Good afternoon. My name is Shannon and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems First Quarter 2016 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, Shannon, and welcome everyone to our first quarter 2016 earnings conference call. With me today, are Lip-Bu Tan, President and CEO; and Geoff Ribar, Senior Vice President and CFO. The webcast of this call can be accessed through our website, cadence.com and will be archived through June 17th, 2016. A copy of today's prepared remarks will also be available on our website at the conclusion of today's call. Before I start, I want to call your attention to our CFO commentary which was included in our 8-K filing today and is available on our Investor Relations' website at cadence.com. The CFO commentary should be referenced in conjunction with both today's conference call remarks and the earnings press release issued today. Next, 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 statements 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. Additionally, a copy of today's press release, dated April 25th, 2016, for the quarter ended April 2md, 2016, and related financial tables can also be found in the Investor Relations portion of our website. Now, I'll turn the call over to Lip-Bu.

Good afternoon, everyone, and thank you for joining us today. Cadence delivered good operating results for Q1. Revenue was $448 million, up 9% year-over-year. Non-GAAP operating margin was 26%. Non-GAAP EPS was $0.28 and operating cash flow was $83 million. Looking at the environment, conditions have not changed significantly since last quarter. Semiconductor business conditions remain challenging and we remain mindful of the ongoing consolidation in our semiconductor customer base. While we do not expect a material impact on our business in 2016, consolidation could pose a challenge to industry growth over the next few years. I will begin our Q1 business highlights with system design and verification. In February, I asked Anirudh Devgan, who has led resurgence of our Digital & Signoff business to; expand his responsibilities to include leadership of our system and verification group. Anirudh will bring innovative ideas and drive to our next generation verification solutions. Cadence offers a holistic verification suite of connected solutions that are based on strong core engines and optimized for total verification throughput. Rapid growing complexity and time-to-market requirements make emulation more critical than ever for customers, designing chips and systems for mobile, cloud, automotive and other verticals. Palladium Z1 sales ramped nicely as customers embrace its advance enterprise class capabilities, while demand for Palladium XP remain strong. As a result, Cadence achieved its best quarter ever for hardware revenue. While our primary innovation focus continues to be organic development, we will also consider strategic acquisitions that will bring outstanding technology and talent. Recently, we announced that we've entered into a definitive agreement to acquire Rocketick Technologies. Rocketick brings pioneering technology and talented team that will significantly increase the performance of our incisive enterprise simulator using parallel computing on standard multi-core servers. In custom, analog, mixed-signal design world, Virtuoso has been…

Thanks, Lip-Bu, and good afternoon, everyone. It has been an honor for me to serve as CFO of Cadence for the past five and a half years. I'm extremely grateful for the support of my colleagues and our talented extended team. I will work with Lip-Bu in the search process, and I am fully committed to ensuring a smooth transition and look forward to maintaining our strong momentum throughout the transition process. I'm confident that our strong CEO, executive team and finance team will continue to successfully execute on strategic initiatives and drive shareholder value, just as we have over these past five and a half years. Now moving onto our results, please note that the CFO Commentary that we posted on the investor section of our company website should be referenced in conjunction with both my remarks and the earnings press release issued today. As Lip-Bu discussed, Q1 was a good quarter in what remains a challenging environment. Innovative new products and strong execution continue to distinguish us in the market. Total revenue was $448 million, up 9% year-over-year. Non-GAAP operating margin was 26%, compared to 23% for Q1 2015. Timing of revenue and expenses contributed to a higher than expected margin for Q1. We are maintaining our revenue and margin outlook for the year. GAAP net income per share was $0.17. Non-GAAP net income per share was $0.28, up $0.22 over the year ago quarter. Operating cash flow was $83 million. Cash and short-term investments were $907 million, compared to $711 million at the end of Q4 2015. Recall, that in January, we entered a three-year $300 million term loan and drew $50 million on a revolving credit agreement. At quarter end, we had $700 million of debt outstanding. Approximately 45% of cash and short-term investments were in…

[Operator Instructions] Your first question comes from the line of Krish Sankar from Banc of America. Your line is open. Please go ahead.

Yes, hi thanks for taking my question. I had a couple of them. First and foremost, can you just talk a little bit about the tool you're getting from your customers given that there are some near-term demand and longer term consolidation; just kind of curious what your point is what you're hearing from your customers in terms of what they are telling you regarding purchases?

