Cadence Design Systems Inc (CDNS) — Q4 2018 Earnings Call Transcript

Thank you, Gigi and I would like to welcome everyone to our fourth quarter 2018 earnings conference call. I am joined today by Lip-Bu Tan, CEO and John Wall, Senior Vice President and CFO. The webcast of this call is available through our website and will be archived through March 15, 2019. A copy of today’s prepared remarks will also be available on our website at the conclusion of today’s call. Please note that today’s discussion will contain forward-looking statements and that 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 we issued today. In addition to financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to review 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 reconciliations are available at the Investor Relations section of cadence.com. Copies of today’s press release dated February 19, 2019 for the quarter ended December 29, 2018 related financial tables and the CFO commentary are also available on our website. Now, I will turn the call over to Lip-Bu.

Good afternoon, everyone and thank you for joining us today. We are pleased to report that Cadence achieved excellent operating results for 2018, delivering 10% year-over-year revenue growth and a 30% non-GAAP operating margin with broad-based strength across product lines. While the overall macro environment remains mixed, we remain confident in the technology trends including AI machine learning, cloud data center, and 5G that continue to drive strong design activity. Our system design enablement strategy is to continue growing our core EDA and IP business, broaden our reach in system companies and targeted verticals, and importantly, expand into newer adjacent areas. I'm delighted to report that we have continued to make significant progress in all these areas. We achieved strong growth across our product lines in our cloud business, which included a breakthrough wide-ranging win with a marquee US semiconductor company. In Q4, we expanded our relationship with Samsung through their broader adoption of our digital, custom and verification products. We expanded our long-term partnership with Analog Devices for the development of mixed signal solutions for IoT, automotive, medical, and industrial applications, including the adoption of several of our new digital and verification products. We made good progress in vertical segments such as the datacenter cloud, automotive and particularly in aerospace and defense. We have won business with some of the top companies in this space including GE Aviation and BAE Systems, and we finished the year with a major core EDA and IP contract with a major aerospace and defense contractor. Earlier in the year, we won a significant research contract with DARPA and have made very good progress developing advanced machine learning technologies to enhance automation and productivity. As we look at expanding beyond EDA, I'm very excited about our new strategic partnership with the Green Hills Software. Cadence invested about 150 million in Green Hills, representing an ownership interest of approximately 16%. Our investment is important because safety and security are some of the greatest concerns in the increasingly hyper-connected world, especially in the critical industries, such as aerospace and defense, automotive, and medical. Green Hills is the leading player in the embedded safety and security software space with its INTEGRITY-178B real-time operating system having been certified to EAL6+, the highest Common Criteria security level achieved for an operating system. Green Hills products are broadly deployed across multiple application domains, particularly in aerospace and defense, with customers including Boeing and Lockheed Martin and in automotive, with many top OEM and Tier 1 customers including Toyota and Ford. We expect to leverage the strength of both companies to drive embedded system safety and security, open up new market opportunities, and accelerate growth for both companies. I will now reveal other highlights for Q4 and 2018 beginning with functional verification, which remains the fastest-growing challenge for our customers. Cadence verification suite had a good 2018 with revenue growth in the high teens, led by strong demand for Palladium Z1. Palladium Z1 won 22 new customers during the year with significant expansions at similar existing customers, and Protium, our FPGA-Based Prototyping solution also grew steadily. Growing adoption of our Xcelium simulator was highlighted by several market shipping customers expanding their commitment to our technology during the year. The IP outsourcing trend continued and strong execution of our refined IP strategy delivered double-digit growth for our IP business in 2018. Tensilica had a good year with strong loyalty growth, and we maintain our lead in audio applications with growing adoption in vision and key wins in automotive surveillance and augmented reality applications. We have engaged with several customers for our new Tensilica DNA 100 processor, which is ideal for embedded influencing applications and will be generally available to customers in the first half of the year. For the cloud data center market, earlier in the year we announced the first DDR5 test chip and in Q4 we began selling our new 112 gig long-reach SerDes IP in 7-nanometer technology. On digital and Signoff, we are particularly pleased with the growing proliferation of our solutions at the most advanced nodes with market shipping customers. We grew our relationship with MediaTek to include the full digital flow from Synthesis through Signoff. Customers tape out more than 80 7-nanometer designs in 2018 using our digital solutions, and we had 23 full flow wins. We're actively engaged with very early adopted customers on the 5-nanometer design and we delivered two 3-nanometer test chips in 2018. On the custom analog front, we have growing adoption of both our Virtuoso RF and photonic solutions. One of the very last remaining large customers that was not using our flagship Virtuoso layout solutions committed to adopting it. Last June, we introduced Cadence Cloud in collaboration with major cloud industry players, Amazon Web Services, Microsoft Azure, and Google Cloud. We are pleased with the adoption momentum as we continue to lead the industry transition to the cloud. Now, before turning it over to John, let me quickly summarize my comments. Continued execution of our system design enablement strategy led to broad strength across our product lines and particularly in aerospace and defense verticals. I'm very excited about our new strategic partnership with Green Hills Software, the leader in embedded safety and security software. It was a good year for our Verification Suite products as well as our IP business. With that, I will now turn the call over to John to review the financial results and provide our outlook.

