Good afternoon. My name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems 4th Quarter 2016 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, Shannon, and welcome everyone to our Q4 2016 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 March 17, 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 Web site atcadence.com.
The CFO commentary should be referenced with both today's conference call remarks and the earnings press release issued today. Please note that today's discussion will contain forward looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence's most recent reports on Form 10 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 February 1, 2017, for the quarter ended December 31, 2016, and related financial tables can also be found in the Investor Relations portion of our website. Now, I will turn the call over to Lip Bu.
Good afternoon, everyone, and thank you for joining us today. 2016 was another great year for Cadence, and I'm pleased to talk to you about our results, accomplishments and strategic direction. We delivered strong financial results in the Q4 and for the full year. Revenues of $469,000,000 in Q4 and $1,816,000,000 for the year, representing growth of 6.7% over 2015. Non GAAP operating margin was 27% for the quarter 26% for the year.
Non GAAP EPS was $0.34 in Q4 and $1.21 for the year, up 11% over 2015. Now I will address the environment and strategy before turning to the 2016 product highlights. Starting with the environment. Semiconductor business conditions appear to have improved slightly with the expectations of low single digit growth for 2017. Expected improvements are sector specific though and macro uncertainty remains.
We are focused on key emerging high and high growth areas including automotive, Virtual and Augment Reality, Cloud Infrastructure, IoT, Machine Learning, and Aerospace and Defense. We have successfully managed through the ongoing customer consolidation to date. We expect just a minimum impact on revenue from consolidation in 2017 and believe we are successfully positioned for larger opportunity in the future. At the same time, our relentless focus on innovation, execution and customer success is driving momentum in the marketplace for us. The opportunities continue to grow with system companies.
Turning now to our strategy, we are steadily executing our system design enablement or SDE strategy, the key points of which are to drive increased adoption of our core EDA portfolio, leverage our refined IP strategy for scalable growth, maximize the market opportunity of our system solutions, invest in emerging and new growth areas and develop partnerships with an expanded ecosystem. SDE offers additional growth opportunities as we expand beyond a horizontal focus on semiconductors and tap into significantly larger market through addressing systems companies and new vertical market segments. In 2016, we made measurable progress executing our SDE strategy. Expanding our ecosystem is important to developing opportunities outside our traditional markets. We announced several important partnerships for our SDE ecosystem in 2016.
For example, Cadence and Aero Electronics launched an integrated cloud based version of our Orkad Capture. We partnered with networks to streamline system level design and circuit level implementation for mixed signal IoT and automotive applications. We grew our system business in Aerospace and Defense with expanded partnership with Norton Grauman and BAE Systems. Let me now turn to some of our product highlights and customer successes in Q4 2016. Innovation is at the heart of our success and we have introduced nearly 20 significant products over the past 3 years.
Several of our products won awards in 2016 including Palladium Z1 and Virtuoso Analog Design Environment and we have a robust product pipeline planned for 2017. Investments in our digital sign up products are beginning to pay off as we gain even more momentum with the top 20 semiconductor companies. Revenues was up nearly 20% for the year with these customers. Overall digital and sign off growth was 9% for the year. We are set up for additional proliferations in 2017.
We added 60 Genus customers, 30 Innovus customers and more than 20 new customers using our full digital and sign up flow. 16 of the top 20 semiconductor companies are now using Innovus, including 4 of the 5 top mobile chipmakers. Innovus was used to tape out a large GPU design, which helped a customer realize 15% power savings over the previous design. We are currently working with over 45 customers on advanced node design with more than 12 7 nanometer engagements. In Q4, Calcom enter into an agreement with Cadence that represent an expanded commitment to Cadence products including hardware and IP.
Our verification suites provide complementary connected solutions that are based on strong core engines. It includes Incisive for simulation, Jasper Go for formal verification, Palladium for emulation and a Protium for FPGA prototyping. We are pleased to report that Pralidium Z1 had a phenomenal full year on the market. Total hardware revenue surged to a record high. We gained 29 new Palladium Z1 logos in 2016, 11 of which were system companies.
And this is the fastest adoption of a new emulation system in Cadence history. In Q4, several leading semiconductor companies adopted Palladium Z1 including Cardium and Innovium. Customer demand for the Palladium Z1 remains strong due to its enterprise class capabilities, which are ideally suited for large emulation farms. We expect another strong year in 2017. Jasper Gold, which is a former verification segment leader, continued its adoption and proliferation leading to a record revenue in 2016.
