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 first 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 1 on your telephone keypad. Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence Design Systems. Please go ahead.
Thank you, Shannon, and welcome everyone to our first 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 June 17th, 2016. A copy of today's prepared remarks will also be available on our website at the conclusion of today's call. Before I start, I want to call your attention to our CFO commentary, which was included in our 8-K filing today and is available on our investor relations website at cadence.com. The CFO commentary should be referenced in conjunction 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 statements regarding forward-looking statements in the earnings press release issued today. In addition to the financial results prepared in accordance with generally accepted accounting principles, or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the quarterly earnings section of the investor relations portion of our website.
Additionally, a copy of today's press release, dated April 25th, 2016, for the quarter ended April 2nd, 2016, and related financial tables can also be found in the investor relations portion of our website. I'll turn the call over to Lip-Bu.
Good afternoon, everyone, and thank you for joining us today. Cadence delivered good operating results for Q1. Revenue was $448 million, up 9% year-over-year. Non-GAAP operating margin was 26%. Non-GAAP EPS was $0.28, and operating cash flow was $83 million. Looking at the environment, conditions have not changed significantly since last quarter. Semiconductor business conditions remain challenging, and we remain mindful of the ongoing consolidation in our semiconductor customer base. While we do not expect a material impact on our business in 2016, consolidation could pose a challenge to industry growth over the next few years. I will begin our Q1 business highlights with system design and verification. In February, I asked Anirudh Devgan, who has led resurgence of our Digital & Signoff business, to expand his responsibilities to include leadership of our System & Verification Group.
Anirudh will bring innovative ideas and drive to our next-generation verification solutions. Cadence offers a holistic verification suite of connected solutions that are based on strong core engines and optimized for total verification throughput. Rapid growing complexity and tight time-to-market requirements make emulation more critical than ever for customers designing chips and systems for mobile, cloud, automotive, and other verticals. Palladium Z1 sales ramped nicely as customers embrace its advanced enterprise-class capabilities, while demand for Palladium XP remains strong. As a result, Cadence achieved its best quarter ever for hardware revenue. While our primary innovation focus continues to be organic development, we will also consider strategic acquisitions that will bring outstanding technology and talent. Recently, we announced that we entered into a definitive agreement to acquire Rocketick Technologies.
Rocketick brings pioneering technology and talented team that will significantly increase the performance of our Incisive enterprise simulator using parallel computing on standard multi-core servers. In custom analog mixed-signal design world, Virtuoso has been the de facto industry standard for the past 2 decades, used on the vast majority of designs with thousands of tape outs. At our CadenceLIVE Silicon Valley user conference earlier this month, we announced the next-generation Virtuoso platform, including the Virtuoso Analog Design Environment Suite and the Virtuoso Layout Suite. The new Virtuoso offers designers an average 10X improvement in performance and capacity across the platform. The platform includes new technologies to address requirements of automotive safety, medical device, and IoT applications. IP is an important component of our system design enablement strategy. I'm very pleased to announce that Peter Bollenkamp joined Cadence as Senior Vice President and General Manager of our IP Group.
Peter comes to Cadence after 18 successful years with Broadcom, where he held roles of increasing responsibility, most recently as Senior VP, Vice President of Operation Engineering. Peter's rich experience will enable us to deliver high-quality, differentiated products as it drives the refinement of our IP strategy to focus on sustained and scalable growth. This quarter, I would like to highlight our Tensilica DSP cores, which are a very important strategic component of our IP business. In Q1, we had key design win for 5G baseband DSPs with the leading mobile handset company. Spreadtrum licensed our Tensilica HiFi audio voice DSP because of its ultra-low power capabilities. Now move on to Digital & Signoff. The success and momentum we gained with our new flow continue with strong adoption of full flow in Q1, especially with customers in mobile, consumer, automotive, and IoT segments.
