Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence second 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 star then the number 1 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, Rob, and I would like to welcome everyone to our second quarter 2018 earnings conference call. I am joined by Lip-Bu Tan, CEO, and John Wall, Senior Vice President and CFO. The webcast of this call is available through our website, cadence.com, and will be archived through September 14th, 2018. Note that today's discussion will contain forward-looking statements and that the 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 July 23rd, 2018 for the quarter ended June 30th, 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. Cadence achieved excellent operating results for the second quarter, with revenue increasing 8% year-over-year, and non-GAAP operating margin of 30%. John will provide details in a moment. Our system design enablement strategy is perfectly positioned to enable the data-driven economy and the multiple key technology waves driving it. We are increasing our footprint with system companies and tailoring our solution to vertical market segments. Not only the cloud data center one of the most significant technology drivers, it also enables us to bring innovative design solutions and increase productivity to our customers. This past month at Design Automation Conference, we introduced the Cadence Cloud, the industry's first broad cloud portfolio for the development of electronic systems and semiconductors. Benefits from using Cadence Cloud include improved productivity, intelligent scalability, optimized security, and flexibility.
We collaborated with Amazon Web Services, Microsoft Azure, and Google Cloud to deploy our cloud-ready products in customer-managed cloud environments. We also launched Palladium Cloud, which is a cloud-based emulation solution that easily addresses peak requirements of existing customers and brings emulation to new customers and markets. Finally, in conjunction with the Cadence Cloud, we launched Liberate Trio, the first unified library characterization solution that employs machine learning techniques and optimized for the cloud. Cadence Cloud is endorsed by our close partners, Arm and TSMC, and more than 20 customers are using Cadence Cloud, including Annapurna Labs and Amazon company and [CNEX Labs] . Additionally, the aerospace and defense vertical had another strong quarter. A major aerospace and defense company selected Cadence as a primary vendor for SoC design and verification, including our software and hardware products.
We also won a significant research contract with DARPA to develop advanced machine learning technologies that speed up and optimize power, performance, and area results. Watch for more announcements on this exciting project tomorrow. Now I will review a few additional highlights from Q2. Momentum continues to build up for our IP business. It was another strong quarter for our flagship DDR and PCIE products. We prototyped the world's first DDR5 test chip, achieving a data rate of 4,400 mega transfers per second in TSMC's 7 nanometer process. We had significant wins for DDR with a major semiconductor company, for PCIe with a leading storage company, and we are working with mobile customers on 7 nanometer sensor application. Tensilica added 5 new logos with wins for application in IoT, wearable, photonics, and crypto mining. Moving on to our system design and verification solutions.
In Q2, our broad-based renewal with LG Electronics included adoption of our Xcelium parallel simulator. Other key Xcelium adopters included a large Chinese customer and an AI processor startup. Palladium added 6 new customers with 9 repeat orders. 2 of the new customers are using Palladium Cloud. Ampere Computing chose Palladium Z1 for their development of their next-generation Arm-based server chip. Palladium Z1 was chosen for its scalability for the large designs, state-of-the-art debugging features, stability, and availability over the cloud. Digital and sign-off continue to do very well, with 8% year-over-year revenue growth. Our digital and sign-off solutions continue to proliferate with existing market-shaping customer, and win new customers. More than 20 customers adopted our full digital flow in the first half of 2018.
Continuing our innovation in sign-off, we enhanced our Voltus IC power integrity solution with the extensively parallel algorithm that provides up to 5 times better performance with giga-scale capacity and cloud-ready. HiSilicon verified that the new Voltus solution can deliver improved performance results for their future 5G silicon development. Cadence also play an important role in enabling more than Moore's technologies, such as RF, MEMS, and sensor, through providing advanced tooling and packaging solutions. We launched the comprehensive new Virtuoso RF solution, partnering with National Instruments to streamline the design and verification process of analog and RFICs and modules. In advanced packaging, we already support TSMC InFO and CoWoS chip integration solutions, and we now added support for the new TSMC wafer-on-wafer stacking technology. Reliability also become more critical as semiconductors proliferate in new vertical segments, like automotive, medical devices, industrial, and aerospace and defense.
