Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems first 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 would like to ask a question during this time, simply press star, then the number one on your telephone keypad. Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence Design Systems. Please go ahead.
Thank you, Mike. Welcome everyone to our first quarter 2017 earnings conference call. With me today are Lip-Bu Tan, President and CEO, and Jeff Ribar, Senior Vice President and CFO. The webcast to this call can be accessed through our website, cadence.com, and will be archived through June 16th, 2017. A copy of today's prepared remarks will also be available on our website at the conclusion of today's call. Before I start, I want to call your attention to our CFO commentary, which was included in our Form 8-K filing today and is available on our investor relations website at cadence.com. The 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. 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 measure 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 April twenty-fourth, 2017, for the quarter ended April first, 2017, and related financial tables can also be found in the investor relations portion of our website. Now I'll turn the call over to Lip-Bu.
Good afternoon, everyone, and thank you for joining us today. We are pleased with our first quarter results. Consistent execution drove solid operating results. It was a great quarter for innovation with several new product introductions. I will address the environment and strategy before turning to the first quarter customer and product highlights. Starting with the environment, semiconductor business conditions appear to have stabilized, with expectations of low single-digit growth for 2017. Expected improvements are sector-specific and macro uncertainty remains. We have successfully managed through some customer consolidation and expect just a minimum impact on revenue in 2017. Turning next to strategy. We are steadily executing our system design enablement or SDE strategy. SDE offers additional growth opportunities as we expand beyond semiconductors and tap into a significantly larger market with system companies and new vertical market segments.
Cadence is pursuing opportunities in higher growth areas, including automotive, cloud infrastructure, machine learning, and aerospace and defense. In Q1, we expanded our engagement with Renesas for the design of their industry-leading ADAS, autonomous driving, and IoT semiconductor solutions using Innovus Virtuoso advanced nodes and the Cadence verification suite. Let me now turn to some of our product highlights and customer successes for the first quarter. Innovation is the engine of our success. We have introduced more than 20 significant internally developed products in the last three years. In Q1, we launched Xcelium, the industry first parallel simulator for production use. The Protium S1 FPGA-based prototyping platform for earlier software development. Xcelium and Protium S1 join JasperGold for formal verification and Palladium Z1 for emulation as the four-core connected engines of our verification suite.
Xcelium incorporates innovative multi-core parallel computing technology from last year's acquisition of Rocketick. It has been deployed at several customers across multiple domains, including Arm and STMicroelectronics. Protium S1 new architecture increases scalability and speed and reduces design bring up time due to common compiler with the Palladium Z1. A number of new customers have purchased the Protium S1, including Xilinx and Mellanox Technologies. After a successful 2016, the Palladium Z1 continues to do well with seven new customers, six of them being system companies. An additional seven customers make repeat orders. We also introduced a new product within digital and sign-off in earlier April called Pegasus. The Pegasus verification system is massively parallel, cloud-ready, physical verification sign-off solution that can deliver up to 10x improved performance across hundreds of CPUs. Early adopters include Texas Instruments and Microsemi.
Our focus on innovation and market-shaping customers is paying off, as place and route revenue was up over 20% with the top 20 semiconductor companies year-over-year. Our integration of our leading custom analog and new digital products provides customers with the best solution for their mixed-signal designs. Several top-tier customers are now using full Cadence mixed-signal flow from IP block characterizations to implementations to full chip verification. Next, I would like to talk about our IP business, which is a key component of our SDE strategy. IP market opportunity is strong as outsourcing trend keeps growing. We see the result of our strategic refinement of our IP business with strong year-over-year revenue growth. We booked our largest design IP contract ever with a major customer in the automotive semiconductor sector.
Also, a major Asian semiconductor company is using Tensilica Vision P5 processor to improve image quality in its mobile products. Looking to the future, I'm most excited about the opportunity for our Tensilica processors in artificial intelligence, automotive, and vision applications. Before turning it over to Geoff, let me quickly summarize my comments. Consistent execution drove solid financial results for Q1. System design enablement is expanding our opportunity beyond EDA and extending our customer reach. Innovation is the engine of our success, and so far this year, we have introduced three significant new products. Our digital and sign-off tools are proliferating for advanced node design with market-shaping customers. Our refined IP strategy set us up to drive scalable, profitable growth as evidenced by Q1 results. I will turn the call over to Geoff to review financial results and provide our outlook.