Thanks, Lip-Bu and good afternoon everyone. Cadence exceeded all of its key operating metrics and delivered strong financial results for the fourth quarter and fiscal year 2018. Before we get into Q4 results, let me remind you that Cadence adopted the new revenue accounting standard known as ASC 606 for fiscal 2018. The numbers I present today for our fourth quarter and 2018 are based on these new rules unless otherwise stated. 2018 was our transition year to ASC 606 and to provide a more direct comparison against our 2017 results. We show our quarterly and annual results under both sets of rules for 2018. Now let's go through the key results for the fourth quarter and the year starting with the P&L. As reported, total revenue was $570 million for the quarter and $2.138 billion for the year. Q4 and 2018 both benefited from the shift and timing of revenue recognized on some hardware systems that we previously expected to deliver in 2019. As a result, non-GAAP operating margin was just over 31% for the fourth quarter and just over 30% for the year. GAAP EPS was $0.35 for the quarter and $1.23 for the year, and non-GAAP EPS was $0.52 for the quarter and $1.87 for the year. For the old rules which can be directly compared to 2017, total revenue for the fourth quarter was $579 million and $2.146 billion for the year and also benefited from the earlier than expected delivery of hardware systems in Q4 2018. As a result, non-GAAP operating margin was just over 30% for both Q4 and the year. GAAP EPS was $0.36 for the quarter and $1.25 for the year. Non-GAAP EPS was $0.51 for the quarter and $1.88 for the year. The recurring revenue mix for the full year was approximately 90%. The mix for Q4 was approximately 85%, slightly lower than usual due to the extra hardware systems delivered in Q4. Now turning to the balance sheet and cash flow, cash totaled $533 million at year end. Toward the end of December, we drew down $100 million on our revolving credit facility to fund the investment in Green Hills Software. As a result, debt outstanding at quarter end was $450 million. Operating cash flow in Q4 was $132 million and $605 million for the full year. DSOs were 48 days; under the old rules, DSOs were 46 days. Our DSO target for 2019 remains 45 days. During Q4, we repurchased $100 million of Cadence shares. Now for our guidance, note that we have completed the transition to the new revenue accounting rules. So going forward, all numbers will be reported on an ASC 606 basis. For fiscal 2019, we expect revenue in the range of $2.27 billion to $2.31 billion representing growth of approximately 7% at the midpoint compared to 2018. We expect non-GAAP operating margin of 30% to 31%, GAAP EPS in the range of $1.33 to $1.43, non-GAAP EPS in the range of $1.97 to $2.07. We expect operating cash flow to be in the range of $640 million to $690 million. We expect to use approximately 50% of our free cash flow to repurchase Cadence common stock during 2019. For Q1, we expect revenue in the range of $565 million to $575 million, non-GAAP operating margin of approximately 30%, GAAP EPS in the range of $0.36 to $0.38 and non-GAAP EPS in the range of $0.48 to $0.50. You will find guidance for additional items as well as further analysis in the CFO commentary available on our website. In conclusion, I'm pleased with our execution, financial performance, and progress across all of our businesses. Our investments are paying off and our system design enablement strategy is driving results and creating value for customers and shareholders. With that, operator, we'll now take questions.

Yeah, good afternoon, guys. Thanks for letting me ask the question. Congratulations on the solid results. John, I just want to go through the gross margin for December and then how we should think about it in March. For the December quarter, was that all just the impact of having higher hardware sales or was there anything else going on in there? And as you look at the mix towards the March quarter, I know you gave us up margin guidance. But how do we think about gross margin sequentially in the March.