This quarter, we introduced the Legato Reliability Solution, the industry's first software product that meets the challenges of designing high reliability analog and mixed-signal ICs. Infineon successfully used this solution to speed up simulation runtimes by a factor of more than 100. Like reliability, function safety is very important to automotive, industrial, and aerospace and defense. Rohm used the Cadence automotive solution for safety verification, which is critical component in its ISO 26262 compliant toolchain for automotive chips. Hitachi used our JasperGold platform to develop and receive certification for an industry safety controller. Before turning it over to John, let me quickly summarize my comments. We drove excellent results through consistent execution and broad-based proliferation and adoption of our solutions to meet the needs of the data-driven economy. We introduced the Cadence Cloud, the first broad portfolio of cloud-based EDA technologies.
Our growing aerospace and defense business had another strong quarter. Our flagship IP products are doing very well in the marketplace. Adoption of our Xcelium parallel simulator is growing. Our digital and sign-off solution are proliferating with market-shaping customers and winning new customers. Cadence solutions are helping enable continued innovation in electronics through more than Moore's technology. With that, I will now turn over the call to John to review the financial results and provide the update outlook.
Thanks, Lip-Bu, and good afternoon, everyone. I'm pleased to report we met or exceeded all of our key operating metrics in Q2. As a result of strong execution across our business, we are increasing our outlook for fiscal 2018. Before we get into Q2 results, I'd like to remind you that Cadence adopted the new revenue accounting standard known as ASC 606 for fiscal 2018. These new rules, as we often refer to them, are now GAAP. The numbers I present for our second quarter are based on these new rules, unless otherwise stated. Please also keep in mind that this is the first year we are reporting under the new rules, which are not directly comparable to those of 2017, which were reported under ASC 605 or the old rules.
For all four quarters of 2018, we will show our quarterly results as reported under the old rules to allow comparison to 2017 on an apples-to-apples basis. Having covered that, let's now go through the key results for the second quarter, starting with the P&L. As reported, total revenue was $518 million. Non-GAAP operating margin was 30%. GAAP EPS was $0.27, and non-GAAP EPS was $0.45. Under the old rules for direct comparison against 2017, total revenue was $515 million, up 8% year-over-year. Non-GAAP operating margin was 30%. GAAP EPS was $0.26, and non-GAAP EPS was $0.44. Now turning to the balance sheet and cash flow. Cash and short-term investments totaled $825 million at the end of Q2, with approximately $475 million of that cash here in the U.S. Debt outstanding at quarter end was $650 million.
Operating cash flow in Q2 was $205 million. During the quarter, we used $50 million for share repurchases and $45 million to pay down borrowings under our revolving credit facility. As reported, DSOs were 39 days. Under the old rules, DSOs were 36 days. I will now provide our updated guidance. For Q3, we expect the following results: revenue in the range of $510 million-$520 million, non-GAAP operating margin in the range of 27%-28%, GAAP EPS in the range of $0.22-$0.24, non-GAAP EPS in the range of $0.40-$0.42, and DSOs of approximately 40 days.
For fiscal 2018, we now expect revenue in the range of $2.07 billion-$2.09 billion, non-GAAP operating margin of approximately 28%, GAAP EPS in the range of $0.95-$1.01, non-GAAP EPS in the range of $1.64-$1.70, and operating cash flow in the range of $535 million-$565 million. We now expect the difference in revenue under the new and old rules to be approximately $25 million. As a result, under the old rules, our implied 2018 guidance at the midpoint is now expected to be revenue of approximately $2.105 billion, non-GAAP operating margin of approximately 29%, GAAP EPS of approximately $1.06, and non-GAAP EPS of approximately $1.74. Our operating cash flow is expected to be approximately $550 million.
Please note that we expect our operating cash flow to be the same under both the new and old rules because our transition to the new rules in 2018 is just an accounting change, and as a result, there is no impact to our cash flows or how we operate our business. For more details on the impact of the transition to the new rules on our financial statements, please see our CFO commentary, which was included with our Form 8-K filing today and is available on our website. To sum up today's call, I want to highlight that I am pleased with our progress. On an apples-to-apples basis, we are now expecting annual revenue to increase by more than 8% compared to the 7% revenue growth we achieved in 2017.
We expect non-GAAP operating margin on the basis of the old rules to improve to approximately 29% for the year compared to 27.5% last year. It's pleasing to me to see so much of the improvement in profitability flowing through to operating cash, which we now expect to land at a midpoint of $550 million for 2018, an increase of approximately $80 million over last year. Before I finish, I'd like to thank the extended Cadence team for their operational discipline, their drive and passion to make our customers successful, and for the very large part they have all played in allowing us to raise our guidance for the year. With that, operator, we'll now take questions.