Integration of the proven Rocklatac technology with our simulation platform has gone very well. Feedback from key customers in earlier adopter engagements on the integrated platform has been very positive with significant simulation speed up due to the revolutionary multicore parallel simulation technology. For custom, analog and mixed signal design, Kadant continues to invest in and provide the most advanced set of custom, analog and mixed signal tools for customers. Adoption of our next generation products like the new Virtuoso Analog Design Environment Suite is ahead of our expectations. Virtuoso Advanced Nodes is now being used by over 100 customers.
Over 70 customers are using Spectre XPS, our FASP 5 simulator on SRAM designs and we are expanding into mixed signal applications. It was a solid year for our package and board business. We delivered a comprehensive system design solution for TSMC advanced wafer level integrated fan out packaging technology known as InFO. And we released our next generation Allegro and OrCAD product families with the support for flexible board design. And we just deliver our newest version of our security analysis portfolio which significantly speed up power and signal integrity sign off for boards.
Next, I would like to talk about our IP business, which is a key component of our SDE strategy and an important business for us. IP business opportunity remains strong as outsourcing continues. 2016 was a year of strategic refinement. We are significantly increasing our focus on standardized off the shelf IP, certain strategic vertical market segments and the most advanced process notes. Our IP business returned to year over year growth in Q4 and we expect about 10% growth for 2017.
IP highlights for 2016 included the largest ever renewal for our Tensilica technology. The announcement by Microsoft that 24 Tensilica Processors are at the heart of the HoloLens. The delivery of the 7 nanometer DDRIP to our top tier Asia Pacific customer. Q4 highlights included a large design IP contract with a Japanese customer primarily for automotive applications and adoption of our data center IP by a large U. S.
Semiconductor company. On the organizational front, I'm set to report that Peter Volenkamp recently left Cadence in order to spend more time with his family after the death of his son last year. We were fortunate that Babu Mendhava, a longtime colleague of mine could step in as a Senior Vice President and General Manager of the IP Group. Babu has been a CEO and held multiple senior operating roles at semiconductor companies. I am confident Babu will drive scalable, sustainable and profitable growth for our IP business.
Finally, I'm pleased to I'm pleased that Jeff Reebach has decided to extend his retirement date by a year. Jeff is an accomplished CFO and important business partner to me and an invaluable leader at Cadence. Before turning over to Jeff, let me quickly summarize my comments. 2016 was another great year for Cadence and we are well positioned for 2017. System design enablement is expanding our opportunities beyond EDA and expanding our customer reach.
Our digital and sign off tools are well on their way for advanced node design with market shipping customers. Customer enthusiasm for the Palladium Z1 led to a record year for hardware. Our refined IP strategy set us up to drive scalable profitable growth. Our next generation tools are helping customers succeed and are soliciting our position as a leader for custom analog and mixed signal design. There are macro challenges ahead but also opportunities specific to Cadence.
Through innovation and execution, we are positioned to build our build on our success and to further proliferating our solutions with market shipping customers. Now I will turn the call over to Jeff to review the financial results and provide our outlook.
Thanks, Lupu, and good afternoon, everyone. 2016 was a great year for Cadence all around. We delivered strong innovation, customer successes, execution and robust financial results. Overall, we are in a good position as we start 2017. Key results for Q4 and 2016 were total revenue of $469,000,000 for the quarter and $1,816,000,000 for the year.
Non GAAP operating margin was 27% for the quarter 26% for the year. GAAP net income per share was $0.14 for the quarter and $0.70 for the year. Non GAAP net income per share was $0.34 for the quarter $1.21 for the year. Operating cash flow was $197,000,000 for Q4 $445,000,000 for the year. Stronger than expected collections in Q4 drove operating cash flow upside.
Also note that bookings were $2,057,000,000 for 2016. Weighted average contract life was 2.6 years for both Q4 and 2016. The recurring bookings and revenue mix was approximately 90% for 2016. DSO at the end of the year was 33 days, down one day from Q3. Primarily due to the end of life of Palladium XP, we recorded an inventory charge of $13,000,000 for Q4, following a charge of $5,000,000 in Q3.
