Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems 4th Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence Design Systems. Please go ahead.
Thank you, Mike, and welcome, everyone, to our 4th quarter 2015 earnings conference call. With me today are Lip Bu Tan, President and CEO and Jeff Rebar, Senior Vice President and CFO. The webcast of this call can be accessed through our website, cadence.com, and will be archived through March 18, 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 ks filing today and is available on our Investor Relations website at cadence.com.
Since we are providing the CFO commentary, Jeff's remarks will be streamlined and certain metrics not discussed in today's call, including historical comparisons, will appear in the CFO commentary. The CFO commentary should be referenced in conjunction with both today's conference call remarks and the earnings press release issued today. Next, please note that today's discussion will contain forward looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence's most recent reports on Form 10 ks and Form 10 Q, including the company's future filings and the cautionary comments regarding forward looking statements in the earnings press release issued today.
In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP, we will also present certain non GAAP financial measures today. Cadence Management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the Quarterly Earnings section of the Investor Relations portion of our website. Additionally, a copy of today's press release dated February 3, 2016, for the quarter ended January 2, 2016, and related financial tables can also be found in the Investor Relations portion of our website. Now I will turn the call over to Lip Bu.
Good afternoon, everyone, and thank you for joining us today. 2015 was another excellent year for Cadence. So I'm especially pleased to be able to talk to you today about our accomplishments and strategic direction. First, let us review our Q4 and twenty fifteen financial highlights. Cadence produced excellent financial results.
We delivered revenue of $441,000,000 for Q4 $1,700,000,000 for the year, growth of 8% over the prior year. Non GAAP operating margin was 29% in Q4 and 27% for the year, up from 25% for 2014. Non GAAP EPS was $0.31 in Q4 and $1.09 for the year, up 16% over the prior year. Execution of our system design enablement strategy drove revenue growth from both semiconductor and system companies in all areas of our business, core EDA, IP and system integration. A key part of our strategy is to increase our engagement with new vertical segments and we have notable wins in aviation, automotive and medical.
Demonstrating our constant commitment to innovation, we delivered 9 new differentiating products. We continue our pioneering work in advanced node technology with our ecosystem partners, including partnering with IMAIC to tape out the first 5 nanometer test chip. And yesterday, we launched our first new product of 2016, the MODIS test solution. This innovative new technology can reduce SoC test time by up to 3 times with no impact on area or routing. Strategy, innovation, execution and customer success are driving strong results for our shareholders and we have momentum going into 2016.
Jeff will provide more details shortly on our 2015 results and our 2016 outlook. Now let us address the environment. Semiconductor business conditions remain challenging as the industry experienced negative growth in 2015. We remain mindful of ongoing consolidation in our semiconductor customer base. While we do not expect a material impact on our business in 20 consolidation could pose a challenge to industry growth over the next few years.
Now let us talk about some of the product highlights and customer successes in 2015. In digital and sign off, Cadence revolutionized the digital flow with the release of Innovus for implementation, Janus for synthesis and Juice for power estimation. Digital and sign off revenue grew approximately 35% at the accounts we targeted. Adoption of our new digital and sign up portfolio continued in Q4, including a large agreement recently closed with GlobalFoundry that supports the newly acquired ASIC team from IBM. Broadcom also renewed their investment in Cadence and added technology to their digital flow based on a thorough performance evaluation.
HiSilicon adopted Innovus for production DSP designs enabled them to reduce area by 20% while meeting their frequency goal. And ARM using our full digital flow take out its 10 nanometer test chip. Overall, we have more than 1,000 digital full flow wins in 2015. IP is a key component of our overall strategy and is now 12% of our revenue with growth last year of 17%. We continue to expect IP to be a great business for us, but we are projecting more moderate growth this year as we refine our strategy to focus on sustained scalable growth.
In terms of products highlights, Tensilica Vision P5 DSP, our latest vision and imaging processor built strong momentum with key design wins at 3 application processor vendors in Q4. System Design and Verification revenue grew 12 percent in 2015 driven by strength across the product line. Our system development suite attained record revenue in 2015 driven by strong core verification technologies integrated tightly together to offer a compelling holistic solution. We launched our new Pralidium Z1 enterprise emulation platform in November and recognized revenue in Q4. Palladium Z1 now has orders from more than 10 customers, including PMC Sierra, NVIDIA and Huawei, and the most successful launch of any new cadence emulator.
