Good afternoon. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems second quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Alan Lindstrom, Senior Group Director of Investor Relations, you may begin your conference.
Thank you, Nicole, and welcome everyone to our second quarter 2016 earnings conference call. With me today are Lip-Bu Tan, President and CEO, and Geoff Ribar, Senior Vice President and CFO. The webcast of this call can be accessed through our website, cadence.com, and will be archived through September 16th, 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 Form 8-K filing today, and it's available on our investor relations website at cadence.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-K and Form 10-Q, including the company's future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today. In addition to the financial results prepared in accordance with generally accepted accounting principles or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the quarterly earnings section of the investor relations portion of our website.
Additionally, a copy of today's press release, dated July 25, 2016, for the quarter ended July 2nd, 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 million, up 9% year-over-year. non-GAAP operating margin was 25%, non-GAAP EPS was $0.29, and operating cash flow was $80 million. 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. 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, three out of our five largest software contracts were with system customers. Cadence signed a comprehensive agreement with Canon, which includes Verification IP. 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 another record quarter for hardware revenue. Nine new systems and semiconductor companies embrace Palladium Z1 enterprise class capabilities, including Realtek, Imagination Technologies, and Socionext.
We also completed the acquisition of Rocketick Technologies, integration is underway. Rocketick brings revolutionary multi-core technology that will provide industry-leading simulation performance using massive parallelism on standard x86-based multi-core servers. Revenue for our formal 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 OrCAD 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 Sigrity analysis tools grew 11% year-over-year. Also, an exciting VR company adopted our PCB solutions. Next, let us move on to our digital and sign-off product group.
Our digital sign-off flow continued to gain momentum with market-shaping 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. 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 Cortex-A73 and Mali-G71 cores, which were designed with Cadence digital and sign-off 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-off tools for its 10-nanometer FinFET process, SMIC and Cadence released a 28-nanometer low-power reference flow.
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 Bollenkamp, 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 used multiple Tensilica cores. In design IP, we have made significant progress on seven-nanometer products and signed our first major seven-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 OrCAD product families strengthen PCB and IC packaging design and analysis. Digital and sign-off solutions have momentum with our market-shaping customers, and we are growing our business with both systems and semiconductor company. I will turn the call to Geoff 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 to good results in a challenging environment. Total revenue was $453 million, 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 million, and we repurchased 10 million shares of stock for $240 million, which represents over 3% of shares outstanding. 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. Why we have narrowed the ranges on bookings, revenue, and EPS. We expect bookings in the range of $2.02 billion-$2.08 billion, which equates to 8% growth at the midpoint.
Revenue in a range of $1.8 billion-$1.83 billion, which would be a 7% growth at the midpoint. Non-GAAP operating margin of approximately 26%. GAAP EPS in the range of $0.70-$0.76. Non-GAAP EPS of $1.17 to $1.23. Operating cash flow in the range of $380 million-$420 million. For Q3, we expect revenue in a range of $440 million-$450 million. Non-GAAP operating margin of approximately 25%. GAAP EPS in the range of $0.17-$0.19, and non-GAAP EPS in the range of $0.27-$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 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 million. With that operator, we'll now take questions.
At this time, I'd like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes to the line of Mitch Steves 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 we saw material revenue for the quarter was the highest ever, can you give us an idea of how much it was up year-over-year or the incremental dollars you saw for the product line on a year-over-year basis?
Yeah. 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. 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 a piece that you believe you can potentially gain share at this point?
Yeah, I think this is Lip-Bu. I think across the board, I think that all product have been moving nicely. Just to highlight in the digital front, we continue to gain momentum with our market shipping customer. I highlight a couple of key like the new aero, Northrop Grumman, Cypress and a few others. Clearly we continue to drive the advanced node with our ecosystem partner like Arm, TSMC, Intel Custom Foundry, and SMIC across the board. 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, really driving a holistic flow in terms of suite that we can really provide for the customer within the platform.