In Q1, a leading mobile chip company adopted our digital and sign-off flow for its most demanding 10-nanometer projects. The Innovus implementation system added more than 15 new customers in Q1, while our Genus RTL synthesis solutions added more than 25 new customers. TSMC certified our digital and sign-off tools for seven-nanometer design and 10-nanometer productions. Samsung Foundry certified our tools for its 14 LPP process. Finally, we also announced today that Geoff Ribar decided to retire from Cadence in March 2017. Geoff had been a great partner to me and the company over the five and a half years. As an integrated member of my leadership team, he has made long-lasting contributions to the company. During Geoff's tenure, we have consistently met or exceeded our financial objectives, improved both our operating margin and cash flow, strengthened the balance sheet, and optimized our return on capital.
Geoff has done an outstanding job of executing on the strategy and the management philosophy that my board and I have put in place and built strong financial teams. We have initiated a comprehensive search to identify our next CFO. Geoff is working with me in the search process. Once a new CFO is appointed, Geoff will work collaboratively on the transfer of responsibilities and will remain active, involved with us through the retirement date. While Geoff's retirement is bittersweet, we all congratulate him on the successful career as CFO and wish him well in the next chapter of his professional life. In summary, Cadence once again delivered good results in a challenging environment. Our portfolio of solutions across chip, package, board, system, and software, and IP, guided by our system design enablement strategy, best position us to drive new business in verticals, including automotive, aerospace, medical, and across IoT applications.
Strong, broad-based demand for the new Palladium Z1 contributed to our best hardware revenue quarter ever. The innovative new Virtuoso platform strengthens and solidifies our position in custom, analog, and mixed-signal design. Our digital sign-off solutions are proliferating with current customers and gaining new customers. Over to Geoff to review the financial results and provide our outlook.
Thanks, Lip-Bu, and good afternoon, everyone. It has been an honor for me to serve as CFO of Cadence for the past five and a half years. I'm extremely grateful for the support of my colleagues and our talented extended team. I will work with Lip-Bu in the search process. I'm fully committed to ensuring a smooth transition and look forward to maintaining our strong momentum through the transition process. I'm confident that with our strong CEO, Lip-Bu Tan, executive team, and finance team, we'll continue to successfully execute on the strategic initiatives and drive shareholder value just as we have over the past five and a half years. Now, moving on to our results. Please note that the CFO commentary we posted on the investor section of our company website should be referenced in conjunction with both my remarks and earnings press release issued today.
As Lip-Bu discussed, Q1 was a good quarter. It remains a challenging environment. Innovative new products and strong execution continued to distinguish us in the market. Total revenue was $448 million, up 9% year-over-year. Non-GAAP operating margin was 26%, compared to 23% for Q1 2015. The timing of revenue and expenses contributed to a higher-than-expected margin for Q1. We are maintaining our revenue and margin outlook for the year. GAAP net income per share was $0.17. Non-GAAP net income per share was $0.28, up 22% over the year-ago quarter. Operating cash flow was $83 million. Cash and short-term investments were $907 million, compared to $711 million at the end of Q4 2015. Recall that in January, we entered into a three-year, $300 million term loan and drew $50 million on a revolving credit agreement. At quarter end, we had $700 million of debt outstanding.
Approximately 45% of cash and short-term investments were in the U.S. at quarter end. DSOs were 32 days, down from 35 days in Q4. We repurchased 11.6 million shares of stock for $240 million, which represents a little less than 4% of shares outstanding. Before turning to our outlook, let me call your attention to the following items. As Lip-Bu mentioned, we believe Rocketick will help accelerate our innovation in functional verification to address the increasing challenges of system design complexity. This acquisition is expected to close in Q2 and is not expected to have a material impact on our 2016 financials. We have not disclosed the terms of the transaction. We undertook a restructuring in Q1 as part of our ongoing efforts to optimize resource allocation and operate the business efficiently and effectively. The restructuring charge was $14 million. Let's turn to our outlook.
There are no changes to our fiscal 2016 outlook for bookings, revenue, operating margin, non-GAAP EPS, or cash flow. We continue to expect bookings in the range of $2.0 billion-$2.1 billion, which equates to 8% growth at the midpoint. Revenue in the range of $1.79 billion-$1.84 billion, which would be a 7% growth at the midpoint. Non-GAAP operating margin of approximately 26%. GAAP EPS in the range of $0.71-$0.81. Non-GAAP EPS of $1.15-$1.25. Operating cash flow in the range of $380 million-$420 million. For Q2, we expect revenue to be in the range of $445 million-$455 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 will find guidance for additional items in the CFO commentary. With that, Shannon, we will now take questions.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Krish Sankar from Bank of America. Your line is open. Please go ahead.