For custom analog design, Virtuoso is the market leading analog and mixed signal design platform. In Q4, we delivered the new Virtuoso advanced node platform for 10 nanometer FinFET design with initial support for 7 nanometer design. Over 80 customers are now using Virtuoso for advanced node design, including over 25 for 10 nanometer nodes. Security analysis tools had their best year ever. Our printed circuit board and analysis products won an important competitive replacement with an automotive manufacturer.
In summary, 2015 was an excellent year for Cadence. System design enablement is escalating our opportunity beyond EDA. We have tremendous momentum in digital and sign off market segments. And our Pralidium Z1 enterprise emulation platform is off to a very quick start. There are micro challenges ahead, but also opportunities specific to cadence.
Through innovation and execution, we are positioned to build on our success and to further proliferating our solutions with market shipping customers. Now I will turn the call to Jeff to review financial results and provide our outlook. Thanks Lip Bu, and good afternoon, everyone. Our CFO commentary should be referenced in conjunction with both my remarks
and earning press release issued today. Overall, 2015 was one of the best years in Cadence history. Our innovation is paying off and our execution was superb. Now for the results of Q4 and fiscal 2015. Bookings totaled $1,900,000,000 an increase of 7% over 2014.
The book to bill was 1.12 and the year end backlog was $2,300,000,000 up 10% from the prior year. Weighted average contract life for Q4 was 2.8 years. For the year, it was 2.58 years within our expected range of 2.4 to 2.6 years. Revenue for Q4 was $441,000,000 Revenue for the year was $1,700,000,000 up 8% year over year. Without the extra week in Q4 2014, year over year growth would have been 9%.
Over 90% of the revenue for the year was recurring in nature. Non GAAP operating margin for Q4 was 29%. For the year, it was 27% compared to 25% for the prior year. The positive variance relative to our initial guidance for 2015 was due to effective resource management, lower than planned headcount, better than expected hardware margins and favorable foreign exchange trends. GAAP net income per share for Q4 was $0.26 $0.81 for the year.
Non GAAP net income per share for Q4 was $0.31 up 15% year over year. For 2015, non GAAP net income per share was $1.09 compared to $0.94 for 2014, up 16%. Operating cash flow was $123,000,000 for Q4 $378,000,000 for the year. Cash and short term investments were $711,000,000 at year end, unchanged from the end of Q3. DSO were 35 days, an increase of 7 days from Q3.
We repurchased 5,500,000 shares of stock in Q4 for $120,000,000 For the year, we repurchased 16,300,000 shares for $333,000,000 At year end, dollars 960,000,000 remained in our current $1,200,000,000 repurchase program. On January 28, 2016, we entered into a 3 year $300,000,000 term loan. We also drew $50,000,000 on a revolving credit agreement. Now let's turn to our outlook for fiscal 2016 and the 1st fiscal quarter. For fiscal 2016, we expect bookings in the range of $2,000,000,000 to $2,100,000,000 which equates to an 8% growth at the midpoint revenue in the range of $1,790,000,000 to $1,840,000,000 which would be a 7% growth at the midpoint.
Non GAAP operating margin of approximately 26%, GAAP EPS in the range of $0.72 to $0.82 and non GAAP EPS from $1.15 to 1 $0.25 which is up 10% at the midpoint over 2015. Operating cash flow in the range of $380,000,000 to $420,000,000 weighted average contract life to be in the range of 2.4 to 2.6 years approximately 70% of revenue from beginning backlog and weighted average diluted shares outstanding of 280,000,000 to 295,000,000 shares. Note that backlog is expected to grow 10% in 2016 based on the midpoints of the guidance. For Q1, we expect revenue to be in the range of $440,000,000 to $450,000,000 non GAAP operating margin to be in the range of 24% to 25%, GAAP EPS to be in the range of $0.17 to 0 point 19 dollars and non GAAP EPS in the range of $0.26 to $0.28 at least 90% of the revenue from beginning backlog. There are several factors that will impact the seasonality of operating expenses and margin for the year.