Okay, so let me start. First of all I think as I mentioned, semiconductor business conditions remain challenging, little or no growth expecting for 2016 according to other various analyst reports. But clearly, in whereabouts position in terms of long-term growth opportunity, in terms of the mobile IoT vision, machine learning, and automotive related area so those will be driving some advanced note growth in system and IP. So, answer to your question clearly, we don't see any much changes, but actually we see a lot more design opportunity in terms of proliferating our tool and solution on various vertical markets and in terms of consolidation clearly last years a big consolidation year more than 100 billion consolidation was a major deal like of Avago Broadcom, Intel, Altera, and many others so we are mindful of the ongoing consolidation to our semiconductor conductor base. But meanwhile seeing that clearly I mentioned earlier about the opportunity we see and in terms of proliferating our new solutions and in terms of the long-term impact it's very hard to predict but we don't expect any material changes to our business and I think in the longer run with this consolidation may pose a challenge to the industry growth over the next few years.

Got it. Got it. That's very helpful. And in terms of R&D, there's a question I've asked in past kind of curious any updated thoughts regarding the five video customers are getting more cognizant of their cost and complexity so along that is there an opportunity for you guys to be efficient with your R&D or do you think mid 30% is going to be the predictable mix of R&D for the intermediate future.

Yeah. So, let me try to answer your questions if I hear correctly. In the complexity in a time to market pressure is increasing tremendously especially in the advanced notes and a 14 and 16 and 10 and 7 and the mass cost is pretty high so first time pass is critical and so we see a tremendous growth into our emulation and also the growth in terms of full flow in the digital and custom mixed signal related. And then our relationship with the foundry partner become very critical and we mentioned we have a very deep partnership with the foundry partners that include TSMC, Samsung and many others and I think clearly all this relationship and also with our ARM IP, ecosystem are critical for the success. And so we continue to drive R&D efficiency and we continue to drive, Geoff mentioned, about the restructuring to drive more efficiency and we double triple down in the area and then also with some of the key customers support. And so we want to make sure that the customer design based on our two unsuccessful in implementing in the most advanced nodes.

Got it and then just two quick housekeeping questions. One was -- I think last earnings call, Geoff you mentioned most of your OpEx is front-half loaded, so it slowed a bit in the second half is that still true and the second question is what is the number left in the buyback?

So, we have -- I'll answer the second question first. We have $720 million left on the buyback for the remaining part of this year. As far as OpEx, yeah, in the first half of the year, you tend to have less vacation and more social security tax, those things roll off in the latter half of the year we continue to invest in key R&D people and key technical salespeople so that will counteract the other trend.

So, OpEx should be similar in the second half versus first half?

Yes approximately similar. Because we have more shutdowns and less social security tax impact but more talented engineers and talented salespeople.

Got it. Thank you very much guys.

Your next question comes from the line of Gary Mobley from Benchmark. Your line is open. Please go ahead.

Hi everyone thanks for taking my question, so if I'm not mistaken Cadence has a policy of raising prices to try to implement a price increase every two years or so. I'm curious if that is across the Board price increase for all products or whether or not that's staggered across the various product lines and could you remind us of when we may be hitting that biannual price increase?

So, our fundamental purpose, of course, is to deliver great innovative products to our customers and when we do that we can capture value from our customers. We do folks on the quality of our deals and pricing but the key thing is we deliver value we'll get paid for it.

Okay. You mention that hardware sales are record level and emulation related. I'm curious how those hardware sales are impacting your gross margin and operating margin for that matter. And how it may create some lumpiness in the bookings backlog figures that you guys are striving for 2016.

Well, emulation like our hardware business, our emulation business is certainly lumpy like our IP business will be lumpy. What we've said as we've introduced and released the Z1 and started shipping and selling to Z1 is that we expect revenue to go up in a hardware business and margin to go up with the new product. And I think we're happy with that and you saw we had a record hardware quarter. So, we're doing quite well so far.

Okay. Any notable change between EDA and system design enablement, is it still roughly a 55/45 mix respectively?

Our system side is about 40% of our business, 60% is the traditional semiconductor.

Okay, great. Thank you, guys.

Thank you.

Your next question comes from the line of Rich Valera from Needham & Company. Your line is open. Please go ahead.

Thank you. With regards to the restructuring, Geoff, is that kind of a business as usual more of a reallocation of resources bringing I guess pruning in areas that are less strategic and adding in more strategic areas?

Yes, it was planned as part of our guidance and certainly, we're trying to optimize our resource allocation between different parts of the business. So, yes.

Got it. And then I'm guessing you kind of said what you want to say on emulation but I'll try anyway. You talked about very strong demand for XP boxes in the quarter which helped drive this record quarter. Can you help us understand why folks would buy an XP when a Z1 is out there maybe other than the obvious which is maybe they can't get Z1 yet because you can't make them as fast as people would like them?