Yeah, hi. Thanks for taking my question. I had a couple of them. First and foremost, Lip-Bu, can you just talk a little bit about the tone you're getting from your customers, given that there are some concerns on near-term demand and longer-term consolidation? Just kind of curious what your guys' viewpoint is, what you're hearing from your customers, either in terms of what they're telling you or what their body language is regarding EDA purchases.
Okay, let me start. First of all, I think as I mentioned, semiconductor business conditions remain challenging. Little or no growth expecting for 2016, according to all the various analysts report. Clearly, we are well-positioned in term of long-term growth opportunity, in term of the mobile, cloud, wearable, IoT, vision, machine learning, and automotive-related area. Those will be driving some of this advanced node growth in system and IP. To answer your question, clearly, we don't see any much changes. Actually, we see a lot more design opportunity in term of proliferating our tool and solution on the various vertical market. In term of consolidation, clearly, last year is a big consolidation year, more than $100 billion consolidation with some major deal like Avago, Broadcom, Intel, Altera, and many others. We are mindful of the ongoing consolidation to our semiconductor customer base.
Meanwhile, saying that, clearly, I mentioned earlier about the opportunity we see and in term of proliferating our new solutions. In term of the long-term impact, it's very hard to predict, but we don't expect any material changes to our business. I think in the longer run, what some of this consolidation may pose a challenge to the industry growth over the next few years.
Got it. That's very helpful. In terms of R&D, I think this is a question that I've asked in the past. Just kind of curious, any updated thoughts regarding the fact that your customers are getting more cognizant of their cost and complexity. Along the path, is there an opportunity for you guys to be a little more efficient with your R&D? Or do you think that this mid-30% of sales is still going to be the predictable mix of R&D for the intermediate future?
Yeah. Let me try to answer your question, if I hear correctly. I think clearly, the complexity and the time to market pressure is increasing tremendously, especially in the advanced nodes, in the 14 and 16 and 10 and 7. As you know, the mask cost is very high, first time pass is critical, that's why we see a tremendous growth into our emulations and also the growth in term of full flow in the digital and custom mixed signal related. Our relationship with the foundry partner become very critical, we mentioned we have a very deep partnership with our foundry partners, that include TSMC, Samsung, and many others. I think clearly, all this relationship and also with our ARM IP ecosystem are critical for the success.
We continue to drive R&D efficiency, we continue to drive, I think Geoff mentioned about some of the restructuring to drive more efficiency, we double, triple down in some of the area, also with some of the key customers support. We want to make sure that the customer design, based on our tool, are successful in implementing in the most advanced nodes.
Got it. Just two quick housekeeping questions. One was, I think last earnings call, Geoff, you mentioned that most of your OpEx is front-half loaded, it should slow down in the second half. Is that still true? The second question is, what is the number left on the buyback?
I'll answer the second question first. We have $720 million left on the buyback for the remaining part of this year. As far as OpEx, in the first half of the year, you tend to have less vacation and more Social Security tax. Those things roll off in the later half of the year, offset by the fact that we continue to invest in R&D, key R&D people, and key technical salespeople. That will counteract the other trend a little bit.
OpEx should be similar in the second half as in the first half, or?
Approximately similar, we have more shutdowns and less Social Security tax impact, but more talented engineers and talented salespeople.
Got it. Thank you very much, guys.
Your next question comes from the line of Gary Mobley from Benchmark. Your line is open. Please go ahead.
Hi, everyone. Thanks for taking my question. If I'm not mistaken, Cadence has a policy of raising prices or trying to implement a price increase every two years or so. I'm curious if that is an across the board price increase for all products or whether or not that's staggered across the various product lines. Could you remind us of when we may be hitting that biannual price increase?