At this time, I'd like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad now. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Monika Garg from KeyBanc Capital Markets. Your line is open.
Hi. Thanks for taking my question. First of all, if I look, I just see a 605 equivalent operating margins as you highlighted, John, pretty good at 29%. Where do you think operating margins could be next three to four years?
Hi, Monika. Yes. We believe there is still room to grow operating margin. We're confident in our model and believe that our system design enablement strategy opens up additional growth opportunities for us.
Got it. If I look at the guidance, first half revenue is growing like 8.5%, kind of plus 8%+ year-over-year, but back half is close to 6%, looking at the guidance. Any reason why we would see deceleration in growth in back half?
Overall business is good. I wouldn't focus too intensely on the results of any one individual quarter or one half over the other. Our focus is more on improving year-over-year. The business is very strong for all the reasons that Lip-Bu talked about. For 2018, we're now looking at over 8% revenue growth, and almost all of that is organic. Like we said on non-GAAP operating margin, that's up to 29% compared to 27.5% achieved last year. The other thing to note on cash, the first half was particularly strong for operating cash flow due to the timing of collections. That's just a shift between quarters within this year.
Got it. Thank you. Just the last one here for Lip-Bu. Lip-Bu, Synopsys entered software security market about four years back. Would that market be interesting for Cadence? Could you talk about your views on Cadence's M&A strategy? Thank you.
Sure. I think there are two part of the question. One is on the security side. Clearly, we are also looking at that and then how to provide really high-quality design for our customers, including stronger in verification and security is part of it, and then to drive the success to our customers. That's one. The second question Can you repeat the second question again?
Yes, just wanted to understand your views, how you look at the M&A strategy for Cadence.
Yeah, M&A, we have a very disciplined approach to the M&A. Clearly, we want to feed into our overall strategy and also the providing the customer with a differentiating technology and also the recruiting, the bringing the top talent either in the managerial or technical side. At the end of the day, it's really focused on the shareholder return.
Thank you so much.
Thank you.
Your next question comes from the line of Gary Mobley from Benchmark. Your line is open.
Hi, everyone. Thanks for taking my question. Can you hear me okay?
Yes.
Yes.
I wanted to start out asking about the strength of the IP licensing in the second quarter. Can you speak to what drove the strength, the repeatability of the second quarter strength, conversely, it looks like your emulation business was weak during the quarter, and we know that's an upfront revenue recognition product line. Can you confirm that emulation was weak in the quarter, and what's your outlook for the balance of the year in emulation?
Let me start first, John will fill in. Overall, we really like our refined IP strategy, and it's working well for us. It's another strong quarter for us in the DDR and PCIe. We mentioned couple of key one. The first DDR5 test chip is working at a seven nanometer at TSMC, and I highlight couple of key success with the customer, DDR with a major semiconductor company, PCIe with a leading storage company, and also working with the leading mobile customer on the seven-nanometer sensor applications. Overall, I think the IP business is doing well, and Tensilica also mentioned five new logos, growing at about over 10% of the revenue. Overall, we are quite happy with our leadership and also our IP portfolio.
As you know, we recently just add the acquisition of NuSemi, even though will be minimum impact for this year, but going forward, it will be exciting for us. It's very critical for the hyperscale, the infrastructure rollout. I think it's an exciting one for us. In terms of emulation, I think clearly we are also quite pleased with our performance. We mentioned about six new customer and nine repeat orders, two for the Palladium Cloud. We're excited about that, but I just want to highlight it's a very lumpy business. Quarter to quarter may change. Overall, we like what we have. This is the third full year of continue to do well. Overall, we really focus on the verification suite that consists of Jasper, Xcelium, Palladium, Protium, and VIP. Overall, the verification suite is coming up nicely.
Okay. I just had a follow-up question about your SaaS model or Cadence Cloud. Should we assume that there's really going to be no change to revenue recognition, average license duration, and perhaps no change to the operating expense model to Cadence? Should we view it really as more of a point of differentiation vis-à-vis your larger competitor?
That's a fair assumption, Gary. Cadence Cloud offers customers another way to optimize their investment in Cadence tools. It's a valuable addition to our product portfolio for both customers and Cadence.
It's too early to say more than that.
Okay. You don't expect a change in the revenue recognition or the average license duration?
I don't, but it's too early to say that definitively.
Okay, fair enough. Thank you, guys.
Thank you.
Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open.