As part of our ongoing efforts to operate efficiently and effectively and optimally allocate resources, we undertook a restructuring in Q4, which resulted in a charge of $26,000,000 This included the cost of voluntary retirement program that we announced on our last earnings call. Earlier this week, Cadence entered into a new 5 year $350,000,000 senior unsecured revolving credit facility with a group of lenders. This credit facility replaces the $250,000,000 facility originally entered into in December of 2012. We also completed our $1,200,000,000 stock repurchase program in Q4 with the purchase of 9,300,000 shares of stock for $240,000,000 Over the course of the program, we repurchased a total of 51,900,000 shares, about 18% of shares outstanding at the start of the program. Also this week, the Cadence Board of Directors renewed its commitment to optimizing capital allocation and shareholder value by authorizing the repurchase of $525,000,000 of Cadence stock.
The actual timing and amount of repurchase will be subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and the other factors. Now let's turn to our outlook. For fiscal 20 17, 2017, we expect revenue in the range of $1,900,000,000 to $1,950,000,000 which would be 6% growth at the midpoint. Non GAAP operating margin of approximately 27%, GAAP EPS in the range of $0.89 to $0.99 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 Q1, we expect revenue in the range of $470,000,000 to $480,000,000 non GAAP operating margin of approximately 25 percent GAAP EPS in the range of $0.19 to $0.21 and non GAAP EPS in the range of $0.30 to 0 point 3 $2 Approximately 90% of revenue expected to come from beginning backlog. You will find guidance for additional items in the CFO commentary.
I want to add a few additional comments on outlook. Booking for 2017 are expected to exceed $2,000,000,000 with a weighted average contract life of 2.4 to 2.6 years. Going forward, we do not intend to comment on bookings or weighted average contract life. We introduced bookings guidance in the early days of the license model transition, but the model has now been mature for several years. Retaining flexibility over the timing of bookings will facilitate our goal of driving consistent scalable revenue growth within the context of stable revenue recognition model, while preserving the quality of bookings.
I also want to remind you as in the past that the hardware and IP have become a larger portion of our business. There may be more variation in quarter to quarter results. I want to conclude by talking about my own plans. As you know by now, I'm extending my retirement date until March 31, 2018. Cadence is very important to me and that I decided that I wanted to continue to partner with Lip Bu for another year as we drive the company forward towards our goals.
So with that, Shannon, we'll now take questions.
Your first question comes from the line of Salan Ahmad from Credit Suisse. Your line is open. Please go ahead.
Hi, thanks for taking my question. Libbu, can you provide some color on growth by different end market segments that you expect between your functional verification and digital IC in this year?
Yes. Fahan, I think your question is the growth on the functional verification and the digital side. So I think overall I think I will give you the high level and then Jeff can provide you more detail. So far in terms of our verification side, we are doing well and this is the fastest growing for our customers. And our Verification suite that as I mentioned in my script and now we have Incisive in simulation, JasperGo for formal verification, Palladium for emulation and then the Proteum for FPGA.
And just let me address 1 by 1. And then first of all I think the Jasper goal as I mentioned we have a record revenue in 2016. This is a segment leader and is very well received by the customer. And then the our simulation in our Incisive right now with the Rockitax integration have done very well and the key customer in the earlier Doppler engagement have been very, very positive. They see tremendous simulation speed up with the multi core parallel simulation.
So I think stay tuned. I think that one we should do very, very well. And then hardware we have a record in our 1st year, full year in the market. And we mentioned couple of 29 new logos, 11 are system company and we mentioned couple of leading semiconductor company include CarVM, Innovium. And so I think overall we are very excited about this whole verification suite that we provide and it's really, really critical for our customers.
So we're excited about it. On the digital front, I think we're doing really well And I mentioned to you, we are really focused on the top 20 customers and that we see more than 20% growth in these customers. And overall our sign off and digital are growing at 99% for the year and we expect additional proliferation in 2017. And then we mentioned about 16 of the top 20 semiconductor already embrace and adopt Innovus and then 4 of the top 5 mobile and a chip designer and then they are using us. And then and also we are very proud of the performance on the large GPU design.
And so overall and then we also highlight the Qualcomm enter a very important agreement with us and expand the commitment to the cadence. So I think overall the digital we are all the investment we make and now we are starting to see the payoff and the proliferation will accelerate in 2017.