Yeah, John, gross margins have consistently been about 90% or 91% every quarter and it dropped to 88% for Q4. That was entirely due to the shift in Palladium Z1 hardware shipments that shifted from 2019 into 2018.

That's helpful and then the maybe I can ask you the question. You guys continue to put up solid results. And I think one of the strengths of your model and the EDA industry is just the lack of volatility despite some of the volatility that your customers are enjoying – are going through right now. If you look at the guidance for growth for this fiscal year of about 7% year-over-year, how do you think that's being impacted by the macro, by some of the uncertainties in China? What could it be if you think some of these had in the – kind of resolve themselves and what end markets that you participate in you think will be most impacted by the macro backdrop right now?

Yeah, thanks John, for the questions. And clearly in our case, we have less volatility because we are very focused on the design front end of the development and even though the environment changes, we remain confident that some of the AI machine learning, cloud datacenter, 5G, and autonomous driving are driving a very strong design activity, especially as we are very focused on the market shipping customer and also in other SD strategy that we put in place that provide not only the opportunity into the system and the vertical markets that we serve and that opens up a tremendous opportunity for us to drive better success and engage with our leading customers. In terms of the end market impact, clearly Asia Pacific is a very good opportunity and good growth for us. We can continue to benefit from that. While some of the challenges that we see, we are much more in the design front end, so we don't see some of these manufacturing impacts that some other companies will have.

And John, it's John Wall here. You'll see some revenue mix by geography information on page four of our CFO commentary. On that you'll see that Asia ticked up to 28% for 2018. Of that 28%, just under 10% of that was from China.

Perfect, thanks guys. Congratulations.

Thank you.

Hey guys, thanks for taking my question. I just really had two. The first one is actually just focusing on the hardware, so obviously you guys gave out a very, very good full-year guide, but what is embedded in terms of hardware assumptions there, not looking for exact numbers, but I mean it's been kind of three or four years in this cycle now and so what's kind of the expectation that business relative to the rest of the core EDA?

Yeah, so let me get started first. And clearly the functional verification is very challenging for our customers I mentioned and we will be providing the Cadence Verification Suite and that providing a very nice platform for our customer, providing the whole Verification Suite not just the hardware and also the Xcelium, Jasper, and VIP. So the whole package can be very compelling for customers. And on the hardware side, we have a great 2018 and we won 22 new customers. The demand is very strong for my existing customers to increase the capacity and for the advanced note design; customers just love that scale and more predictable and find a box earlier and that’s critical for the design.

And Mitch, in relation to your question regarding what's included in guidance for 2019, I mean, 2018 was a very strong year for functional verification. It benefited from that shift of hardware revenue that we were originally expecting to deliver in 2019 and we delivered it in 2018, so that's going to make 2019 a tough compare for functional verification.

Got it and then secondly, in terms of the margins here, I mean, you guys have been above 30% now twice in a row. I guess, you've had a longer-term target of being around this range. So I mean, is that essentially coming up now, if you guys get a higher revenue base, let's say three or four years out?

Yes, Mitch, we're very pleased with our results for 2018 and feel very confident and happy with our guidance for 2019. Naturally, there was an operating margin impact from that shift in hardware revenue from 2019 to 2018 on both years, but we're very pleased with the progression we're making.

Got it, thank you.

Thank you. My understanding Lip, we've seen really good demand in the AI and I think autonomous and electrified vehicle areas. Both of those areas have had a lot of startups that have emerged over the last few years. I'm just wondering with some of the market turmoil and weaker demand, particularly in China, have you seen any of those startups experience stress or potential attrition in the current environment?

Yeah, so I think, Rich it's a good question. AI machine learning is very dear to my heart because I think we're moving into this data-driven economy and it's very broad applications to medical, datacenter, intelligent energy management, and across the automotive vertical. So the impact is significant. We're addressing not just for the startups; I think they raised a lot of money like Graphcore, Habana Labs, and many others, and I think they'll continue to do well. We haven't seen any shake up yet because the application market is so big. On the other hand, some of the big companies, hyper-scale players, and system players are deploying massively into AI machine learning R&D deployment, and we are delighted to support them with our tools in IP. Clearly, we have a lot to offer. Besides our EDA tools, we actually apply AI machine learning into our tools; we see significant improvement on that, and customers love it and encouraging us to continue to invest in it. The other part is clearly our Tensilica turns out to be very important for the embedded influence applications and also for augmented reality applications. So, the DNA 100 has been very well received. We are excited about it. Overall, I think this AI machine learning impact is going to drive new compute capabilities, not only for training but also on the front side.

