Afternoon. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to Cadence Design Systems Second 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. Alan Lindstrom, Senior Group Director of Investor Relations, you may begin your conference.
Thank you, Nicole, and welcome everyone to our Q2 20 16 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 September 16, 2016. A copy of today's prepared remarks will 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 the 8 ks filing today and is available on our Investor Relations website atcadence.com.
The CFO commentary should be referenced with both today's conference call remarks and the earnings press release issued today. 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 July 25, 2016, for the quarter ended July 2, 2016, 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. Cadence continues to gain momentum through innovation, execution and relentless focus on helping our customers succeed. We delivered good operating results for Q2. Revenue was $453,000,000 up 9% year over year. Non GAAP operating margin was 25%.
Non GAAP EPS was $0.29 and operating cash flow was $80,000,000 Let us start with the environment. As they have been for some time now, semiconductor business conditions remain challenging. As we remain mindful of the consolidation activity in the semiconductor industry. While we do not expect a material impact on our business in 2016, consolidations will present both challenges and opportunities for us over the next few years. But at this point, it is too early to estimate any potential impact in the future.
In any event, I want to emphasize the growing opportunity we have with systems companies. A key aspect of our system design enablement strategy is to increase our system customer base and participate in new verticals. Q2 was a strong quarter for us from digital implementation to PCB and across newer verticals, including automotive, mil aero and medical. In fact, 3 out of our 5 largest software contracts were with system customers. Cadence signed a comprehensive agreement with Canon, which includes VIP.
Business was also good with our semiconductor customer base. One example being a comprehensive multiple year agreement with SK Hynix. Looking at our Q2 business highlights. I will begin with system design and verification. Palladium Z1 continued its strong momentum, and we had a record another record quarter for hardware revenue.
9 new systems and semiconductor companies embraced Palladium Z1 enterprise class capabilities capacities sorry, capabilities including Realtek, Imagination Technology and SocialNet. We also completed the acquisition of Rocketeq Technologies and integration is underway. Rockatik brings revolutionary multi core technology that will provide industry leading simulation performance using massive parallelism on standard X86 based multicore servers. And revenue for our former solution, which include JasperGold grew nearly 20% year over year to a new high for us. Turning now to our system interconnect and analysis business, which includes tools for board and IC packaging design and system analysis.
This quarter, we introduced our next generation Allegro and Orchid product families. These new releases are our most significant in over 10 years, and they support flexible board designs now commonly used in automotive, consumer electronics, mobile and wearable applications. Revenue for our security analysis tools grew 11% year over year. Also an exciting virtual reality company adopted our PCB solution. Next, let us move on to our digital and sign off product group.
Our digital sign off flow continued to gain momentum with market shipping customers. In addition, we significantly expanded our business with Northrop Grumman, which adopted Cadence full digital flow, including Innovus Genus to support their future SoC design requirements. And Cypress Semiconductor adopted our full digital flow for automotive design. Stratus, our high level synthesis solution, which enables system design through a high level of abstraction, had its best booking quarter so far. We continue to invest in strong ecosystem support.
Cadence delivered design kits for 10 nanometer implementation of ARM Kotak A73 and Mali G71 cores, which were designed with Cadence Digital and Signoff tools. Cadence and ARM also delivered the industry first end to end hosted design solution for IoT design. Intel Custom Foundry certified our implementation and sign of tools for its 10 nanometer FinFET process. And SMIC and Cadence released a 28 nanometer low power reference flow. Now let us turn to IP, which is strategic business for us and is important component for our system design enablement strategy.
Under the leadership of Peter Vollenkamp, who joined us in April, we are continuing to refine our strategy to focus on sustainable and scalable growth. Tensilica had its best booking quarter ever with the completion of a major renewal with a leading semiconductor company. This customer significantly increased both the scope and size of his relationship with us, Targeting artificial intelligence and machine learning, we released the new Tensilica Vision P6 Processor. In another exciting application, a leading virtual reality headset use multiple Tensens Tensilica calls. In design IP, we have made significant progress on 7 nanometer products and signed our 1st major 7 nanometer contract.