So let me start first and then Geoff can fill in. So clearly, we want to highlight that XP platform still continues to remain strong and Z1 is the best launch for us and is the Enterprise class and that extra throughput and very scalable and customers love it and we ship as we built and have been very well received and we are delighted with that. The combination of both that makes the quarter the best quarter ever and Geoff, you can expand more.

Obviously, I think both product lines were very strong and there is different purposes for each product and different customer needs, so people are going to buy what they need and are happy to sell me the ones.

Got it. And then -- so you sounds like you've hired a new Head of IP which is great. Can any more color you can give on the trajectory of that business? I think what you've said so far is you expect it to grow less this year than it has in the past which I think is a kind of a mid-teens rate. Can you talk about what you would expect that to grow at once this sort of restructuring is done and you've kind of re-shifted some of the portfolio towards more sustainable profitable businesses I guess you intend to do?

Yes, Rich, I'm happy to highlight here. So clearly we are excited about that Pieter Vorenkamp joined us with his rich experience and highly qualified and to deliver the high quality and differentiating product as we drive the refinement of our IP strategy and focus on sustainable and scalable model going forward, and in terms of growth. And Pieter Vorenkamp, as I mentioned at the last job he had at the Broadcom, as a Senior VP Operation Engineering, and that itself in charge of not just the design, but also global worldwide manufacturing technology that includes all of the hardware program and then he personally now is a very strong in the analog RF related area. He is an inventor that actually holds more than a hundred issue and patent pending patterns in the US. So he is very accomplished innovator himself and so we are excited for him. And then as we kind of grow the business over 10% of revenue and right now it's about time to refine our IP strategy for the next part of growth, so we mentioned in the past, and moderate growth in 2015 and that already built into our guidance. Longer term, IP revenue grew expect to be above corporate average and that is our expectation in terms of growth so we are excited about the IP portfolio we have actually in the 10 silicon related area and the VPI related area bit strong for us and then now we also double down on some of the design IP and clearly he will bring some differentiating product going forward. And we have a couple successes. Clearly, we highlight this 5G baseband DSP win with leading mobile handset and also the spectrum and now we’re starting to move into some of this machine learning, vision processing, genomic sequencing and so that's a lot of great application Tensilica can be the key heart of the IP design platform the engine going forward. So I think we have some of the good asset portfolio and now we like to have a new leader and just saw the April 1st and now have time to refining his strategy as a new leader, new Sherriff on Board, so he will be refining and come up with the strategy going forward and we are excited about that.

Thanks for taking my questions.

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is open. Please go ahead.

Thank you. Good evening. Lip-Bu, Geoff, I'd like to start with a couple of product segment’s questions. First, when you think about your IC implementation business that is to say at Novis, to what extent would you say your incremental bookings in that business are coming from upgrading your own base versus adoption in competing or incumbent product environments perhaps for new products, in short some of each. But how would you think about that divide between just upgrading your own base implementation versus effectively share gain in other bases? Similarly, in terms of you called system inner connect that areas from 2012 through most of 2015 had pretty good growth and it was looked like there was pretty good reinvestment cycle there going on and for you and for mentor, but the last couple of quarters the system inner connect percentage of revenue has been coming down and looked like maybe the revenues have been under pressure year-over-year so would you say that the three or so yield reinvestment cycle in PCB has largely run its course or do you think that perhaps this is just a temporary pause and you don't see rebound there?

Jay, these are good questions and let me address one at a time. So first of all on the digital and sign off area, as you know, we revolutionized that whole digital flow with some of the new tool and I think you mentioned a couple of them and Innovus for the implementation placed in route Synthesis for Genus and we also have Tempus for sign off, Voltas for power, Quantus and Joules. And overall, we have been very good last year and now we are proliferating in the Q1 strong adoption and proliferation and for some of our full flow digital and sign off especially in the area of mobile, consumer, automotive and IOT related area. And so overall I think Q1, we mentioned in my script leading mobile chip Company adopting full flow digital sign of for the most demanding 10-nanometer projects with volume. And then Innovus I think I mentioned we have 15 new customers in Q1 and some of them is successful competing and we win; and Genus has 25 new customers so I mean that when I say new I mean that we are winning and Tempus 15, Voltas is 4, Quantus is 6 and Joules about 3. So we continue to proliferate nicely and cost very deep important partnership with the ecosystem IT SMC Samsung and RM and very critical in most of the advanced node 10 and 7-nanometer that will bring a success. And then beside the company I mentioned leading mobile chip company adopting for 10-nanometer, in fact today this morning we are now Toshiba adopting our Innovus implementation for production mobile memory control that achieved 16% area reduction and 25% power saving those are very remarkable in the real case topic because of the much better product and solution they look for.