Thanks, Lip-Bu, good afternoon, everyone. Consistent execution led to strong operating results for Q1. Key results for the quarter were: total revenue was $477 million. Non-GAAP operating margin was 26%. GAAP net income per share was $0.25. Non-GAAP net income per share was $0.32, and operating cash flow was $92 million. Also note that the recurring revenue mix was approximately 90%, that Cadence did not repurchase any stock in the first quarter. DSOs were 37 days, up four days from Q4 due to the delays in collecting several large payments. Most of these payments have already been collected in Q2. We now expect DSO to be approximately 35 days for 2017. Service revenue was down $11 million year-over-year. Service revenue that is recognized on a completed contract basis can lead to variability from quarter-to-quarter.
Service revenue was down year-over-year, primarily because in Q1 of 2016, we recognized a large amount on a completed contract. Tensilica had a strong revenue quarter and a one-time benefit to royalties. The one-time benefit was a result of beginning to recognize royalties on a current quarter basis. Excluding this one-time benefit, our IP business still had strong growth. Let's turn to our outlook. There's no change in our outlook for the year for revenue, non-GAAP operating margin, non-GAAP EPS, and operating cash flow. For fiscal 2017, we expect revenue in a range of $1.9 billion-$1.95 billion, which would be a 6% growth at the midpoint. Non-GAAP operating margin of approximately 27%. GAAP EPS in the range of $0.93-$1.03. Non-GAAP EPS of $1.32-$1.42. Operating cash flow in the range of $430 million-$470 million.
For Q2, we expect revenue in the range of $470 million-$480 million, non-GAAP operating margin of approximately 26%, GAAP EPS in the range of $0.20-$0.22, non-GAAP EPS in the range of $0.31-$0.33. Approximately 90% of revenue is expected to come from beginning backlog. You'll find guidance for additional items in the CFO commentary. 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 results from quarter-to-quarter. Only about 5% of our revenue is in currencies other than the U.S. 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 has weakened since the beginning of the year, and we are taking steps to manage our costs accordingly. As you know, we've been reviewing the new revenue accounting standard that we will implement for 2018, and we are confident that we will substantially maintain recurring revenue treatment. Now, in closing, we had a strong first quarter, delivering both financial results that met or exceeded our expectations and introducing innovative new products. Looking to the future, I like the opportunities created by our SDE strategy, innovative new products, and trends such as autonomous driving, cloud infrastructure, industrial IoT, and machine learning, just to name a few. 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'll pause for a moment to compile the Q&A roster. Your first question comes from Mitch Steves from RBC Capital Markets.
Hey, guys. Thanks for taking my question. Overall, good quarter. I just had one question starting on kind of the digital side. It looks like that's seeing some lumpiness. It was up double digits last quarter, and now it's kind of singles. And then on conversely as well, the IP business looks like it's now growing at double digits again. Could you maybe walk me through how we should expect that to shape out for the rest of the year, both those segments?
Yes. On the digital side, Mitch, the actual revenue growth was close to 6% compared to Q1 of 2016. You're right, the apparent growth was lower than recent results. This was because in Q1 of 2016 included a large completed service contract, which was included in our digital and sign-off product line. We're seeing a lot of success in our digital and sign-off products proliferating with market-shaping customers, and new customers are adopting these products. We expect good growth for 2017.
Got it. Yeah, then secondly, on the IP side, seeing that growing at double digits now, apparently. Do you expect that to continue for 2017?
Yeah, we did have a one-time benefit on our IP business as we started recognizing royalties on a current quarter basis. Excluding that one-time benefit, our IP business still had strong growth in the mid-teens over Q1.
Okay, got it. Thank you very much.
Great.
Your next question comes from Jay Vleeschhouwer from Griffin Securities.