And so a little bit of color, we don't guide specific questions, but a little bit of color perhaps. We do expect good growth across our core software business, especially in digital and sign off. We expect IP to rebound and they have at least 10% growth. And we expect another strong year for hardware, but want you to recognize we're coming off a phenomenal year with record revenue, meaning that the year over year comps may be difficult in hardware.
Got it. And Lip Bu, can you talk about maybe VR, NAR and the role that your IP is playing in HoloLens and how big of an opportunity do you see that growing for you over time?
Yes. We are excited about this whole ARVR. I mentioned couple of area that we are double, triple down on it. And clearly the ARVR is a very important area. And then clearly the machine learning is very, very important.
And then those actually the Tensilica and couple of our tool can really is helping our customer to design the best product. And then so on the ARVR clearly this is emerging whole experience for not just entertainment like gaming or entertainment like games, the live game broadcast. And also I think for education, for multiple applications. So we are seeing that quietly building up and then Tensilica being the programmable low power and the engine that turned out to be very, very useful for that. And then same thing for the machine learning.
And then the other part in this whole ARVR, audio play a very important role. And then we have the kind of industry standard audio that can be really exciting. And then you touched a little bit about the Microsoft. We are very happy. They announced using 24 Tensilica Processor for their HoloLens and then they are making good progress in the marketplace.
We're excited about it. Thank you. That's all I have.
Thank you. Your next question comes from the line of Monika Garg from Pacific Crest. Your line is open. Please go ahead.
Yes. Hi, thanks for taking my question. Jeff, first, this new revenue recognition model, maybe can you talk about when you expect to implement it and any impact to your current revenue recognition model?
Yes. So I'll start. We do expect to retain recurring revenue treatment, but we're currently working through the details of the new standard with our advisors to determine how we will implement it and what impact, if any, it will have. There's still a lot of work to do, so stay tuned.
Any initial assessment, do you think it could impact your model or not?
Yes. Again, we expect to retain recurring revenue treatment, Monica.
Got it. Okay. Then a couple of months back, Siemens announced acquisition of Mentor. Maybe could you talk about how do you see that impacting the EDA industry and cadence?
Sure. This is Lip Bu, Monica. And I think clearly Mentor is a good competitor and you got to remain the important competitors. And we are not in the right place we are not the place to comment or speculate as they are pending for transaction. But one thing that highlights the importance of the SDE and then the EDA is part of that SDE system design enablement.
We are excited about that to tie into our overall strategy in terms of more supporting to the system company and some of the new vertical market that I highlight like for example in the military and defense, automotive and then some of this industrial application like IoT and machine learning across all the infrastructure in the cloud and the intelligent into the medical, I think there are going to be a lot of opportunity open up.
Got it. Just the last one, custom IC design for 2 consecutive years has grown less than 5%. Anything particular there? Or do you think custom IC design is a lower growth market than digital? Thank you.
Yes. Custom analog, as you know, we are the leader. And clearly when you had the positions sometimes the growth is not going to be higher. And but we continue to drive the leadership and then we drive the most advanced set of custom and analog. And in fact right now we also try to tie in with our strength in the digital side to provide the mixed signal solution to our customers.
And in fact, we have a couple of new encouragement points in our adoption of our next generation product, the new Virtuoso suite actually is ahead of our expectation and we're very pleased with that. And then and also adopt by over 100 customers. And then the other part is that the Spectre XPS, our new fast spy simulator and now we have over 70 customer on the SRAM side and now we're starting to apply and expand into the mixed signal side. So I think all I can highlight is that we have a strong position. We continue to drive the leadership on that.
And then the other part is we also drive some of the new emerging opportunities like IoT, automotive and then the mixed signal application that we can really drive continued leadership.
Got it. Thank you so much.
Thank you.
Your next question comes from the line of Mitch Steves from RBC Capital Markets. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my question. I just have one kind of on the actual systems side of the business. So, so far just based on your comments, I think R and D spending hasn't really been impacted by consolidation. So the semiconductor piece should be fine.
But how do we think about the systems piece in terms of how that growth rate is comparing on a relative basis to overall semiconductor R and D spend?
Yes. So Mitch, let me try to answer that. That's why I think it's important to understanding our system design enablement strategy. And this is expanding beyond our EDA towards expanding to also the system company and some of the new verticals that we are pursuing. And then just like we did in semiconductor side, the ecosystem partnership become very important.