In summary, Cadence once again delivered good results in challenging environment. Business with system companies was strong across vertical segments, including Automotive, Mil Aero, Medical and Mobile. Strong broad based demand for the new Palladium Z1 contributed to our best hardware revenue quarter ever. The innovative next generation Allegro and Orchid product families strengthen PCB and IC packaging design and analysis. And digital and sign off solutions have momentum with our market shaping customers, and we are growing our business with both systems and semiconductor company.
Now I will turn the call to Jeff to review the financial results and provide our outlook.
Thanks, Lip Bu, and good afternoon, everyone. For Q2, our innovative new products and strong execution contributed good results in a challenging environment. Total revenue was $453,000,000 up 9% year over year, including record hardware revenue. Non GAAP operating margin was 25%, in line with our expectations. GAAP net income per share was $0.17 Non GAAP net income per share was $0.29 up 7% over the year ago quarter.
Operating cash flow was $80,000,000 and we repurchased 100,000,000 shares of stock for $240,000,000 which represents over 3% of shares outstanding. Now let's turn to our outlook. There are no changes to our fiscal 2016 outlook for the midpoint for bookings, revenue, operating margin, EPS or cash flow, while we have narrowed the ranges on bookings, revenue and EPS. We expect bookings in the range of $2,020,000,000 to $2,800,000,000 which equates to 8% growth at the midpoint. Revenue in the range of 1.8 $1,830,000,000 to $1,830,000,000 which would be a 7% growth at the midpoint.
Non GAAP operating margin of approximately 26 percent. GAAP EPS in the range of $0.70 to 0 point 7 $6 and non GAAP EPS of $1.17 to 1 $0.23 and operating cash flow in the range of 380 dollars to $420,000,000 For Q3, we expect revenue in the range of 440 dollars to $450,000,000 non GAAP operating margin of approximately 25 percent GAAP EPS in the range of $0.17 to $0.19 and non GAAP EPS in the range of $0.27 to $0.29 Approximately 90% of revenue is expected to come from beginning backlog. You'll find guidance for additional items in the CFO commentary. Finally, note while we are maintaining our full year revenue guidance, we do not we do expect revenue to decline from Q2 to Q3 due to timing of certain hardware transactions. We expect Q4 revenue to ramp to a midpoint in the neighborhood of $470,000,000 So with that, operator, we'll now take questions.
Your first question comes from the line of Mitch Stegan from RBC Capital Markets. Your line is open.
Hey, guys. Thanks for taking my question. Just real quickly on the hardware platform, just given that was or saw material revenue for the quarter was the highest ever. Can you give us an idea of how much was up year over year or the incremental dollars you saw for the product line a year over year basis?
Yes. We don't give that kind of detailed guidance on our individual business segments. What we have said is that we expect hardware revenue to be up year over year at better margins with obviously that driven by the Z1 product.
Got it. And then secondly, if I were to think about the sub segments within the remaining EDA tool piece, is there any segment that's growing faster than others or at least you believe you can potentially gain share at this point?
Yes, I think this is Lip Bu. I think across the board, I think that all products have been moving nicely. Just to highlight in the digital front, we continue to gain momentum with our market shipping customer. And highlight couple of key like the Mu Aero, Northrop, Cummins and then Cypress and a few others. And clearly, we continue to drive the advanced nodes and also with our ecosystem partner like ARM and also TSMC, Intel Custom Foundry and SMIC across the board.
And then on the custom analog side, in April, we announced the next generation of the Virtuoso platform and environment suite that consists of Explorer, assembler, compliance and really driving a holistic flow and then in terms of suite that we can really provide and then for the customer within the platform. And then meanwhile, we really double, triple down on the advanced node, the 10 nanometer, 7 nanometer application. So I think overall, they look healthy. And then on the IP side, I think we mentioned earlier, we kind of refined our strategy under the leadership of a very capable Peter Volenkamp, and I'm very pleased with what he has done. He's very strong in execution and very strong in terms of delivering to customer You pay a lot of attention to the customer.