Thank you. Good evening. Lip-Bu, let me start with you and ask about opportunities you may have for incremental revenue and share in a number of respects. First of all, let's ask about geography. When we look at the 2016 EDA industry results, there was a very substantial increase in China. We know how much of that was due to Mentor from the numbers in their 10-K, but that still left well over $200 million in revenues from China for everybody else. Perhaps you could talk about how you're doing there and what share progress you're making in China. Secondly, you highlighted a number of new products, including Pegasus and Protium. Could you talk about how you think about the share opportunity with Pegasus? It's an enormous category that you're addressing, but by the same token, it's historically proven to be very sticky for incumbent products.
Lastly, on the new product front, with respect to Protium, your revenues in FPGA prototyping to date have been immaterial relative to what Synopsys is doing there, for example, with the HAPS product. Again, similarly, maybe you could talk about how you're thinking about the revenue or share opportunity in that hardware category. Then a couple for Jeff. Thanks.
Krish, thank you so much for the question. A couple of things. One, I think you mentioned about the geographical. Clearly, China is a great opportunity. We are well-positioned in China, and we are very confident to continue to drive success and grow, not only on the tool side and also the IP side. China, as you know, the government is very committed to build out their domestic semiconductor industry with heavy investment, and we've done well in China. We're going to continue. It's going to be a growth opportunity for us in China. Regarding the new products, a couple of things that you highlight. Thank you for bringing it up. Pegasus, and this is very important for us to complete our digital and sign-off flow.
As you recall, we are building up quite a lot of the digital success with the Innovus. I mentioned about 20% growth with the top 20 customer. Then we have Genus on the synthesis side, and we have sign-off on Tempus, and Voltus on power. Then now this physical verification become the missing piece. We are delighted to completely from ground up building up this product massively parallel and then cloud ready, and then can scale up to 1,000 CPUs, and then drive 10X in terms of turnaround time. This is very significant. We are delighted a couple of customer already support us, and we mentioned that in our script. This should be exciting so that we have complete full flow opportunity for our customer to drive from the Innovus and the place and route, all the way to physical verification.
Of course, working closely with our foundry partners are critical for the success. The other two new product we also have a successful launch, that is on the verification part of our business. Clearly it's very exciting for us to complete our whole verification suite. As you recall, we have the JasperGold that is the very strong position in the formal verification. We have Palladium Z1, have been very strong for emulation. What we like to do is basically to really complete that with the FPGA prototyping. This is something that can scale up to 600 million gates. Using the same compiler as the Z1 hardware emulation, so the customer can really go from prototyping all the way to massive scaling in term of emulation.
The other part is in our simulation tool, with the acquisition of Rocketick, that provide very strong parallel simulator and that engine can be very fully integrated. We call the name called Xcelium. This is first production-ready parallel simulator. Very well-received with the customer, and we are delighted so that we can complete that whole verification suite to provide to our customer. On the Protium FPGA side, we have Xilinx and Mellanox with us, plus a few others. It's a very early state, but people are really excited about it. We are very positive about it.
You highlighted a number of end markets that you're focusing on, like auto, aero, and defense, and so forth. Could you again remind us how you're organizing yourselves to address those markets in terms of teams or sales or anything of that kind? One of the persistent issues for you and for EDA historically has always been, particularly when you've had active new product periods, is having sufficient AE capacity. Maybe you could address that issue, how you're doing there in having the requisite support and AEs and so forth that you think you're going to need given the multiple new product ramps that you now have to manage.
Thank you so much for the question. This is very much related to our strategy of system design enablement. This is really providing not just the core EDA strength of increased adoption and not only the IP strategy for the scalable growth, more important right now, we are moving into some of the emerging new growth area. We highlight a couple of them. This is automotive, the massive data center, the machine learning related, apply into some of this vertical market that we are going after. Thank you for bringing it up. We have very focused on the aerospace and defense. Over the last few quarter, we highlight Northrop Grumman, BAE Systems, and also GE Aviation, that we are very deeply engaged with them. Same thing with automotive.