First, the fact that both payroll tax and vacation expense tend to be higher in the first half of the year than the second. 2nd, pay increases incur in Q3 and 3rd an expected ramp in headcount throughout the year. You will find guidance for additional items in the CFO commentary. Note that we have increased our DSO target from 30 days to a range of 30 to 35 days. We think this is prudent in light of the current economic uncertainties.
Our cash flow was strong for 2015 and we expect cash flow to grow in 2016. Cadence had a great 2015. We have momentum going into 2016. Our strategic priority remains to develop innovative products, help our customers be successful and proliferate our solutions with market shaping customers. So with that, operator, we'll now take questions.
Your first question comes from Krish Sankar with
BoA. I had 2 of them. First one for Lip Bu. You kind of highlighted the semi M and A could be impactful in the next couple of years. Is there a way you can quantify it?
If not, I'm just trying to figure out qualitatively, have you seen at your customer side any kind of EDA purchasing decisions slowing down?
Okay. That would be your first question. So let me answer that. So first of all, I think we all recognize 2015 in term of consolidation more and larger consolidation. If I estimate correctly, more than $100,000,000,000 transactions.
So that is the reality in the industry. But consolidation clearly will create stronger and more focused company that can do more innovative design. Long term impact to EDA is very hard to predict, but we expect actually we do not expect any material impact to our business in 2016. But I mentioned that consolidation could pose a challenge to our industry growth over a few years. And by meanwhile, I think the consolidation actually provide opportunity for us to proliferate our newly innovative solution as customer are looking for differentiating product development.
So I think answer your question, the consolidations for us I think there's a trend, we just had to expect that. But meanwhile, there's a lot of pocket opportunity that we can grow our business with our solution that are so unique and the best and in a way that we can proliferate with great execution. Got it.
And I guess a couple of things, Krish, that we looked at and considered before we mentioned that we don't see an impact in 2016. We certainly looked at whether customers would have greater economic power. We looked at market share shifts. We looked at potential for engineering synergies. We also looked at the past acquisitions that are through they were smaller a little bit smaller in scale over the past several years, where we've generally not inhibited our ability to grow our business with those customers.
Of course, we are also getting increasingly competitive with our technology during that time. So those are some of the factors we looked in and we're looking at that, we don't see an impact in 2016 for us.
Got it, got it. All right. And then as a follow-up, when you look at your customers, like they seem to be slowing down Moore's Law. I mean, no matter which way you dissect it, it's probably not at the same pace as like several years ago. Kind of curious, if they are slowing it down and kind of moving to the tick, tock, tock schedule, is there an opportunity for you guys to lower your R and D?
I mean, at 33% to 34%, 35% of sales, it seems like a very high number, especially given the fact that your customers are consolidating, they're doing some financial engineering and slowing the technology cadence?
Yes, so let me try to answer your question. First of all, I think the in terms of our customer, I should break down to 2 part. 1 is the semiconductor side, 1 is the system side. On the semiconductor, when they consolidate, that meant that you really want to drive more unique solution that can win in the marketplace, continue their strength and their leadership. And they will be really driving more advanced node, more efficient in terms of driving the result and performance.
And that's why our innovative product with that in mind when we do all this innovation product to really providing the solution to help them in terms of their productivity, time to market and also the run time and the performance PPA that is critical for them and also the whole system SoC in terms of mixed signal of digital and analog come together and also how to verify and in a very holistic way companies that we mentioned quite a few times and that is our companies that we mentioned quite a few times and that is our system design enablement strategy and that IP is a very critical part of that. But more than that, there's a sea change in that industry in terms of application driven design. And just give you an example like Cloud is a big example and that people customer are starting to look at kind of the workload looking at the what application, the IO, big data analytical and there's a sea change in the architecture changes and then when we design some of our tool and solution, we have that in mind, so that we can really engage and support and give them the solution they need to drive some of this new design and some of this system company, I call it market shipping customer, they are really driving a very different system approach to the application and that our solution will be really nicely fit with them to optimize the application they want to drive.
Got it. Got it. All right. Very helpful. Thanks a lot, Lip Bu.
Sure. Your next question comes from Rich Valera from Needham and Company.