Our fundamental purpose, of course, is deliver great innovative products to our customers. When we do that, we believe we can capture value from our customers. We do focus on the quality of our deals and pricing, but the key thing is we deliver value, we'll get paid for it.
Okay. All right. You mentioned that the hardware sales are record level, I believe that might be emulation related. I'm just curious how those hardware sales are impacting your gross margin and operating margin for that matter, and how it may create some lumpiness in the bookings and backlog figures that you guys are striving for 2016.
Well, emulation, like our hardware business or our emulation business, is certainly lumpy like our IP business is going to be lumpy. What we've said as we've introduced and released the Z1 and started shipping and selling the Z1, is that we expect revenue to go up in our hardware business and margin to go up with the new product. I think we're happy with that. You saw we had a record hardware quarter, we're doing quite well so far.
Okay. Any notable change between EDA and system design enablement? Is it still roughly a 55%-45% mix respectively?
Yeah. Our system side is about 40% of our business. Traditional semiconductor business.
Okay. All right, great. Thank you, guys.
Thank you.
Your next question comes from the line of Rich Valera from Needham & Company. Your line is open. Please go ahead.
Thank you. With regards to the restructuring, Geoff, is that kind of a business as usual, more of a reallocation of resources bringing, I guess, pruning in areas that are less strategic and adding in more strategic areas?
Yeah, it was planned as part of our guidance, certainly we're trying to optimize our resource allocation between different parts of the business. Yes.
Got it. I'm guessing you kind of have said what you want to say on emulation, but I'll try anyway. You talked about very strong demand for XP boxes in the quarter, which helped drive this record quarter. Can you help us understand why folks would buy an XP when a Z1 is out there? Maybe other than the obvious, which is maybe they can't get a Z1 yet because you can't make them as fast as people would like them.
Let me start first, Geoff can fill in. Clearly, we want to highlight that in the XP platform still continually remains strong. The Z1 is the best launch for us, and it's the enterprise class. The 5x, the throughput, and very scalable, and customer love it. We ship as we build, and have been very well received, and we are delighted with that. The combination of both that make the best quarter ever. Geoff can add more.
Obviously, I think both product lines were very strong, and there's different purposes for each product and different customer needs. People are going to buy what they need, and we're happy to sell them either one.
Got it. It sounds like you've hired a new head of IP, which is great. Any more color you can give on the trajectory of that business? I think what you've said so far is you expect it to grow less this year than it has in the past, which I think had been kind of a mid-teens rate. Can you talk about what you would expect that to grow at once this sort of restructuring is done and you've shifted some of the portfolio towards more sustainable, profitable businesses, I guess you intend to do?
Rich, I'm happy to share a highlight here. Clearly, we are excited about Peter Bollenkamp join us, with his rich experience and highly qualified, to deliver the high quality and differentiating product as he drive the refinement of our IP strategy the focus on sustainable and scalable model going forward, in term of growth. Peter came from Broadcom, as I mentioned. The last job he had at Broadcom is the Senior VP, Operation Engineering. That is in charge of not just the design and also global worldwide manufacturing technology that include all the hardware program. He personally now is very strong in the analog RF-related area. He's an inventor and actually hold more than 100 issued and pending patents in U.S.
He's a very accomplished innovator himself, we are excited for him. As we kind of grow the business over 10% of revenue, right now it's about time to refine our IP strategy for the next path of growth. We mentioned in the past, the moderate growth than 2015, that already built into our guidance. Longer term, IP revenue growth we expect to be above corporate average, that is our expectation in term of growth. We are excited about the IP portfolio we have, especially in the Tensilica-related area, the VIP-related area have been strong for us. Now we also double down on some of the design IP. Clearly, he will bring some differentiating product going forward. We have couple of success.
Clearly, we highlight we have this 5G baseband DSP win with the leading mobile handset and also Spreadtrum. Now we're starting to move into some of this machine learning, ADAS, vision processing, genomic sequencing. There's a lot of great application that Tensilica can be the key part of the IP design platform, the engine for going forward. I think we have some of the good asset portfolio, now we like to have a new leader. He just joined April 1st, now have time to refining his strategy as a new leader, new sheriff on board. He will be refining and come up with a strategy going forward, we are excited about that.