Got it and then maybe this is for you John. I wonder if you could give us the growth rates for the functional verification and IP segments in Q4 and then if you'd be willing to say with respect to 2019 where you'd expect them to grow relative to the 7% that you put out as the corporate bogey.

Sure Rich, yeah, I mean for functional verification it was high teens, and for IP it was mid to high teens for the year in 2018. Let me see for – and then in relation to next year, the key thing to point out is that we pretty much had an inline quarter for Q4 with the addition of that hardware shift that came out of 2019 into 2018. Therefore, for 2019, I think the knock-on impact is that we think it's a tough compare for functional verification. However, we think the rest of the businesses should all perform strongly to average us at 7%.

Got it, okay. Thank you.

Yeah good afternoon. So first quick question for John, when I look at the guidance, the non-GAAP guidance, it looks like there's an unusually high impact from taxes going from GAAP to non-GAAP, curious what was behind that?

I'll have to get back to you on that, Tom.

Okay. Alright and then maybe look through – it sounds like you had some nice wins in the aerospace defense market. How big is that market for your core products and what is it behind your products or what enabled you to gain some share in that space?

Yeah, so I think clearly we're excited. The aerospace and defense space is a vertical that we're targeting, and we don't have a breakdown of the market potential, but you can see that there's a lot of activity especially in the AI machine learning development. That's why we're excited about our contract with DARPA, and we have a couple of really significant customers working with us, and we mentioned a couple of them that we have success with, and we signed a very big major aerospace and defense contractor with four significant EDA and IP contracts. Overall, we're excited about this vertical; we focus on three verticals: cloud datacenter, automotive and aerospace and defense; and that’s the one where we had a very good 2018.

And Tom, just to come back to you on the difference between GAAP and non-GAAP tax impact, it may need to do with share-based compensation, but with the share price doing so well this year, we picked up a lot of share-based comp expense that we could use in our tax return, but that's not in our non-GAAP results, but it's in our GAAP results.

Okay, that's helpful and finally when you look at the Green Hills investment, it sounds like their additional focus is on the Aerospace Defense market as well. It sounds like it's your belief that with this technology being developed for this security critical space, that you're moving over into the cloud into other automotive sectors is where regional goes eventually.

Yeah, Tom, I think first of all, this is not an acquisition; this is a strategic investment that we made, 150 million investment for 16% of the company, and I will join the board. This is something that we're very excited about. It ties in very well with our system design and implementation strategy, attempting to expand beyond our core business. This embedded software is the nearest adjacency and it's the next level up to the system spec being closed tight to the underlying hardware. This is now exploring new opportunities for us. That's about an estimated $3 billion embedded system safety and security market. With this hyper-connected world, safety and security become a critical challenge for many industry sectors like aerospace, automotive, industrial, and medical. They are very well positioned; they have been certified at the highest EAL6+ security level, and we are very excited. This will open up a lot of doors for us in terms of combining Green Hill and Cadence expertise and providing that very unique differentiating value to our customers and shareholders.

Okay, that's helpful. Appreciate it. Thanks.

Thank you.

Thank you. Good evening. Lip-Bu, could you talk about the evolution of your mix of semiconductor and systems customers over the last couple of years, and perhaps more importantly, talk about any discernible differences in how you serve those customers or how they behave as customers in terms of buying patterns and what they select in terms of their tool mix one versus the other. We also noticed that over the last year, you have been significantly increasing your openings for AEs, which is post case in AE – in EDA, but especially so for you over the last year. Would that, for instance, be largely connected to your systems business particularly domestically or is that a broader requirement for AEs globally? Then I had a follow up.