Thank you. Good evening, Lip-Bu and John. Lip, let me start with you regarding the overall EDA landscape in the following sense. We've seen more and more examples of partnering in the industry. Ansys with Synopsys, Ansys with Mentor, earlier this month, quite interestingly, Synopsys with Siemens. Also in the parallel universe of technical software, we've seen examples also of more and more partnering. It's becoming a little bit more evident that Cadence hasn't really been participating in these kinds of relationships. I know you're very much focused on your own internal development, and Anirudh has done a great job with that. Do you think that it's become increasingly important for you to participate in some of the kinds of relationships that we've seen more and more around you?
Yeah. I think you have two part of the questions. One is about the overall EDA. I think, overall, I have to say, the EDA is very good, driven by the strong design activity, especially when we drive the whole data-driven and also the whole technology and the technology waves, in terms of machine learning, deep learning application. We see the increase in the design activity, and we are very pleased to see that. Overall, from the EDA side, we are excited. The other part is also the broad-based demand for our innovative system design enable solution have been quite well received. Overall, we are excited about the overall EDA environment. Regarding the partnership, you mentioned a couple of them. Clearly we're also working on that. I think it's important to really focus on what customer needs.
We partner, in some cases, with our peers and also ecosystem partners working together to support the customer success. Couple of them that we highlight in the past, partnership with The Networks and a partnership with National Instruments and many others. We continue to do that. We have a great success also.
With respect to technology, let me ask you about three products that, if they succeed, might stimulate some incremental growth for you, but you haven't really talked about them. Number 1 is Pegasus, which you announced over a year ago at DAC. What's the status of that? I know it's hard to share shift in that market, but it is an important new product for you. Secondly, synthesis. There clearly at under 10 nanometers, some incremental requirements for synthesis. Do you see that as perhaps a source of incremental business for you? Lastly, you've just launched Sigrity 2018. Could that stimulate some resurgent growth in PCB for you as we saw 6 years ago?
Jay, it's a good question. Let me address one by one. Pegasus, as you know, this is for the manufacturing-related area. We're excited about the design we have with a massive parallelism and also cloud enable, so that we can really addressing all the cloud requirements. The other part is clearly, right now we are very focused on the certification from some of our foundry partners, and we're excited about that and stay tuned. On the synthesis side, the Genus, we are making great progress with multiple customer in the most advanced nodes. The Sigrity in term of the product. So far we have great success, and then it tied in with the Voltus and approach, I think is very good. So far, we are not guiding any specific product line.
Clearly just back to that Sigrity 2018, we have a new 3D capability that help the PCB that is quite unique. Overall, I think all this already built into our guidance for 2018. Just back to your point, these three, we're making great progress. Stay tuned.
Okay. Thanks very much.
Thank you.
Your next question comes from the line of Richard Valera from Needham & Company. Your line is open.
Thank you. Lip-Bu, question for you on the macro environment you're seeing with your customers. As well, there's been some noise in the semiconductor industry around kind of where we are in the cycle, concerns about, particularly on the memory side of the market. There's been some issues on the semi CAP side with some push-outs of expected CapEx, none of which I would expect would affect your business. I just wanted to get your sense on the demand trends within EDA, how they are now versus, say, a couple of quarters ago, and just how you see as far as the strength of the industry and your customer base. Thank you.
Yeah, good question. I think on the macro side, clearly, as I mentioned earlier, we see the design activity increase. Due to a couple of factors I mentioned earlier, the next decade could be the big data analytics. They change the whole workload and become more a data-driven economy. We are very well-positioned for doing that. Then also some of the new technology like 5G, the machine learning, deep learning, and some of the neuromorphics and related silicon photonics related area. We are very well-positioned for that. I think overall, our EDA is more related to the design activity. We really see the increase of that. I think overall, I'm cautiously optimistic on that. Regarding the memory, clearly the memory related to data memory and storage will be critical for us. We are delighted.
We are making great progress on the memory player and the customer. We highlight in the past two quarters, we continue to make progress on that, and we're also very good progress on some of the storage related. We just highlight some of the IP engagement with the storage player. I think overall, the demand trend is continue to look good. Regarding the semiconductor cycle, as we all know, there's a cycle, I'm very cautiously optimistic because we see the design activity has increased a lot. We are excited, and we are very well-positioned for that.
