Good afternoon. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems second quarter 2017 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'd like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence Design Systems. Please go ahead.
Thank you, Devon, and welcome everyone to our second quarter 2017 earnings conference call. With me today are Lip-Bu Tan, President and CEO, Geoff Ribar, Senior Vice President and CFO, and John Wall, Corporate Vice President, Finance and Controller. The webcast of this call can be accessed through our website, cadence.com, and will be archived through September 15th, 2017. A copy of today's prepared remarks will also be available on our website at the conclusion of today's call. Before we start, I want to call your attention to our CFO commentary, which was included in our 8-K filing today and is available on our investor relations website at cadence.com. The CFO commentary should be referenced with both today's conference call remarks and the earnings press release issued today. Please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations.
For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence's most recent reports on Form 10-K and Form 10-Q, including the company's future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today. Also note that this afternoon we filed our 10-Q for the quarter ended July 1st, 2017. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to review results using certain non-GAAP financial measures.
Investors and potential investors are encouraged to review their reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the quarterly earnings section of the investor relations portion of our website. Additionally, a copy of today's press release, dated July 24th, 2017, for the quarter ended July 1st, 2017, and related financial tables can also be found in the investor relations portion of our website. Today, following Lip-Bu's remarks, John Wall will present the financial results and outlook. Lip-Bu, John, and Jeff will all be available during the question and answer session. I'll turn it over to Lip-Bu.
Good afternoon, everyone, and thank you for joining us today. We are steadily executing our System Design Enablement, or SDE strategy. SDE offers additional growth opportunity as we expand beyond semiconductors and tap into a significantly larger market with system companies and vertical market segments, such as automotive, aerospace, and defense. In Q1, we booked our largest design IP contract ever with a major customer in automotive semiconductor sector. In Q2, this momentum continued with an ADAS system company licensing our PCIe Gen 4 IP on the new seven nanometer SoC, and another major customer licensing Tensilica for automotive radar application. Also in the automotive space, ROHM adopted our ISO 26262 compliant functional safety verification solution, and we received ISO 26262 certification for our PCB flow. Overall, four of the top five automotive semiconductor companies are now using Cadence IP.
In aerospace and defense, adoption of our Palladium Z1 emulation system increased with purchases by several significant system customers. Providing integrated system-level solutions is also a key goal of our SDE strategy. In Q2, we released the Virtuoso system design platform, which optimized design integration between our chip, package, and board flows. We also expanded our partnership with MathWorks through a new integration between Virtuoso ADE and MATLAB that will enable customers to accelerate analysis of large data sets when verifying custom RF and mixed signal design. Digital and sign-off revenue grew 14% year-over-year, driven by growing proliferation with market-shipping customers. Innovus is rapidly becoming the implementation solution of choice for CPU, GPU, and SoC designs. For networking, wireless, consumer, automotive, and IoT. In addition to the momentum on the digital products, there's increasing traction on the adoption of the full flow by digital and mixed signal customers.
Our full digital flow is now used by over 70 customers performing advanced node design, including more than 20 full flow customers designing at the seven nanometer nodes. I want to talk about our IP business, which is the key element of our SDE strategy. As we have stated, the IP market opportunity remains strong due to growing outsourcing trend. IP revenue grew 15% year-over-year as our refined strategy gains momentum. Multiple smart speakers are using Tensilica processor for AI, audio, and Wi-Fi. In Q2, we have multiple Tensilica Vision processor wins for drone, handset, and industrial applications. We introduced the Tensilica Vision C5, is the first dedicated neural network DSP IP. For system design and verification. While overall hardware revenue was less than anticipated for the first half, we expect hardware revenue to be a little stronger for the second half.