We mentioned about Mobileye, using our Palladium Z1 for automotive vision, also Infineon for the automotive function safety. We right now have a dedicated team to focus on the automotive and then dedicated team to focus for aviation and defense. Some of this vertical, besides providing the tool, the IP, the emulation, but more important, we're going to learn what their new requirements are, then we're going to be starting to pick up the area that we need to either organically growing or through acquisition to provide that total solution to our customer in the system and then some of the vertical market that we are pursuing.
All right. Again, just to pick on this point, you're saying in effect that field support, AEs, all that sort of thing that historically has been a constraint for EDA when ramping new products is not an issue for you right now or a manageable one?
Yeah. What we did is basically continue the AE support is very important for some of success. We relocate then we rearrange then recruit some of the talent on the AE side for some of this defense, aerospace, and automotive, then continue to drive efficiency. In some way, we are driving the efficiency of the AE support to our current customer and put more resources in some of this vertical market to support their success.
Thank you, Lip-Bu.
Thank you.
Your next question comes from Krish Sankar from Bank of America Merrill Lynch.
Yeah. Hi. Thanks for taking my question. I had a few of them. First one, Geoff, just wanted to find out why no buybacks this quarter. You guys have been doing it at a very consistent pace for the last three years. I'm kind of surprised why there was no buyback, and is there any reasoning behind it?
Yeah. When we announced the program in the Q4 earnings call in February timeframe, we said we're going to be more flexible with this most recent authorization. We're sticking to that. Don't take any other messages besides we're being more flexible.
Got you. It's not like you are constrained by certain events or something, it's just more your own choice.
We're just going to be more flexible going forward.
Got you. All right. I'm going to follow up on the ASC 606 rev rec. You guys are still confident that you can maintain the 90% ratable revenue that you have. I'm kind of curious, A, is that still the case, and if there is a risk of that ratable revenue going away, how much of the 90% do you think could be at risk?
Yeah. We are going to implement the new standard, as you know, 606 in 2018. We are confident that we have substantially maintained recurring revenue treatment for the language, or in the language of the new standard, revenue over time treatment. We're not committing to a particular percentage right now.
Got you. A significant portion of the 90% today can be
Substantially maintained, I think, is the keyword. Substantially maintained.
Got you. All right. Then on the IP revenue side, I had a two-part question. One is, what do you think the IP revenue or the IP business for the overall industry growth this year, is it still a 15%-20% growth business? For you specifically, of your IP revenues, how much is upfront versus ratable?
Upfront versus ratable. A lot of them, we issue a license and we would recognize the revenue when we deliver the license. Sometimes we do longer-term deals, and those can be recognized over time. Essentially when we take over, for example, somebody's roadmap for a particular type of IP. Then royalties are booked now when our customers ship the product, and we recognize the royalties over that. We've never really communicated the percentage of IP that's recurring or not.
Got you. All right.
We anticipate we're going to have double-digit growth for this year overall on the IP business. Low double digits.
Yeah. Just to add on to what Geoff is talking about. Clearly, we have this refinement of the IP business to drive profitability and scalability, we are very much on track of that. Double-digit growth, the outsourcing trend is continue, that create opportunity for us. Clearly, we are focused on standardized off-the-shelf IP, strategic vertical market, most advanced process node and top customer. We really drive quality revenue with the top customer. That is our focus.
Got you. That's very helpful. Two last quick questions. One is what is the weighted average contract life in the quarter, did you guys have any revenues from FPGA prototyping?
Yes, we had revenue from FPGA prototyping on Protium S1. It was our first quarter of release to market, so we're excited about the revenue. Lip-Bu mentioned a couple of the customers that we've already recognized business with. The weighted average contract life, since we stopped in Q1 of giving our Q1 earnings call, giving bookings guidance, we're also not giving a weighted average contract life anymore. We don't think it's really relevant. We're concentrated on deal quality, not on those two metrics.
All right. Thank you.
Thank you.
The next question is from Richard Valera from Needham & Company.
Thank you. Question on the emulation market. Historically, new emulation product releases by yourselves and Mentor have had pretty meaningful impacts on the growth rates of your respective emulation businesses, looks like Mentor just released their new Strato platform this quarter. Still very early there. One, can you say, have you seen it in the market? Do you have any sense of how that stacks up competitively, if it changes the competitive dynamics, and do you think it has any impact on the market, or do you think maybe the market's matured enough and is big enough now that it doesn't necessarily have the same impact as it might have in the past? Thank you.