Meanwhile, we really double triple down on the advanced node, the 10 nanometer, 7 nanometer application. I think overall, they look healthy. On the IP side, I think we mentioned earlier, we kind of refine our strategy under the leadership of very capable Peter Bollenkamp. I'm very pleased with what he has done. He's very strong in execution and very strong in terms of delivering to customer. He pay a lot of attention to the customer. We're going to drive the different. He's very strong in the analog RF area and more than 100 patent filings or pending patents. I think he's a very strong technical, and he brought in a very strong team come together. Stay tuned.
Got it. Thanks. Just one really small one. For the buyback, is there any change there just given you guys have been buying back about $240 a quarter? That's my last one.
Yeah. We've been buying $240 a quarter, and we bought 10 million shares in Q2. I may have said 100. We bought 10 million shares in Q2. We plan as always to complete our buyback, and I believe we have substantial liquidity to do that.
Thank you very much.
Thank you.
Your next question comes from the line of Gary Mobley from Benchmark. Your line is open.
Hi, everyone. Good afternoon, congrats on the strong quarter. Wanted 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. 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&A targets may have changed in light of the large valuation multiple Arm received.
Yes, good question. This certainly is a very exciting development in our industry, Arm is a very strategic partner for us. We're looking forward to continue that relationship and then expand from that. Stay tuned, we are really excited about it.
Okay. All right. I have a follow-up question relating to the extension in the expected contract life, now up to 2.6 years, as you expected to end, presumably this year, 2016, and that's up a bit from your prior expectations. Is there one large contract that is driving that up?
Yes. Generally, we always focus on deal quality and maximizing deal quality. We don't focus on contract term. It will vary, and it has varied, and it will continue to vary from quarter to quarter. Generally, larger companies prefer longer terms. Smaller companies prefer smaller terms. We've said for the year we expect it to be closer to 2.6, which is within our original 2.4-2.6 range. We're kind of in the neighborhood we expected to be when we started this.
Okay. 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. If I'm not mistaken, that was primarily a function of the consolidation taking place in the industry. Are you any more optimistic on that business, or I guess, more pessimistic, conversely, on the business?
Yeah. First of all, we didn't say that. I think overall, the IP is very strategic, very important to us, especially now our whole vision of a system design enablement is a very key component of that. We grew from zero to over 10% revenue. Now the new leadership of Peter Bollenkamp, since he joined in April. We are delighted for him to refine the strategy, reviewing what we have, 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 IP business. Tensilica, as I mentioned in my script, have the best booking quarter ever, with the completion of a major renewal with a leading semiconductor company. We also focus on the artificial intelligence machine learning with our new Tensilica Vision processor.
We also have a leading virtual reality headset using multiple Tensilica cores for us, and that's on the Tensilica side. On the design IP, I mentioned earlier, we make significant progress in the seven nanometer development, and we signed our first major seven-nanometer contract. In some of the VIP side, I mentioned that Canon. We signed a comprehensive agreement with Canon, including VIP. Overall, I think I continue to drive success in our IP business. Give Peter a little bit time to fine-tune his strategy. When we are ready, we will introduce you our strategy going forward.
As we go through this transition, we are expecting more modest results in the IP business this year.
Okay. That's it for me. Congrats again. Thanks.
Thank you.
Your next question comes from the line of Richard Valera from Needham & Company. Your line is open.
Thank you. Good afternoon. I was wondering if you could give any color on how things are going with the 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. 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. Any comments there would be helpful. Thank you.
Sure. Rich, thanks so much for the question. Clearly, the whole semiconductor consolidation will continue. Even though it's not the same magnitude as 2015, that over $100 billion consolidation on the semi sector, that is relevant to us because they are customers. We expect this year will be slower but still very active year. 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. In the longer term, there's some opportunity and challenges for us in the next couple of years. I think clearly the consolidation, it will happen, it will continue.
I think the consolidating company will be stronger and also drive more efficiency, and they pay a lot of more attention to productivity. 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. 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. Meanwhile, we have to drive value and be disciplined on that. That's kind of I will stop there.
I think just a few data points. Our booking range at $2.02-$2.08 still has the same midpoint, and our revenue range of $1.8 billion-$1.83 billion still has the same midpoint. You're seeing no impact in 2016.
Fair enough. That's actually a good segue to my next question, Geoff. Since you did tweak up your duration slightly, and if you're just sort of picking the midpoint previously up to from 2.5-2.6, that'd be a 4%. 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?