Palladium Z1 remains the most advanced emulator on the market. In Q2, we expanded our partnership with HiSilicon on Palladium Z1 with significant add-on, on emulation capacity. We are also pleased with the earlier customer reception of Protium S1 FPGA-based prototyping system. Momentum continue as we receive an important endorsement of our technology and integrated hardware approach with a competitive win at the leading North American semiconductor company that is one of the largest users of Palladium Z1. Overall, we have several repeat orders and five new logos. Before turning over to John, let me quickly summarize my comments. Consistent execution drove excellent financial result for Q2. System Design Enablement is expanding our opportunity and extending our customer reach. Software and IP were particularly strong, and proliferation of our digital and sign-off solutions is growing with market-shaping customers.
We continue to innovate and introduce new products like Tensilica Vision C5 DSP targeted at neural network applications. I will turn the call over to John to review the financial results and provide our outlook.
Thanks, Lip-Bu, good afternoon, everyone. Consistent execution drove excellent financial results for the second quarter, highlighted by revenue near the high end of our guidance range and operating margin, EPS, and operating cash flow, all exceeding expectations. Specifically, here are some key results for the quarter. Total revenue of $479 million. Non-GAAP operating margin was 27%. GAAP net income per share was $0.25. Non-GAAP net income per share was $0.34. Operating cash flow was $162 million. Also, please note that the recurring revenue mix was approximately 90%. DSOs were 31 days, down six days from Q1 on strong collections. Our DSO target remains approximately 35 days. For geographies and products, Asia continued as our fastest-growing region, with revenue up 18% year-over-year.
As Lip-Bu mentioned, digital and sign-off revenue was up 14% year-over-year as we benefit from proliferation with market-shaping customers, IP continued to rebound from 2016, with revenue up 15%. Functional verification revenue was down from last year as overall hardware revenue was less than anticipated for the first half. However, we expect hardware revenue to be a little stronger for the second half. Let's turn to our outlook. We are increasing our revenue and EPS outlook. For fiscal 2017, we now expect revenue in the range of $1.91 billion-$1.95 billion, non-GAAP operating margin of approximately 27%, GAAP EPS in the range of $0.98 to $1.04, non-GAAP EPS of $1.36-$1.42, operating cash flow in the range of $430 million-$470 million.
For Q3, we expect revenue in the range of $475 million-$485 million, non-GAAP operating margin of 26%-27%, GAAP EPS in the range of $0.24 to $0.26, non-GAAP EPS in the range of $0.33 to $0.35. Approximately 90% of revenue is expected to come from beginning backlog. You will find guidance for additional items in the CFO commentary. I will take a moment to review our capital allocation priorities. As we have said before, the company regularly reviews its capital structure, balancing our needs for investment, the appropriate level of risk for our business model and operating environment, maintaining adequate liquidity, and the opportunity to return cash to shareholders. In January of this year, the board authorized the repurchase of $525 million of our common stock.
We did not repurchase shares in the first half of the year, but we do expect to repurchase some shares in Q3. I also want to provide a few additional comments before we take questions. As a reminder, hardware and IP have become a larger portion of our business, which may lead to more variability in our results from quarter to quarter. Only about 5% of our revenue is in currencies other than the US dollar, primarily the Japanese yen. About 30% of our costs are in currencies other than the dollar. A weakening dollar would generally be a headwind to operating profits, and conversely, a strengthening dollar would be a tailwind. The dollar further weakened in Q2, but so far we have been able to manage through this challenge.
As you know, we have been reviewing the new revenue recognition standard that we will implement for 2018, and we are confident that we will substantially maintain recurring revenue or revenue over time treatment. To conclude, we are pleased with our second quarter results, including strong financial performance, software and IP growth, and growing proliferation of our digital and sign-off solutions with market-shaping customers. Looking forward, we are excited about the new opportunities resulting from our system design enablement strategy, and we are confident that we will continue to drive strong financial and operating results. With that, operator, we'll now take questions.
At this time, 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 Rich Valera with Needham. Please go ahead. Your line is open.