And in the numbers a little bit the digital revenue was up substantially quarter-over-quarter or year-over-year and some of that was a benefit from a completed contract in Q1 but generally our digital business has been quite strong. And the system inner connect business, I would take it as nothing more than a pause. We sometimes have fluctuations a little bit in revenue accounting due to MEAs or due in payable contract so we just view it as nothing more than a pause right now.

And on the PCP related area Q1 is overall solid quarter with number of good size renewal from both system and semiconductor company and we continue to expand our collaboration with TSMC on the integrated design flow from TSMC in the integrated fan out and call it info packaging technology and also I think we've clearly driven the foundry proven IC packaging and analysis solutions and then security that is for the power signal integrity analysis system level and we have a 2016 technology portfolio that improved the product creation time and then ends a PCP design analysis methodology for multi-gigabit interface and like USB 3.1, so overall we continue to drive success

With respect to your earlier comments on restructuring there's question about that and your margin expectations for the year and as well your comments about your R&D, let me ask you this. We've noticed just being a quick spot check on your website and an unusually large increase in the number of job openings that you're posting probably the largest we counted to date and several years we've been looking at this data and that included not surprisingly a particularly large increase in R&D and virtually none for sales so I guess the question is to what extent is that increase in R&D positions your posting a function of having to compensate perhaps for attrition or turnover versus real organic investment or net capacity additions that you're looking to make in R&D.

I think it shows a lot of confidence for sure that we have these positions. We do tend to hire or concentrate or hire on technical positions in R&D and technical sales and you'll generally see most of those as being in that area. The restructuring is of course the concentrated efficiency and effectiveness of making sure we're using the resources where we need to use the resources. And of course, as you're well aware we are in a great place to work, very highly ranked and great pace to work and I think it's a good time for us to track talented people.

Lastly, Geoff, could you comment on the increase in services revenue in the quarter? Was that largely related to IP engagements and is there anything to extrapolate there?

No, we recognized revenue in a completed contract in Q1 and that drove the services revenue up uniquely in Q1.

Thank you.

Thank you.

Your next question comes from the line of Monika Garg from Pacific Crest Securities. Your line is open. Please go ahead.

Thanks for taking my question. The first question on the emulation side one of your peers Mentors they were talking about that they think that you guys had a very good quarter in emulation but they were seeing evaluation times are looking to be stretch from three months to seven to nine months and some pricing pressure in the market so how to reconcile any commentary on that?

We don't want to commend our competitors. I think so far we have been very focused on our business. And as I mentioned earlier, especially in the most advanced node the complexity and the time to market emulation is a must have and clearly our XP platform and Z1 have been doing really well and customer is putting orders and they have many repeated orders and so overall we see a tremendous opportunity for us and because time to market is so critical for the semiconductor company and system company and our Z1 and we had been the sales were very nicely and then we have repeat orders already.

And the other thing is you need to realize is we introduced a product in late Q4 and look we talked about this being the fastest ramp for emulation platform we've had. I think those two things clearly show what we believe the cycle time is.

Thanks. Then Geoff, on the operating margins side Q1 Op margins are better year-over-year and Q1 is the lowest revenue quarter so likely margins go up from here but in your 2016 op margin guidance they are slightly lower year-over-year, so are you just being conservative?

I think the Q1 out performs it was largely related to the timing of revenue and expenses obviously between the quarter but we are expecting to hire as Jay asked in his question in both R&D and technical sales which will increase spending in later part of the year we're quite comfortable in maintaining our revenue and operating guidance for the year.

Thanks last one. Intel announced typically off almost 10-11% workforce reduction. Do you see an impact from that?

Yes, I think first of all clearly, Intel is a great Company and I have a lot of respect from them but we won't comment on any specifics on that Company.

I meant any impact on EDA spent as due to the reduction of headcount.

We just don't comment on individual companies anything that -- great company as Lip Bu said.

Okay thank you so much.

Thank you.

Your next question comes from the line of Sterling Auty from JPMorgan. Your line is open. Please go ahead.

Thanks, hi guys. Want to start with the comment about the hardware revenue record in the quarter. How did that deliver relative to your expectations, in other words had you factored in that revenue, that record revenue in your guidance and also how did the margins stack up versus what you were expecting especially in the new Z1 platform?

So everything when we give guidance we always include everything we know at the time when we give guidance so obviously it's hard for us to comment specifically on that. As we said also when we were introducing the Z1 and talking about the Z1 coming out that we would see higher revenue this year and higher margins as a result of transferring to the Z1 platforms and of course know for sure hardware is a lumpy revenue piece for us along with IP.