Yeah. Rich, this is Lip-Bu. Let me start first. Clearly, this emulation business continue to be good. Last year, we announced Z1. We have a phenomenal first full year. With 29 new Palladium logos. First quarter, we continue to sell well. We have seven new customer I mentioned, also seven make repeat orders. Very strong Q1. We expect to be a strong year for 2017. Regarding the Mentor announcing their new product, we haven't seen them in the marketplace or customer. We stay tuned, and we keep a close eye on it. Clearly, the emulation business for the most advanced node and complex design is a must-have, in term of time to market, to verification. We continue to see strong customer interest in our Z1, many customer double, triple down, the capacity scale and is phenomenal.
We are excited about it.
As far as Q1 was concerned, it was roughly flat to Q4. As we said last time, we still expect a strong year for hardware. Of course, you realize we're coming off a record year. We'll make the year-over-year comps difficult, but we still expect a very strong year in hardware.
That's helpful. Thank you. You've mentioned a couple of markets, particularly auto, I guess the combination of auto or more specifically ADAS and then IoT. I think AI as well. I'm just wondering, aside from IP, where I'm assuming you probably have some, call it vertically focused IP for maybe some of these markets. Can you talk about your other efforts at putting together sort of vertically focused solutions and what that's comprised of and what kind of success you've had at sort of vertically targeting these certain markets?
Yeah. Let me try to address that. Clearly automotive is a faster growth area for us. We're excited about it. We mentioned in our earnings script, we are delighted on the Renesas and expand the engagements along with the tools and Innovus and the custom advanced node and also the verification side. We also mentioned quite a bit on the design IP front. We have a very big contract with a very big automotive component company, and we are excited about it, and this is on the IP front, on the design IP. Then, clearly we continue to focus on the function safety that we mentioned about Infineon. We focus on the reliability and simulation side and also on the emulation side with the Mobileye. This is a major focus.
We have a dedicated team to drive the success, and we're going to learn a lot, in the automotive phase, working with the tier 1, the automotive manufacturers directly. So they're understanding their requirement so that we can provide them a total solution, not just a tool, not just the IP, and also provide them what they need in terms of Tensilica in our division and ADAS requirement. Then working with the sensor companies, either it's LiDAR or LiDAR or even some of the laser approach to drive the level 4, level 5 autonomous driving. We're heavily engaging with all the above.
Got it. Thank you, Lip-Bu. Just one more, for Jeff, if I could. Jeff, can you give us a sense of what your cash tax rate is right now and how you think that could be impacted? I mean, if you just picked a theoretical, whether it's 15% or 25% rate, if the federal rate was changed, how that would or wouldn't affect the cash taxes you might pay.
Yeah. We obviously haven't released our Q for Q1, for last year, our cash tax rate was between 10% and 15%, varied a little bit from quarter to quarter. How it's going to go in the future is your guess is as good as ours.
Got it. Okay. Thanks very much, gentlemen.
Thank you.
The next question is from Sterling Auty from JPMorgan.
Yeah, thanks. Hi, guys. I wanted to follow on the emulation question. You mentioned that it's still selling strongly, but given the quarter-over-quarter comparison, just wondering, is that just seasonality or is there any lead time issues, or have we actually seen the peak in this cycle and we're starting to enter the tail?
I think Sterling, let me start first. Far we don't see the peak. Clearly from our customer, we are heavily engaged with the customer. They want to have more actually, the scalability is critical. We're excited working with the top tier customer and then meet their requirement, and this is something that's very important to them in term of their design, complex design to verify and that they really like it. Far we continue to see strong demand from our customer. Meanwhile, right now we also have the FPGA version. This is a Protium using the same compiler and then can scale up to 600 million gates, and that can effectively compete with the other competitors. We have a two-pronged approach.
Using the same compiler, the customer can stay with us on both front, on the emulation and FPGA front.