Thank you. I appreciate that, Lip-Bu Tan. One more on China, if I could. You've talked fairly extensively in the past about your knowledge of that market and your, I think, penetration of that market. Just wanted to get your sense on the opportunity there, but also how you see that market potentially being affected by the current trade situation with the U.S. Do you think that they may be driven to actually do more in internal development of all types of technology, including EDA? What are surely just the opportunities and risks for Cadence in the China market, if you could? Thank you.
Good questions. Overall, we have done well in China. It's a growing opportunity, and we pay a lot of attention on that. China, as you know, the government is very committed to build their own domestic industry to be self-sufficient. I think most important for us is really to be the best trusted partner to our customer globally, including China customers. We make sure that our tool and our IP supporting them for their developments. That's something that's a high priority for us. Overall, we paid a lot of attention about the trade war, and then clearly we hope for the best. Meanwhile, we really make sure that we are well-positioned to support our customers.
Okay. That's helpful. One final one, and I'm assuming this is still the case, but last quarter, you had talked about IP likely being the segment of your businesses, of all your segments that was likely to grow the fastest this year. I think you were looking at that maybe as another double-digit growth year. Is that still the case? I would assume so from the commentary, but just wanted to confirm that.
Yes, Rich. When I look at the results, we're not guiding revenue by individual product groups. What I can say is that, yeah, we continue to expect IP to be our fastest-growing product group for 2018. Yeah, that's true.
Perfect. Thanks very much, gentlemen. Appreciate it.
Thank you.
Your next question comes from the line of Mitch Steves from RBC Capital Markets. Your line is open.
Hey, guys. Thanks for taking my question. I really have two. The first one's a bit nuanced. I know you guys kind of benefit when the US dollar strengthens. Is there any way to quantify what the tailwind of that was this quarter?
There was a tailwind, Mitch, it was minimal.
Is that going to be the same case next quarter as well, assuming the rates are the same?
Assuming the rates are the same, it will be already embedded in our guidance.
Okay. Perfect. The second question is just more of a kind of a thematic one. The semi cap guys are now talking about how kind of EDA design is being more integrated with what they're doing. Is there any reason why, I guess, you would integrate both a semi cap company and an EDA company in the future?
Yeah. I think, Mitch, first of all, I'm not going to speculate. Clearly we work closely with all our ecosystem partner ranging from the IP to the foundry and include the semi cap equipment. I think this is a whole ecosystem, and we focus on what we do best in terms of providing the tool and IP to be the best partner for the customers.
Got it. I guess, just one last one. At DAC, there was a lot of private companies on the automotive side specifically that I noticed. Is that market still fragmented, or how do you guys view the automotive space specifically for design?
Yeah, we are very excited about automotive verticals. Clearly we are very well-positioned on that. As you can tell, the automotive right now have a lot of more electronic components, and everybody from tier 1 to the automotive maker, they're putting a big effort into the ADAS in terms of machine learning, deep learning to drive in the cloud connected and device in the vehicles. We are very heavily engaging with them and stating, I think this is a great platform. We have great opportunity in terms of the IP and also the tool. We are well-positioned for supporting them.
Perfect. Thank you.
Thank you.
Your next question comes from the line of Tom Diffely from D.A. Davidson & Co. Your line is open.
Okay. Good afternoon. Maybe first a follow-up on Rich's question on China. Do you have more exposure on the printed circuit board side of your business there, or is it more on the chip design side?
Can you repeat the question again?
Your exposure in China, is it more exposed to your PCB design tools or to your actual chip or semiconductor design tools?
I think we don't have the breakdown, but I think clearly, in more on the chip design activity. On the PCB side, clearly we have some engagement from our Allegro and then the packaging related area. Overall, it's a good opportunity for us, and we continue to support our customer.
Okay, great. Just a couple questions then on the cloud. The industry for several years has been talking about moving to the cloud, there's been some small little movements here and there, what do you think it is about the increases or the advances in security that make now the right time to be more aggressive on moving towards the cloud?
I think you have a good questions, clearly, Cadence Cloud is a high priority for us. We are delighted we're collaborating with Amazon, Microsoft, and Google, to provide a cloud readiness to our customer-managed cloud. That's something that is exciting, we highlight couple of offerings from Palladium Cloud to Liberate Trio, that is cloud available and Pegasus on the cloud available. We have great traction in term of customer adoptions and endorsement by Arm and TSMC. Overall, I think the security is a issue, that the last two years we have been working through with our foundry partner and our IP partners. Then make more important is to make sure that our customer are satisfied and then really feel comfortable to deploy and in their customer manage cloud.
