Afternoon. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems' 2nd Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
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, Devin, and welcome, everyone, to our Q2 2017 earnings conference call. With me today are Lip Bu Tan, President and CEO Jeff Rebar, 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 15, 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 ks filing today and is available on our Investor Relations website atcadence.com.
The CFO commentary should be referenced with both today's conference call remarks and the earnings press release issued today. Next, please note that today's discussion will contain forward looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence's most recent reports on Form 10 ks 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 1, 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 the 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 24, 2017, for the quarter ended July 1, 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.
Then Lip Bu, John and Jeff will all be available during the question
and answer session. Now 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 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 Express Gen 4 IP on the new 7 nanometer SoC and another major customer licensing Tensilica for automotive radar application. Also in the automotive space, Rome adopted our ISO 26,262 compliant functional safety verification solution, and we received ISO 26,262 certification for our PCB flow. Overall, 4 of the top 5 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 optimize design integration between our chip, package and board flows. We also expanded our partnership with Metworks 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 7 nanometer nodes. Next, I want to talk about our IP business, which is a 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. And we introduced the Tensilica Vision C5 is the 1st dedicated neural network DSP IP. Now 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 5 new logos.
Before turning over to John, let me quickly summarize my comments. Consistent execution drove excellent financial results 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 shipping customers. We continue to innovate and introduce new products like Tensilica Vision C5 DSP targeted at neural network applications.
Now, I will turn the call over to John to review the financial results and provide our outlook.
Thanks, Lip Bu, and good afternoon, everyone. Consistent execution drove excellent financial results for the 2nd 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 $479,000,000 non GAAP operating margin was 27 percent GAAP net income per share was $0.25 non GAAP net income per share was $0.34 and operating cash flow was $162,000,000 Also, please note that the recurring revenue mix was approximately 90%. DSOs were 31 days, down 6 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 and 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.
Now 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 $1,910,000,000 to $1,950,000,000 non GAAP operating margin of approximately 27%, GAAP EPS in the range of $0.98 to 1 $0.04 non GAAP EPS of 1 $0.36 to $1.42 and operating cash flow in the range of $430,000,000 to $470,000,000 For Q3, we expect revenue in the range of $475,000,000 to $485,000,000 non GAAP operating margin of 26% to 27%, GAAP EPS in the range of $0.24 to 0 point 26 dollars and 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. Next, 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 investments, 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 $525,000,000 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 take 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 U. S. Dollar, primarily the Japanese yen, but about 30% of our costs are in currencies other than the dollar. So 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 2nd 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. And with that, operator, we'll now take questions.
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 eyeing 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 5 year strategic plan and at the conclusion of that you decide whether you'd be starting to buy back stock or not. So I'm taking based on your decision that you've actually concluded that plan. So wondering if there's anything you can share with us about that plan as it relates to opportunities for M and 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 and A.
But just wondering if you can share anything about that 5 year strategic plan and how it relates to your decision to start buying back stock? Thank you.
Yes, Rich, this is Lip Bu. First of all, I think I just want to highlight that last year, we completed our $1,200,000,000 repurchase program And then the Board have approved and authorized RMB 525,000,000 buyback in 2017. And then clearly, our approach usually is focused on our business requirement and also the appropriate risk along to related to business model and operating environment. And we also want to provide the flexibility for us to continue to execute the plan. And clearly, returning to capital, return to the shareholder is top priority from my point of view.
So overall, I think we continue to review that with our Board. The Board just approved the new acquisition purchase starting in Q3.
Okay. I guess I'd like to move on to hardwareemulation. You mentioned it was a little lighter in the first half than you 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 Cementor's new stratto platform? And then 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.
Sure. 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, and we expect to do little stronger in the second half. And saying that, I think clearly, we're still the most advanced emulator and on the market and our capacity can scale up to 9,200,000,000 gates and have concurrent 2,300 plus users.
And so clearly, still very well received, 16 of the top 20 semiconductor using them, our hardware emulation, 9 of the 10 smartphone player are using the hardware Z1. So overall, I think we are happy with our product offering. And then 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 and also we have 5 new logos and they're using the same compiler so that customer have that flexibility from FPGA to very scalable hardware platform. And so I think overall, we like what we have.
Which has continued executing. Just to highlight, it's a very lumpy business. Saying that, I think Q2 is a good quarter for us. The software, we've done quite nicely. And then just to highlight a few points, the digital side, we are growing year to year 14%, IP with the renewal focus, we grew 15% year to year.
And then the custom analog is we are clearly the leader. We grew 9% year to year. And then the SPV is 7% growth. So overall, software and IP is very strong and hardware is just a very lumpy business, and we continue to really focus on customer requirement and customer focus and so stay tuned second half a little bit stronger.