Like for example, in the semiconductor side in the early day, we're very focused on ARM, we're very focused on TSMC. Same thing we are starting to very focus on networks that we announced on the system level design and circuit level implementation, aero electronics and then some of this packaging become very important with TSMC. And then some of the vertical we are pursuing, a couple of them we highlight is aerospace and the defense and then with our expanded partnership with Northern German and BAE and then continue stay tuned we will tell you more. And then also our expanded partnership with the GE Aviation side. And then on the automotive side, we highlight a couple of pointers to you.
Mobileye is engaging with us on the Palladium, Z1, Infineon engaging with us on the automotive function safety. And then some of this enablement in terms of automotive application on the TSMC 16 nanometer FinFET. And also we have a dedicated team right now on the automotive and aerospace and defense. And then we also highlight some of the IP engagement with the Japanese customer on automotive application. And also in our data center is another area that we are focusing on.
And beside our data center IP, our hardware, we call VM, Innovium and engagement and I think stay tuned. So I think over time we're going to kind of show you how we're going to expand that strategy. And then some of that strategy I think we highlight not just new area actually enhance our core EDA to drive even more adoptions and then leverage on some of the refined IP strategy that we focus on and then to drive some of the success in the expanded ecosystem.
And just a little bit, Mitch, on the numbers, it's the systems business is approximately 40% of our business. It has expanded our TAM and it's growing nicely.
Okay, got it. Thank you very much. Thank you.
Your next question comes from the line of Krish Sankar from BLA Merrill Lynch. Your line is open. Please go ahead.
Thanks for taking my question. I had a few of them. First one, either Libbu or Jeff. I'm just trying to understand on your guidance, is there a way you can quantify the negative impact from the semiconductor customer consolidation and the positive from your share gains and product traction? Or is the impact of semi consolidation overblown that it's really deminimist?
And then I had a few follow ups.
Yes, Krish. It's really de minimis, had minimum impact on the revenue from consolidation. And we again, I think there's also opportunities that come from consolidation to us that are harder to track for 2017, right? It's de minimis for 2017.
Got it. Got it. And then a couple of other questions. One is, your hardware business, I'm guessing that includes emulation and FPGA prototyping. Is there a way to quantify the market size in 2017 for each of those two categories?
I think it's kind of hard. I think what we've generally said is both of these businesses are growing because of a secular trend, which is benefiting the whole industry. And certainly, as you saw, we had a record year last year in hardware, particularly driven by the Z1.
And in some way for the advanced node complex silicon and system design hardware emulation is very critical and so that they can shipping the product faster because whatever their design, they can verify much closer and then this hardware, software core design, core verification is really the bottleneck. And so we're going to see continue growth and demand and Palladium Z1 is really enterprise class, people love it. And then the customer when they're starting to use Palladium and they just find they want to buy more because the capacity requirement, the benefit they receive and then time to market improvement is tremendous value to them and that's why we see very good growth for us.
Got it. Got it. And then a final question, the operating margins expanding about 100 basis points this year. Is it primarily a function of some of your digital investments winding down now that you're getting the traction Or is there something else going on that actually high 20s, 30% op margin in the future is not is probably a reality?
So glad you noticed that our operating margin improved by 100 basis points. I think it's less that we are continuing to make investment, but I think we're seeing the results of the investment show up with extremely strong digital growth last year and particularly in Q4, and we expect that growth to continue into the next year, plus the results from all the rest of our businesses rolling in.
And in some ways, Jeff and I, we continue to drive the productivity efficiency and to drive success and then scale the business.
Got it. Thanks guys. Thank you. Thank you.
Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open. Please go ahead.
Thank you. Good evening. Lip Bujav, Jeff, you noted a couple of times that semi consolidation had had a minimal impact and that in itself is not too terribly surprising. But the question really is when we consider actual levels of semi R and D, is there some rate of growth that you think you do need to see to sustain your growth in 888? The reason I ask is when you look at a composite of semi R and D at least for the Q3 of last year, the latest data available.
Semi R and D does appear to have somewhat declined sequentially Q1 through Q3 of last year was flat to slightly down year over year, not too terribly much. But that helps you keep a minimal impact. But at what level of growth, if any, do you think you really need to see in semi R and D setting aside systems customers to sustain your core EBITDA growth?
