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 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, Mike, and welcome everyone to our Q1 2017 earnings conference call. With me today are Lip Bu Tan, President and CEO and Jeff Rebar, Senior Vice President and CFO. The webcast of this call can be accessed through our website, cadence.com and will be archived through June 16, 2017. A copy of today's prepared remarks will also be available on our site 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 8 ks filing today and is available on our Investor Relations website atcadence.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 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. 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 24, 2017 for the quarter ended April 1, 2017 and related financial tables can also be found in the Investor Relations portion of our website. And 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 Q1 results. Consistent execution drove solid operating results and it was a great quarter for innovation with several new product introductions. I will address the environment and strategy before turning to the Q1 customer and product highlights. Starting with the environment, semiconductor business conditions appear to have stabilized with expectations of low single digit growth for 2017.
However, 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.
KADEM is pursuing opportunities in higher growth area, 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 Cadence Verification Suite. Let me now turn to some of our product highlights and customer successes for the Q1. Innovation is the engine of our success and we have introduced more than 20 significant internally developed products in the last 3 years. In Q1, we launched Xyleum, the industry first parallel simulator for production use and the Protium S1 FPGA based prototyping platform for earlier software development.
Axcelium and Protium S1 joined JasperGold for formal verification and Palladium Z1 for emulation as the 4 core connected engines of our verification suite. Xylem incorporates innovative multi core parallel computing technology from last year acquisition of Rockitec and it has been deployed at several customers across multiple domains, including ARM and STMicroelectronics. Protium S1 new architecture increased scalability and speed and reduce design bring up time due to common compiler with the Palladium Z1. A number of new customers have purchased the Proteum S1, including Xylene and Menonox Technologies. After a successful 2016, the Palladium Z1 continue to do well with 7 new customers, 6 of them being system companies and an additional 7 customer make repeat orders.
We also introduced a new product within digital and sign off in earlier April called PIKASUS. The PICASUS verification system is massively parallel, cloud ready, physical verification sign off solution that can deliver up to 10x improvement improved performance across hundreds of CPUs. Earlier adopters includes 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. Also, 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 through implementation 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 Jeff, 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 3 significant new products. Our digital and sign off tools are proliferating for advanced node design with market shipping customers. Our refined IP strategy set us up to drive scalable profitable growth as evident by Q1 results. Now, I will turn the call over to Jeff to review financial results and provide our outlook.
Thanks Lip Bu and good afternoon everyone. Consistent execution led to strong operating results for Q1.
Key results for the quarter were total revenue was $477,000,000 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 $92,000,000 Also note that the recurring revenue mix was approximately 90%, that Cadence did not repurchase any stock in the Q1. DSOs were 37 days, up 4 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 $11,000,000 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. Now 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 $1,900,000,000 to $1,950,000,000 which would be a 6% growth at the midpoint non GAAP operating margin of approximately 27 percent GAAP EPS in the range of $0.93 to 1 0.3 dollars non GAAP EPS of $1.32 to $1.42 and operating cash flow in the range of $430,000,000 to $470,000,000 And for Q2, we expect revenue in the range of $470,000,000 to $480,000,000 non GAAP operating margin of approximately 26 percent GAAP EPS in the range of $0.20 to $0.22 and non GAAP EPS in the range of $0.31 to $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, 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 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 matter 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.
So with that, operator, we'll now take questions.
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 as a double digits last quarter and now it's kind of singles. And then on conversely as well, the IT business looks like it's now growing at double digits again.
So could you maybe walk me through how we should expect that to shape out for the rest of the year both those segments?
Yes. So on the digital side, Mitch, the actual revenue growth was close to 6 percent compared to Q1 of 2016. You're right that parent 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. But 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. Yes. And then secondly on the IP side, seeing that growing at double digits now apparently. Do you expect that to continue for 2017?
Yes. We did have a one time benefit on our IP business as we started recognizing royalties on a current quarter basis. But excluding that one time benefit, our IP business still had strong growth in the mid teens in Q1 over Q1.
Okay, got it. Thank you very much.
Your next question comes from Jay Vleeschhouwer from Griffin Securities.