And we've not drive that different. And he's very, very strong in the analog RF area and more than 100 patent filed or pending patent. So I think he's a very strong technical and you brought in a very strong team come together. So stay tuned.
Got it. Thanks. And then just one really small one for the buyback. Is there any change there just given you guys have been buying back about $240,000,000 a quarter?
And that's my last one.
Yes. So we've been buying $240,000,000 a quarter and we bought 10,000,000 shares in Q2. I may have said 100. So we bought 10,000,000 shares in Q2. We plan as always to complete our buyback and believe we have substantial liquidity to do that.
Thanks very much. Thank you.
Your next question comes from the line of Gary Mobley from Benchmark. Your line is open.
Hi, everyone. Good afternoon and congrats on the strong quarter. I want to start out with the big news from last week that is ARM Holdings being acquired by SoftBank. Given that ARM seemingly is going to be run autonomously as of course has been the case for decades now, it would seemingly have little impact on your business. But maybe if you can give any insight as to how Cadence relationship with ARM may change if at all, whether there might be any change in the marketplace in terms of trust factor or how valuation expectations for some of your M and A targets may have changed in light of the large valuation multiple arm received?
Yes, it's a good question. This certainly is a very exciting development in our industry. And then ARM is a very strategic partner for us. We're looking forward to continue that relationship and then expand from that. And so stay tuned and we are really excited about it.
Okay. All right. And I have a follow-up question relating to the extended the extension in the expected contract life now up to 2.6 years as you expected to end presumably fiscal year 'sixteen and that's up a bit from your prior expectations. Is there one large contract that is driving that up?
Yes. So generally, we always focus on deal quality and maximizing deal quality. We don't focus on contract term. And it will vary and it has varied and it will continue to vary from quarter to quarter. Generally, larger companies prefer longer term, smaller companies prefer smaller terms.
We've said for the year, we expect it to be a closer to 2.6%, which was within our original 2.4% to 2.6% range. So we're kind of in the neighborhood where we expected to be when we started
there. Okay. So can you give me an update on and your perspective on the IP business? If I'm not mistaken, you were all along expecting the IP business to be flattish in 2016. Just if I'm not mistaken, that was primarily a function of the consolidation taking place in the industry.
But are you any more optimistic on that business or I guess more pessimistic conversely on the business?
Yes. First of all, we didn't say that. But I think overall, the IP is a very strategic, very important to us, especially in our whole vision of a system design enablement is a very key component of that. And then we grew from 0% to over 10% revenue. And then now the new leadership of Peter Volenkamp, since he joined in April, We are delighted and for him to refine the strategy and then reviewing the what we have and then make sure that we can really drive the future of sustainable and scalable growth for us.
Saying that, clearly, we continue to drive success in our IT business. Tensileka, as I mentioned in my script, had the best booking quarter ever with the completion of a major renewal with a leading semiconductor company. And we also have been focused on the artificial intelligent machine learning with our new Tensilica Vision Processor. And we also have leading virtual reality headset using multiple Tensilica cores for us and that's on the Tensilica side. On the design IP mentioned earlier, we made significant progress in the 7 nanometer development and we signed our 1st major 7 nanometer contract.
In terms of the VIP side, I mentioned the Canon. We signed a comprehensive agreement with Canon, including VIP. So overall, I think we continue to drive success in our IP business. I'll give Peter a little bit time to fine tune his strategy. And then when we are ready, we will introduce you our strategy going forward.
And as we go through this transition, we are expecting more modest results in IP business this year.
Okay. That's it for me. Congrats, yes. Thanks.
Thank you.
Your next question comes from the line of Rich Valera from Needham and Company. Your line is open.
Thank you. Good afternoon. I was wondering if you could give any color on how things are going with consolidations that you've seen so far? How you think you're faring in those? And if you think you're maybe being able to gain some share?
And then relatedly, how have you seen the pricing around those and the ones that you've done so far? I mean, we've heard some chatter that there's perhaps some fairly aggressive pricing as the various EDA vendors compete to gain or retain share, particularly in the digital side? So any comments there would be helpful. Thank you.