That's something is exciting. We have rolling out product by product available in a very broad way to provide that cloud to really drive productivity, scalability, and optimize security and flexibility to the customer. We are very focused on the customer success here.
Okay. When you talk about customers, is it mainly the smaller customers that can really benefit from the economics of moving to the cloud? Or are you also seeing some of the larger customers move there to as more of a maybe a capacity overflow point of view?
Answer your question, both. Very excited to see some of the major customer really want to be in the cloud, and at the end of the day is driving the productivity and the performance of their design. When you can able to partition all your design to spread over the virtually unlimited servers, that can be really drive the performance and they see the benefit. That is really the key thing for us, for Cadence to really embark on it. Some of the smaller company also benefit from it. In the end, either the small company or big company is really the bottom line is drive the performance and then the scalability and the productivity for their design.
Okay, finally, when you look out three to five years, what % of your business, or what is your vision as far as how big the cloud becomes as a percentage of your overall business?
It's a little bit too early to give the guidance. Clearly, we are excited about this new Cadence Cloud, and we are focused on it and focused on customer success. We're delighted the leading hyperscale web service cloud guy are partnering with us, and we are also very excited in our TSMC and Arm are endorsing and supporting us. This is a major effort, and we are clearly the leader in this.
Okay. Thank you.
Thank you.
Our final question comes from the line of Sterling Auty from JPMorgan. Your line is open.
Yeah, thanks. Hi, guys. I wanted to continue the line of questions on the Cadence Cloud. Can you help us understand what is the pricing structure for your solutions in the cloud versus the traditional on-premise solutions?
Hi, Sterling. This is John. A key part of our strategy is to become increasingly mission-critical to our customers, Cadence Cloud offers customers another way to optimize their investment in Cadence tools. We believe that Cadence Cloud will make our product portfolio more valuable.
Okay, does that mean are you pricing on a per user, some sort of per process or per metered pricing like traditional Amazon? Just to understand how this opportunity will grow.
Again, it's a valuable addition to the product portfolio, Customers will pay for the value they receive. I mean, generally, operationally, we focus on three key things, which I believe creates a virtuous cycle. We lead with innovation, which makes us become increasingly mission-critical to our customers, We drive operational excellence across the company. That virtuous cycle creates gains for Cadence that improve cash flow, We use that cash flow to reward employees, return value to shareholders, and invest in product development and new innovation to continue that virtuous cycle. As Lip-Bu said earlier, when our customers look at Cadence Cloud, they'll focus on productivity, scalability, security, and flexibility.
In some way, I think, Sterling, the feedback from our customer is really delighted because they see clearly performance improvement, productivity improvement, and that means that we can really support the pricing that we want, to support the customer success.
Got it. When you look at, obviously, the first solutions here seem to be in the verification and emulation area, which makes perfect sense given the elastic compute capabilities of those cloud platforms. Wondering what the gross margin impact As that particular sets of products, is it actually better for your gross margins given the low-margin hardware that you typically have to ship with it? Or is it actually maybe neutral to the gross margins?
Yes, Sterling, I think a little bit too early to tell. So far, we are very encouraged in term of the customer feedback and also very strong partnership with TSMC and our hyperscale partners. To scale out and really able to provide that unlimited service that customer can enjoy, and then scalability and the productivity and the time to market for their benefit. Hopefully, that will really drive the success of the cloud.
Got it. Very last question on the cash flow and collections. John, you mentioned just, this was collections that you expected. It sounds like some of the collections perhaps came earlier in the year than we would've expected anyway. Can you just walk through, what drives the change in the timing of those collections? Was it anything to do with either early renewals or other things that maybe allowed further upsell into those customers?
No, it was mainly on the IP and hardware side. We received some IP and hardware payments in the first half that would normally have fallen more evenly across the year. That caused the first half to be particularly strong for operating cash flow. This is just a shift between quarters within this year, though.
Understood. Thank you, guys. I appreciate it.
Thank you.
I will now turn the call over to Lip-Bu Tan, Chief Executive Officer, for closing remarks.
In closing, through continuous innovation and execution, we are well-positioned with our system design enablement strategy to leverage the multiple technology waves that further proliferate our solutions with a broader base of customers. We are proud of the innovative and inclusive culture we are building at Cadence. I would like to thank all our shareholders, customers and partners, board of directors, and hardworking employee globally for their continued support. Thank you all for joining us this afternoon.
Thank you for participating in today's Cadence second quarter 2018 earnings conference call. This concludes today's call. You may now disconnect.