Thank you. Good evening. Look, let me start with 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 ks, but that still left well over $200,000,000 in revenues from China for everybody else. So 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 PEGASYS and Proteum. Could you talk about how you think about the share opportunity with PEGASUS? It's an enormous category that we're addressing, but by the same token, it's historically proven to be very, very sticky for incumbent products.
And then lastly, for 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. So 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.
Yes, Chris, thank you so much for the question. So 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 2 sides and also the IP side.
And 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. So we're going to continue it's going to be a growth opportunity for us in China. And then regarding the new products, so 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 up flow. And 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. And then we have Janus on the synthesis side, and we have signed off on Tempus and voters on Power. And then now this physical verification becomes the missing piece.
And 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 term of turnaround time. This is very, very significant. And we're delighted a couple of customer already support us, and we mentioned that in our script. And so 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 and of course working closely with our foundry partners are critical for the success. And then the other 2 new products, we also have a successful launch and that is on the verification part of our business.
And clearly, it's very exciting for us to complete our whole verification suite. As you recall, we have the Jasper Gold that is the very strong position in the former verification. We have hardware Z1 have been very strong for emulation. And then what you like to do is basically to really complete that with the FPGA prototyping. And then this is something that can scale up to 600,000,000 gates.
And then using the same compiler as the Z1 hardware emulation, so the customer can really go from prototyping all the way to massive scaling in some of emulation. And then the other part is our simulation tool to with the acquisition of Rokitex that provide very, very strong parallel simulator. And that engine can be very fully integrated. We call it a name called Xyleum. This is 1st 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 Xyleen and Menonox with us and plus a few others. And then so with 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? And then 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. And maybe you could address that issue, how you're doing there and 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?
Yes. Thank you so much for the question. This is very much related to our strategy of system design enablement. And this is really providing not just the core EDA strength of increased adoption and not only the IP strategy for the scalable growth, but more important right now, we are moving into some of the emerging new growth area. We highlight couple of them.
This is automotive, the massive data center and then the machine learning related and then apply into some of this vertical market that we're going after. Thank you for bringing it up. We have very, very focused on the aerospace and defense. Over the last few quarter, we highlight not a Graemeun BAE system and also GE Aviation that we are very deeply engaged with them. And then same thing with automotive.
And we mentioned about MobileEyes using our Palladium Z1 for automotive vision and also Infineon for the automotive function safety. And stay tuned. We right now have a dedicated team to focus on the automotive and then dedicated team to focus for aviation and defense. And so some of this vertical beside providing the tool, the IP, the emulation, but more important, we're going to learn what their new requirements are. And then we're going to be starting to pick up the area that we need to either organically growing or through acquisition to provide us total solution to our customer in the system and then some of the vertical market that we are pursuing.
All right. But 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 manageable one?
Yes. So what we did is basically continue the AE support is very important for some of the success, but we relocate and then we rearrange and then we put some of the talent on the AE side for some of this defense, aerospace and automotive and then continue to drive efficiency. So 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 and to support their success.
Thank you, Nupu. Thank you.
Your next question comes from Krish Sankar from Bank of America Merrill Lynch.
Yes. Hi. Thanks for taking my question. I had a few of them. First one, Jeff, just wanted to find out why no buybacks this quarter?
Like you guys have been doing it at a very consistent pace for the last 3 years. So I'm kind of surprised why there was no buyback and is there any reasoning behind it?
Yes. So when we announced the program at in the Q1 or 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. So it's not like you are you're constrained by certain like events or something, it's just more your own choice?
We're just going to be more flexible going forward.
Got you. All right. And then a follow-up on the ASC 606 rev rec. So you guys are still confident that you can maintain the 90% ratable revenue that you have. I'm kind of curious, 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?
Yes. So we are going to implement a new standard as you know 606 in 2018. We are confident that we will substantially maintain recurring revenue treatment for the language in the or in the language of the new standard revenue over time treatment. We're not committing to a particular percentage right now.
Got you. But a significant portion of the 90% can be? Yeah.
We're substantially maintain, I think is the key word, substantially maintain.
