Cadence Design Systems Inc (CDNS) — Q4 2015 Earnings Call Transcript

Thank you, Mike, and welcome everyone to our fourth quarter 2015 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 March 18, 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. Since we are providing the CFO commentary, Geoff’s remarks will be streamlined and certain metrics not discussed in today’s call including historical comparisons will appear in the CFO commentary. 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 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’s management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures 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 February 3, 2016 for the quarter ended January 2, 2016 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 today. 2015 was another excellent year for Cadence, so I am especially pleased to be able to talk to you today about our accomplishments and strategic direction. First let us review our Q4 and 2015 financial highlights. Cadence produced excellent financial results. We delivered revenue of $441 million for Q4 and $1.7 billion for the year, growth of 8% over the prior year. Non-GAAP operating margins was 29% in Q4 and 27% for the year, up from 25% for 2014. Non-GAAP EPS was $0.31 in Q4 and $1.09 for the year, up 16% over the prior year. Execution of our system design enablement strategy drove revenue growth from both semiconductor and system companies in all areas of our business core EDA, IP and system integration. A key part of our strategy is to increase our engagement with new vertical segments and we have notable wins in aviation, automotive, and medical. Demonstrating our constant commitment to innovation, we delivered nine new product releases. We continue our pioneering work in advanced node technology, with our ecosystem partners, including partnering with Imecs to tape out the first 5-nanometer test chip. And yesterday, we launched our first new product of 2016, the Modus Test Solution. This innovative technology can reduce SOC test time by up to three times, with no impact on area or routing. Strategy, innovation, execution, and customer success are driving strong results for our shareholders, and we have momentum going into 2016. Geoff will provide more detail shortly on our 2015 results and our 2016 outlook. Now let us address the environment. Semiconductor business conditions remain challenging, as the industry experienced negative growth in 2015. We remain mindful of ongoing consolidation in our semiconductor customer base. While we do not expect material impact on our business in 2016, consolidation could pose a challenge to industry growth over the next few years. Now, let us talk about some of the product highlights and customer successes in 2015. In digital and sign-off, Cadence revenues are nice with the release of Innovus for Implementation, Genus for Synthesis and Joules for power estimation. Digital and sign-off revenue grew approximately 35% at the accounts we targeted. Adoption of our new digital and sign-off portfolio continued in Q4, including a large agreement recently closed with global foundry that supports the newly acquired ASIC team from IBM. Broadcom also renewed investment in Cadence and added the technology to their digital floor, based on total performance evaluation. High silicon adopted Innovus for production DSP designs, enabling them to reduce area by 20% while meeting their frequency goal. ARM used our full digital floor to tape out its 10-nanometer test chip. Overall, we had more than a dozen digital floor wins in 2015. IP is a key component of our overall strategy and is now 12% of our revenue, with growth last year of 17%. We continue to expect IP to be a great business for us, but we are projecting more moderate growth this year as we refine our strategy to focus on sustained, scalable growth. In terms of production, product highlights, Tensilica Vision P5, DSP, our latest vision and imaging processor built strong momentum with key design wins at three application processor vendors in Q4. System design and verification revenue grew 12% in 2015, driven by strength across the product line. Our system development suite attained record revenue in 2015, driven by strong core verification technologies, integrated tightly together to offer a compelling holistic solution. We launched our new Palladium Z1 enterprise emulation platform in November and recognized revenue in Q4. Palladium Z1 now has orders from more than ten customers, including PMC Sierra, Nvidia, and Huawei and had the most successful launch of any new Cadence emulator. For custom analog design, Virtuoso is the market-leading analog and mixed-signal design platform. In Q4, we delivered the new Virtuoso Advanced Node Platform for 10-nanometer FinFET Design with initial support for 7-nanometer design. Over 80 customers are now using Virtuoso for advanced node design, including over 25 for 10 and 7-nanometer nodes. Security analysis tools had their best year ever. Our printed circuit board analysis products won an important competitive replacement with an automotive manufacturer. In summary, 2015 was an excellent year for Cadence. System design enablement is escalating our opportunity beyond EDA. We have tremendous momentum in digital and sign-off market segments, and our Palladium Z1 Enterprise Emulation platform is off to a very quick start. There are macro challenges ahead, but also opportunities specific to Cadence. Through innovation and execution, we are positioned to build on our success and further proliferate our solutions with market-leading customers. Now, I will turn the call to Geoff to review financial results and provide our outlook.