Yes. Jay, let me start first. I think clearly our focus on the leading company the top 20 and when they do more and more consolidation actually is very interesting. They actually spend more money in R and D because they want to continue their leadership. And so by focusing on the right customer and then really drive efficiency, drive the most innovating products to help them.
And I think we're going to see that opportunity for us. So that's why I think the impact is minimum. And then secondly, we're very well positioned to getting greater opportunity going forward. And also I think I mentioned earlier, the system company, the SDE strategy that we're pursuing, we get that. And also I think the China, the fabric semiconductor company were not very determined to build a domestic semiconductor ecosystem industry and we are well positioned to work closely with those customers to help them successful.
So I think overall, I think we do the right thing and then focused with the right customer and engage heavily on the customer with the innovation product. And at the end of the day, I always strongly believe the best product win. Okay.
And follow-up question is how you're thinking about some of your internal investment priorities for 2017 and beyond? When we consider your need to hire people or bring people on, one thing we noticed recently was an unusually large increase in job openings that you're looking to fill in Asia, much more pronounced than we've seen before. And again, that in itself is also logical given the importance of that market to EDA. But how are you thinking about your headcount expansion plans, at least in that part of the world from a geo perspective? And then from a product perspective, one of the area that we noticed that you seemingly are looking to spend more on or add people in is synthesis, which is interesting too because Synopsys seems to be doing the same thing and Mentor to some extent.
So perhaps you could talk a little bit about what's going on in the synthesis market that has otherwise been pretty flat towards revenues are concerned for the last many years?
So I think, Jay, let me answer the try to answer the R and D side and then Jack can talk about the other portion in terms of internal priority. From the R and D point of view, I think clearly we will continue investing in digital and sign off because we are proofreading with our customers, the leading customers. And then secondly, we're going to continue to double down on some of the verification side because that's where the bottleneck on some of the customer shipment. And then in terms of the digital front I'll just go a little bit deeper and we are right now very focused on the full flow. And so not just the place and route, the sign off, synthesis is very important.
We have a new product came out very well received. And right now our priority focus is full flow. And as a customer looking for full flow optimization productivity gain in term of the PPA in a performance power and area and the run time so that they can drive their efficiency. So I think that part we're going to continue to double down. And then the other part we are really exciting is the IP business and because our sourcing trend is accelerating And then also the Tensilica we talked a little bit more earlier in the machine learning.
I'm a big fan of the machine learning and the VR, AR and then some of these infrastructure changes that are more programmable and more power efficiency and that really play into Tensilica strength. So I think all in all I think we have all the right elements. I think the key challenge for us is really drive customer success and recruit the best talent in the industry, outside the industry globally if we can get one and then continue to do the innovation and then make sure that customer successful in their timely fashion in their design and then the tip out. So I think that's our high priority.
All right. And then lastly for Jeff on emulation, your cost of revenue for product maintenance increased sequentially by about $19,000,000 from the Q3. So just to be clear, dollars 13,000,000 of that was due to the write down for XP2, which perhaps has reached end of life now. And therefore, the remaining 6 or so would have been largely tied to a sequential increase in hardware from Q3 and therefore there would have been a strong by inference sequential increase in emulation revenue for the quarter possibly leading to a record quarter for hardware in Q4? Yes.
So on the reserves, yes, we took a $13,000,000 charge in Q4 for XP, not just XP2, but XP, right, as we're reaching the end of life of that product. That was on top of $5,000,000 in Q3. And so that was the major thing. We're not breaking out hardware beyond that in Q4. But as we said, hardware was a record year last year, mostly driven by Z1.
Okay. Thank you.
Your next question comes from the line of Rich Valera from Needham and Company. Your line is open. Please go ahead.
Thank you. Lip Bu, I was wondering how you would characterize the macro environment for your customers entering 2017 versus 2016? I know you mentioned that semis look a little bit better this year with at least some growth expected, but can you just put in your own words how you think about the environment
this year versus last year? Yes. As I mentioned the environment from what I see is improved slightly. And I think it's not in general. I think it's more sector specific from my point of view.
And I think that I like what I see and engage with the customer. I think automotive as you all know the ADAS, the self driving is a lot of excitement going on right now. And ARVR there's a lot of whole suite of new player coming up. And then the cloud infrastructure, that's something that I am very dear to my heart. And clearly, the scalability of the hyperscale web services they have a changing they're driving the new changes.