Sorry, thank you. Jeff, just wanted to ask you about how you're thinking about the leverage in the business longer term. It looks like you're guiding for effectively negative leverage in the business this year, 26 ish percent op margin off of 26.7% last year. And that was a fairly elevated level of spend last year as you'd indicated you were investing pretty heavily to pursue some of your new wins. So just wanted to get your thoughts on how you think about leverage longer term.
Is there a point when you start letting some of the natural leverage in the model flow through and when might that be?
Yes, Rich, good question. So we are really focused as our strategic priority on developing innovative products. We want our customers to be successful and we are attempting to proliferate our solutions with these market shaping customers. For example, I think you can see our some of our digital successes that we highlighted during the past year with very good customer names, strong growth in our digital business, shareholders. So we are concentrating on that as our strategic priority.
Got it. And then your verification business was the strongest it's been from a percentage of total sales and I guess 2 years in the Q4. Wondered if you could give any color on what drove that? Was it emulation? Any color on that and how that momentum might carry into next year?
Yes, this is Lip Bu. Let me try to answer that and then Jeff will fill more detail. So overall, we are very excited about our Z1. As I mentioned, the most successful launch of any cadence emulator. A couple of reasons, one is clearly is the 1st true emulator in the market with the enterprise class reliability And also the capacity is 5x in term of throughput capacity improvement.
And then clearly, we have a lot of overwhelming positive feedback from customer. I mentioned more than 10 customer already placed order and some already repeat orders coming and we are shipping as fast as we can produce. And so something that we are really excited and in terms of respond to the customer and this is something that customer really want in terms of true capacity improvement and performance improvement, speed, footprint and cost of ownership and that is something really, really important for them. And beside, I think that the latency in this Palladium XP tool remain very strong.
Great. Just one more for me, if I could. Jeff, I think you said $920,000,000 or so left on your buyback, which would normally be over 4 quarters. Should we think of that as a pretty linear buyback over those 4 quarters?
Yes. We've bought back 240 on our current plan. We have 960 that remains. And as you know, we tend to buy pretty linearly and at VWAP.
Got you. All right. That's it for me. Thanks, gentlemen.
Your next question comes from Gary Mobley from Benchmark.
Good afternoon. Thanks for taking my question. I had a question on the divergent trends in backlog and deferred revenue. And I know deferred revenue is only representative of a small portion of your backlog. But for 2015, your backlog was up 10% and you're expecting a like increase in 2016, but yet your deferred revenue at year end was down about 8 percent year over year.
What's the dynamic explaining that?
Yes. So for our business model deferred revenue means different than a lot of probably other software companies that you're familiar with. Deferred revenue for us is just cash that we've taken upfront that we haven't recognized revenue for. One of the things we work really hard to is try to match billings, collection and revenue recognition in the same period. As we're doing that deferred revenue will continue to decrease for us.
For us, that's it's a liability, not necessarily an asset as you would sometimes consider with the other companies.
Understood. All right. In your description of the IP business having grown 17% in 2015 and the expectation of slowing growth looking out into 2016, I think you might have used the adjective rational or more prudent in describing your approach to managing the IP business. Does that mean that you're deemphasizing any portion of the IP portfolio?
Yes. And I mentioned that in that first of all, in the last few years, we kind of grew the business from 0, slightly small to all the way to 12% of the revenue and then growing at 17% last year. It's time for us to kind of refine our strategy to focus that make sure that it's sustainable and scalable growth and also for customer delight. And so I think those are the things that we put into the factor and then so that we kind of project a more moderate growth for this
year. And again, remember, we as we said last year, we grew at 17% very close to what our plan was.
And then if you remember, our IP business, there's a 3 portion. 1 is the Tensilica. This is very exciting for us because this whole vision image processing and for object detection, for big data or for video surveillance and so very broad application. We are very excited. We are continuing to invest on that.
And then our design IP for all the industry standard IP, we continue to invest in that. And then thirdly is the verification IP that tie in very well with our whole verification development suite and that tie in with all the incisive and the Jasper Gold that we just launched with very responsive from customers. So I think we we try to make sure that we're really providing holistic solution to our customer in their overall design and so that we can really strengthen the solution to the customer.
Okay. Just a final question on the industry backdrop. Independent of the massive wave of chip industry consolidation that we've we don't we haven't really seen any sort of robustness in the end markets you serve. You've got a declining PC market, flattening mobile handset market and just in general deceleration in the electronics production supply chain, if you will. And despite that, you're managing to grow your bookings and deferred revenue 8% to 10% per year.