Thanks, Lip-Bu, and good afternoon, everyone. Our CFO commentary should be referenced in conjunction with both my remarks and the earnings press release issued today. Overall, 2015 was one of the best years in Cadence's history. Our innovation is paying off, and our execution was superb. Now for the results of Q4 and fiscal 2015, bookings totaled $1.9 billion, an increase of 7% over 2014. The book-to-bill was 1.12, and year-end backlog was $2.3 billion, up 10% from the prior year. Weighted average contract life for Q4 was 2.8 years. For the year, it was 2.58 years, within our expected range of 2.4 to 2.6 years. Revenue for Q4 was $441 million. Revenue for the year was $1.7 billion, up 8% year-over-year. Without the extra week in Q4 2014, year-over-year growth would have been 9%. Over 90% of the revenue for the year was recurring in nature. Non-GAAP operating margin for Q4 was 29%. For the year, it was 27% compared to 25% for the prior year. The positive variance relative to our initial guidance for 2015 was due to effective resource management, lower than planned headcount, better than expected hardware margins, and favorable foreign exchange trends. GAAP net income per share for Q4 was $0.26 and $0.81 for the year. Non-GAAP net income per share for Q4 was $0.31, up 15% year-over-year. For 2015, non-GAAP net income per share was $1.09 compared to $0.94 for 2014, up 16%. Operating cash flow was $123 million for Q4 and $378 million for the year. Cash and short-term investments were $711 million at year-end, unchanged from the end of Q3. DSO was 35 days, an increase of seven days from Q3. We repurchased 5.5 million shares of stock in Q4 for $120 million. For the year, we repurchased 16.3 million shares for $333 million. At year-end, $960 million remained in our current $1.2 billion repurchase program. On January 28th, 2016, we entered into a three-year, $300 million term loan. We also drew $50 million on the revolving credit agreement. Now let's turn to our outlook for fiscal 2016 and the first fiscal quarter. For fiscal 2016, we expect bookings in the range of $2 billion to $2.1 billion, which equates to an 8% growth at the midpoint. Revenue in the range of $1.79 billion to $1.84 billion, which would be a 7% growth at the midpoint. Non-GAAP operating margin of approximately 26%. GAAP EPS in the range of $0.72 to $0.82, and non-GAAP EPS from $1.15 to $1.25, which is up 10% at the midpoint over 2015. Operating cash flow in the range of $380 million to $420 million. Weighted average contract life to be in the range of 2.4 to 2.6 years. Approximately 70% of revenue from beginning backlog and weighted average diluted shares outstanding of 280 million to 295 million shares. Note that backlog is expected to grow 10% in 2016 based on the midpoints of the guidance. For Q1, we expect revenue to be in the range of $440 million to $450 million. Non-GAAP operating margin to be in a range of 24% to 25%. GAAP EPS to be in the range of $0.17 to $0.19, and non-GAAP EPS in the range of $0.26 to $0.28, at least 90% of the revenue from beginning backlog. There are several factors that will impact the seasonality of operating expenses and margin for the year. First is the fact that both payroll tax and vacation expense seem to be higher in the first half of the year than the second. Second, pay increases occur in Q3. And third, an expected ramp in headcount throughout the year. You'll find guidance for additional items in the CFO commentary. Note that we have increased our DSO target from 30 days to a range of 30 to 35 days. We think this is prudent in light of the current economic uncertainties. Our cash flow was strong for 2015 and we expect cash flow to grow in 2016. Cadence had a great 2015. We had momentum going into 2016. Our strategic priority remains to develop innovative products, help our customers be successful, and proliferate our solutions with market-shaping customers. So with that, operator, we'll now take questions.

Yeah, hi. Thanks for taking my question. I had two of them. First one is for Lip-Bu, you kind of highlighted the semi M&A could be impactful in the next couple of years. Is there a way you can quantify it? If not, just trying to figure out qualitatively have you seen at your customer site any kind of EDA purchasing decisions slowing down?