Got you. All right. And then on the IP revenue side, I had a 2 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% to 20% growth business?
And for you specifically, of your IP revenues, how much is upfront versus ratable?
So, upfront versus is 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. And then royalties are booked now when our customers ship the product and we recognize the royalties over that. And we've never really communicated the percentage of IP is that's recurring or not.
Got you.
And we anticipate we're going to have double digit growth for this year overall in IP business, low double digits.
Yes. Just to add on to what Jeff is talking about, clearly, we have this refinement and of the IP business to drive profitability and scalability and we are very much on track of that. And so double digit growth and then the outsourcing trend is continue and that create opportunity for us. And then clearly we are focused on standardized off the shelf IP, strategic vertical market and most advanced process node and top customer. So we really drive quality revenue with the top customer.
That is our focus.
Got you. That's very helpful. And then two last quick questions. One is, what is the weighted average contract life in the quarter? And did you guys have any revenues from FPGA prototyping?
So yes, we had revenue from FPGA prototyping on Proteum S1. It was our Q1 of release to market. So we're excited about the revenue and 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 on 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.
And we're concentrated on deal quality, not in those two metrics.
All right. Thank you.
Thank you.
The next question is from Rich Valera from Needham and 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. And it looks like Mentor just released their new Strato platform this quarter. So still very early there, but 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.
Yes. Rich, this is Lemuel. Let me start first. Clearly, this emulation business continue to be good. Last year, we announced Z1.
We have a phenomena first full year and then with 29 new Palladium logos. And Q1, we continue to sell well. We have 7 new customer, I mentioned, and then also 7 make repeat orders. So very strong Q1, so 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.
And we stay tuned and we keep a close eye on it. And so 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 a strong customer interest in our Z1 and then many customers double, triple down the capacity scale and is phenomenal. So we are excited about it.
And as far as Q1 was concerned, it was roughly flat to Q4. And as we said last time, we still expect a strong year for hardware. But of course, you realize we were 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. And then you've mentioned a couple of markets, particularly auto, I guess, combination of auto or more specifically ADAS and then IoT and I think AI as well. And 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?
Yes. So let me try to address that. Clearly automotive is a faster growth area for us. We are excited about it. And so we mentioned in our earnings script, we are delighted on the Renesys and our expanded engagements.
And a lot with the tools and innovas 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 and with a very big automotive component company and we are excited about it. And this is on the IP front on the design IP. And 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 mobile eyes. And so 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. And 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, the vision and ADAS requirement and then working with the sensor companies and then either is LIDAR or LIDAR or even some of the laser approach and to drive the level 4, level 5 autonomous driving and we're heavily engaging with all the above.
Got it. Thank you, Lip Bu. And 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 pick the 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?
Yes. We obviously haven't released our Q for Q1. But for last year, our cash tax rate was between 10% 15% varied a little bit from quarter to quarter. And 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.
Yes, 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?
Yes. So I think Sterling, let me start first. So 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 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. And then so far, we continue to see strong demand from our customer. And then meanwhile, right now, we also have the FPGA version.
This is a proteome using the same compiler and then can scale up to 600,000,000 gates and that can effectively compete with the other competitors. And so we have a 2 pronged approach. And then using the same compiler, the customer can stay with us on both front on the emulation and FPGA front.
And again, I think we continue to see emulation being a secular trend, right? That will benefit clearly us, but perhaps our competitors certainly our competitors also. But it's a secular trend. It will be lumpy though. It will go up and down for a period of time, but secular trend still continues, Sterling.
That's fair. And Jeff, 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. And then last question, I wasn't clear you may have mentioned, Jeff, 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 some
more color on that front in particular. And 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?
Yes. So we did have a one time benefit, one 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.
And we mentioned about 2 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. So overall, we are excited about IP and our refined strategy is working.
Got it. Thank you, guys.
Thank you.
The next question is from Faran Ahmad from Credit Suisse.
Thanks for taking my question. My first question, Lable, is like if I look at your growth and your year over year growth the 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? And what is really needed to make it more like a 10% growth?