I was wondering if you have taken a stab or care to take a stab today, sort of commenting on what percent of your customers' R and D budget you can occupy now and how that's trending?
Yes, if I understand your question, clearly, we continue to drive success with our customers even though they're consolidating, but we continue to proliferating our innovative products. The other part that we are growing quite rapidly is a system design, system customer. And I mentioned earlier a couple of pocket opportunity, you highlight PC slowdown, that is true. But we see some of this new application coming up really strong in the video related area in term of the IoT. And then most of this in the image vision related area, automotive in term of ADAS, autopiloting.
And all these are driving a lot of data and sensor to the cloud. And that's why I mentioned earlier about the big data, data analytics across multiple vertical market all the way to medical, video surveillance and they want to have all this data in order to improve their business even in the retail stores. So I think those kind of be driving the silicon development and also driving the system company doing vertically integrated. And so I think those are the opportunity for us that on the 2 side. 1 is a stronger consolidation company that we'll continue to grow with them and proliferate with them and as a new breed of system enablement because we are uniquely positioned for our tool, our IP and then our system integration and the hardware, software codesign, code verification and so that really can address the power, signal integrity and time to market requirement from system company point of view, so they can go to market much faster than in a very compressed timetable.
And I think one more thing, Gary, that's important. Remember, we're mission critical to our customers, whether they're IC or system companies. And our increasingly differentiated technology is clearly helping us our customers.
Congratulations on the good execution in a tough environment. Thanks guys.
Thank you.
Your next question comes from Dave Lishauer from Griffin Securities.
Thank you. Good evening. I'd like to ask first a question about the emulation business. You had guided to an increase for the year in that business, albeit it might not have been much of an increase. When we look at your cost of product and maintenance revenue sequentially and even year over year, there was hardly any change at all, which would suggest that unless you had a pretty extraordinary increase in the gross margin for emulation that you might not have had much of an increase in that business, either sequentially or year over year and perhaps the business was not up year over year as you had guided.
So perhaps you're over inferring from the cost numbers, but could you comment on whether or not you did in fact increase that business? And is it possible that to the extent your Q1 guidance for revenue is somewhat above consensus that in fact we're seeing some carryover of emulation business backlog into Q1 from Q4. Then a couple of other questions.
So a couple of points Jay, revenue did grow. Our Emulation business did grow year over year, driven by both strong sales and margins for Palladium XP. As we also said, when we started shipping and recognizing revenue on the Z1, Palladium Z1, our next generation, we expected hardware revenue to grow and margins to improve. I also will tell you we had one of our best quarters ever in hardware in Q4 ever. Okay.
Looking at your new products or asking about your new products, is there anything you can say in terms of adoption, particularly for Innovus, Tempus, Voltus, in terms of, for example, design sizes or where they're being adopted? In other words, are they being brought in largely for new programs? Are you seeing any displacement of incumbent implementation and sign off tools, all of the above for any of the products on the digital side. Also in terms of your sales pitch for the new tools, you've made the point that you have a much more highly integrated flow now, lots of common engines, particularly around timing and so forth. Is that commonality across the tools, in fact leading to new business that you can identify?
Jay, it's a good question. Let me try to answer your questions. So as I mentioned earlier, we revolutionized our digital flow from ground up and then Innovus is our implementation, Janus is our synthesis and then the Tempus is our sign off and then Juice for our power and our design. And so a couple of things, just to give you a little bit history. 9 months ago we announced the Innovus.
We launched the products. Right now we have more than 60 customers, 6 0 customer worldwide and then 8 of the top 10 semiconductor adopting the flow. On the JENAS side, we launched the products about 6 months ago. After the launch, we have more than 40 customer, four-zero customer adopting. And then clearly in our campus, I think we have an announcement that we surpassed 200 tape outs and Q3 we announced that and we are approaching more than 100 customers.