Thank you. First question relates to the decision to start buying back stock. I think as recently as a few weeks ago, in public appearances, some management were saying that you guys were going to be doing a five-year strategic plan and sort of at the conclusion of that, you decide whether you'd be starting to buy back stock or not. I'm taking, based on your decision, that you've actually kind of concluded that plan. I'm wondering if there's anything you can share with us about that plan as it relates to opportunities for M&A on your side. Presumably, that you're buying back stock, I guess that you might conclude that you don't see much opportunity for M&A. Just wondering if you can share anything about that five-year strategic plan, and how it relates to your decision to start buying back stock. Thank you.
Rich. This is Lip-Bu. First of all, I just want to highlight that last year we completed our $1.2 billion repurchase program. The board has approved and authorized $525 million buyback in 2017. Clearly, our approach usually is focused on the business requirement and also the appropriate risk related to business model and operating environment. We also want to provide the flexibility for us to continue to execute the plan. Clearly, returning to capital, return to the shareholder is top priority from my point of view. Overall, we continue to review that with our board. The board just approved the new purchase starting in Q3.
I'd like to move on to hardware/emulation. You mentioned it was a little lighter in the first half than you'd expected. If you could just comment on why it was lighter and if there's been any competitive changes in the markets, particularly as it relates to Mentor's new Veloce Strato platform. Presumably something came in stronger than you expected in the first half. I'm wondering if that's IP or digital that sort of backfilled for that slightly lighter hardware revenue. If you could comment on that. Thank you.
Thank you, Rich. On the hardware side, clearly, we didn't do as well as we had anticipated in the first half. As you know, this is a very lumpy business. We expect to do a little stronger in the second half. Saying that, clearly we're still the most advanced emulator on the market. Our capacity can scale up to 9.2 billion gates and have concurrent 2,300-plus users. Clearly, still very well received. 16 out of the top 20 semiconductor are using them, our hardware emulation. Nine of the 10 smartphone players are using the hardware Z1. Overall, we are happy with our product offering. Now we have the Z1, that is the prototyping FPGA versions, and that is in a very good and encouraging reception from our customer.
We mentioned about repeat orders. We also have five new logos. They're using the same compiler so that customer has that flexibility from FPGA to very scalable hardware platform. Overall, we like what we have. We just continue executing. Just to highlight, it's a very lumpy business. Saying that, Q2 is a good quarter for us. The software, we've done quite nicely. Just to highlight a few points, the digital side, we are growing year-over-year 14%. IP with the renewal focus, we grew 15% year-over-year. The custom analog, we are clearly the leader. We grew 9% year-over-year. The SDE is 7% growth. Overall, software and IP is very strong. Hardware is just a very lumpy business, and we continue to really focus on customer requirement and customer focus.
stay tuned second half, a little bit stronger.
Okay. Thank you, Lip-Bu. Appreciate it.
Sure.
Your next question comes from Jackson Ader with J.P. Morgan. Please go ahead. Your line is open.
Hey, guys. Yeah, it's Jackson on for Sterling tonight. If we can just circle back to the buyback that you're anticipating to start in the third quarter. What exactly is different about the third quarter or the second half of 2017 versus the first half when you elected not to repurchase any shares?
Yeah, as I mentioned earlier, last year we completing a very big $1.2 billion of buyback. The board, even though approved for the $525 million for this year, Clearly, we want to have the flexibility. Clearly, the timing, it had to reflect on the business market condition, corporate and regulatory requirements, and also look at the acquisition opportunity and other factors. I think we put that into a total picture. We discuss at length in every quarter with our board, and we decided that Q3, we're going to starting to buy.
Okay. Just a quick follow-up. Within functional verification and hardware, which you just mentioned, were there any deals that maybe you expected to close from the first half that slipped into the second half? Do you just see more demand building in the second half of the year?
Yeah, I think clearly, as I mentioned, it's a lumpy business. Still, the most advanced emulator. We continue to work with the customer, and we basically also want to drive the value in term of the customer need and make sure that we fulfill them. Meanwhile, we don't want to sell aggressively. Clearly, we want to just meet the customer requirement. Hardware, we just have to plan. It's a long-term business.
