Cadence Design Systems, Inc.

Good afternoon. My name is Gigi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence fourth quarter 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star, then the number one on your telephone keypad. Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence. Please go ahead.

Thank you, Gigi. And I would like to welcome everyone to our fourth quarter 2018 earnings conference call. I am joined today by Lipu Tan, CEO, and John Wall, Senior Vice President and CFO. The webcast of this call is available through our website, www.cadence.com, 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 financial 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 19th, 2019 for the quarter ended December 29th 2018 related financial tables and the CFO commentary are also available on our website. And now I'll turn the call over to Lipu.

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 30% non-gap operating margin with broad-based strength across our 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 am 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 core business, which included a breakthrough while 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 their 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've made good progress in vertical segments, such as the data center 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 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. And as we look at expanding beyond EDA, I'm very excited about our new strategic partnership with 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 include Boeing and Rocky Martin, and in automotive with many top OEM and tier one customers, including Toyota and Ford. We expect to leverage the strength of both companies to drive embedded system security and safety, 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 several existing customers. And Proteum, our FPGA-based prototyping solution, also grew steadily. Growing adoptions of our Exilium simulator was highlighted by several market-shaping 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 has 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 DNA100 processor which is ideal for embedded inferencing 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 ROM-rich 30IP in 7-nanometer technology. On digital and sign-off, we are particularly pleased with the growing proliferation of our solutions at the most advanced nodes with market-shaping customers. We grew our relationship with MediaTek to include the full digital flow from synthesis through sign-off. Customers taped out more than 80 7-nanometer designs in 2018. using our digital solutions, and we had 23 full-flow wins. We are actively engaged with very early adopter customers on their 5 nanometer designs, and we delivered two 3 nanometer test chips in 2018. On the custom analog front, we have growing adoptions of both our Virtuoso RF and Photonic solutions. And one of the very last remaining large customers that was not using our flagship Virtuoso layout solution 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 a broad strength across our product lines, and particularly in aerospace and defense vertical. I'm very excited about our new strategic partnership with Green Hills Software, the leader in embedded safety and security software. And it was a good year for our verification suite products, and 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, Lipu, 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 in 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 Hill 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. And 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 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 to $690 million, and 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 to $575 million, non-GAAP operating margin of approximately 30%, GAAP EPS in the range of 36 to 38 cents, and non-GAAP EPS in the range of 48 to 50 cents. You will find guidance for additional items as well as further analysis in the CFO commentary available on our website. In conclusion, I am 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. And with that operator, we'll now take questions.

At this time, I would like to welcome, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad now. We will pause for a moment to compile the Q&A roster. Your first question comes from John Pitzer from Credit Suisse. Your line is now open.

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 op margin guidance, but how do we think about gross margin sequentially in the March?

Yeah, John, gross margins consistently being like 90 or 91% every quarter and it dropped to 88% for Q4. That was entirely due to the shift in demand Palladium Z1 hardware shipments that shifted from 2019 into 2018. For Q1 and for 2019, we'd expect to go back to normal.

That's helpful. And then, Babu, 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 in the EBA industry is just the lack of volatility despite some of the volatility that your customers are enjoying or 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 kind of resolve themselves? And what end markets that you participate in are you thinking being most impacted by the macro backdrop right now?

Yeah, thanks, John, for the questions. And clearly, you know, we have less volatility because we are very focused on the design front end of the development. And even though the environment kind of mix, but we remain confident that, you know, some of this AI machine learning, cloud data center, 5G, autonomous driving, they are driving a very strong design activity. And especially, you know, we are very focused on the market shaping customer, and then also, you know, the SDE strategy that we put in place that provides not only the opportunity into the system and the vertical markets that we serve, and that opened up a tremendous opportunity for us so that we can drive better success and engaging with our leading customer. And in terms of the end market impact, you know, clearly Asia Pacific is a very good opportunity and good growth for us. We can continue to benefit that. And then so some of these challenges that we see, we are much more in the design front end, so we don't see some of this manufacturing impact some other company will have.

And, John, it's John Wall here. You'll see some revenue mixed 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. I know you asked that in the last call.

Perfect. Thanks, guys. Congratulations.

Thank you.

Thank you. Our next question is from Mitch Steeves from RBC Capital Markets. Your line is now open.

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 four-year guide, but What is embedded in terms of hardware assumptions there? I'm 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 of that business relative to the rest of the core ADA?