Okay. Thank you, Lip Bu. Appreciate it.
Sure.
Your next question comes from Jackson Ader with JPMorgan. Please go ahead. Your line is open.
Hey, guys. Yes, it's Jackson on for Sterling tonight. If we can just circle back to the buyback that you're anticipating to start in the Q3. So what exactly is different about the Q3 or the second half of twenty seventeen versus the first half when you elected last year, we're completing a
very big 1,200,000,000 last year, we're completing a very big $1,200,000,000 of buyback and the Board, even though approved for the 525 1,000,000 for this year, and clearly, we want to have the flexibility, clearly, the timing, you had to reflect on business market condition, corporate and regulatory requirements and also look at the acquisition opportunity and other factors. So I think we put that into total picture. We discussed at length in every quarter with our Board, and we decided that Q3 is we're going to starting to buy.
Okay. And then 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? Or do you just see more demand building in the second half of the year?
Yes, I think clearly, as I mentioned, it's a lumpy business and but still the most advanced emulator. And so we continue to work with the customer and we basically also want to drive the value and in term of the customer need and make sure that we fulfill them. And then meanwhile, we don't want to sell aggressively that clearly we want to just meet the customer requirement. Hardware, we just have to plan is 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 for me. So 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. So we have enough time to get the best CFO on board. And then saying that, clearly, we have strong internal talents and also we continue looking at very we have access to the high qualified external talent. Jeff, coming to me, have a smooth transitions, and so we continue to work on that, and that is kind of our game plan.
Got it. And then secondly, I'm going to circle back to the hardware side. I think that just generally speaking, mentors should be losing share, it seems like, to both you guys and Synopsys. And my basic understanding is that you guys are actually more comparable in terms of the emulator and what products you compete against, particularly in the smartphone side. So I guess why would that slow down, I guess, this quarter then reaccelerate next quarter?
Yes. As I mentioned, it's a very lumpy business and we continue to drive value. And in term of customer requirement. And also is a place that based on their capacity requirement, we want to plan properly on that. We have a lot of respect for our competitors, Synopsys and Mentor.
And so 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. So stay tuned and we continue to execute and meet the customer requirement.
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. And then I look at Synopsys, and there the hardware sales are actually coming in quite a bit stronger. So is there some market shift going on firstly between you and Synopsys?
And 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?
Yes. So I think, 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. And so earlier reception from our customer is very encouraging. As I mentioned, we have repeat orders and also have 5 new logos that we are very proud of. And in fact, I mentioned that also one very important point, it's a very important endorsement technology wise and hardware integration approach with a very competitive win at the leading North American semiconductor company that is very large one of the largest user of Palladium Z1, but they endorse us on the FPGA Z S1 and that is a very, very important endorsement.
Hopefully, we will continue that momentum and then scaling it up.
And Farhan, this is John Wall here. I'd just like to add that and remind you that Q2 of 2016 was a record year for us for hardware and that we continue to see a secular trend and increasing customer need for emulation and acceleration products. But just wanted to point that out.
Got it. Thank you. And then for the emulation business, do you still expect it to be a growth for you this year? Because if I recall it correctly, you at the beginning of the year, you were expecting that the business will grow?
Yes. As I mentioned, the first half didn't do as well as we anticipated. But as I mentioned, we expect it to little stronger in the second half.
Got it. And then in terms of the growth that we are seeing in digital and then system interconnect, you have pretty impressive growth there, more than 15% year on year. How sustainable is that? And how should we think about that portion of the business in the second half of the
year? Yes, very good question. We're, very proud of our innovation approach to our digital flow. As I mentioned in my remarks and the Innovus, it become the platform of choice for the place and route for multiple application and they are very big platform. And so we are very excited about that in terms of the performance area, power and then also the run time.
We clearly see the big improvement and the customer adoption is very rapidly with the market shaping customers. And so we are very encouraged on that. And then second part is, clearly, our other part of digital flow, the Genus and on the synthesis side and our voters on the timing, the tempers on the sign off and the power. So I think those all come together pickers as we have the really end to end full flow and we are very excited. 70 customers are endorsing us and using us and proliferating on the full flow.
And we're extremely excited, 20 of them for the 7 nanometer. So overall, I think we're excited about digital flow. And the custom and the log side, 9% is very, very strong for the analog and custom flow and clearly, we're the leader on that. And then the even with a little bit lesser than anticipated in the hardware side, Our former verification Jasper have been great. And then our Xyleum that is a simulation with the Rockertek integrated new tool, we have more than customer 20 customer adopting and we are scaling and we'll continue to drive the performance and scalability and stability.
And so I think, overall, I think we have pretty good solution for the most advanced node for the digital and the mixed signal customer. And so 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 had.
Thank you.
Your next question comes from Jaive Leshower with Griffin Securities. Please go ahead. Your line is open.