Again, I think we continue to see emulation being a secular trend, right? That will benefit clearly us, but perhaps certainly our competitors also. It's a secular trend. It will be lumpy, though. It'll go up and down for a period of time, but the secular trend still continues, Sterling.
No, that's fair. Geoff, you touched upon the variability given the IP and the hardware, just trying to put the model together and get it to triangulate. Is it fair to say that in the quarter that the time-based license or time-based ratable revenue was actually less than 90% in the quarter?
It was approximately 90%. It's been consistently for a very long time for us.
Okay. Then last question, I wasn't clear, you made mention, Geoff, early on in terms of the IP business that, unless I misheard it, that there were some one-time items. I'm just, if you can give us-
Yeah
more color on that front in particular. Then you talked about the strength in automotive around IP. Is that something you could turn around and see the same customers come back for additional IP right on top of it? Or how should we think about the timing of repeat purchases from customers in that space?
Yeah. We did have a one-time benefit related to recognizing royalties, Tensilica royalties on a current quarter basis. Even excluding that, our IP business grew mid-teens year-over-year.
We mentioned about two big opportunity for us. One is we just signed, and booked the largest design IP contract with the automotive semiconductor sector, and then also a major Asian semiconductor, adopting the Tensilica for the mobile products. Overall, we are excited about IP, our refined strategy is working.
Got it. Thank you, guys.
Thank you.
The next question is from Farhan Ahmad from Credit Suisse.
Thanks for taking my question. My first question, Lip-Bu, is like if I look at your growth, and your year-over-year growth for last few years, every year it has been decelerating and it's now at about 6% for this year. I just wanted to understand, like how do you think about the long-term growth of the business? Is it more like a 5% growth business over the next few years? What is really needed to make it more like a 10% growth?
Okay, good question. Farhan, a couple of points. First of all, we are confident with our strategy and direction of the business and the future opportunity. We are pleased with the revenue growth, for this year, 6%, with all the mixed environment that we are operating in. I think couple of thing that are good driver for us, our core EDA software is doing well, growing with all the new product we came out, and then the IP is rebound to 10% growth rate. The hardware continue to be a good year this year for us. I think overall, I think we are pleased with what we see in the marketplace, and that's why we guide the 6%. In term of the trend of going down, clearly, we are mission-critical solution to our customer.
I think we continue to drive value and are very disciplined with what we provide to our customer. I strongly believe collaborating deeply with the customer, deliver innovative products to meet their challenges design. The other part that I think that are now going to help us to grow the business in term of revenue growth will be the system design enablement. That's where we are moving into some of the vertical area, and then the vertical market, and then the addressing some of the higher growth opportunity in automotive, data center, and then the aerospace and defense related area. Again, the chip design is getting more and more complex. We are very mission-critical, and the design verification is getting a lot more complex, and we can drive a lot of more value, and that's why we want to be disciplined and drive value.
That is our motto going forward.
Got it. One question I have for you is, in regards to the Geoff, you mentioned in regards to the buybacks that you want to maintain flexibility. Should I interpret it as meaning that you're looking at some M&A? If you can talk about, a MIPS asset that's apparently on sale right now. Is that something that you would be interested?
Yeah. Again, we are not going to go into speculation, but clearly we have a very disciplined approach to our M&A. We are not buying revenue. Very important is to fix and further our strategy, and really drive the customer with differentiating products, and attract the top talents, either managerial and technical talent we want to bring on board. We are very disciplined in terms of return on investment. So far, we have been very focused on internal developing, innovating products. That's evident by 20 new products in last three years. In the first quarter, we already introduced three new products. We continue doing that, and only we see value and fit into the strategy, our SDE, then we put a trigger on M&A.
Got it. One question on China. Can you talk about software piracy in China? Have you seen any effect of software piracy within semiconductor or in the systems design?
I think clearly in piracy, not just in China, in across the country world, is happening. We are very focused on getting the value and protect our IP. That make sure that our tool and IP customer properly pay for it and then for the full value. That's something we are believe in it, and we are disciplined on that. If there's anything in piracy, we will definitely approaching the customer to make sure that they come clean and then pay up not just the past and then going forward. We want to make sure that we enforce that.