Yeah, I think it's just noise or rounding, right, within the scheme of things. We've been quite happy with our bookings this year, and we haven't changed the midpoint, and the range has been tightened. We're quite happy with what we're seeing.
Great. Just one final one, Geoff. Any update on the status of the search for your replacement?
Lip-Bu will take that one.
Okay, thanks.
No, 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 reputable model, and it's a very strong platform that people like to be here. We'll let you know when we have something to tell you. Meanwhile, Geoff is committed to stay until March 2017.
Well, I'm glad to hear that. Thank you, gentlemen.
Thank you.
Your next question comes from Jay Vleeschhouwer from Griffin Securities. Your line is open.
Thank you. Good evening. A couple first for Geoff, then I'll turn to Lip-Bu for a couple of product questions. Geoff, for you first, a geographic question. It looked as though your, 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? Secondly, on the other hand, your Japan business was up for the 2nd quarter in a row, year-over-year. We've been perennially asking about a possible bottoming in Japan, and so the question there is this it? A follow-up for you, Geoff, on emulation, then to Lip-Bu.
Yeah. Obviously, we don't guide individual geographic segments of our business. 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 in North America and Japan is exactly how you described. 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 million 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 hundred basis points and perhaps even more so year-over-year. Does that sound about right that you had at least a several hundred 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 a Z1 are better than the prior XP. 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. The specific question I'd like you to address is if you could comment on the expansion and deployment 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 Voltus and so forth. 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?
Good question, and thank you for asking. Clearly, our digital and sign-off flow, as you know, we have Innovus for place and route, Genus for synthesis, Tempus for sign-off, Voltus for power. I think these are all very new products coming up last year, even some of them are later part of last year. Clearly from engagement from customer, we are delighted with the progress we make with the market-shaping customer. They are the leader in their industry. They are a very big important customer for us. I think first of all, they start to evaluate our tool, and then secondly, put some projects. See whether it works. The next thing is a couple of adoptions, and then to make sure that it's stable, it can be counted on the most advanced node.
They're starting to proliferate across the product group. We are in the various stage of that proliferation and use the baseball season, and then clearly in the second, third, and fourth inning, this is the most critical period coming up right now, is a lot of customers look at the tool, the entire flow, can I count on it for the production? That's where we are in this, in multiple accounts. Stay tuned. We're going to continue to drive that. The main reason, from the Q2 to Q1, because Q1, we have one important order in the foundry, and this is a one-off type, and then clearly in a part of the proliferation, it will be continuing Q3, Q4, and the beginning of next year.
I think this is a critical period, and we continue to highlight to you some of the success we have, like Cypress. We announced a full flow and that we are extremely excited about Northrop Grumman, and this is a new aero site, using our full digital flow, for their future SoC design. This is really exciting for us. We're going to continue over time to tell you some of the success we have. So far, I'm pleased with the progress we make.
We expect good growth in 2016 overall against 2015 for the digital business for us.
Okay, last, 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, at DAC last month, there was a very interesting presentation by NXP, 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. 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 IP and at the systems level for automotive?
Yeah, it's a very good question. Automotive is a very important vertical market we go after in our whole system design enablement. This is a very important strategy we have. Then we have a very nice complete portfolio. Besides the digital front, the analog mixed signal is critical in some of the applications for automotive. We have a lot of success in that. Then the other part is the IP. Tensilica is really played very well in the whole ADAS autopiloting-related area, then we have multiple engagement in that. It's very critical in terms of the whole machine learning, deep learning, the artificial intelligence and application to the whole automotive driving-related area. Of course, on the IP front, we also have our audio. Audio, we have a lot of success in that.
Then the other part that very important for us is the PCB. Clearly, we just announced our new generation of Allegro and OrCAD, also through our acquisition, Sigrity, that we grew 11% year-to-year, clearly that will provide the signal integrity, the power analysis for the automotive applications. I think all in all, we have many important. Then the other part is also, I think, on the verification front, that we also incorporate some of the functional safety requirement into our tool and offering and solution, that is very welcome by the automotive, either tier 1 or the direct automotive companies, that they see a lot of value from Cadence side.
Thanks very much.
Thank you.