Sure. Richard, thanks so much for the question. Clearly, the whole consolidation will continue even though it's not the same magnitude as 2015 that over RMB 100,000,000,000 consolidation on the semi sector that is relevant to us because they are customer. And that we expect this year will be slower, but still very active year. And in saying that, I think consolidation, usually the consolidator want to drive efficiency and then drive more productivity and then more synergy in doing that.
As we mentioned earlier, we don't expect any material impact to us in 2016. But in the longer term, there's some opportunity and challenges for us in the next couple of years. So answer your question, I think clearly the consolidation, it will happen, it will continue. But I think the consolidating company will be stronger and also drive more efficiency and they pay a lot of more attention to productivity. And then from in terms of the pricing point of view, as you know, EDA is a very competitive business, sector to sector, product to product.
From Cadence point of view, we continue to be very disciplined and then drive value. And I think the best way to continue the success is collaborating deeply with our customer and then developing that innovating, I always strongly believe the best product wins. And so but meanwhile, we have to drive value and be disciplined on that. And that's kind of I will put I will stop there. And I
think just a few data points. Our booking range at 2.02 to 2.08 still has the same midpoint and our revenue range of $1,800,000,000 to $1,830,000,000 still has the same midpoint. So you're seeing no impact in 2016.
So fair enough. That's actually a good segue to my next question, Jeff. I mean, since you did tweak up your duration slightly, and I mean, if you're just sort of picking the midpoint previously up to from 2.5% to 2.6%, that be a 4%. And I know there's small numbers here, so you could say it's rounding. But it would imply that you actually have a slightly lower bookings run rate on sort of a time weighted basis.
Is there anything to that or are we just talking kind of rounding here?
Yes, I think it's just noise or rounding, right, within the scheme of things. Our bookings that we've been quite happy with our bookings this year and we haven't changed the midpoint and the range has been tightened. So we're quite happy with what we're seeing.
Great. And just one final one. Jeff, any update on the status of the search for your replacement?
Lipu will take that one. Yes.
I think let me touch on that. We are in the middle of the comprehensive and thoughtful search. A lot of interest in this position, as you can imagine. We are a ratable model and it's a very strong platform that people like to be here. And we'll let you know when we have something to tell you.
And then meanwhile, Jeff is committed to stay until March 2017.
I'm glad to hear that. Thank you, gentlemen.
Thank you.
Your next question comes from Jay Felicia Hower from Griffin Securities. Your line is
open. Thank you. Good evening. A couple of first for Jeff and then I'll turn to Lip Bu for a couple of product questions. So Jeff, for you first, geographic question.
It looked as though you're according to the 10 Q out tonight, your Americas revenue was down sequentially from Q1, albeit up year over year. Was that mostly just some timing of contracts perhaps related to IT or maybe hardware or whatever you can describe? And then secondly, on the other hand, your Japan business was up for the Q2 in a row year over year. And so we've been perennially asking about a possible bottoming in Japan and just sort of the question there is, is this it? And then a follow-up for you, Jeff, on emulation then Filippo.
Yes. I mean, obviously, we don't guide individual geographic segments of our business. But you did get parts of our business, both the hardware and IT business, which are more variable parts of our business
and how
that turned out. And North America and Japan is exactly how you it. I don't think I have more
relevant comments
on that.
Okay. On emulation, according to the Q, your cost of hardware was up just over $10,000,000 year over year. When we combine that with your comments about record revenue for hardware, it would seem to suggest that your emulation absolute cost of revenues might have gone down sequentially even with record revenue, which would of course have led to a good sequential increase in emulation margin, perhaps a few 100 basis points and perhaps even more so year over year. So does that sound about right that you had at least several 100 basis point improvement in profitability in emulation and is that at all sustainable?
Without obviously commenting on your specific numbers because we can't do that, Z1 was the majority of sales in Q2 and margins on the Z1 are better than the prior XP. So having a record quarter, all good stuff.
Okay. For Lip Bu, the question on digital and sign off, the percentage of revenue from that segment actually went down a little bit sequentially and year over year. But the specific question I'd like you to address is if you could comment on the expansion and deployment or of Tempus, Voltus, Genus and certainly for Innovus that you've been seeing. In other words, you've commented on previous calls about having had several dozen at least customers adopt Tempus and Baltus and so forth. But what isn't entirely clear is if you could comment on what's been going on after initial acceptance.