Yeah, so let me get started first. Clearly, the function verification is very challenging for our customers, as I mentioned, and we're really providing the Kaizen verification suite, and that's providing a very nice platform for our customer, you know, providing, you know, the whole verification suite, not just the hardware, and also the Exilium, the Jasper, the VIP. So that whole package turned out to be very compelling for our customer. And on the hardware side, we have a great 2018, and we want 22 new customers. The demand is very strong from our existing customer to increase the capacity. And for the advanced node design, customers just love that scale and more predictable and find the box earlier, and that's critical for their design.

Yeah, and Mitch, in relation to your question with regard to what's included in guidance for 2019, I mean, 2018 was a very strong year for functional verification, and, of course, it benefited from that shift of hardware revenue that we felt we were originally expecting to deliver in 2019, and we delivered it in 2018. So that's going to give... 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 know, you've kind of 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. I feel very confident and happy with our guidance for 2019. Naturally, there was an operating margin impact of that shift in hardware revenue from 2019 into 2018 on both years, but we're very pleased with the progression we're making.

Got it. Thank you.

Thank you. Our next question is from Rich Valera from Needham & Company. Your line is now open.

Thank you. Understanding Lipwood, have you 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 that, Rich, is a good question. AI and machine learning is very dear to my heart because I think we are moving into this data-driven economy. And it's very broad application to medical, to the data center, to the intelligent energy management and across all the vertical. And so the impact is significant. And we're addressing not just for the startups, I think startup, I think you saw some of them raise a lot of money, like Graphcore, Havana Lab, and many others. And so I think they'll continue to do well. We haven't seen any shakeup yet because the application market is so big. And on the other hand, some of the very big company, that in the hyperscale player and also some of the system player, they are deploying massively into the AI machine learning R&D development. We are delighted to support them with our tool and IP, and clearly we have a lot to offer. Besides our tool, EDA tool, we actually apply the AI machine learning into our tool. We see significant improvement on that, and customers love it, and encouraging us to continue to triple down on it. And then the other part is clearly our Tensilica platform It turned out to be very, very important for the embedded inference applications and also for the augmented reality applications. So the DNA 100 has been very well received. We are excited about it. So I think overall, stay tuned. I think this AI machine learning impact is going to be a new compute in not only the training and also the inference 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 4Q. 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 sort of the corporate bogey.

Sure, Rich. Yeah, I mean, for functional verification, it was high teens. for actually high teens for functional verification and mid to high teens for IP for the year in 2018. Let me see for the, and then in relation to next year, I think the key thing to point out here is that we're pretty much an inline quarter for Q4 with the addition of that hardware shift that came out of 19 into 18. So therefore for 19, I think the knock-on impact there is We think it's a tough compare for functional verification, but we think the rest of the businesses should all perform strongly to get us to average at 7%.

Got it. Okay. Thank you.

Thank you. Our next question is from Tom Diffley from DA Davidson. Your line is now open.

Yeah, good afternoon. So first, a 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. Yeah. Okay.

All right. 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, you know, clearly we're excited and, uh, aerospace and defense space area. This is a vertical that we have targeted, and we don't have a breakdown in terms 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 are excited about our contract with DARPA, and also we have a couple of really significant customers that are working with us, And we mentioned a couple of them that we have successful. And then also we signed a very big major aerospace and defense contractor with a full significant EDA and IP contract. So I think overall we're excited about this vertical. We kind of focus on three vertical, cloud data center, automotive, and aerospace and defense. And so this is the one that we have a very good 2018.

And, Tom, just to come back to you on the difference between GAAP and non-GAAP tax impact, it's mainly 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. That's not in our non-GAAP results, but it's in our GAAP results.

Okay, that is helpful. And finally, when you look at the Green Hills acquisition, and it sounds like their initial focus is on the aerospace defense market as well, It sounds like it's your belief that with this technology kind of developed for this really security critical space that moving over into the cloud and to other automotive sectors is where Green Hill goes eventually.