Your next question comes to the line of Monika Garg from Pacific Crest Securities. Your line is open.
Hi. Thanks for taking my question. First, on the IC side, first half of 2016 is actually lower than first half of 2015. Could you provide some details? Is there some change of strategy?
Yeah. I think, first of all, let me chip in first, and then Geoff 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 grow from 0-10% of our revenue. Now we're going to driving some of the metrics that we're looking for in terms of sustainable, scalable, profitable operations. Clearly, in some of the three pieces, in the Tensilica is a great opportunity. We're going to double down on that. The design IP, clearly, we really focus 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 the customer support on driving the productivity.
We see the trend of outsourcing more and more coming to the IP. We strongly believe the IP strategy is the right one, but it's important to somehow find a way really sustainable and then driving efficiency. We are more than 1,000 people, employees in this area, and we're going to really drive to become a profitable center for us also. 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.
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. We do expect more modest results this year versus last year, as we said.
Got it. Geoff, 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. That's what we knew at the time. We continue, I think, to execute well. We'll see how it plays out.
Got it. Thanks. Just the last one on the emulation side, you're seeing very strong growth. How fast do you think this market is growing and how big do you think this market could be?
Monika, maybe I would broaden a little bit of your question. Clearly, we see a tremendous opportunity in the whole verification. It's the fastest-growing challenge for our customer. As you know, whatever they design, they need to be verified and what is designed is really working. We have a four engine within that verification. We try to really drive, tighten that relationship together. First of all, we have the JasperGold. 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. We have the Incisive simulation through our acquisition on the Rocketick, and that is a really revolutionary technology with a very massive parallelism, multi-core on the standard, the x86-based server.
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. The hardware emulation, not just emulation. Right now, we are starting to drive, we are already driving in the simulation side. We also have the Protium, that is the prototyping, and we are really driving some of the next generation development coming up. I think all four are going to tie in and drive this whole verification that is with the bottleneck for our system company and also customer and also our semiconductor customer. That really can holistically tie in together. This is something that we are working on, stay tuned. On the hardware side, this is the most successful launch of Cadence emulation.
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 billion gates and then over 2,000 plus concurrent user. We're going to continue driving the excellence in term of scalability and then driving the power dial continuously. I think we're going to be an important platform, and then we're going to also find a lot of new 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 to our customers.
That's awesome. Thanks.
Thank you.
Again, if you would like to ask a question, please press star one. Your next question comes on the line of Sterling Auty from JPMorgan. Your line is open.
Thanks. Hi, guys. Wanted 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? If you'd be so willing to possibly give us, are you expecting that emulation area revenue to be up, down, or flat sequentially?
Yeah. The timing here isn't about closure, it's just about the timing of customer demand and when the customers want the product. It will decline, hardware will decline from Q2 to Q3, as we said. I think importantly, we're retaining the full year guidance, right? By the way, Q1 and Q2 were record quarters, right, for us in hardware. Some timing between quarters, it's going to rotate. We're retaining the full year, and that leads to Q4 at a $470 million midpoint.
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 just anticipating when you think you'll close those deals?
Yeah. It's large customers, and these are large deals, as you're probably aware, the price of Z1 is quite large, and they're frequently buying more than one system from us. It's just a timing of when they want the product.
Okay. You've made a number of comments around the IP business and the change in leadership, et cetera. I guess what I'm curious is, how long you think the turnaround takes? In other words, when do we kind of hit trough revenue or its decline, so I don't want to say growth, but you get the idea. When do we hit the bottom and we start to see acceleration in that part of the business?
Yeah. Sterling, this is Lip-Bu. It's not a turnaround, it's just refining our strategy. Peter came from a very strong background on execution, customer satisfactions. If you recall, he is the Senior Vice President of operation engineering, working very close with the foundry partners to drive the really silicon-proven IP. Basically, we're very quickly ramping the revenue on the more than 10% revenue. Right now we really want to really drive quality, really drive customer satisfaction, and then really prioritize what really makes a difference in terms of Tensilica, in terms of design IP, and really find the differentiations and then what can satisfy the customer. It's not try to do some of this one-off type of things, more the proliferating and then to our leading customer, and then helping them to really drive differentiating products.