Is there broader deployment and expansion beyond perhaps initial design projects for those new products?
Yes, good question and thank you for asking. Clearly, our digital and sign off flow, as you know, we have Innovus for place and route and Genus for synthesis and then Tempus for sign off for the store the power. And so I think these are all very new products coming up last year, even some of them are later part of last year. So clearly from engagement from customer, we are delighted with the progress we make with the market shipping customer. They are the leader in important customer for us.
And so I think, first of all, they start to evaluate our tool. And secondly, put some projects and see whether it works. The next thing is in our couple of adoptions and then to make sure that it's stable and can be found on the most advanced node. Then they're starting to proliferate across the product group. So we are in the various stage of that proliferation and now it's a baseball season.
I mean, clearly, in the second and third and fourth ending, this is the most critical period coming up right now is a lot of customer look at the tool, the entire floor cannot count on it for the production. And that's where we are in this multiple trial. And so stay tuned. We're going to continue to drive that. The main reason from the Q3 Q2 to Q1 because Q1 we have won important orders with the foundry and this is a one off type.
And then clearly, in a part of the proliferation, it will be continuing in Q3, Q4 and the beginning of next year. So I think this is a critical period. And we continue to highlight to you some of the success we have. Like the Cypress, we announced a full flow. We are extremely excited about the Nobloom drumming.
And this is a new aero site and then using our full digital flow and then for their future SoC design. This is really, really exciting for us. And then we're going to continue over time to tell you some of the success we have. But so far, I'm pleased with the progress we made.
And we expect good growth in 2016 overall against 2015 for the digital business for us.
Okay. And then lastly, if I may, for Lip Bu, referring to automotive, which was, of course, a major subject at DAC last month, You talked about it earlier. And at DAC last month, there was a very interesting presentation by NXP and they showed some interesting demos of technology that would seem to play to your strengths in custom in terms of automotive telematics and so forth. So the question is really for you, what so to say is going on under the hood for Cadence with respect to automotive? What have you really done in terms of organization, investments, resources, particularly to drive the needs in IC and IT and at the systems level for automotive?
Yes, it's a very good question. And automotive is a very important vertical market we go after in our whole system design enablement. And this is a very important strategy we have. And then we have a very nice complete portfolio beside the digital front. The analog mix signal is critical in some of the applications for automotive.
We have a lot of success in that. And then the other part is the IP. Tensilica has played very well in the whole ADAS autopiloting related area. And then we have multiple engagement in that. It's very critical in terms of the whole machine learning, deep learning and then artificial intelligence and application to the whole automotive driving related area.
And of course, on the IP front, we also have our audio. Audio, we have a lot of success in there. Then the other part that is very important for us is the PCB. Clearly, we just announced our new generation of Allegro and OrCAD and then also through our acquisition security that we grew 11% year to year And then clearly, that will provide the signal integrity, the power analysis for the automotive, the application. So I think all in all, we have many important.
And then the other part is also I think on the verification front that we also incorporate some of the function safety requirement into the our tool and offering and solution. And that is very welcome by the automotive either Tier 1 or the direct automotive companies and that they see a lot of value from Cadence.
Thanks very much.
Thank you.
Your next question comes from the line of Monika Garg from Pacific Crest Securities. Your line is open.
Hi. Thanks for taking my question. First on the IFP side, first half of twenty sixteen is actually lower than first half of twenty fifteen. Could you provide some details? Is there some change of strategy?
Yes. I think first of all, let me Chip in first and then Jeff can address the number. I think clearly, as I mentioned earlier, we just have a new leader and he is reviewing our business and then refine our strategy. Important is in our first phase is the growth from 0% to 10 percent of our revenue. Now we're kind of driving some of the metrics that we're looking for in terms of sustainable, scalable, profitable operations.