Yeah. Thanks so much Jay for the two very important questions. So first question you have about the semiconductor to the system, company and even service provider, the differences of supporting them. Clearly they are all demanding customers, we love them. In terms of system companies, there are some differences. They are looking at the total performance power envelope and the system modeling and requirements, and we are very well positioned for providing that. Besides the EDA tool, we also have packaging, PC board layout, and system modeling and simulation that are really compelling for them to come to us. We are also understanding their requirements better in terms of how to serve them and support them. Time to market is more important to them, and then we're able to meet their schedule, meet their timetable, and deliver the product. From the system level, they are more comprehensive and satisfying the requirement that is critically important to them. Also, as you can tell, many of our service providers are building up their silicon and subsystem ASIC models to meet their requirements, and we're excited about doing that. Overall, we are doing very well on both the semiconductor and system side. The semiconductor side, I highlighted a couple of them; Samsung has clearly broader adoption of our tools, and MediaTek is adopting our full digital flow from Synthesis to Signoff. Of course, we are very excited about our marquee US semiconductor company, which explains why we have increased openings for the AE because the demand and the requirement to support this, I call it a game-changing opportunity for us. We had to support them in a very timely fashion and meet their requirement on performance and scalability, and that’s why we're increasing our AE support.

As a follow up, you mentioned Protium and Xcelium, but could you speak more broadly about the momentum you're seeing with the US and UM portfolios? For instance, Genus, Pegasus Tempus, Voltus? Is the momentum seen in digital largely Innovus for PnR, or are you in fact seeing a broad adoption of the other newer products in digital that you've introduced over the last few years?

Yeah, so I think it's a good question, and clearly, as we mentioned earlier, the hardware emulation and our Protium are steadily increasing adoption, we're very pleased with that. In terms of the digital flow, clearly I think you pointed out our Innovus Place & Route is very successful, with many leading market shipping customers adopting it. We are also excited about Innovus, for example, MediaTek from Synthesis, Genus all the way to Tempus and also the same thing with Samsung, broader adoption for our digital flow. We want to be the best tool in every category, and besides Place & Route, sometimes it takes time for maturity. Now our Synthesis Genus I think will kick off, and now our Signoff will kick off because it is very critical in terms of production. Signoff is very critical and will take a little bit longer time; finally, I think we turned the corner. We had 23 full flow wins for 2018, stay tuned, we are working very hard on 2019. We have more exciting news to share as time counts down.

Thanks very much.

Thank you.

Thanks for taking my questions. The first one, I just like to expand a bit on what Jay said and be a bit more specific just in terms of the contribution and the growth of each semi versus systems, how have we seen that developing in 2018 and maybe if you can kind of share maybe John, what proportion of revenue today represents versus maybe the last few years?

Yeah, I think as I mentioned earlier, both are doing very well for us. The semiconductor side, as you can tell, over time, we will share with you some of the marquee and market shipping customers. They are the leaders in their sector and we are winning and broadly proliferating in the most advanced nodes. It's clear that because of performance, scalability, and run time, they are very happy to see the performance we have, using the parallelism and also using our AI machine learning approach, and now moving to the cloud, they can see significant improvement and scalability they look for. On the system and service provider, we are excited, we have a lot of opportunities in front of us, and we are engaging heavily. Stay tuned; from time to time we will highlight our success.

And Gal, the mix of our business that comes from systems companies is approximately 40%. That's been pretty consistent over the last two or three years. That's because the system business is growing, but so is our semiconductor business.

That makes sense. Thank you. And then just as a follow up, I'd like to focus a bit on the cloud. Obviously it's growing probably very fast; can you tell me how fast from a lower base and just like to understand what the base is now and how do you think this opportunity could grow maybe in the midterm? How big is the addressable market?

Yeah, we mentioned earlier, last June, during STAC, which is the largest industry conference and exhibition, we launched our Cadence Cloud with three major leaders: Amazon, Microsoft, and Google. We are excited about that partnership and collaboration. We have adoption momentum and we are very pleased with that. Clearly, we're taking the lead in terms of the industry transition to the cloud. It's not just for the sake of cloud; it's really focused on driving the performance and productivity for our customers. We work closely with our customers with the selected cloud enablers, providing really focused on enhancing their performance and productivity and providing them with the security that they can scale within their organizations.

Do you have maybe an idea of what proportion of the workloads could flow in the future? How those customers could potentially move onto the cloud? Or is that, kind of, we'll have to wait and see?

I think you have to wait and see because it's still early, only last June and we have the growing momentum of adoptions. We want to make sure that we really drive the performance and productivity from the customer, and clearly the simulation characteristics, workload is now quite broadly adopted by some of the customers to the cloud. The Palladium cloud is also happening. We're kind of doing tool by tool and then driving the performance to make sure that our customers see the benefit.

Thank you so much.

Thank you.

Good afternoon, gentlemen. Thanks for taking my question. A couple of questions about your IP business, the first one relates to well, it's just really more of a verification of growth in the IP business that roughly $8 million revenue haircut from ASC 606 was almost all of that in the IP business and hence growth for the IP has been more like 13% versus 12%.