Evening. A couple of short term questions to start. First for Jeff and John, then a more strategic question for Lip Bu. For Jeff 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 reiteration of the current range.
And then 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. And 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?
So Jay, this is John. I'll take that first question on the cash flow. But I'll just point you to the DSOs. That's we had a 6 day 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.
So Q2 ended up being a very strong quarter for us for collections. But so you'll see a little bit more shift to the first half for cash collections. But 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.
Yes. And then, 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 to do a little stronger in the second half. That's what we see in the and 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. So 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 1, is about the length of your current product cycles or adoption cycles. We've seen now for the past roughly 2 years that the implementation business, both yours and Synopsys have done well. And 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 3 years, 2012 to 2015.
And I know it's not the same technology or even the same customers necessarily, but 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?
Yes, 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 7, to 5. And we are very aggressive on the 10, the 7 and 5 and beyond. And so clearly, this is we are very committed to drive the technology leaderships, and so we continue to drive the innovation. I'm very proud of my team that in the last 3 years, we have 23 organically developed products that are very disruptive, and that's why we continue to drive the success in the implementation.
As I mentioned, complexity has increased, so I don't see any slowdown. And also some of the new exciting application in terms of machine learning, deep learning, cloud infrastructure changes and then the whole opportunity in autonomous driving in the automotive side. And so I think all going to be driving new runtime, the new performance, power going to be a big challenge. And we continue to innovate, continue working closely with the customer, providing the best tool and software first time pass requirements. So I think overall, the adoption cycle, I don't see any slowdown and because of this all this new requirement, the complexity and also the more deeper advanced nodes that need double tripling, triple tripling patterning.
And so I think all in all, I think I'm excited about the future. And I think most important for Cadence is to drive the leadership in technology. And then with that, we're really, really focused on customer, make sure that we are the trusted partner for them to go forward, 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 and congrats on a good quarter. I had a few of them. First one, either for Lip Bu or John. I don't want to like ask the same question on buyback, but I'm trying to figure out a different way.
Your capital allocation or capital return policy, in the last six months you didn't do any buyback and there's always speculation on whether it's a takeout or M and A happening or something. So from your standpoint, why would you consider doing a dividend so that you don't have to worry about timing the buyback?
Yes. So, Chris, I think clearly, our capital allocation is a topic that every Board meeting I discuss with my Board, Jeff and I and John, this is a topic that we review quarterly. And so in terms of buyback, in terms of dividends and all this have been discussed with our Board. But so far right now, the Board authorized for 525,000,000 buyback and then we review that, provide the flexibility, we look at our business requirement and then after that $1,200,000,000 buyback we completed last year, we decided in the Q3, we're going to start buyback again.
Got it. Got it. All right. And then on your hardware business, can you roughly say the split between emulation and FPGA prototyping? Is it like the eightytwenty split or am I in the ballpark?
Yes. We don't provide the breakdown. As you can tell, I mean, we don't want to give the information to our competitors. But clearly, hardware emulation is our current volume productions. And then the S1, we just announced recently, and then we are excited with the earlier reception from our customer with repeat orders and then with 5 new logos and then one very important and very strong competitive win and that they never use our FPGA and they adopt us and that will be carry out the momentum for going forward.
And Krish, this is John here. I just want to add that we have great products in the hardware space. And note that we delivered excellent financial results for Q2. Software and IP were both strong and we increased our outlook for the year. So software hardware
in the first half is only part of what is a really good story.
Got it. Got it. And then a final question 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 ED opportunity in this trend?
Yes, 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 is going to be changing our semiconductor industry And then the application is very broad. And 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. And so and even the medical genomic sequencing and then there's a lot of compute that our brain can't function that fast and with so much data.
And as you know, the big data is massively is a lot of data from not just compute and also from video is massive. I think clearly, the next 10, 20 years, the data is going to be how to manage the data are going to be because of opportunity and challenge. And so that can be a lot of implication to our customer and customers and that they have to design based on that to do the data analytics from training to inference. And so there's going to be a new requirement for a lot of our EDA solution to provide them to optimize their calculation and the data management. So we're excited about it, and it's very hard to quantify it.
And stay tuned. And then if we have the insight, we'll share with you. But 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.
Got it.
Thanks, Ruudu. Thanks, John.
Your next question comes from Tom Diffely with D. A. Davidson. Please go ahead. Your line is open.
Yes, 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 a bigger opportunity on an incremental basis?
Yes, very good question. And 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. And so 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 and the storage related area. So I think on the back to your question in term 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, but 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 and also for the whole data center cloud infrastructure. So I think they're going to be require more optimization from a tool point of view and also the speed and the run time of our design flow and then in the most advanced node. And so those parallel massive parallelism going to be critical require, and that's why we're 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 call to optimize the solution that the customer looking for, and that is something that we are very well positioned.