And then clearly, in some of the 3 pieces, in the Tensilica is a great opportunity. We're going to double down on that. And then the design IP, clearly, we're really focused on the most advanced node 7, 10 nanometer. And then the VIP continue to drive differentiating verification IP and then together with our verification suite to tie in with our customer support on driving the productivity. We see the trend of outsourcing more and more coming to the IP.
So we strongly believe the IP strategy is the right one. But it's important to somehow find a way to really sustainable and driving efficiency. We have more than 1,000 people, employees in this area, and we're going to really drive to become a profitable center for us also. So I think all in all, we want to really drive this year maybe moderate growth, but then going forward will be a stronger growth going forward.
And so all through the mix, it's down as a portion of our overall mix. That's because of the strength of a lot of the rest of our businesses. It's actually up for the first half of the year versus the first half of the year last year. But we do expect more modest results this year versus last year, as we said.
Got it. Then just on the Emulation side, margins are going to be up year over year. But as a company, operating margin guidance is modestly lower year over year. Are you just being conservative? Or otherwise, why are we not able to see any operating margin leverage this year?
Whenever we guide, we always put everything we know into the guidance that we know at that point in time. When we guided this year, we clearly guided at a midpoint that was lower than our actual achievement last year and that's what we knew at the time. We continue, I think, to execute well and we'll see how it plays out.
Got it. Thanks. Just a last one on the emulation side, you've seen very strong growth. How fast do you think this market is growing and how big you think this market could be?
Yes. Monica, maybe I would have broadened a little bit of your question. Clearly, we see a tremendous opportunity in the whole verification. And it's the fastest growing challenge for our customer. Actually, whatever they design, they need to be verified and what is designed is really working.
And we have 4 engines within that verification and we try to really drive, tighten that relationship together. And first of all, we have the Jasper goal. This is a function verification. It's a very critical piece of the verification, formal verification and growing at about 20% year to year and we are very excited about it. Then we have the incisive simulation through our acquisition on the Rockitech and that is a very revolutionary technology with a very massive parallelism, multi core on the standard X86 based server and that give us a tremendous performance into the simulation side.
And we are doing the integration to make it really, really strong offering to our customer. Then the hardware emulation and not just emulation, right now we are starting to drive, we are already driving and the simulation side. Then we also have the Proteum that is the prototyping and we are really driving some of the next generation development coming up. So I think all 4 are going to tie in and drive this whole verification that is where the bottleneck for our system company and also customer and also our semiconductor customer and then really can holistically tie in together. And so this is something that we are working on.
Stay tuned. And then on the hardware side, this is the most successful launch of a cadence emulation. And then we're going to continue driving the next generation better throughput and a more scalable. In fact, it's already quite scalable to 9.2 in a 1,000,000,000 gates and over 2,000 plus concurrent user. And we're going to continue driving the excellent on top of scalability and then driving the power dial continuously.
And so I think we're going to be an important platform. And then we're going to also find a lot of new user use model and for simulation and then also tie in with our prototyping, Protium next generation coming up are going to be a very compelling verification offering for our customers.
That's all from me. Thanks. Thank
Your next question comes from the line of Sterling Auty from JPMorgan. Your line is open.
Thanks. Hi, guys. I want to talk a
little bit about the comment that you made around the guidance for the September quarter, specifically on the hardware and emulation. I think you mentioned some timing of deals. I was just curious if it's deal closure timing that you're referring to or is it lead times on the manufacturing of emulation devices that's going to impact that hardware? And if you'd be so willing to possibly give us, would are you expecting that emulation area revenue to be up, down or flat sequentially?
Yes. So the timing here isn't about closure. It's just about the timing of customer demand and when the customers want the product. And so it will decline hardware will decline from Q2 to Q3, as we said. I think importantly, we're retaining the full year guidance, right?
And by the way, Q1 and Q2 were record quarters, right, for us in hardware. So some timing between quarters, it's going to rotate. We're retaining the full year and that leads to Q4 at a 470,000,000 dollars midpoint.
And are these deals that are actually whether they're follow on deals or just timing of shipments, if it's large orders from same customers or is it new customer discussions that you're still you're just anticipating when you think you will close those deals?