So Gary, the IP business grew about 16% in 2018. In terms of the shift from ASC 605 to ASC 606, the 8 million difference was spread across all businesses; it wasn't all IP in the end.

Okay. Alright, that's helpful. And with respect to the proliferation of open source process for IP, how is it impacting the ability to license the Tensilica cores with RISC-V and myths now being open, architected options out there? And how from a strategic standpoint do you guard against or invest in this adoption of open source?

Yeah, I think clearly Tensilica is very strongly positioned in audio, as I mentioned, and now moving to vision and also automotive, surveillance, and augmented reality, so it really depends on applications. In some cases, we coexist, and in some cases, we shine. We are excited about our IP; it's registering double-digit growth for us. The Tensilica DNA 100 is very well received for embedded processing. RISC-V is another architecture, and our tools support all these different architectures, so we are coexisting very well. We support those architectures. IP is— we embrace open source and clearly we support various architectures. Right now, we are moving towards domain-specific, workload-specific processors and applications. We are open to that. The other big opportunity is high-speed connectivity. So the high-speed 3000 and 112 gig at the 7-nanometer for the long-reach is very well received, and this is a must-have in the datacenter and cloud. It’s silicon proven, and we're excited about that opportunity too.

Okay, got it. Thank you, guys.

Thank you.

Thanks for taking my question. First, I'm looking for more details on your partners with Green Hills; what are you looking to achieve with the partnership? Could you talk about products you are looking to develop with them? And when do you expect to have any contribution from this?

Yeah, so Monica, first of all, I'm very excited about this; I call it a world-class solution for security and safety in embedded systems. They have a lot to offer, this real-time operating system and also software development tools, with very proprietary partitioned architecture that helps protect both hardware and software. We take ownership in this. I just joined the board, and we're exploring a couple of areas of collaboration. First, our go-to-market strategy; this is a very useful software to proliferate into some of the different verticals: defense and aerospace clearly is their stronghold, and besides that clearly in automotive and medical, there's many areas that we can explore. We will also look into technology collaborations; we are the industry leader in providing end-to-end EDA and semiconductor IP solutions, and they are very strong in embedded safety and security software solutions. Each one brings something really unique, and we can leverage our respective strengths and collaborate in multiple fronts. Clearly, we can explore collaborations with our Verification Suite, our IP, and others to serve our system vertical markets together more effectively. Additionally, we can also look at some co-marketing activities in the future. We’re just finalizing the agreement, and we have multiple meetings to explore how to prioritize and truly increase revenue for both companies. I'm excited about it; customers are eager to work with us together.

And then John, you just posted a 10% goal for 2018, but you're guiding 7% midpoint for '19. Are you being conservative? I mean even if I adjust for $15 million revenue from emulation from '18 to '19, you're still kind of did like 9% less than '18 and guiding like 7.5% for '19?

Yeah, Monica, I think the key thing to remember there is that shift in hardware revenue from 2019 to 2018. While it benefits 2018, it has a larger impact on 2019. Like I said, it was an inline quarter with the exception of that. You're talking about about a $20 million shift from 2019 into 2018 which puts you at a 1% impact to revenue growth for 2018. Without it, we'd be closer to a 9% revenue growth in 2018, but had a much larger impact on 2019.

Got it and then if I look generally, CapEx for Cadence has been somewhere around $60 million range, but you are guiding to $90 million for 2019, kind of any specific hard expenses for '19 you're thinking about?

Yes, that's correct Monica. We're investing in R&D and field engineering resources to support the expansion of our footprint and market shipping customers. That’s what you’re seeing flow through there on the CapEx side.

Does that – should it normalize back to $60 million range by 2020 then?

Well, it's hard to say: we're not guiding 2020 right now.

Hardest! Then the last one, I mean, we have seen very strong operating margin improvement last two years, almost 400 bps; you’re guiding 5200 bps for '19. Is that the way to think about longer term margin expansion? Thank you so much.

Again, we're not guiding beyond 2019, and everything we know is included in our guidance.

Yeah, thanks. Hi, guys. Thanks for squeezing me in. Just a couple of questions here. One of the questions I still get a lot from investors is helping them understand as they go through the earning season and see the different results, whether it be AMD on one end or NVIDIA on the other end. Can you help give a sense as to your exposures across the semi landscape and how they should put that into context?