Okay. Thank you.
Your next question comes from Mitch Steves with RBC Capital Markets. Please go ahead. Your line is open.
Hey, thanks guys. Just two quick questions from me. Actually, kind of first on the strategic side, I know you guys are looking for a new CFO. Do you guys mind just providing a quick update on the process there?
Sure. First of all, Jeff committed to March 2018. We have enough time to get the best CFO on board. Saying that, clearly, we have strong internal talents, and also we continue looking at the way we have access to the high-qualified external talent. Jeff commit to me, have a smooth transition. We continue to work on that, and that is kind of our game plan.
Got it. Secondly, I'm going to circle back to the hardware side. I think that, just generally speaking, Mentor should be losing share, it seems like, to both you guys and Synopsys. My basic understanding is that you guys are actually more comparable in terms of the emulator and what products you compete against, particularly on the smartphone side. I guess why would that slow down, I guess, this quarter then re-accelerate next quarter?
Yeah. As I mentioned, it's a very lumpy business, and we continue to drive value in terms of customer requirement. Also, it's a place that based on their capacity requirement, we want to plan properly on that. We have a lot of respect for our competitor, Synopsys and Mentor. Clearly, we keep a close eye. Meanwhile, we just continue executing our plan on the hardware emulation and also our new introduced S1 on the FPGA prototyping and using the same compiler, and then we can scale on both sides. Stay tuned, and we continue to execute and meet the customer requirement.
Perfect. Another great quarter. Thanks, guys.
Thank you.
Your next question comes from Farhan Ahmad with Credit Suisse. Please go ahead. Your line is open.
Thanks for taking my question. My first question is on the hardware side. On the emulation, your first half sales are coming in a little bit stronger. I look at Synopsys, their hardware sales are actually coming in quite a bit stronger. Is there some market shift going on firstly between you and Synopsys? Secondly, can you talk about what are the end markets that you saw weakness in, and what gives you the confidence that it comes back in the back half of the year?
Yeah. First of all, I think the hardware emulation side, as I mentioned, we have a lot of respect for our competitors, Mentor and Synopsys. Clearly, on the hardware emulation side, we compete more with Mentor. Clearly, we continue to be the most advanced emulator in the marketplace, so it's more the timing, the customer requirement. On the Synopsys side, clearly a lot of respect for them. They have the FPGA versions and clearly we have our own S1 FPGA. Earlier reception from a customer is very encouraging. As I mentioned, we have repeat orders and also have five new logos that we are very proud of.
In fact, I mentioned that also one very important point is a very important endorsement technology-wise and hardware integration approach with a very competitive win at the leading North American semiconductor company that is one of the largest user of Palladium Z1, but they endorsed us on the FPGA ZS1. That is a very important endorsement. Hopefully, we will continue that momentum scaling it up.
Farhan, this is John Wall here. I'd just like to add that and remind you that Q2 2016 was a record year for us for hardware. We continue to see a secular trend, an increasing customer need for emulation and acceleration products. Just want to point that out.
Got it. Thank you. For the emulation business, do you still expect it to be a growth for you this year? If I recall it correctly, at the beginning of the year, you were expecting that the business will grow.
As I mentioned, the first half didn't do as well as we anticipated. As I mentioned, we expected to little stronger in the second half.
Got it. In terms of the growth that we are seeing in digital and then system interconnect, you're putting impressive growth there, more than 15% year-over-year. How sustainable is that and how should we think about that portion of the business in the second half of the year?
Very good question. We are very proud of our innovation approach to our digital flow. As I mentioned in my remarks, the Innovus, it become the platform of choice for the place and route for multiple application, they are very big platform. We are very excited about that in term of the performance area, power, and then also the runtime. You clearly see the big improvement and customer adoption is very rapidly with the market-shaping customers. We are very encouraged on that. The second part is clearly our other part of digital flow, the Genus and on the synthesis side and our Virtuoso on the timing, the Tempus on the signoff and the power. I think those and all come together with our new tool, Pegasus. We have the really end-to-end full flow, we are very excited.