Yes. So it's large customers and these are large deals as you probably aware, the price of G1 is quite large and they're frequently buying more than one system from us. So it's just the timing of when they want the product.
Okay. And then you've made a number of comments around the IP business and the change in leadership, etcetera. But I guess what I'm curious is how long you think the turnaround takes? So in other words, when do we kind of hit trough revenue or trough decline, so I don't want to say growth, but you get the idea. When do we hit the bottom when we start to see acceleration in that part of the business?
Yes. Sareen, this is Lip Bu. It's not a turnaround. It's just refining our strategy. And Peter came from a very strong background on execution, customer satisfactions.
And if you recall, he is the Senior VP of Operation Engineering, working very close with the foundry partners to drive the really silicon proven IP. Basically, we very quickly ramping the revenue on the more than 10% revenue. And then right now, we really want to really drive quality, really drive customer satisfaction and then really prioritize what really make the difference in terms of Tensilica, in terms of design IP and really find the differentiation and therefore can satisfy the customer. And then it's not trying to do some of this one off type of things, more not proliferating and then to our leading customer and helping them to really drive differentiating products. So I think you kind of can see that we highlight those are differentiating like Tensilica.
Even in the DIP side, we highlight 7 nanometer process node signed with the 1st major contract, VIP with Canon, more system company, more leading edge customer. And so we really drive more into the quality of the customer, driving more quality of product offering IP. And so and I'll give Peter a little bit time. He just completed his visiting with offices and then fine tune the strategy, present to our team and then to our Board and then stay tuned. He will come out with our strategy going forward.
Great. And then last question around R and D spending. I think R and D expenses were up a shade under 15% year over year, so going faster than revenue. I think that probably ties to some of the commentary you made about the investments you're making there to help gain market share, especially in some of these larger digital customers that you've won? And I guess my question is, when do we see the peak of those investments and start to see more leverage coming out of the R and D line?
So, a couple of things. You're right. This is largely the investment we're making in innovative products across our product lines. One more thing that's clearly playing in is just the timing of shutdowns this year versus last year. Last year was in Q2.
This year, our summer shutdown will be largely in Q3. So you're seeing a little bit of a timing impact there. And again, for us to get return on these investments, of course, it's proliferation and innovation continuing. So stay tuned. Got it.
Got it. Thank you, guys.
Thank you.
Your next question comes from the line of Tom Diffely from D. A. Davidson. Your line is open.
Yes, good afternoon. So, Jeff, staying on this and on the operating expenses, what drove or what's behind the roughly 30% increase in the G and A this quarter?
I think it's largely the same thing. It's the timing of the shutdown. Last year was in Q2. This year, it's in Q3.
Okay. It just seems like the combined several quarters in a row is kind of a step function higher this year with that split just posted?
We do make investments in our technical sales organization. Also, that's an important part of our strategy with our customers.
Okay. And then when you look at your guidance for the GAAP earnings this year, it's down 4% or 5% this quarter versus last quarter. What is the delta there between the GAAP and non GAAP difference?
So the biggest delta between GAAP and non GAAP, we're going to always have three things that are going to be a delta between GAAP and non GAAP. First is stock compensation. 2nd is amortization of intangibles related to M and A. And third is we use a standard non GAAP tax rate, while our real tax rate fluctuates. So those are the three things that always makes the difference up.
Okay. So what was the which one of those changed in this quarter when you brought down the GAAP number and kept the non GAAP as is?
So, I think our tax rate is that what? Yes. So there's a couple of things, obviously, the Rocketeq acquisition, but I think the more prominent thing is the changes in our expectations of a GAAP profitability and therefore the GAAP tax rate.
Okay. And Lip Bu, in the last few quarters, you've been talking a lot about success with the systems customers. How big is that business for you today and how big do you think it gets over time?
Yes, good question. And we are very excited about this system design enablement strategy that we have. And I highlight 3 of our 5 largest software contract this quarter helping with the system companies. And so we continue to drive success here in the new aero, success in the automotive side and then the mobile and medical related. So I think all in all, we are excited about this whole and then we have a really good portfolio of product that the system company appreciate that.