And then on the voters, that is a power sign off and 17 out of the 20 top tier semiconductor company adopting well over 100 customers overall and we are really excited. Yesterday we launched our MODIS test solution that reduced the SoC test time and then clearly is a groundbreaking technology that reduce the time for test chip and also can really catch the potential manufacturing defects so that they don't have to ship bad parts of products and that is very critical for the customer success and we are excited. GlobalFoundry, TI, microsemiconductor, Sequin and they are adopting the motors, very well received and from the get go that we just launched. So I think overall, it is a very exciting time for us. Truly is a very breakthrough technology that we have in the digital flow.
And by the way, we also double, triple down on the most advanced node and then we with ARM using the completely digital flow, integrated flow, we have more than 10 full flow wins in 2015. So all in all, I think clearly it's not just for the new the customer also replacement of some of the existing tool providers.
A follow-up if I may on Motus and then I'll wrap up with a corporate question. The market for test is not a particularly large addressable market according to the industry data. It's almost certainly less than $150,000,000 TAM and that includes hardware. And the question is, is that a large enough space to address now to have warranted the investments in R and D and presumably now the sales resources for a relatively small TAM that has also proven over the years to be pretty lumpy and in constant. And do you now with the test have what some might call a verification continuum?
Do you have in fact the wide enough panoply of products for verification? And then I'll wrap up. Thanks. On the corporate side.
Yes, good questions. I think you're absolutely correct. It's a $150,000,000 TAM market, but clearly it's going to be more and more bottleneck now in terms of customer want to be able to ship products. It's our fully integrated flow that we are emphasizing. So on the whole system design verification and the whole digital front providing a solution to shorten their design time, verification time and also their test time and their customers spend a lot of money on the testers, but using this actually can augment that to really drive some of the design success and then time to market is critical for some of these companies.
All right. Lastly, on the corporate side, you recently had your annual sales meeting, which of course everyone in your industry does. And I'm wondering if anything came out of that in terms of new priorities or organizational structure perhaps around verticals or anything of that kind that you might care to comment on? And also related to that, is there anything unique or specific about the development of your systems customer base in terms of incremental organization that you need to make to grow that part of the customer base further?
Yes, Jay, good questions. And we have a very successful sales kickoff that we have a team come together and then to look at how we moving forward this year. I think that is very emotionally charged. We have a very strong leader and very passionately driving the success to the customer. And then the message is really work closely with our customer providing the solution, make them successful and then a big chunk of a portion is talking about the whole system design enablement strategy and then how can we proliferate into some of the market shipping customer.
And we mentioned earlier in the past last quarter about general electrics and then some of the automotive, aviation and the whole cloud infrastructure, big data. And so I think we are excited about the opportunity to us and then how can we proliferate our product and then continue to drive excellent
Your next question comes from Gus Richard from Northland.
Yes. Thanks for taking my question. Luca, you had highlighted a couple of vertical markets, avionics, automotive, etcetera, early on. And I was wondering if you could give a little color as to how you engage with those customers. And is that opportunity sort of bigger as it compares to a semiconductor company?
What I'm trying to ask is, do you have a bigger revenue opportunity for a fixed number of designers at a vertical company?
Yes, good questions. I think this vertical market is very dear to my heart. And the way I understanding to do successfully is to listen and understanding their requirement and then look at the holistic way how can we help them to make sure they're successful in whatever application they want to drive and then whatever the productivity they're looking for and then the vertical integration that they are planning to do and then try to learn what they try to do and then the solution they try to provide And then the best way to success is collaborating with them and then look at our portfolio and then see how can we strengthen that and how are the pieces that we don't have and either we organically developing that or through M and A to get that so that we can provide our overall solution to meet their requirement. And this is a very exciting time for my team and myself to learn new things and then along the way we try to adopt and then what is the best practice and also learn what are the requirement they have and they all have different requirement in term of redundancy and then safety function that they need to have and then how can we incorporate our tool and IP to provide a holistic secure environment solution for them.
So I think those are the way we're going to grow the business with them and then to work closely and collaborate with them.
Thank you. And then just as a follow on, you're very clearly outperforming the industry and your peers. Can you sort of attribute where your outperformance is coming from? Is it the fact that you are doing better at the vertically integrated companies? Is it the new emulation tool?
Is it new digital design flow? What is driving what do you attribute the outperformance to?