70 customers are endorsing us and using us and proofreading on the full flow. We're extremely excited, 20 of them for the 7 nanometer. Overall, I think we're excited about digital flow. The custom analog side, the 9% is very strong for the analog and custom flow, and clearly we're the leader on that. Even with a little bit lesser than anticipated in the hardware side, our formal verification, JasperGold, have been great. Our Xcelium, that is a simulation with the Rocketick integrated new tool. We have more than 20 customers are adopting, and we are scaling, and we continue to drive the performance and scalability and stability. I think overall, I think we have pretty good solution for the most advanced node for the digital and the mixed signal customer.
We're excited about the overall portfolio on the software and also the IP also coming up very strong.
Thank you. That's all I have.
Thank you.
Your next question is from Jay Vleeschhouwer with Griffin Securities. Please go ahead. Your line is open.
Evening. Couple of short-term questions to start, first for Geoff and John, then a more strategic question for Lip-Bu. For Geoff and for John, you reiterated your cash flow guidance for the year, yet through the first half of the year, you've already done about 60% of the low end of your guidance range for cash flow, and I'm wondering what you're seeing in the second half of the year that perhaps cash flow might be less than in the first half, hence the iteration of the current range. Secondly, back to the emulation question, just to clarify what you mean by stronger, is that an increase in absolute terms, first half to second half, or are you talking about year-over-year increase in the second half versus pretty easy comp versus second half of last year?
In order for you to grow your emulation business for the year, it looks like your second half would have to be up by about a third in total or more, if you could comment on that.
Jay, this is John. I'll take that first question on the cash flow. I'll just point you to the DSOs. We had a 60 decrease in DSO from Q1. A number of large payments came in after the end of the first quarter, driving a more favorable comparison between the quarters. Q2 ended up being a very strong quarter for us for collections. Our guidance reflects our confidence in the business and takes into account everything we know at this time, so we reiterated the cash flow guidance.
Yeah. Jay, on the hardware side, as I mentioned, the first half is lower than our anticipated. As I mentioned, it's a very lumpy business, and we expect it to a little stronger in the second half. That's what we see. Again, we want to really preserve the value and we want to make sure that we provide and protect the value rather than just selling and for whatever price. We want to keep the value and then drive a more manageable growth.
For you, Lip-Bu, a couple of market and customer questions. Number one is about the length of your current product cycles or adoption cycles. We've seen now for the past roughly two years that the implementation business, both yours and Synopsys, have done well. I'm wondering how long you think this cycle might last. The reason I ask it that way is when we look at the last big product cycle for you in PCB, that lasted for about three years, 2012 to 2015. I know it's not the same technology, not or even the same customers necessarily, but do you think that it was maybe just another year or so to go to fulfill this adoption or upgrade cycle and implementation, then you're going to have to see some other category pick up?
Yeah, it's a good question, Jay. Clearly, as you know, the complexity of the design is increased substantially when you move down the geometry to 10 to seven to five. We are very aggressive on the 10 to seven and five and beyond. Clearly, we are very committed to drive the technology leaderships, we continue to drive the innovation. I'm very proud of my team, that in the last three years, we have 23 organically developed products that are very disruptive, that's why we continue to drive the success in the implementation. As I mentioned, complexity is increased, I don't see any slowdown. Also some of the new exciting application in term of machine learning, deep learning, cloud infrastructure changes, and then the whole opportunity in autonomous driving in the automotive side.