And clearly, the mixed signal, analog digital, the packaging, the IP portfolio and the whole system analysis. And this is really, really welcome from them. In some of the percentage of revenue, sometimes it's very hard to calculate. Some of the system company also have the semiconductor. And we are growing from the 40% upwards.
And so we continue to drive that. And even though with all this consolidation, we are really, really excited about this whole system opportunity for us and we are heavily engaging with some of this vertical and the new vertical that we're embarking on. Earlier, the question on automotive, we are really excited about it. I'm very, very big believer in the whole VR, AR is a tremendous opportunity. We have a couple of success either in PCB or the CanSILICA IT Fund.
And then there's a whole suite of new changes in the whole hyperscale web services in the cloud data center that in the supply enough to work on the programmable different workload on the more IO, more memory related. That's another opportunity for us. So we are excited about automotive vertical and we are the closest customer are really excited about our portfolio that we can offer.
Great. All
right. Thank you. Thank you.
Your last question comes from the line of Krish Sankar from Bank of America. Your line is open.
Yes, hi. Thanks for taking my question. I had a couple of them. 1, Libbu, if you maintain a current traction or momentum in emulation, do you think exiting calendar 2016, you could be number 1 or do you think it's going to take a longer time?
Yes. The whole hardware emulation, we are excited about it. We clearly have a very strong leadership team. They have very strong technical team that I'm very, very pleased with. And the Palladium Z1 is the best launch we have and the most successful one for us.
And then also we have more used model, I mentioned earlier. And this is a very scalable platform. And if you do design hardware emulation, the scalability and accuracy is critical. And so this is something that customer will buy and if that's the best one. And so I think all in all, we like this.
And as you know, Q1 and Q2 is a record quarter for us. And Q3 a little bit because of timing. But overall as a whole year is a very strong growth percentage growth for us. We are excited about it. And then stay tuned.
I mean, we're going to be driving not just the simulation, we're going to drive simulation and we're going to drive prototyping whole suite of product and then tie into the whole verification. I just talked about providing the total throughput solution to our whole verification suite offering to our customer. So I think this is something that we believe is a double digit growth for us and we love it.
And again, we think based on all the market things that we see and all the market studies we see that we are number 1 and have generally been number 1 over the past quite a number of years.
Got you. All right. And then, in your core EDA business, stripping out emulation and systems and IT, I'm just curious how is the bookings trending year to date versus last year? I know you guys already gave annual booking guidance and updated, but I'm just kind of curious on how it's trending year to date on the core EDA side?
Yes. I think overall, we like what we have and in some of the product offering. Digital, clearly, we drive a lot of innovation, massive parallelism and then the customer love it. Right now, it's more a proliferation and execution focus. Analog, the custom analog and is the defector and standard for the decade.
And then we don't sit still. We continue to drive the advanced node. We have a whole new suite of new development I mentioned earlier to drive performance and then drive acceptance and then compliance and then in the newsfeed that we're just offering. And then we also have a focus on the mixed signal, so we can help our customer in terms of mixed signal offering, power, low power offering. And then now we also have the PCB and then with our system analysis and then with the IP, we're really focused on the differentiating IP that we're going to offer.
I think we have a very good portfolio. A lot of customers really, really impressed what we come out with. Stay tuned. We continue that culture of innovation. We don't stop here.
And we're going to double down and triple down on that. And we strongly believe the best product wins. Our job is basically providing the best tool for our customer to design and increase their productivity and the time to market and that's our job.
Got it. And then the final question, do you guys say what the percentage of revenue from systems were?
Yes. I mentioned earlier, 40% and north of that, we continue to drive success there. Got it. Thank you.
There are no further questions at this time. I will turn the call back over to Cadence President and CEO, Lip Bu Tan for closing remarks.
In closing, we are continuing to innovate and deliver design enabling solutions to our customers. And we are looking forward to continuing to execute on our strategy and create value for our shareholders. So I want to thank all our hardworking employees worldwide and shareholders, customers and partners for their continued support that make this possible. Thank you all for joining us this afternoon. Thank you.
This concludes today's conference. You may now