And then in terms of more programmability and more scalability in terms of the storage requirement. And then of course the IoT not just a consumer IoT a lot of industrial IoT to drive productivity and to drive efficiency and more intelligent and machine learning deep learning on the cloud and on the edge. And there's a lot of new changing landscape and of course the whole aerospace and defense application and the requirements. So those I think that drive the 2017 semiconductor growth and I'm excited about it. And I think cadence are well positioned to capture some of this.
And then clearly they are driving some of the most advanced nodes and design. And also they are looking a holistic approach from just design all the way to verification to the PCB board packaging design and then all the way to the system hardware software design and verification and I like what we have in our portfolio.
Got it. Thank you for that Lip Bu. A question for Jeff and first, glad to hear you'll be staying on for another year, Jeff. But question, just want to revisit the operating margin. It is nice to see that you're guiding for about a percentage increase this year.
Just wondering, going back a ways, there was a point when you guys talked about kind of a target incremental operating margin. And I know you kind of got away from that as you got into the investment mode Is there any thought of getting back to that sort of target as you move forward, some kind of target for leverage in the model? Or are we going to kind of play this year by year?
Yes. So our strategic priority, Rich, remains to develop innovative products and to derive customer value, customer success. And so that remains our concentration. But as you noted, we started guiding 2015 at 25%, 2016 at 26% and this year at 27%. So we are seeing the impact of those investments working out.
So I think that's a positive. But we're not guiding we're concentrating on strategic priority, which is innovative products.
Got it. And then just with respect to the written down emulation product, if you sell that product, are you guys going to call that out in your COGS? I mean, essentially, you have sort of 0 cost inventory, I guess, now?
Yes. If we happen to sell stuff, it would be largely at 0 cost. We also have maintenance requirements going forward on the XPs that are out there in the field. So that will also consume some inventory. So yes, if we're selling at 0 COGS, as you know, the SEC requires you to disclose how much was sold at 0 COGS.
So we'll let you know.
Okay, very good. Thanks very much, gentlemen.
Thank you.
And our final question comes from the line of Sterling Auty from JPMorgan. Your line is open. Please go ahead.
Yes, thanks. Hi, guys. Wanted to drill into first the 20% growth with the top 20 semi companies. Is there additional color you can give us in terms of how much of that was expanding usage by more design teams versus taking down additional tools versus selling to new maybe top 20 that you weren't doing as much or maybe any business with previously?
Yes. Sterling, let me start first. Clearly, we are excited in our investments starting to pay off now. And I think clearly in terms of our entire new suite of tool that we developed and clearly customers see the benefit in terms of the performance power area and run time and can help them to drive this complex design. So the top 20 semiconductor company plus some several top tier system company really adopting our the Innovus.
And then right now we are working closely with them in terms of full flow design. And that is very important, so that they can really count on us to design the most complex chip and can be fabricated in the most advanced node, the 10 nanometer to 7 nanometer and towards later on to the 5 nanometer. So I think overall, they are basically start with work with us and then adopting some of our tool. And then now we are starting to not just the couple of projects, now there are some group and now of the design and either the CPU or either it's GPU or either specific SoC that they're starting to adopt making us as a standard for the design and that is huge for us. And then right now there is baseball terminology, we are in the 3rd ending now and then 4th and 5th ending will be really driving the success in terms of fully proliferate across all their engineering team.
Got you. And then one follow-up would be, Jeff, I think the non GAAP R and D expenses dropped sequentially more than I've seen in my memory anyway. Was that just the timing of the restructuring or what other items drove that? And is there any snapback that we should expect in that R and D spend in the first half of twenty seventeen?
So a
couple of things always happen in the later half of the year for us Q3 and in Q4. First is the Social Security goes down and frequently to 0 as people go over the Social Security cap. 2nd is the vacation time goes up in the second half of the year, both in Q3 for the summer and in Q4 for the holidays. So those 2, obviously, are the biggest drivers and you should expect some snapback in R and D in Q1 as a result.
I would now like to turn the call back to Mr. Luke Boutin for closing remarks.
In closing, 2016 was a year of great success and 2017 present us with exciting opportunities. I would like to thank all our shareholders, customers and partners, Board of Directors and hardworking employees for their continued support. Thank you all for joining us this afternoon.
Thank you for participating in today's Cadence Design Systems 4th Quarter and Fiscal Year 2016 Earnings Conference Call. This concludes today's call. You may now disconnect.