Yes. I think clearly we're still a long way to go. I mean we are continuing to be humble and work hard with customer. And I think the one single point that I can point to, I always believe the best product win. And so we continue to innovate, continue to drive and listen to the customer carefully and then responding to the customer needs and then closely collaborating with our customer and also IP and foundry partners, even the equipment semiconductor equipment company to work closely with them, make sure that we're providing the solution in a very proactive way and then suggest solution and learn from them.
And then all in all, I think this is something that we continue to do and I make sure that we continue to drive excellent in execution to proliferate our product and adopting by the customers.
Okay. Thank you very much.
Sure. Thank you.
Your next question comes from Monika Garg from Pacific Crest Securities.
Hi. Thanks for taking my question. The first on the emulation side, you released a new platform end of last year. So last time when you had a new platform, you had seen significant growth in that segment. Could you kind of walk us through kind of what kind of growth we should expect in 2016 in the Emulation segment?
Yes. So good question. We're going to, as we've said before, with the new emulation platform, we expect good hardware growth in 2016 and for improvements in margin. We really are not at this stage going beyond that.
And also I think just to add on beside our new Z1 that we're excited about and currently momentum also increased for our Protium and that is our FPGA based prototyping platform and also continue to drive other than emulation also simulation related
I just want to kind of ask again what Krish had asked in the beginning. So this year you have retreated number of times, are closing a lot of big consolidations, they are closing this year or they have closed. And you're very sure that is an impact, the revenue growth this year. Then maybe could you give us quantitative kind of impact you expect going forward next couple of years, especially given your commentary that you expect it to pose some challenge to EDA industry growth rate?
Yes. So again, Monica, we said we don't expect and see any implications for 20 16. It could impact the industry more in the long run. Again, the key factors will go back to our economic power, change in economic power. 2nd, is there going to be market share shifts?
And 3rd, will there be engineering synergies within those customers? We've navigated, we believe, quite well over a period of time under the past acquisitions. Of course, no guarantee that that's going to happen going forward. The consolidation also has offered opportunities for us, right, to deliver innovative new products what the exact impact is going to be.
Okay. Just the last one here for me. Service revenue increased significantly in 20 15. Was it any reclassification of revenue in that segment?
Sometimes some of our revenue that's IP is considered services that there's enough customization of that IP. So that some of the things that will call IP will also be called services.
Your next question is from Sterling Auty from JPMorgan.
Yes, thanks. Hi, guys. Just wondering, I guess, I wasn't completely clear when you talked about focusing on more sustainable growth within the IP business. Is that focusing more on the profitability, so you want more repeatable designs or is it a different type of structural change to that IP business? If you could give some more color that would be great.
Sure. Sterling, clearly IP is a very important portion of our strategy. We have a nice growth when we get started a few years ago. Our goal is to grow more than 10% of revenue and then from emerging start that we have through M and A and also organic growth, We reached that stage now. So we have 12% in the term of growth.
Like any of the new business, you're starting to look at the performance metrics and then see how can we sustain and scalable in terms of growth. We have a matrix just like our EDA business. And so we try to make sure that they map into that matrix and it's scalable and then we can have good business for us. So I think this kind of the Phase 2 of the growth and we try to redefine and then recalculate classify and then really tie into our overall matrix with the company.
That makes sense. And then in terms of the emulation contribution, specifically to the upfront revenue versus the ratable, and you still have greater than 90% coming from ratable sources. But just kind of curious how that mix is going to get impacted here as you get that spike in the emulation business?
Yes. So we've said that we expect Q1 to be remain 90% ratable. Obviously, we're not guiding Q2, Q3 or Q4 at this stage. We'll let you know when we do that. Again, part of hardware, there's also a maintenance piece.
It's always part of our hardware business also, which is ratable over a period of time. But we're quite happy with the emulation platform and the new prototyping platform and how they're going.
Sounds good. Thank you, guys.
Thank you.
Your next question is from Tom Diffely from D. A. Davidson.
Yes. Good afternoon. Another, I guess, question following up on the previous one. When you look at the ramp projected ramp of emulation over the next year or 2, what do you think if any would be the impact on the overall corporate margin structure?
So again, I think when we look at it, we do believe it will help the overall corporate margin just because it's also helping the margin improvements in margin in that particular business, right? Strong revenue and good margins.
Okay. So both margin dollars and percentages go up over time with that?
Yes. And it's all baked into our guidance as we're giving our guidance.