Yeah, Tom, I think first of all, this is not an acquisition, and this is a strategic investment that we're making of $150 million investment for 16% of the company, and I will join the board. And I think, you know, this is something that we are very excited. First of all, it ties in very well with our system design and development strategy. And that we now we try to expand beyond our core business. This embedded software is the nearest adjacency. And this is the next level up to the system stack and being close tied to the underwriting hardware. And then this is... and are exploring the new opportunity for us that's about $3 billion estimated, $3 billion embedded systems, safety, and security. And then with this hyper-connected world, this safety and security become a critical challenge for many of the industry, especially the critical industry like the aerospace, automotive, industrial, and medical. They are very well positioned, as I mentioned in my script, that they have been certified. at the highest EAL 6-plus security level. And so we are very excited. This will open up a lot of doors for us in terms of combining, you know, the Green Hill and Cadence expertise and providing that very unique differentiating value to our customer and shareholders.

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

Thank you. Our next question is from Jay Fleeshower from Griffin Securities. Your line is now open.

Thank you. Good evening. Lipu, 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 bind patterns, 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 always the case 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? And then a follow-up.

Yeah, thanks so much, Jake, for the two very important questions. So first question you have about the, you know, semiconductor to the system company and even service provider, the differences of supporting them. Clearly, they are all demanding customer. We love them. And in terms of system company, there are some differences. They are looking at the total, you know, the performance power envelope and the system modeling system. and requirement, and we are very well positioned for providing that. Besides the EDA tool, we also have the packaging, PC board layout, and system, you know, modeling and system, you know, simulation. That is really, really compelling for them to come to us. And then the other part, you know, we're also understanding their requirement better in terms of how to serve them and support them. You know, they are very much time to market is more important to them. And then we're able to meet their schedule, meet their timetable, and then deliver the product from the system level. They are more comprehensive and that they are satisfying the requirement. That is critically important to them. And then also, as you can tell, many of our service providers, they're also building up their silicon and subsystem, you know, ASIC model to meet that requirement, and we are excited about doing that. So I think overall, and we both, semiconductor and system side, we're doing very well. The semiconductor side, I highlight a couple of them. Samsung, clearly broader adoptions of our tool. MediaTek, you know, adopting our full digital flow from synthesis to sign-off. And, of course, we are really, really excited about our marquee semiconductor U.S. company. And that explains to you why we have increased of the REC for the AE, because the demand, the requirement to support, you know, this, you know, I call it game-changing opportunity for us. We had to support them in a very timely fashion, and we had to meet their requirement on performance and scalability. and that's why we're increasing our AE support that we need to drive the success here.

As a follow-up, you mentioned Proteum and Accelium, 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 you're seeing in digital largely in Novus for P&R, or are you in fact seeing 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, you know, we mentioned earlier the hardware emulation and the proteome also is steadily increasing adoptions. We are very pleased with that. In terms of the digital flow, clearly, I think you point out our Innoverse place and route is very successful. Very many leading market shipping customers are adopting them. And then we're also excited about, you know, like, for example, MediaTek from Synthesis Genus all the way to Tempest, and also same thing with Samsung, broader adoption for our full digital flow, and that we are excited about. So I think, you know, we kind of want to be the best of two in every category, and besides the place and route, and sometimes it takes time, you know, to the maturity, and now our Synthesis Genus starting to take off, And now our sign-off starting to take off because that is very critical in terms of production. Sign-off is very critical. And it takes a little bit longer time. Finally, I think we turn the corner. We have 23 full flow win for 2018. Stay tuned. We are working really hard on 2019. We have more to exciting to share with you as the time count go by.

Thanks very much.

Thank you.

Thank you. Our next question is from Galmunda from Berenberg Capital Markets. Your line is now open.

Hi. Thanks for taking my questions. The first one, I'd 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 you 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, you know, 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-shaping customers. They are the leader in their sector, and we are winning and we are broadly proliferating in the most advanced nodes. And then clearly because of the performance, the scalability, you know, the PPA and runtime, and 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 and that they can see significant improvement and the scalability they look for. On the system and service provider, we are very excited. We have a lot of opportunity in front of us and we are engaging heavily. And stay tuned, from time to time we will highlight our success in our stadium.

And Gal, the mix of our business that comes from systems companies is approximately 40%. That's been pretty consistent the last two or three years. That's because the systems 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. You can tell me maybe how fast from a lower base. And I'd just like to understand what the base is now and how do you think this this opportunity could grow, maybe in the mid-term, how big the addressable market is. Thank you.

Yeah, we mentioned earlier last June on DEC, this is the largest industry conference and exhibition, and 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. We are very pleased with that. And clearly we're taking the lead in terms of industry transition to the cloud. And it's not just for the sake of cloud. It's really focused on driving the performance and the productivity for our customer. And we work very close with our customer with the selected cloud enabler so that we're providing customers and really focus on driving the performance and productivity of our customer and provide them the security that they can scale within their own organizations.