Okay, let me address your first question. We recognize that 2015 marked a significant period of consolidation in our industry, with transactions exceeding 100 billion. Such consolidation can lead to stronger, more focused companies capable of innovative design. While it's difficult to predict the long-term impacts on EDA, we do not anticipate any material effects on our business in 2016. However, consolidation may present challenges to industry growth in the coming years. On a positive note, this trend also creates opportunities for us to deliver our innovative solutions, as customers are in search of distinct product development. In summary, while we acknowledge the trend of consolidation, we believe there are ample opportunities to expand our business with our unique and superior solutions through excellent execution.

Got it.

We considered several factors before concluding that we don’t anticipate any impact in 2016. We evaluated whether customers might gain more economic power, shifts in market share, and potential engineering synergies. We also reviewed past acquisitions, which, although smaller in scale, have not limited our growth with those customers. Additionally, we have become increasingly competitive with our technology during this period. These are some of the elements we examined, and we do not foresee any impact on our performance in 2016.

Got it, got it. All right. And then as a follow-up, when you look at your customers, like they seem to be slowing down, Moore’s Law I mean, no matter which way you dissect it, it's probably not at the same pace as like several years ago. Kind of curious, if they are slowing it down and kind of moving to the tick tock talk schedule, is there an opportunity for you guys to lower your R&D, I mean at 33 to 34, 35 percentage of sales, it seems like a very high number especially given the fact that your customers are consolidating, they are doing some financial engineering and slowing the technology Cadence?

Let me try to address your question. First, I want to break it down into two parts: the semiconductor side and the system side. On the semiconductor front, when companies consolidate, they aim to develop unique solutions that can excel in the marketplace while maintaining their leadership strengths. They will focus on more advanced nodes and efficiency to enhance performance. Our innovative products are designed with this focus to enhance their productivity and reduce time to market, while also improving performance metrics, which is crucial for them. On the system side, the integration of mixed signal, digital, and analog components, along with a holistic verification process, is important for timely market entry. We're also very enthusiastic about the system companies we've mentioned several times, particularly in terms of our synergy in system design enablement. Intellectual property is a key component of this, but there is also a significant shift in the industry toward application-driven design. For instance, companies are beginning to analyze workloads and applications, which is leading to architectural changes. When we create our end-to-end solutions, we keep this in mind to engage effectively and provide the necessary support to help drive these new designs. We're collaborating with what I refer to as market-shaping customers who are adopting a distinctly different system approach to applications, and our solutions will align well with their efforts to optimize the applications they aim to develop.

Got it, got it. Very helpful. Thanks a lot Lip-Bu.

Sure.

Sorry. Thank you. Geoff, just wanted to ask you about how you're thinking about the leverage in the business longer term, looks like you're guiding for effectively negative leverage in the business this year, 26ish% op margin off a 26.7% last year. And that was a fairly elevated level of spent last year, as you had indicated you were investing pretty heavily to pursue some of your new wins. So, just wanted get your thoughts on how you think about leverage longer term, is there a point when you start letting some of the natural leverage in the model flow through and when might that be?

Yeah, Rich, good question. So, we are really focused as our strategic priority on developing innovative products. We want our customers to be successful. And we are attempting to proliferate our solutions with these market-shaping customers. For example, I think you can see some of our digital successes that we highlighted during the past year with very good customer names, strong growth in our digital business, particularly with the top targeted customers, but also overall. We believe that's the best long-term focus for shareholders and the best long-term return for shareholders. So, we are concentrating on that as our strategic priority.

Got it. And then your verification business was the strongest it's been from a percentage of total sales, and I guess two years in the fourth quarter. Wondered if you could give any color on what drove that. Was it emulation? Any color on that and how that momentum might carry into next year.

This is Lip-Bu. Let me address that and then Geoff will provide more details. We are very excited about our Z1, which has been the most successful launch of any Cadence emulator. There are a few reasons for this. First, it is the first true emulator in the market with enterprise-class reliability. Additionally, it offers a fivefold improvement in throughput capacity. We have received overwhelmingly positive feedback from customers, with over ten already placing orders, and some have even made repeat orders. We are shipping as quickly as we can produce. This is something we are truly excited about. Customers really want improvements in capacity, performance, speed, footprint, and cost of ownership, which are all very important to them. Also, the latency in the Palladium XP II remains very strong.