I think all going to be driving new runtime, the new performance, power going to be a big challenge. We continue going to renovate, continue working closely with the customer, providing the best tool and solve their first time pass requirements. I think overall, the adoption cycle, I don't see any slowdown, and because of all this new requirement, the complexity and also the more deeper advanced nodes that need double patterning, triple patterning. I think all in all, I think I'm excited about the future. I think most important for Cadence is to drive the leadership in technology. With that, we really focus on our customer, make sure that we are the trusted partner for them to go forward, or they can count on us to go forward.
Okay. Thank you very much.
Thank you.
Your next question comes from Krish Sankar with Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi. Thanks for taking my question. Congrats on a good quarter. I had a few of them. First one either for Lip-Bu or John. I don't want to ask the same question on buyback, I'm trying to figure out a different way. Your capital allocation or capital return policy, the last 6 months, you didn't do any buyback, and there's always speculation on whether it's a takeout or M&A happening or something. From your standpoint, why wouldn't you consider doing a dividend so that you don't have to worry about timing the buyback?
Yeah. Krish, I think clearly, capital allocation is a topic that every board meeting I discuss with my board, Geoff and I and John Wall. This is a topic that we review quarterly. In terms of buyback, in terms of dividends, and all this have been discussed with our board. So far right now, the board authorized for $525 million buyback. We've reviewed that, provide the flexibility. We look at our business requirement, after that $1.2 billion buyback we completed last year, we decided in the Q3 we're going to start buyback again.
Got it. All right. On your hardware business, can you roughly say the split between emulation and FPGA prototyping? Is it like a 80/20 split, or am I in the ballpark?
Yeah. We don't provide the breakdown. As you can tell, we don't want to give the information to our competitors. Clearly, hardware emulation is our current volume productions. The S1 we just announced recently, we are excited with the earlier reception from our customer with repeat orders with five new logos one very important and very strong competitive win, they never use our FPGA and they adopt us, that will be carry out the momentum for going forward.
Krish, this is John Wall here. I just want to add that we've great products in the hardware space. Note that we delivered excellent financial results for Q2. Software and IP were both strong, we increased our outlook for the year. Software hardware in the first half is only part of what is a really good story.
Got it. A final question is for Lip-Bu. If you look at the market, obviously, you have all these exciting technologies like AI, deep learning, autonomous driving. Is there a way you can quantify what the EDA or Cadence opportunity is, either as a percentage of the market size for AI or a percentage of the dollar value, or a percentage of what the chip market could be for those? Is there a way you can help us quantify the EDA opportunity in those trends?
Yeah, it's a good question. It will be difficult for us to quantify it at this moment, but I can share some of my excitement. Clearly, the machine learning, deep learning, AI are going to be changing our semiconductor industry. The application is very broad. Autonomous driving is just one of the application. Machine learning, deep learning, and that can be a very huge impact to the data center and cloud infrastructure, and then also for the industrial IoT. Even the medical genomic sequencing. There's a lot of compute that our brain can't function that fast. With so much data, and as you know, the big data is a lot of data from not just compute and also from video, is massive.
Clearly the next 10, 20 years, how to manage the data are going to be the biggest opportunity and challenge. That can be a lot of implication to our customer and customers. That they have to design based on that to do the data analytics from training to inference. There's going to be a new requirement for a lot of our EDA solution to provide them to optimize their calculation and their data management. We are excited about it, and it's very hard to quantify it and stay tuned. If we have the insight, we'll share with you. Right now, it's just an exciting opportunity. It's just an emerging new market. The application is going to be very broad, and it's very exciting.
All right. Thanks, Lip-Bu. Thanks, John.
Sure.
Your next question comes from Tom Diffley with D.A. Davidson. Please go ahead. Your line is open.
Yeah, good afternoon. Just following up on that last question. When we get into an environment when you guys like NVIDIA are building these huge chips, is it a bigger opportunity for you on the hardware side, or do you think the core EDA software side is the bigger opportunity on an incremental basis?