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

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

Thank you so much.

Thank you.

Thank you. Our next question is from Gary Mobley from Benchmark. Your line is now open.

Good afternoon, gentlemen. Thanks for taking my question. I have a couple 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, would the growth of the IP business have been more like 13% versus 12%?

So Gary, the IP business grew 16% in 2018, approximately 16% in 2018. And in terms of the shift from 605 to 606, the reason that it's 8 million and not 40 million, as we thought earlier in the year, was because we kind of underestimated our ability to write business under the new rules in a very, very consistent revenue timing way. So we ended up with very much the same revenue timing. So the 8 million difference was kind of spread across all businesses. It wasn't all IP in the end.

Okay. All right. That's helpful. And with respect to the proliferation of open source processor IP, how is that impacting the ability to license the Tensilica cores with RISC-V and MIPS 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 a very strong position in the audio, as I mentioned, and then now move into vision and also automotive surveillance and augmented reality. So it really depends on applications. And in some cases, we coexist. And in some cases, we shine. And so, you know, clearly, we are excited about our IP. You know, it's a double-digit growth for us. And then the Tensilica DNA 100 is very well-received. and for the embedded processing. And then RISC-V is another architecture, and our tools support all the different architecture, and so we are coexisting very well. We support them. And then, you know, IP is, you know, we embrace open source, and then clearly, you know, we support any different architecture, but more really, And right now we are moving towards, I call it domain-specific, workload-specific processor and application. And so we're open with that. And also I think the other big opportunity is this high-speed connectivity. So the high-speed 30, 112 gig 30, at the 7 nanometer for the long reach, that is very well received. And in the data center and cloud, this is a must-have. And it's a silicon-proven technology. we're excited about that opportunity also.

Okay. All right. Thank you, guys.

Thank you.

Thank you. Our next question is from Monica Garg from KeyBank Capital Markets. Your line is now open.

Hi. Thanks for taking my question. First, you know, I'm looking for more details on your partnership with Greens Hill. What are you looking to achieve with the partnership? Could you talk about, you know, products that you're looking to develop with them? And when do you expect revenue contributions from this?

Yeah, so Monica, first of all, I'm very excited about this, and I call it the world-class for the security and safety embedded system. And clearly, they have a lot to offer. There's a real-time operating system and also software development tools and middleware. And then with this very proprietary partitional architecture, that protecting what you really need to protect in the very highly reliable security and performance. And we are excited about it. And we take ownership in it. I just joined the board. And we are exploring a couple of areas of collaborations. First of all is the go-to-market. And this is a very good software. And then how do we proliferate into some of the different verticals? defense and aerospace clearly is their stronghold. And then beside that, you know, clearly in the automotive and medical, there's many areas that we can explore how to go to market. And then secondly, the technology collaborations in terms of, you know, clearly we are the industry leader in providing the end-to-end EDA and semiconductor IP solution They are very strong in embedded safety and security software solution that each one bring in something really unique, and we can leverage our respective strength and collaborate in multiple fronts. In terms of the technology collaborations, clearly we can explore a collaboration with our verification suite, our IP, and others so that we can serve our customers system vertical markets together in a more effective way. And also we can also look at some of the joint co-marketing activity in the future. So all this is now we just have this agreement finalized and then we have a multiple meeting to explore how can we do and how do we prioritize that so that we can really increase the revenue from both companies. and I'm excited about it. And then the customer that we're exposed to, they can't wait to get us together to work on it. And so something that we stay tuned, and then we will report as it goes.

All right, thanks. Then, John, you just posted 10% growth for 2018, but you're guiding 7% midpoint for 2019. Are you being conservative? I mean, even if I adjust for 15 million revenue from emulation from 18 to 19, you still kind of did like 9% plus on 18 and getting like 7.5-ish percent for 19.

Yeah, Monica, I think the thing to remember there is that the shift in hardware revenue from 2019 to 2018, while it benefits 2018, has doubled the impact on 2019. Like I say, it was an inline quarter with the exception of that. So you're talking about a $20 million shift from 2019 into 2018. it's got like a 1% impact to revenue growth for 2018. So without it, we'd be closer to 9% revenue growth in 2018, but it has double the impact. It's like a 40 million swing on 2019. 2019 would be 9% revenue growth if that $20 million of hardware revenue had fallen into 19 instead of 18.