Yeah, Sterling, that’s a good question. Again, as I mentioned earlier, it's a very mixed environment. Clearly, we are supporting the customer, and they're the leaders in the industry. So, far we are very happy with our engagement with them. In terms of the exposure, I think we're heavily engaging with some of these leading sectors: AI machine learning that I mentioned earlier, the cloud datacenter infrastructure that we are very well positioned in, clearly in autonomous driving, the Tier 1 OEM, and then also the 5G, some leading customers, and we are engaging. Overall, I think we're well positioned; we are very diversified, very broad in terms of our customer base, and clearly we're also in a new area that we are excited is the whole SDE, System Design Enablement, thereby increasing our system companies and also some of the vertical market like Aerospace Defense, and we have had a lot of success there and also clearly one thing that over time we’re going to be also expanding is a medical-related, and that's another big area of opportunity for us.

Alright, great. The other hot topic in terms of conversations is while Synopsys reported their fourth quarter, they came out gave a three year margin target. I think one of the earlier questions on the call was alluding to it. I just want to hit it head on. You guys were one of the first ones to give a margin target back when you started your subscription transition all the way back in 2008. Given the success that you've had and over 30% operating margins as you pointed out, is there a thought and when if you decide to might we expect you to come out and kind of give an update to a new long-term target whether it be three years in the future, five years, etcetera?

Yeah, Sterling, it's a very good question. If you followed me for the last 10 years, I will continue to guide you at the right time. If you recall, we initially guided you from a very disruptive year in 2008 and '09, and then we started to aim for the teens, then mid-20s, and now we’re reaching 30. Stay tuned, at the right time, we will highlight where we are going. We're continuing to drive efficiency in R&D, G&A, in every sector, and meanwhile we continue to invest for the long-term shareholder. You can see that we have been investing in the right place. Our digital implementation side has seen a lot of success now. Our custom analog invests continue to lead, and we're investing in the future, in the 5-nanometer, 3-nanometer with leading customers. We’re moving into the cloud now, and we’re moving to the SD, and we also focus on some vertical systems and service providers, and those take investment. We continue to drive efficiency and drive success, and with the AE support, stay tuned, when the right time comes, we will guide you to a longer-term operating margin target that we aim for.

Excellent. Just one last little housekeeping question for John. The Green Hills investment, I didn't catch: How does this actually get accounted for? What will we see in the non-GAAP income statement in terms of where it's accounted? And any general sense of the revenue run rate at Green Hills at the moment?

So Sterling, we're not disclosing anything about revenue run rate at Green Hills; they're a private company. But we'll account for the investment in Green Hills using the equity method of accounting. You'll see our portion of Green Hills results flow through the other income and expense line for GAAP only, so it won't be in our non-GAAP results. Green Hills is profitable, with a broad base of top customers, especially proliferating in industries where the highest levels of safety and security are required, such as aerospace and defense and automotive. There will be nothing in our non-GAAP results; it will show up in GAAP only on our other income and expense line.

Got it, thank you guys.

Thank you.

Hey, guys, thanks for putting me back in. Just really quickly, one of the other topical items has been the US-China trade dynamics. Have you guys seen any change in terms of your sales there or any different negotiations, or is it still essentially business as usual?

Yeah, so I think Mitch, that's a good question. We have done well in China and continue to represent a growing opportunity. We remain committed to building out the domestic semiconductor industry in China, and we are well positioned there. We are supporting our global customers throughout. So, I'd say business as usual, and we continue to support our customers.

And Mitch, we've seen steady growth in revenue in China. If you are referring to page four of our CFO commentary, you'll see that Asia drove 24% of our revenue in 2016, 27% in 2017, and 28% in 2018. However, of that, roughly 8% of 2016 revenue is from China, 9% in 2017, and now it's just under 10% in 2018.

Perfect, thank you.

Thank you. In closing, through continuous innovation and execution, our system design enablement strategy has positioned us to capitalize on multiple technology wins and further proliferating our solutions with a broader base of customers. We're proud of the innovative and inclusive culture we are building at Cadence. The strength of our culture is highlighted by the recognition we received from Fortune magazine a few days ago, as we're proud that for the fifth year in a row we made the list of Fortune Top 100 best companies to work for. I would like to thank all our shareholders, customers and partners, Board of Directors and our hardworking employees globally for their continued support. Thank you all for joining us this afternoon.