, we are going to be at a higher expense rate than we were during the beginning of the year. We’re quite happy with the results we’ve had in Q1 and Q2.

So just to follow up. So 2016 will be a nominal increase whatever you normalize it, is there -- will your additional support personnel and everything will be in place by end of 2015 or continues little bit in 2015?

We’re really not guiding 2016 at this point. All we want to do is make clear that our expense run rate is going to be higher than it is at present. Again, we’re investing to support the wins that we’ve had; it’s very important for us to sustain and proliferate within these customers. So, we’re making R&D investment and the technical sales investment to ensure we do that. We just want you to be aware that our run rate is going to higher on expenses than when we leave -- than when we started the year.

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

In closing, I am proud of what we are accomplishing together at Cadence and I want to thank all our hardworking employees, shareholders, customers, and partners for their continued support. Thank you all for joining us this afternoon.

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