Yeah, very good question. Clearly we have a lot of respect for NVIDIA and what Jensen have done is fabulous for the industry. Continue that innovation engine that they have. Saying in general, I think clearly the machine learning, deep learning, as I mentioned, is a huge impact to our semiconductor industry beside the memory that we are right now seeing a lot of impact into the memory side. Again, tie into that whole data management in the storage-related area. I think back to your question in terms of NVIDIA as an example, and then broadly into the whole AI machine learning, not just the hardware.
Hardware is just for the verification, whatever they design, a lot going to be driving the IP, like our Tensilica will be a very great platform because it's programmable, low power and it's very good for a lot of industrial application for autonomous driving that I highlight in my remarks. Also for the whole data center cloud infrastructure. I think they're going to be require more optimization from a tool point of view and also the speed and the runtime of our design flow and in the most advanced node. Those massive parallelism going to be critical require, and that's why we are excited. We are so well-positioned in terms of many of our new tool are completely rewrite, able to scale to massive parallel in terms of processor core to optimize the solution that the customer looking for.
That is something that we are very well positioned.
Okay. I know we spent a lot of time talking about the leading edge, but as we look into things like IoT and the pervasiveness of sensors and the like on the low end, how are you positioned to benefit from that to the unit growth and the design growth at the low end?
Yeah, very good question. I think on the low end, like the IoT and also the devices that now can collect the data. Then we also have a very unique offering because the Tensilica is very low power, programmable. Then the other part is one of our expertise is the low power and in our flow. Either it's a custom flow or digital flow. That's one of the area that we are driving. A low power going to be the key for some of this industrial IoT that will be able to collect data, and in some way, they can replace the battery so that it can last longer. Then some of the technique, some of the approach that is a very strong Cadence offering we have in our tools.
Okay. When you, I guess, put this all together, is your expectation then as this starts to develop over the next few years, that the growth in your served market actually accelerates from where it is today?
Yeah. I think we're kind of looking forward to that. One thing that I wanted to highlight is our analog mixed signal. That is a lot of this IoT or data collection on the end products that is critical for the low power on analog mixed signal side. That is our expertise. We're going to be offering that to our customer. In fact, a couple of important customer in those area have been adopting us and then using our flow for doing that.
Okay. I guess moving over, obviously, the Asian market was very strong for you over the last year. Curious, though, was most of that growth from core EDA, the hardware, or the IP side of the business? Do you think that trend continues whatever it is?
Yeah. Asia Pacific is a very important region outside the U.S. A couple of area that we really like and we really focus on are like in Japan, the system company and then the automotive semiconductor area, they are doing really well. We are very well-positioned with those customers. So we double down on that. The other part of the Asian, clearly, Korea is a very important market for us. We have a lot of success in that, in our digital flow, our hardware emulation, and our IP front. The other part is a big engine, is the China. We are very well-positioned in our China position. Clearly, the government have a very big initiative in terms of driving the domestic semiconductor industry, with a massive investment in the $ hundreds of billions building that.
We are very well-positioned to partner and then collaborate and support. That is very broad to the digital, for our EDA flow and also the IP and also hardware emulation. So it's all total solution that we can provide to some of this leading company. I think I mentioned, on the hardware emulation side with HiSilicon, in terms of their add-on capacity that they require, and they're one of the winning company. In the past, we also mentioned couple of others. There's quite a few Chinese company going to be a world-class company. We want to be part of that and support them globally and just like any of our U.S. company and European company and Japan company.
Okay. Just finally, going forward, do you think the FPGA prototyping product will be sold or packaged with emulation, or are those separate sales?
That depend on customer requirement. Hardware emulation that have a scale of capacity like 9.2 billion gates, that is very attractive for many leading large company, because the hardware emulation is the most accurate and in terms of whatever you design, you want to verify that. Secondly, I think FPGA for prototyping, that is a very good way to do that, we offer both, using the same compiler that is very attractive for customer, can go one way or the other depend on their application, depend on their needs, then they can scale it or they have to do it separately. They can do it all in the same compiler, that is very compelling.