I think you kind of can see that we highlight those differentiating like Tensilica, even in the DIP side, we highlight seven nanometer process node signed with the first major contract, VIP with Canon, more system company, more leading-edge customer. We really drive more into the quality of the customer, driving more quality of the product offering IP. Give Peter a little bit time. He just completed his visiting with officers and then he fine-tune the strategy, present to our team and then to our board. Stay tuned. He will come out with our strategy going forward.
Great. Last question around R&D spending. I think R&D expenses were up a shade under 15% year-over-year, growing 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. 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&D line?
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. You're seeing a little bit of a timing impact there. Again, for us to get return on these investments, of course, it's proliferation and innovation continuing. Stay tuned.
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.
Good afternoon. Geoff, staying on the same, on the operating expenses, what drove or what's behind the roughly 30% increase in the G&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, it's kind of a step function higher this year with that, what you just posted.
We do make investments in our technical sales organization also. That's an important part of our strategy with our customers.
Okay. 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?
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, second is amortization of intangibles related to M&A, and third is we use a standard non-GAAP tax rate while our real tax rate fluctuates. Those are the three things that always makes the difference up.
Okay. Which one of those changed then this quarter when you brought down the GAAP number and kept the non-GAAP as is?
I think our tax rate what? Yeah, there's a couple things. Obviously, the Rocketick 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. 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?
Yeah, good question. We are very excited about this system design enablement strategy that we have. I highlight three of our five largest software contracts this quarter have been with the system company. We continue to drive success here in the new era, success in the automotive side, and then the mobile and medical related. I think all in all, we are excited about this whole, and then we have a really good portfolio of products that the system company appreciate that. Clearly the mixed signal analog digital and the packaging, the IP portfolio and the whole system analysis. This is really well come from them. In some of the percentage of revenue, sometimes it's very hard to calculate because some of the system company also have the semiconductor, and we are growing from the 40% upwards.
We continue to drive that. Even though with all this consolidation, we are really excited about this whole system opportunity for us, and then 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, and I'm very big believer in the whole VR, AR. It's a tremendous opportunity. We have couple of successes, either in PCB or the Tensilica IP front. There's a whole suite of new changes in the whole hyperscale web services in the cloud data center. That and the shift now to work on the programmable, different workload on more IO, more memory related. That's another opportunity for us. We are excited about some of this vertical, and the closest customers 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.
Hi, thanks for taking my question. I had a couple of them. One, Lip-Bu, if you maintain a current traction or momentum in emulation, do you think exiting calendar 2016, you could be number one, or do you think it's going to take a longer time?
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 pleased with. The Palladium Z1 is the best launch we have and the most successful one for us. Also we have more use model, I mentioned earlier. This is a very scalable platform. If you do design hardware emulation, the scalability and accuracy is critical. This is something that customer will buy, and if that's the best one. I think all in all, we like this. As you know, Q1 and Q2 is a record quarter for us. Q3 a little bit, because of timing. Overall, as a whole year, is a very strong growth percentage growth for us. We are excited about it. Stay tuned.
I mean, we're going to be driving not just the emulation. 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. I think this is something that we believe is a double-digit growth for us, we love it.
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. In your core EDA business, stripping out emulation and systems and IP, I'm just curious, how is the bookings trending year-to-date versus last year? I know you guys only give annual booking guidance and update it, but I'm just kind of curious on how it's trending year-to-date on the core EDA side.
Yeah, I think overall, we like what we have and in terms of the product offering. Digital, clearly we drive a lot of innovation, massive parallelism, the customer love it. Right now, it's more a proliferation and execution focus. Analog, the custom analog and is the de facto and standard for the decade. 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 new suite that we're just offering. 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.
Now we also have the PCB, with our system analysis, with the IP, with a really focus on the differentiating IP that we're going to offer. I think we have a very good portfolio. A lot of customer really impressed what we come out with. Stay tuned. We continue that culture of innovation. We don't stop here. We're going to double down and triple down on that. We strongly believe the best product win. 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.
Yeah. The final question, did you guys say what the percentage of revenue from systems was?
Yeah, I mentioned earlier, the 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 the solutions to our customers, and we are looking forward to continuing to execute on our strategy and create value for our shareholders. 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 disconnect.