And then if I look, generally CapEx for Cadence has been somewhere around $60 million range, but you are guiding to $19 million, $90 for 2019. Any specific hard expenses for 2019 you're thinking about?

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

Should it normalize back to $60 million range by 2020 then?

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

Got it. Then the last one, I mean, we have seen very strong operating margin improvement last two years, almost 400 BIPs. You are guiding to 5,200 BIPs for 2019. 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.

All right. Thank you.

Thank you. Our final question comes from Sterling Audi from JP Morgan. Your line is now open.

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 earnings season and see the differing 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, this is a good question. And as I mentioned earlier, it's a very mixed environment. You know, clearly we are supporting the customer, you know, clearly the leader in their industry. And so far we are very happy with our, you know, the engagement with them. And they are the leader in the sector. So we kind of highlight to you that it's our high priority to support that. In terms of the exposure, I think we're heavily engaging with some of this leading sector, you know, AI, machine learning that I mentioned earlier, the cloud data center infrastructure that we are very well positioned there, and clearly automotive driving, you know, from the tier one and OEM, and then also the 5G, some of the leading customer, and we are engaging, and then ranging from cell phone all the way to the infrastructure provider. And so, Overall, I think we are well-positioned. We are very diversified, very broad in terms of our customer base. And clearly, we also have a new area that we are excited. It's the whole STE system design environment that we are increasing our system companies and also some of the vertical market, like aerospace defense, and then clearly the automotive side. And we have a lot of success there. And also, clearly, one thing that over time we're going to be also expanding is the medical related. That's another big area opportunity for us. So overall, I think we are very broad. We don't expose to any specific sector or specific company. And then the design activity remains very strong across semiconductor system and vertical market.

All right, great. The other hot topic in terms of conversations is when Synopsys reported their fourth quarter, they came out and gave a three-year margin target. And 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 in 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, et cetera?

Yeah, Sterling, very good question. If you follow me for the last 10 years, I will continue to guide you at the time that we see it. And if you recall, we initially guiding you from a very disaster year, 2008 and 2009, and then we starting to point to the teen and then point to the mid-20s. And then now we are reaching 30. And then stay tuned. And then at the right time, we will highlight to you where we are going. We continue to drive efficiency, R&D, G&A in every sector. And then meanwhile, we also continue to invest for the success for the long-term shareholder. And clearly, you can see that we have been investing in the right place. And you can see that our Digital implementation site is a lot of success right now. Our customer analog continues to have the leadership. And then we're investing in the future in the 5 nanometer, 3 nanometer with the leading customer. We're moving to the cloud, and we're moving to the SDE. And then we also focus on some of the vertical system and service provider, and those take investment. And so we continue to drive efficiency and drive success and then with the AE support, stay tuned. And when the right time comes, we will guide you the longer-term operating margin that we like to shoot 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 actually see in the non-GAAP income statement in terms of where it's accounted? And Any just 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. So 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, has a broad base of top customers, and is especially proliferated in industries where the highest levels of safety and security are required, such as aerospace and defense and automotive. But, yeah, 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.

Thank you, and we have a follow-up question from Mitch Steeves from RBC Capital Markets. Your line is now open.

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

Yeah, so I think, Mitch, good question. We have done well in China and we continue to representing a growing opportunity. And China remains committed to build their own domestic semiconductor industry. And so we are well positioned there and we are supporting our global customer throughout. And so I think stay tuned, business as usual, and we continue to support our customers.

And Mitch, we've seen steady growth in revenue in China. I'll refer you to page four of our CFO commentary. There you'll see in Asia, Asia drove 24% of our revenue in 2016, 27% in 2017, 28% in 2018. But of that, roughly 8% of 2016 revenue was China, 9% of 2017 revenue was China, and now it's just under 10% in 2018. Perfect. Thank you. Thank you.

I would now like to turn the call back over to Lib Bhutan, CEO, for closing remarks.

Thank you. In closing, through continuous innovation and execution, our system design enablement strategy has positioned us to capitalize on multiple technology waves and further proliferating our solutions with a broader base of customers. We are 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 are proud that for the fifth year in a row, we make the list of Fortune's top 100 best companies to work for. I would like to thank all of 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.

Thank you for participating in today's Cadence fourth quarter 2018's earnings conference call. This concludes today's webcast. You may now disconnect.