If I can add a little bit more clearly we have really, really outstanding team and they are driving the business and so far we are very comfortable to meet the customer demand.

Relative to the IP business I didn't quite get, I understand lumpiness but what's impacting the growth rate in terms of the seasonality for this year?

So I think that it's really the change in our focus as we said on the last call, we're focused on sustained scalable growth in a really concentrating on delivering that and I think more than anything else that's driving our business as we said we expect more modest growth this year than last year where it was as somebody said in the upper teens and long term we expect IP growth to be above corporate average.

Last question if you look at the OpEx, I guess the OpEx dropped in the first quarter for sales and marketing its more than I think historical at least for the last few years and the OpEx drop in R&D was actually less. Didn't know if that was indicative of what you guys did as hiring in the quarter or if there's something else going on.

Yes, we're not going to comment on the details of our restructuring or number of positions impacted. Obviously, we focused on effectiveness and efficiency with the restructuring and obviously that have some impact on spending in the quarter.

Just to add a bit color clearly as Geoff mentioned earlier we are doubled down on R&D and Field Support Engineering FAE, because a couple of big customer are proliferating and we are working with them and then we support them successfully in the most advanced nodes, so it's more to support technically and continue the innovation for the flow that we are focusing on.

Great. Thank you, guys.

Thank you.

[Operator Instructions] Your next question comes from the line of Tom Diffely from DA Davidson. Your line is open. Please go ahead.

Yes, good afternoon. So I was curious are you at what you would consider full production right now for the emulation business or you still in the process of ramping the new tool?

We are in production and not clearly, we're meeting the customer demand.

Okay, sometimes or cycles takes a while to get that to full levels. Alright, and then Geoff, when you look at your commentary, it looked like the GAAP margin was down a little bit. What was the driver of the GAAP margin decreasing but the non-GAAP staying constant?

We expect a higher tax rate this year than we did last year on a GAAP basis.

Okay, but cash tax rate stays the same?

Should stay the same, maybe slightly up.

Okay. And is that just location of where you are getting your revenue?

I think every government in the world needs more money.

Alright. When you look at your full year guidance I'm curious how much of the buyback was in that, were you assuming buyback through the year or just buyback through the quarter or how much I guess….

We are guiding through the buyback as authorized through the Board, through the year.

Okay, all right that's it, thank you.

Our final question today comes from the line of Suji De Silva from Topeka. Your line is open. Please go ahead.

Hi, guys. Thanks for taking the question. First of all on the emulation products, Z1 would you expect a natural sort of initial uptake of products as the products launched and then applause to digest those or would it be a steady ramp?

So the business is going to be lumpy obviously for emulation. Customers are going to buy the product when they need it based on their designs, so they weren't waiting, they were buying what they needed and they are going to continue buying what they need.

Okay that was the answer to my question and the other questions around the system customers versus semis. Would you expect that mixed shift over the next several quarters or years and then more importantly for systems customers are they more likely to take bundles of your products versus the semis customers given that they getting into the semis business themselves?

Suji, I assume you're talking about the broad product rather than emulation, right?

Correct, exactly.

I think clearly we are excited about this whole system design enablement and this is exactly about the addressing not just a silicon player and also into the silicon moving to the system Company moving to the Service Provider. And then, clearly we are embarking aggressively and it's very exciting because we have not just a tool, we not only have the IP, we also have packaging and systems design and analysis related and that can very compelling to work with them ranging from automotive sector like ADAS, function safety related and then to the crowd infrastructure and hyper scale infrastructure they want to drive and to the vision into the search and machine learning and with the Tensilica and our tools and also the IOT and you know, you saw the announcement we have with Silicon lab in terms of the low power mix signal, and then real tech in the Tensilica on the ultra-low power and it's just going on and we are just excited about a whole medical aviation automotive, the crowd and IOT related so I think the system level we are going to grow significantly over the years and we are excited about that opportunities.

Okay, thanks again guys.

Thank you.

It is now my pleasure to turn the call back to Cadence President and CEO, Lip-Bu Tan for closing remarks.

In closing, I'm proud that for the second year in the row, Fortune Magazine have recognized Cadence and our hard working employees by including Cadence in a list of the hundred Best Companies to Work For. I would like to thank all our shareholders, customers & partners, Board of Directors, employees for their continued support. Thank you all for joining us this afternoon.

This concludes today’s conference call. You may now disconnect. Thank you for participating in today’s Cadence Design Systems first quarter 2016 earnings conference call.