Great. Just one more for me, if I could. Geoff, I think you said 920 million or so left on your buyback, which would normally be over four quarters. Should we think of that as a pretty linear buyback over those four quarters?

Yes, we bought back 240, on our current plan we have 960 that remains. And as you know, we tend to buy pretty linearly.

Got you. All right. That's it for me. Thanks, gentlemen.

Good afternoon. Thanks for taking my question. I had a question on the divergent trends in backlog and deferred revenue. And I know deferred revenue is only representative of a small portion of your backlog. But for 2015, your backlog was up 10% and you're expecting a like increase in 2016, but yet your deferred revenue at year end was down about 8% year-over-year. What's the dynamic explaining that?

Yes, so for our business model deferred revenue means different than a lot of probably other software companies that you're familiar with. Deferred revenue for us is just cash that we've taken upfront, that we haven't recognized revenue for. One of the things we work hard to do is try to match billings, collection and revenue recognition in the same period. As we're doing that, deferred revenue will continue to decrease for us. For us, that's – it’s a liability, not necessarily an asset, as you would sometimes consider with the other companies.

Understood, understood. All right. And in your description of the IP business having grown 17% in 2015 and the expectation of slowing growth looking out into 2016, I think you might have used the adjective rational or more prudent in describing your approach to managing the IP business, does that mean that you’re deemphasizing any portion of the IP portfolio?

Yes, and I mentioned that first of all in the last few years we kind of grew the business from zero, you know, slightly small to all the way to 12% of the revenue and growing at 17% last year. And it's time for us to kind of refine our strategy to focus on making sure that is sustainable and scalable growth and also for customer delight. And so I think those are the things that we are putting into effect and so that we project more modest growth for this year.

And again, remember, as we said last year, we grew at 17%, which is very close to what our plan was.

And if you remember, our IP business, there are three portions; one is the Tensilica. This is very exciting for us because this whole vision in our image processing and for object detection, for Big Data or for video surveillance and so very broad application. We are very excited. We are continuing to invest on that. And in our design IP for industry standard IP, we continue to invest in that. And then thirdly is the verification IP that ties in very well with our whole verification development suite and that ties in with all the incisive and the JasperGold that we just launched, which was very responsive from customers. So, I think we tried a mixture that we're really providing a holistic solution to our customers in their overall design so that we can really strengthen the solution to the customer.

Okay. Just a final question on the industry backdrop. Independent of the massive wave of chip industry consolidation that we've seen, we haven't really seen any sort of robustness in the end markets you serve. You've got a decline in the EPC market, a flattening mobile handset market, and general decelerations in the electronics production supply chain. Despite that, you're managing to grow your bookings and deferred revenue by 8% to 10% per year. I was wondering if you have any insights on what percentage of your customers' R&D budget you can currently occupy and how that's trending.

If I understand your question clearly, we are successfully engaging with our customers despite their consolidation, and we are continuing to expand our innovative products. We are also experiencing rapid growth in system design and customer systems, and I previously mentioned some opportunities. Although there is a slowdown in the PC market, we are seeing strong growth in new applications, particularly in video-related areas such as IoT and automotive, especially with features like dash autopiloting. These developments are generating significant data and sensors, which is why I spoke about Big Data and data analytics across various industries, including medical and video surveillance. Businesses want to harness this data to enhance operations, even in retail settings. Therefore, these factors are driving our silicon development and supporting system companies that are becoming vertically integrated. We see opportunities in two areas: first, with consolidation among companies we are growing with, and second, a new wave of system enablement. Our unique position with our intellectual property and system integration through hardware/software co-design allows us to meet the needs for power signal integrity and quicker market readiness, enabling system companies to launch their products faster within a compressed timeframe.

And I think one more thing, Gary, that's important. Remember, we're mission-critical to our customers, whether they are IC or system companies. And our increasingly differentiated technology is clearly helping us with our customers.

Congratulations on the good execution in a tough environment. Thanks, guys.

Thank you.