Excellent. Thanks for taking my questions.
Yeah.
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-Bu, Geoff, I'd like to start with a couple of product segment questions. First, when you think about your IC implementation business, that is to say at Innovus, to what extent would you say your incremental bookings in that business are coming from upgrading your own base versus adoption in competing or incumbent product environment, perhaps for new projects? I'm sure it's some of each, but how would you think about that? Divide between just upgrading your own base and implementation versus effectively share gain in other bases. Similarly, in terms of what you call system interconnect, that area from 2012 through most of 2015 had pretty good growth. It looked like there was a pretty good reinvestment cycle there, going on and for you and for Mentor.
The last couple of quarters, the system interconnect percentage of revenue has been coming down, and it looks like maybe even revenues have been under some pressure year-over-year. Would you say that the three or so year reinvestment cycle in PCB has largely run its course? Do you think that perhaps this is just a temporary pause and you'll see some rebound there?
Jay, these are good questions, and let me address one at a time. First of all, on the digital and sign-off area, as you know, we revolutionized the whole digital flow with some of the new tools. I think you mentioned a couple of them. Innovus for the implementation place and route, Genus for synthesis. We also have Tempus for sign-off, Voltus for power, Quantus, and Joules. In overall, we have been very good, last year and then now we are proliferating in the Q1, strong adoption and proliferation and for some of our full flow, digital and sign-off, especially in the area of mobile, consumer, automotive, and IoT related area. Overall, I think, Q1, I think I mentioned in my script, leading mobile chip company adopting full flow, digital sign-off, for their most demanding 10-nanometer projects, with volume.
Innovus, I think I mentioned we have 15 new customers in Q1, some of them it's just successful competing and we win. Genus, 25 new customers. That means that when I say new, that means that we are winning. Tempus, 15, Voltus is four, Quantus is six, and Joules about three. We continue to proliferate nicely. Of course, a very deep, important partnership with the ecosystem like TSMC, Samsung, and Arm, very critical in some of the most advanced nodes, 10 and seven nanometer, that will bring us success. Beside the company I mentioned, the leading mobile chip company adopting for 10 nanometer. Today, this morning, we announced that Toshiba adopting our Innovus implementation for production mobile memory control that achieves 16% area reduction and a 25% power saving.
Those are very remarkable, in the real case, they adopt it because of the much better product and the solution they look for.
On the numbers a little bit, the digital revenue was up substantially quarter-over-quarter, or year-over-year, excuse me. Some of that was a benefit from a completed contract in Q1, but generally, our digital business has been quite strong. On the system interconnect business, I would take it as nothing more than a pause. We sometimes have fluctuations, a little bit in revenue accounting due to MEAs or doing payable contracts. We just view it as nothing more than a pause right now.
Just add on to that, in the PCB related area, Q1 is overall a solid quarter, with number of good size renew and renewal from both system and semiconductor company. We continue to expand our collaboration with TSMC on the integrated design flow for TSMC Integrated Fan-Out, I call it InFO, packaging technology. Also, I think, we're clearly driving some of the foundry-proven IC packaging and analysis solutions. Our Sigrity, that is for the power signal integrity analysis system level. We have a 2016 technology portfolio, that improved the product creation time and enhanced the PCB design analysis methodology for multi-gigabit interface and like USB 3.1. Overall, we continue to drive success there.
With respect to your earlier comments on restructuring, there was a question about that and your margin expectations for the year and as well, your comments about your R&D. Let me ask you this. We've noticed, just doing a quick spot check on your website, an unusually large increase in the number of job openings that you're posting. Probably the largest we've counted to date in the several years we've been looking at this data. That included, not surprisingly, a particularly large increase in R&D, and virtually none for sales. I guess the question is, to what extent is that increase in R&D positions you're posting a function of having to compensate perhaps for attrition or turnover versus real or organic investment or net capacity additions that you're looking to make in R&D?