I think we're going to provide that, we continue to scale, continue to drive the next generation product, we will announce when we are ready, continue to drive the capacity, lower the power and the scale, for the FPGA and the emulation side.
Okay, thanks for your time.
Thank you.
Our final question comes from Monika Garg with KeyBanc Capital Markets. Please go ahead. Your line is open.
Hi. Thanks for taking my question. The first is on the R&D. If I look at R&D as percentage of revenue, first half of this year is somewhere 37.3%, which is higher than previous years. Is it the normalized R&D level to think about going forward or how should we think about what is the R&D level?
Yeah, I think let me start, then John can chip in. First of all, as you know, there's not much out there to buy for EDA tool. A lot of customer are shifting to us with the assumption that we will double down, triple down on R&D to continue to drive the solution that can help them to design the most complex chip. We basically had to continue investing. Especially right now, we have couple of area we try to drive leadership, like in digital, some of the digital flow and some of the verification flow, we want to drive the leadership. Also the proliferation, to some of the leading customer, we need to invest and work with them.
Some of them are game changing and then seven nano and five nano nodes are going to defining going forward, who own the biggest flow for the customer. I think those are critical in this period that we have to continue investing. Like in the past, Geoff and I we talk about every time we put the investment, we're also looking at ROI, in term of customer commitment, to us, to our flow, before we put resources behind. Besides doing that innovation for the product leadership, providing the proliferation on the customer to win, thirdly, until the customer commit to us and make the commitment before we put the money behind in term of R&D and FAE support. I think so far, we continue to drive efficiency, so it's not just continue increasing.
Each of the R&D team know very well. We also ask them to drive the efficiency, drive cost reductions. We are mindful of the overall return, and that's why we continue to guide the operating margin from 26% to 27% this year. So far, we on track on that.
Yeah, Monika, this is John. I'd just like to add that the R&D investment that we're making now is for future years. Our strategic priority is to develop innovative products and help our customers be successful, capture market segment share, and bring our solutions to market-shaping customers. We're continuing to build on our innovation and take action to drive growth and deliver results for our customers, all of which should enable us to deliver value to shareholders. Geoff, I don't know, do you want to add anything there?
Yeah. Just from an expense perspective, in the first half of the year, we have higher Social Security payments, both for the employees and on the company's behalf, and less vacations and more vacations in the second half. Usually, the expense moderates in the second half.
Got it. You talked about $525 million share purchase authorization from the board. Maybe can you discuss how you're thinking about share repurchase the second half of this year?
Yes. As we said, we like to maintain more flexibility with the most recent authorization. The company regularly reviews its capital structure, balancing our needs for investment, the appropriate level of risk for our business model and operating environment, maintaining adequate liquidity, and the opportunity to return cash to shareholders. Board and management make their decisions through the lens of shareholder value. We didn't repurchase shares in the first half, we do obviously expect to repurchase shares in Q3.
We're not specifying the amount, the timing, or the method at this time.
Just the last one is, 8, 9 months since Siemens announced acquisition of Mentor, closed almost 4 months. Have you seen any change in competitive dynamics in the market? Thank you so much.
Sure. Monika, first of all, I think the Mentor products are going to remain competitive under Siemens' ownership. Siemens is a very big company, a $100 billion company. They have tremendous resources. A lot of respect for them. We continue monitoring the product competing with us, and we don't anticipate any less. We treat them the same, and then maybe even more.
Thank you so much.
Thank you.
This concludes the question and answer session of today's call. I will now turn it back over to President and CEO, Lip-Bu Tan.
In closing, through innovation and execution, we are well-positioned to build on our success and to further proliferating our solutions with market-shaping customers. I would like to thank all our shareholders, customer and partners, board of directors, and very hardworking employees for the continued support. Thank you for joining us this afternoon.
Thank you for participating in today's Cadence Design Systems second quarter 2017 earnings conference call. This concludes today's call. You may now disconnect.