Thank you, good evening. I’d like to ask first a question about the emulation business. You had guided to an increase for the year in that business, albeit it might not have been much of an increase. When you look at your cost of product and maintenance revenues sequentially and even year-over-year, there was hardly any change at all, which would suggest that unless you had a pretty extraordinary increase in the gross margin for emulation, that you might not have had much of an increase in that business either sequentially or year-over-year and perhaps the business was not up year-over-year as you had guided. So perhaps you are over inferring from the cost numbers, but could you comment on whether or not you did in fact increase that business and is it possible that to the extent your Q1 guidance for revenue is somewhat above consensus, that in fact we're seeing carry-over of emulation business backlog into Q1 from Q4? Then a couple of other questions.

So a couple of points, Jay. Revenue grew, and our emulation business experienced year-over-year growth, driven by strong sales and margins for Palladium XP. As we mentioned, when we began shipping and recognizing revenue from the Palladium Z1, our next generation product, we anticipated hardware revenue growth and margin improvement. I also want to highlight that we had one of our best hardware quarters ever in Q4.

Okay. Looking at your new products or asking about your new products, is there anything you can say in terms of adoption, particularly for Innovus, Tempus, Voltus in terms of, for example, design sizes or where they are being adopted? In other words, are they being brought in largely for new programs? Are you seeing any displacement of incumbent implementation and sign-off tools? All of the above for any of the products on the digital side? Also, in terms of your sales pitch for the new tools, you've made the point that you have a much more highly integrated flow now, lots of common engines, particularly around timing and so forth. Is that commonality across the tools in fact leading to new business that you could identify?

That's a great question, Jay. Let me address your inquiries. As I mentioned earlier, we have completely transformed our digital flow, including Innovus for implementation, Genus for synthesis, Tempus for sign-off, and Joules for power design. To provide some context, we announced Innovus nine months ago, and since its launch, we've acquired over 60 customers worldwide, including eight of the top ten semiconductor companies. On the Genus side, we launched the products about six months ago and have gained over 40 customers. In Tempus, we've surpassed 200 tape-outs as of Q3 and are nearing 100 customers. For Voltus, which is our power sign-off tool, we have 17 out of the top 20 semiconductor companies adopting it, resulting in well over 100 customers overall. We're very excited about our recent launch of Modus Test Solution, which significantly reduces SOC test time and is a groundbreaking technology that helps identify potential manufacturing defects, ensuring that quality products are shipped to customers. Global Foundry, TI, and others are already adopting Modus, and the feedback has been positive. Overall, this is a thrilling time for us, as our digital flow features a number of breakthrough technologies. Additionally, we've seen substantial advancements at the most advanced node, highlighted by our 10-nanometer test chip with ARM using a fully integrated digital flow. In 2015, we secured over ten full flow wins. Overall, our success isn't just with new customers; we are also displacing some of the existing tool providers.

A follow-up, if I may on Modus, and then I'll wrap-up, thanks, on the corporate side. The market for test is not a particularly large addressable market. According to the industry data, it's almost certainly less than $150 million TAM. And the question is, is that a large enough space to address now to have warrant in the investments in R&D and presumably now the sales resources for relatively small TAM that has also proven over the years to be pretty lumpy and inconsistent. And do you have now with the test have what some might call a verification continuum? Do you have in fact the wide enough panoply of products for verification? And then I'll wrap it up, thanks, on the corporate side.

Good questions. I think you're absolutely correct. It's a 150 million TAM market, but clearly it kind of be a more and more bottleneck now in terms of customer want to be able to ship products. It's our fully integrated floor that we are emphasizing; so on the whole system design verification and the whole digital front providing a solution to sharpen the design time, verification time and also the test time, and the customer spend a lot of money on the testers. But using this, usually you can augment that to really drive some of the design success and then time-to-market is critical for some of these companies.

All right. Lastly, on the corporate side, you recently had your annual sales meeting, of course, everyone in your industry does, and I'm wondering if anything came out of that in terms of new priorities or organizational structure, perhaps around the verticals or anything of that kind that you might care to comment on? And also related to that, is there anything unique or specific about the development of your systems customer base in terms of incremental or new investments or organization that you need to make to grow that part of the customer base further?

Jay, good questions. And we have a very successful sales kickoff that we have a team come together and to look at how we are moving forward this year. I think that is very emotionally charged. We have a very strong leader and very passionately driving the success to the customer and the message that really works closely with our customers, providing the solution, making them successful and then a big churn of a portion talking about whole system design enablement synergy, and then how can we proliferate into some of the market-shaping customers and we mentioned early in the past last quarter general tricks and then some of the automotive, aviation, and, you know, the whole crowd infrastructure, big data. And so I think we are excited about the opportunity to us and how can we proliferate our products and then continue to drive excellent execution to make the customer successful?