Yeah, I think it shows a lot of confidence in our future for sure, right? That we have these positions. We do tend to concentrate our hire on technical positions in R&D and in technical sales, and I think you'll generally see most of those positions in being in that area. The restructuring is, of course, concentrated in efficiency and effectiveness and making sure we're using the resources where we need to use the resources. Then, of course, as you're well aware, we are in a great place to work, very highly ranked as a great place to work.
To people.
All right. Lastly, Geoff, could you comment on the increase in services revenue in the quarter? Was that largely related to IP engagements, and is there anything to extrapolate there for the rest of the year?
Yeah. We recognized revenue in a completed contract in Q1, and that drove the services revenue up uniquely in Q1.
Okay. Thank you.
Thank you.
Your next question comes from the line of Monika Garg from Pacific Crest Securities. Your line is open. Please go ahead.
Thanks for taking my question. First question on the emulation side. One of your peers, Mentor, they were talking about that they think that you guys had a very good quarter in emulation, but they were saying that the evaluation times are looking to be stretched from three months to seven to nine months, and there is some pricing pressure in the market. How to kind of reconcile any commentary on that?
We don't know how to comment our competitors. I think so far we have been very focused on our business. As I mentioned earlier, especially in the most advanced node, the complexity and the time to market, emulation is a must-have. Clearly our XP platform and Z1 have been doing really well. The customer is putting orders, and they have many repeated orders. Overall, we see a tremendous opportunity for us, and because time to market is so critical for the semiconductor company and the system company, and our Z1, the sales have been very nicely, and then we have repeat orders already.
I think the other thing is you need to realize we introduced a product in late Q4. Lip-Bu talked about this being the fastest ramp for an emulation platform we've had. I think those two things clearly show what we believe the cycle time is.
Thanks. Jeff, on the operating margin side, your Q1 op margins are better year-over-year. Q1 is the lowest revenue quarter, so likely margins go up from here. In your 2016 op margin guidance, they are slightly lower year-over-year. Are you just being conservative?
I think the Q1 outperformance was largely related to the timing of revenue and expenses, obviously, between the quarter. We are expecting to hire, as Jay asked in his question, in both R&D and technical sales, which will increase spending in the later part of the year. We're quite comfortable in maintaining our revenue and operating guidance for the year.
Yeah. Thanks. This is last one. Intel announced a big layoff, almost 10, 11% workforce reduction. Do you see any impact from that?
Yeah. I think first of all, I think clearly Intel is a great company. I have a lot of respect for them. We're not going to comment on any specific on the companies.
Right. I meant any impact on the EDA spend as due to the reduction of headcount.
Yeah. We just don't comment on individual companies and/or anything that's going on with them. They're, again, a great company, as Lip-Bu said.
Okay. Thank you so much.
Thank you.
Your next question comes from the line of Sterling Auty from J.P. Morgan. Your line is open. Please go ahead.
Thanks. Hi, guys. I wanted to start with the comment about the hardware revenue record in the quarter. How did that deliver relative to your expectations? In other words, had you factored in that record revenue in your guidance? Also, how did the margins stack up versus what you were expecting, especially in the new Z1 platform?
Okay. Everything when we give guidance, we always include everything we know at the time when we give guidance. Obviously it's hard for us to comment specifically on that. As we said also when we were introducing the Z1 and talking about the Z1 coming out, that we would see higher revenue this year and higher margins as a result of transferring to the Z1 platforms. Of course, as you know for sure, our hardware is a lumpy revenue piece for us, along with IP. Yeah. If I can add a little bit more, I think clearly we have a really, really outstanding team and are driving the business. So far, we are very comfortable to meet the customer demand.
Relative to the IP business, I didn't quite get it. I understand lumpiness, what's impacting the growth rate in terms of seasonality for this year?
I think it's really the change in our focus. As we said on the last call, we're focused on sustained scalable growth, We're really concentrating on delivering that. I think more than anything else that's driving our business is, as we said, we expect more modest growth this year than last year, where it was, as somebody said, they're in the upper teens. In the long term, we expect IP growth to be above corporate average.
Last question, if you look at the OpEx, I guess the OpEx drop in the first quarter for sales and marketing is more than, I think, historical, at least for the last few years, and the OpEx drop in R&D was actually less. Didn't know if that was indicative of what you guys did in hiring in the quarter, or if there was something else going on.