Got it. My last question on Mentor Graphics acquisition by Siemens. Have you seen any business impact where you've seen divestitures or small businesses where Siemens has decided to get out of business? I just want to understand if there's been any sort of noticeable change that you have seen in regards to the acquisition of Mentor by Siemens.
So far, I think we expect Mentor products continue to be competitive under the even bigger umbrella in Siemens ownership, and we don't take it lightly. We continue to compete with them in the marketplace. Clearly, it's $100 billion big giant, we don't take it lightly. There are some good products we are competing with. So far, we continue to pay a lot of attention to them.
Thank you. That's all I have.
Sure.
The next question is from Tom Diffley from D.A. Davidson.
Yeah, good afternoon. I was hoping that you could look at your three new products and maybe rank, if you could, what the relative revenue opportunity is for each of them going forward, and maybe both on a near and a long-term basis.
Yeah, Tom, this is Geoff. Yeah, we don't give specifics on our different businesses at that level of detail. We don't give guidance on that. They're all going to be important products.
All right. Okay. I guess, Geoff, moving on to the margins, it looks like from your guidance here that the margins have to step up nicely in the second half of the year. Is that just stronger revenues? Is it going to be a mix issue? What drives this stronger margin profile?
Generally, if you look at, Tom, our trends over the past couple years, the second half of the year has been stronger than the first half of the year. Some of that is just what I'll call the normal ebb and flow of seasonality in the business. We have Social Security and Medicare taxes kick in at the beginning of the year, and as people reach those limits, those go away. We have more vacations tend to be in Q3 and in Q4 than they have early in the year. Those things contribute to keeping expenses down in the second half of the year or relatively flat. As our revenue has consistently grown, traditionally, we drop more to the bottom line.
Okay. Makes sense. I noticed, I looked at some of the GAAP to non-GAAP adjustments. It was about $0.14, then there was about a $0.07 tax on that $0.14. I'm curious, why is there such a heavy tax rate on those adjustments?
Again, for non-GAAP, we use a 23% non-GAAP tax rate when we give guidance and actually for our actuals. We look at that every couple years and take a look at where we would expect to be if we didn't have any tax attributes and our company was operating in a normal tax environment. Traditionally, our cash taxes have been materially under that. Our GAAP tax rate will fluctuate materially based on all kinds of things, based on where income's earned, various different discrete items in tax. Those things will fluctuate. I tend to focus on two things, the 23% that we use for non-GAAP and the cash tax rate.
Okay, that makes sense. Lip-Bu, in your comments, you talked about the customer consolidation having minimal impact on 2017. Was that a comment that you expect the minimal impact going forward, or is that perhaps just in 2017 and 2018 is perhaps a different story?
Yeah, I don't think we are going to comment on the 2018. We just stick to 2017. So far, we see minimum impact.
Okay. All right. Thank you for your time.
Thank you.
Our final question comes from Monika Garg from Pacific Crest Securities.
Hi, this is Jason on for Monika. Thanks for taking my question. I actually just have one question left. If I look at Q2 guidance, you're guiding to $470 million-$480 million. If you take the midpoint of that quarter-over-quarter, that's going to be relatively flat. Can you just talk about some of the dynamics on this?
Sure, Jason. As I think we mentioned on our February earnings call and I think earlier today, there's more variability in our business from quarter-to-quarter as our IP and our hardware business should become more important to us. Those businesses have a more upfront component to them, we're going to fluctuate from period to period, you're just seeing that from Q1 to Q2.
Okay, great. Thanks. That's my only question.
I will now turn the call over to Lip-Bu Tan for closing remarks.
In closing, there are macro challenges ahead, but also opportunities specific to Cadence. Through innovation and execution, we are well-positioned to build on our success and to further proliferating our solutions with market-shaping customers. I am pleased to note that for the third consecutive year, Fortune magazine named Cadence as one of the top 100 companies to work for. I would like to thank all our shareholders, customer and partners, board of directors, and hardworking employees globally for their continued support. Thank you all for joining us this afternoon.
Thank you for participating in today's Cadence Design Systems first quarter 2017 earnings conference call. This concludes today's call. You may now disconnect.