Yes. Okay. And then Libby, you talked
a little bit about a negative
industry growth for 2015. I wonder if you could share with us what you think the actual growth for 2015. I wonder if you could share with us what you think the actual growth rate was for the industry and if there are any particular segments that were particularly weak during the year?
Yes, I mentioned earlier the negative growth is the semiconductor industry. And yes, that is published information. And then clearly, the projecting this year is a very low single digit growth. And so that's for the semiconductor industry.
Again, remember, 40% of our business is now system companies.
Right. I was wondering if you had a similar number for the EDA industry specifically?
Yes. I don't think I have it offhand. But I think clearly you can just add up the 3 big guys plus a few others and like PDF and others. So I think you should able to get that the growth rate.
Okay. So you talked about 9 new products released last year. How does that compare to the cadence in previous years? And which 1 or 2 products do you think are the major revenue drivers going forward?
Yes, I think couple of that 9 new first of all, I'm very, very proud of innovating culture that we're implementing at Cadence. And that engine is really going very rapidly and that culture is very, very I'm very happy to see that. And then the 9 new technology differentiating product, sometimes it's very hard for you to be telling who is your favorite child and they're all very good. But clearly you can see that we help us a lot in the digital and sign off side. Clearly, it help us a lot into our hardware emulation side.
Clearly, you see that in the system verification side and then some of the innovation is happening now. We are excited about it And then augment with a great acquisition like Jasper and they have a very strong and then on the custom analog and we continue to drive some of the innovations and then the PCB business is also growing nicely with our security acquisition. So all in all, I think we are excited about it. Out of the gate in 2016, we already have first new product coming out. Our motors test is very, very breakthrough technology.
We are excited. Customer love it. And then stay tuned. We have a few more coming up for this year. We are just excited about this innovating culture and meanwhile using the M and A to augment that.
Well, I guess you really can't choose between your kids there.
I can't choose.
Yes. So when you look at M and A question one more time, obviously with your ratable model, there's not an impact for this year. But are you seeing any type of delays happening with the renewal cycles when these M and A programs go through?
I think obviously the transactions take some time to close when our customers consolidate, right. They also then have to work through their own integration, both planning and execution on their what's called. In addition, the timing of the corporate mergers doesn't necessarily reflect the timing of the contract renewals for us either. So we have taken all those things into consideration when we guided 2016 and we said we don't anticipate any impact in 2016.
Okay. All right. Thank you.
Thank you.
Our last question is from Srini Sundararajan of Summit Research.
Hi. Thanks for taking my call. Just wanted to ask you what will be the percentage of adjacency revenues in 2016?
I'm sorry, we didn't get
Yes. From the adjacent areas like medical or automotive, what would be the total contribution for revenues from the adjacent industries?
Yes. First of all, we didn't have that breakdown for the call. And I think Jeff already highlight 40% of our revenue come from the system company. We are working on it and then try to calibrate some of this vertical, the stadium down the road we may provide that. But overall, we are excited about that opportunity.
The system company contribute 40%. It will be growing. And so we're excited about and we have a complete very nice portfolio that able to support the solution for the system company to drive some of these application driven changes that they are planning to do.
Okay. One more question. Do you have any comments on the 5 nanometer work done at IMAIC? Anything that you noticed, anything important?
Yes, as you can I mentioned earlier and we are pushing the envelope in the advanced node to be ahead of customer requirement for adoptions and then our tool has to be there to be ready? So we are heavily engaged on the 2 and IP front on not just 10 nanometer, 7 nanometer, we are also doing research on the 5 nanometer. The one that we highlight last quarter we announced that with IMAIC, this is quadruple patterning and then using the EUV on the 5 nanometer, we are delighted. They chose us to be the platform of choice to work with them on the 5 nanometer. And so we will continue their effort to be on the leading edge of the advanced nodes.
I will now turn the call over to Kadant's President and CEO, Lip Bu Tan for closing remarks.
In closing, 2015 was a year of great success and 2016 present us with exciting opportunities. I would like to thank all our shareholders, customers and partners, Board of Directors and hardworking employees for their continued support. Thank you all for joining us this afternoon.
Thank you for participating in today's Cadence Design Systems 4th quarter 2015 earnings conference call. This concludes today's call. You may now disconnect.