Yeah. I'd say we're not going to comment on the details of our restructuring or number of positions impacted. Obviously, we focus on effectiveness and efficiency with the restructuring, and obviously that had some impact on spending in the quarter.
Yeah, just add a typical clearly, as Geoff mentioned earlier, we are double down on R&D and field support engineering FAE, because a couple of big customer are proliferating and we are working with them, and then make sure that we support them in their tape-out successfully and in the most advanced nodes. It's more to support technically and continue the innovation for the flow that we are focused on.
Great. Thank you, guys.
Thank you.
At this time, I would like to remind our participants that if they have a question or a comment, they may press star followed by the number one on their telephone keypad. Again, if you have a question or comment, you may press star followed by the number one on your telephone keypad. Your next question comes from the line of Tom Diffely from D.A. Davidson. Your line is open. Please go ahead.
Yes, good afternoon. I guess I was curious, are you at what you would consider full production right now for the emulation business, or are you still in the process of ramping the new tool?
We're in production. Clearly, we are meeting the customer demands.
Okay. All right. I know sometimes cycles pass, it's taken a while to get that to full levels. All right. Geoff, when you look at your commentary, it looked like the GAAP margin was down a little bit. What was the driver of the GAAP margin decreasing, but the non-GAAP staying constant?
We expect a higher tax rate this year than we did last year on a GAAP basis.
Okay. The cash tax rate stays the same?
It should stay the same, maybe slightly up.
Okay. Is that just location of where you are getting your revenue?
I think every government in the world needs more money.
Yeah. All right. When you look at your full year guidance, I'm just curious how much of the buyback was in that. Were you assuming the buyback through the year or just the buyback through the quarter?
When we guide shares, we're guiding through the buyback as authorized through the board through the end of the year.
Okay. That's helpful. All right. That's it. Thank you.
Our final question today comes from line of Suji DeSilva from Topeka. Your line is open. Please go ahead.
Hi, guys. Thanks for taking the question. First of all, on the emulation products, Z1, would you expect a natural sort of initial uptake of products as the product's launched and then a pause to digest those, or would it be a steady ramp?
The business is going to be lumpy, obviously, for emulation. Customers are going to buy the product when they need it based on their designs, right? They weren't waiting. They were buying what they needed, and they're going to continue buying what they need.
That was the answer to my question. The other questions were on the system customers versus semis. Would you expect that mix to shift over the next several quarters or years? More importantly for systems customers, are they more likely to take bundles of your products, versus the semis customers, given that they perhaps need more help to kind of get into the semis business themselves?
Suji, I assume that you are talking about the broad product rather than the emulation, right?
Correct. Exactly.
Okay. I think clearly we are excited about this whole system design enablement. This is exactly about addressing the, not just the silicon player and also the silicon move into the system company and even the service provider. Clearly we are embarking aggressively and it's very exciting, because we have not just the tool, we not only have the IP, we also have packaging and the system design and analysis related.
That became very compelling to work with them, that ranging from automotive sector like ADAS, function safety related, to the cloud infrastructure, hyperscale web services infrastructure that they want to drive, to the vision into the search and machine learning. With our Tensilica in our tool, also the IoT. You saw the announcement we have with Silicon Labs in term of the low power mixed signal, Realtek in the Tensilica on the ultra-low power. It's just going on. We are just excited about the whole medical, aviation, automotive, the cloud, and IoT related. I think, the system level, we're going to grow significantly over the years, and we're excited about the opportunity.
Okay. Thanks again, guys.
Great. Thank you.
It is now my pleasure to turn the call back to Cadence President and CEO, Lip-Bu Tan, for closing remarks.
In closing, I am proud that for the second year in a row, Fortune magazine has recognized Cadence and our hardworking employees by including Cadence in the list of the 100 Best Companies to Work For. I would like to thank all our shareholders, customers and partners, Board of Directors, employees, for their continued support. Thank you all for joining us this afternoon.
This concludes today's conference call. You may now disconnect. Thank you for participating in today's Cadence Design Systems first quarter 2016 earnings call.