Thank you for the question.

Thank you.

Yes. Thank you for taking my question. Lip-Bu, you've highlighted a couple of vertical markets, avionics, automotive, etcetera, early on, and I was wondering if you could give a little color as to how you engage with those customers? And is that opportunity sort of bigger as it compares to a semiconductor company? What I'm trying to ask is do you have a bigger revenue opportunity for a fixed number of designers at a vertical company?

Good questions. I think this vertical market is very dear to my heart and the way I am understanding to do successfully is to listen and understand their requirement and then look at the holistic way, how can we help them to make sure they are successful in whatever application they want to drive and in whatever the productivity they are looking for and then the vertical integration that they are planning to do. And then try to learn what they try to do and then the solution they try to provide. And then the best way to success is collaborating with them and then look at our portfolio and see how we can strengthen that and how are the pieces that we don't have, and either we organically developing that or through M&A to get that so that we can provide a overall solution to meet the requirement. And as I say, a very exciting time for my team and myself to learn new things and then along the way try to adopt and what is the best practice. And also learn what are the requirements they have, and they all had different requirements in terms of redundancy and safety, function that they need to have. And then how can we incorporate our tool in IP to provide a holistic, secure environment solution for them. So I think those are the way we are going to grow the business with them and to work closely and collaborate with them.

Thank you. In a follow-up, you are clearly outperforming the industry and your competitors. Can you explain the sources of your outperformance? Is it due to your success with vertically integrated companies or the new emulation tools improving your digital design flow? What do you think is driving this outperformance?

Yes, I think you know, clearly we're still a long way to go. I mean, we’re continuing to be humble and work hard with customers. And I think the one single point that I can point to and I always believe the best product win. And so we continue to innovate, continue to drive and listen to the customer carefully, and then responding to the customer needs and then closely collaborating with our customers and also our IP and foundry partners, even the semiconductor equipment company to work closely with them, make sure that we are providing the solution in a very proactive way and then suggest a solution and learn from them. And then all in all, I think this is something that we continue to do and a mission that we continue to drive excellence in execution to proliferate our product and adopting by the customers.

Okay. Thank you very much.

Sure. Thank you.

Hi, thank you for taking my question. My first inquiry is regarding emulation. You launched a new platform at the end of last year, and previously when you introduced a new platform, there was significant growth in that segment. Could you explain what kind of growth we should anticipate in 2016 in the emulation segment?

Yes. So, good question. We're going to, as we've said before with the new emulation platform, we expect good hardware growth in 2016 and for improvements in margin. We really are not at this stage going beyond that.

And also I think just to add-on besides our new Z1 that we're excited about. Clearly, momentum also increased for our ProTM and that is our FPGA-based prototyping platform and also continue to drive emulation and also simulation-related. And so we want to make sure that we have provided an overall solution to our customers.

I wanted to follow up on what Krish asked earlier. This year, you've mentioned several times about the significant consolidations that are occurring, whether they are closing this year or have already closed. You are confident that this will impact revenue growth this year, so could you provide some quantitative expectations for the impact over the next couple of years, especially in light of your comments about potential challenges to EDA industry growth rates?

Yes. So again, Monica, we said we don't expect and see any implications for 2016. It could impact the industry more in the long run. Again, the key factors we'll go back to our economic power change in economic power. Second is there are going to be market share shifts? And then third, will there be energy synergies within those customers? We've navigated, we believe, quite well over a period of time under the past acquisitions. Of course, no guarantee that that's going to happen going forward. The consolidation also has offered opportunities for us, right, to deliver innovative new products to customers in a way that we've been quite successful with. So it's very hard for us to quantify two years out, or what the direct impact is going to be.

Okay. Just the last one here from me. Service revenue increased significantly in 2015, was there any reclassification of revenue in that segment?

Sometimes some of our revenue that's IP is considered services if there's enough customization of that IP, so that some of the things that we'll call IP will also be called services.

Got it. Thank you so much.