Okay, good question. And 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 the order mix environment that we are operating in. And I think couple of things 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. And then hardware continue to be a good year this year for us. So I think overall, I think we are pleased with what we see in the marketplace and that's why we guide to 6%. And in terms of the trend of going down, clearly, we are mission critical solution to our customer.
And I think we continue to drive value and 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. And then the other part that I think that are going to help us to grow the business in terms of revenue growth will be the system design enablement. And that's where we are moving into some of the vertical area and then the vertical market and then addressing some of the higher growth opportunity in automotive, data center and then the aerospace and defense related area. And again, the chip design is getting more and more complex.
We are in a very mission critical. And the design and 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 and that is our motto going forward.
Got it. And then one question I have for you is in regards to the Jeff, you mentioned like in regards to the buybacks that you want to maintain flexibility. Should I interpret it as meaning that you're looking at some M and A? And if you can talk about a mix asset that's apparently on sale right now, is that something you would be interested?
Yes. So again, we don't want to go we are not going to go into speculation. But clearly, we have a very disciplined approach to M and A. We're not buying revenue. Very important is to fix and then further our strategy and then really drive the customer with differentiating products and then attract the top talents, either managerial and technical talent we want to bring on board.
And then we are very disciplined in term of return on investment. And then so far, we have been very focused on internal developing, innovating products. That's evident by 20 new products in last 3 years. In the Q1, we already introduced 3 new products. So we continue doing that.
And then only receive value and then feed into the strategy of our SDE, then we'll put a trigger on M and A.
Got it. And then 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?
Yes. So I think clearly in our privacy not just in China in across the country world is happening. And so we are very focused on getting the value and protect our IP. And so that makes sure that our tool and IP customer properly pay for it and then for the full value. And that's something we believe in it and we are disciplined on that.
And then so if there's anything in piracy, we will definitely approaching the customer to make sure that they come clean and then pay up the pay up not just the pass and then going forward. And we want to make sure that we enforce that.
Got it. And my last question on Mentor Graphics acquisition by Siemens. Have you seen any business impact where you've seen like divestitures or small businesses where Siemens has decided to get out of business? I just want to understand like if there's been any thought of change that you have noticeable change that you have seen in regards to the acquisition of Mentor by Siemens?
Yes. 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. And so we continue to compete with them in the marketplace. And clearly it's a $100,000,000,000 big giant and we want to don't take it lightly. And then there are some good product we are competing with.
And so far, we continue to pay a lot of attention to them.
Thank you. That's all I had.
Yes.
The next question is from Tom Diffely from D. A. Davidson.
Yes. Good afternoon. I was hoping that you could look at your 3 new products and maybe rank, if you could, what the relative revenue opportunity is for each of them going forward, It may be both on a near and a long term basis.
Yes, Tom, this is Jeff. Yes, 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. So I guess, Jeff, 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 the stronger margin profile?
Yes. Generally, if you look at, Tom, our trends over the past couple of 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.
And those things contribute to keeping expenses down in the second half of the year or relatively flat. And then as our revenue has consistently grown traditionally, we drop more to the bottom line.
Okay. Makes sense. And then I noticed, I looked at some of the GAAP to non GAAP adjustments, It was about $0.14 and then there was about a $0.07 tax on that $0.14 I'm curious why is there such a kind of a heavy tax rate on those adjustments?
Yes. 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 of 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 incomes earned, various different discrete items in tax.
And so those things will fluctuate. I tend to focus on 2 things, the 23% that we use for non GAAP and the cash tax rate.
Okay. That makes sense. And then 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 2018 is perhaps a different story?
Yes. 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. So if I look at Q2 guidance, you're guiding to $470,000,000 to $480,000,000 If you take the midpoint of that quarter over quarter, that's going to be relatively flat. But we've historically seen a sequential increase from Q1 to Q2.
Can you just talk about some of the dynamics on this?
Sure, Jason. As I think we mentioned in 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 have become more important to us. Those businesses are have a more upfront component to them and so we're going to fluctuate from period to period and 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'm pleased to note that for the 3rd consecutive year, Kadant was named by Fortune Magazine 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' Q1 2017 earnings conference call. This concludes today's call. You may now