Okay. And 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, the unit growth and the design growth at the low end?
Yes, very good question. So I think on the low end, like the IoT and also the devices that now can collect the data, and then we also have a very unique offering because the Tensilica is very low power programmable. And then the other part is one of our expertise is the low power and into our flow, either it's a custom flow or digital flow. That's one of the area that we are driving. Low power going to be the key for some of this industrial IoT that should that will be able to collect data and in some ways, they can replace the battery so that you can last longer and then some of the technique, some of the approach that is very strong cadence offering we have in our tools.
Okay. So, 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?
Yes, I think we're kind of looking forward to that. And one thing that I wanted to highlight is our analog mix signal and 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 and that is our expertise. We're going to be offering that to our customer and in fact, we couple of important customer in those areas have been adopting us and then using our flow for doing that.
Okay. I guess then moving over to 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 and you think that trend continues, whatever it is?
Yes. Asia Pacific is a very important region outside the U. S. And a couple of areas 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 very well. We are very well positioned with those customers, and so we're double down on that.
And then 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, hardware installation and our IP front. And then 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 and then with a massive, massive investment in the 100 of 1,000,000,000 building that, we are very well positioned to partner and then collaborate and support.
That is very broad through the digital for our EDA flow and also the IP and also hardware emulation. And 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. And then in the past, we also mentioned a couple of others. And then there's quite a few Chinese company going to be a world class company, and 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. And then just finally, going forward, do you think the FPGA prototyping product will be sold or packaged with emulation or are those separate sales?
Yes, depend on customer requirement. Hardware emulation that have a scale of capacity like 9 point 2,000,000,000 gates, and 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. Then secondly, I think FPGA for prototyping and that is a very good way to do that and we offer both using the same compiler that is very attractive for customer, can go one way or the other depending on their application, depending on their needs. And then they can scale it whether they have to do it separately. They can do it all in the same compiler and that is very, very compelling.
So I think we're going to provide that and we'll continue to scale, continue to drive the next generation product and then we will announce when we are ready and then continue to drive the capacity, lower the power and the scale and then for the FPGA and the emulation side.
Okay. Thanks for your time.
Thank you. Our final question comes from Monica Garg with KeyBanc Pacific Crest. Please go ahead. Your line is open.
Hi. Thanks for taking my question. The first is on R and D. If I look at R and D as a percentage of revenue, first half of this year is somewhere 37.3%, which is higher than previous years. So is it the normalized R and D level to think about going forward?
Or how should we think about what is the R and D level?
Yes, I think let me start and then John can chip in. So first of all, as you know, there's not much out there to buy for EDA tool. And so a lot of customer are shifting to us with the assumption that we will double down, triple down on R and D, so continue to drive the solution that can help them to design the most complex chip. So we basically had to continue investing. And especially right now, we have couple of area, we're trying to drive leadership like in digital, some of the digital flow and some of the verification flow, we want to drive the leadership.
And so and then also the proliferation to some of the leading customer, we need to invest and work with them. And then some of them are game changing and then 7 M and N nodes and 5 NN nodes are going to defining going forward who owns the biggest floor for the customer. So I think those are critical in this period that we have to continue investing. And then like in the past, Jeff 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. And so besides doing the innovation for the product leadership, providing the proliferation on the customer to win and then thirdly, until the customer commit to us and make the commitment before we put the money behind in terms of R and D and FEE support.
So I think so far, we continue to drive efficiency. So it's not just continue increasing. Each of the R and D team know very well, we also ask them to drive the efficiency, drive cost reductions. And so we are mindful of the overall return, and that's why we continue to guide the operating margin from 26% to 27% this year, and so far, we're on track on that.
Yes. Monica, this is John. I'd just like to add that the R and D investment that we're making now is for future years. But 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. But 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.
And Jeff, I don't know, do you want to add anything there? Yes. And 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. So usually the expense moderates in the second
Got it. And then you've talked about $525,000,000 share purchase authorization from the Board. Maybe can you discuss how you're thinking about share repurchase for second half of this year?
Yes. So as we said, we like to choose 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, But we didn't repurchase shares in the first half, but we do obviously expect to repurchase shares in Q3. And we're not specifying the amount, the timing or the method at this time.
Okay. Then just the last one, 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, Monica. First of all, I think the mentor products are going to remain competitive under Siemens ownership. Siemens is a very big company, dollars 100,000,000,000 company. They have tremendous resources, a lot of respect for them. And so we continue monitoring the product competing with us, and we don't anticipate any less.
And so we treat them the same and 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 build on our success and to further proliferating our solutions with market shipping 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 2nd quarter 2017 Earnings Conference Call. This concludes today's call. You may now