Yes, thanks. Hi, guys. Just wondering, I guess I wasn't completely clear when you talked about focusing a more sustainable growth within the IP business. Is that focusing more on the profitability so you want more repeatable designs, or is it a different type of structural change to the IP business? If you could give some more color, that would be great.

Certainly, Sterling. IP is a crucial part of our synergy. We experienced significant growth when we began a few years ago. Our objective is to exceed 10% of revenue growth. Through emerging initiatives and both mergers and acquisitions as well as organic growth, we have now achieved a growth rate of 12%. For any new business, we are assessing performance metrics to ensure sustainability and scalability in terms of growth. We have a matrix similar to our EDA business, and we are committed to ensuring that our efforts align with this framework to foster a successful business. I consider this as the second phase of our growth, and we are working on redefining, reclassifying, and integrating these aspects with our overall company metrics.

That makes sense. And then in terms of the emulation contribution, specifically to the upfront revenue versus the ratable, you still have greater than 90% coming from ratable sources. But just kind of curious how that mix is going to get impacted here as you get that spike in the emulation business?

Yeah. So we've said that we expect Q1 to remain 90% ratable. Obviously, we're not guiding Q2, Q3 or Q4 at this stage. We'll let you know when we do that. Again, part of hardware, there's also a maintenance piece that's always part of our hardware business also, which is ratable over period of time. But we're quite happy with the emulation platform and then the new prototyping platform and how they are going.

Sounds good. Thank you, guys.

Yeah, good afternoon. Another question, following up on the previous one. When you look at through the ramp, projected ramp of emulation over the next year or two, what do you think, if any, would be the impact on the overall corporate margin structure?

So again, I think when we look at it, we do believe it will help the overall corporate margin, just because it's also helping their margin, improvements in margin in that particular business. Right. Strong revenue and good margins.

Okay. So both margin dollars and percentages will go up overtime with that?

Yes, and it's all baked into our guidance, as we're giving our guidance.

Yeah, okay. And then Lip-Bu, you talked a little bit about negative industry growth for 2015. I wonder if you could share with us what you think the actual growth rate was for the industry and if there are any particular segments that were particularly weak during the year.

Yes, I mentioned earlier that the negative growth is the semiconductor industry.

Okay.

And yes, that is published information. And then clearly, they are projecting this year is a very low single-digit growth and so that's for the semiconductor industry.

Again, remember, 40% of our business is now system companies. So...

I was wondering if you had a similar number for the EDA industry specifically.

Yes, I don't think I have it offhand, but I think clearly you can just add up the three big I plus a few others and PDF and others. So I think you should be able to get that, the growth rate.

Okay. So you talked about nine new products released last year. How does that compare to the Cadence in previous years and which one or two products do you think are the major revenue drivers going forward?

I’m very proud of the innovative culture we are establishing at Cadence. This initiative is progressing rapidly, and it’s great to see. The nine new technologies and differentiating products are all impressive, making it difficult for me to pick a favorite. They've significantly contributed to our digital and sign-off segments and have also strengthened our hardware emulation capabilities. This is evident in our system verification advancements, and we’re enthusiastic about the innovations occurring right now. Additionally, our acquisitions, like Jasper, have bolstered our offerings, particularly in custom analog, while our PCB business is thriving thanks to the Sigrity acquisition. Overall, we’re excited about our momentum as we enter 2016 with our first new product, Modus Test, which is a groundbreaking technology that our customers love. Stay tuned for more upcoming products. We’re still very enthusiastic about fostering our innovative culture while leveraging M&A to enhance our progress.

I guess you really can't choose between your kids there. And so, when you look at your M&A question one more time, obviously, with your ratable model, there's not an impact for this year. But are you seeing any type of delays happening with renewal cycles when these M&A programs go through?

I think obviously the transactions take some time to close when our customers consolidate. They also then have to work through their own integration, both planning and execution on their – in addition, the timing of the corporate mergers doesn't necessarily reflect the timing of the contract renewals for us either. So we have taken all of those things into consideration when we guided 2016 and said we don't anticipate any impact in 2016.

Okay. All right. Thank you.

In closing, 2015 was a year of great success and 2016 presents us with exciting opportunities. I would like to thank all our shareholders, customers and partners, Board of Directors and hardworking employees for their continued support. Thank you all for joining us this afternoon.