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 fourth quarter 2015 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'd like to ask a question during this time, simply press star, then the number 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, Mike, and welcome everyone to our fourth quarter 2015 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 March 18th, 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. Since we are providing the CFO commentary, Geoff'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. 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. A copy of today's press release, dated February 3rd, 2016, for the quarter ended January 2nd, 2016, and related financial tables can also be found in the investor relations portion of our website. I will turn the call over to Lip-Bu.
Good afternoon, everyone. Thank you for joining us today. 2015 was another excellent year for Cadence. 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 2015 financial highlights. Cadence produced excellent financial results. We delivered revenue of $441 million for Q4 and $1.7 billion 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. We have notable wins in aviation, automotive, and medical. Demonstrating our constant commitment to innovation, we delivered nine new differentiating products. We continue our pioneering work in advanced node technology with our ecosystem partners, including partnering with imec to tape out the first five nanometer test chip. Yesterday, we launched our first new product of 2016, the Modus Test Solution. This innovative new technology can reduce SoC test time by up to three times with no impact on area or routing. Strategy, innovation, execution, and customer success are driving strong results for our shareholders. We have momentum going into 2016. Geoff 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 2016, 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 signoff, Cadence revolutionized the digital flow with the release of Innovus for implementation, Genus for synthesis, and Joules for power estimation. Digital and signoff revenue grew approximately 35% at the accounts we targeted. Adoption of our new digital and signoff portfolio continued in Q4, including a large agreement recently closed with GlobalFoundries 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. Arm, using our full digital flow, tape out its 10-nanometer test chip. Overall, we have more than a dozen 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. We are projecting more moderate growth this year as we refine our strategy to focus on sustained, scalable growth. In terms of production products highlights, Tensilica Vision P5 DSP, our latest vision and imaging processor, built strong momentum with key design wins at three application processor vendors in Q4. System design and verification revenue grew 12% 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 Palladium 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 deliver the new Virtuoso advanced node platform for 10-nanometer FinFET design with initial support for seven-nanometer design. Over 80 customers are now using Virtuoso for advanced node design, including over 25 for 10 and seven-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 signoff market segments. Our Palladium Z1 enterprise emulation platform is off to a very quick start. There are micro challenges ahead, 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-shaping customers. Now, I will turn the call to Geoff to review financial results and provide our outlook.
Thanks, Lip-Bu. Good afternoon, everyone. Our CFO commentary should be referenced in conjunction with both my remarks and earnings press release issued today. Overall, 2015 was one of the best years in Cadence history. Our innovation is paying off. Our execution was superb. Now for the results of Q4 and fiscal 2015. Bookings totaled $1.9 billion, an increase of 7% over 2014. The book-to-bill was 1.12. The year-end backlog was $2.3 billion, up 10% from the prior year. Weighted average contract life for Q4 was two years. For the year, it was two years within our expected range of 2.4 to 2.6 years. Revenue for Q4 was $441 million. Revenue for the year was $1.7 billion, 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 million for Q4, $378 million for the year. Cash and short-term investments were $711 million at year-end, unchanged from the end of Q3. DSO was 35 days, an increase of seven days from Q3. We repurchased 5.5 million shares of stock in Q4 for $120 million.
For the year, we repurchased 16.3 million shares for $333 million. At year-end, $960 million remained in our current $1.2 billion repurchase program. On January 28th, 2016, we entered into a three-year, $300 million term loan. We also drew $50 million on a revolving credit agreement. Let's turn to our outlook for fiscal 2016 and the first fiscal quarter. For fiscal 2016, we expect bookings in the range of $2 billion-$2.1 billion, which equates to an 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 $0.72-$0.82. Non-GAAP EPS from $1.15-$1.25, which is up 10% at the midpoint over 2015. Operating cash flow in the range of $380 million-$420 million.
Weighted average contract life to be in a range of 2.4-2.6 years. Approximately 70% of revenue from beginning backlog and weighted average diluted shares outstanding of 280 million-295 million 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 million-$450 million. Non-GAAP operating margin to be in the range of 24%-25%. GAAP EPS be in the range of $0.17-$0.19. Non-GAAP EPS in the range of $0.26-$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 is the fact that both payroll tax and vacation expense seem to be higher in the first half of the year than the second. Second, major pay increases occur in Q3. Third, 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 30-35 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. With that, operator, we'll 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 now. We will pause for a moment to compile the Q&A roster. Your first question comes from Krish Sankar with BofA.
Yeah. Hi, thanks for taking my question. I had two of them. First one for Lip-Bu. You kind of highlighted the semi M&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 site any kind of EDA purchasing decisions slowing down?
Okay. That would be your first question, let me answer that. First of all, I think we all recognize 2015, in terms of consolidation, more and larger consolidation. If I estimate correctly, more than $100 billion transactions. That is the reality in the industry. 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. Actually, we do not expect any material impact to our business in 2016. I mentioned that consolidation could pose a challenge to our industry growth over a few years.
Meanwhile, I think the consolidation actually provide opportunity for us to proliferate our newly innovative solution as customers are looking for differentiating product development. I think answer your question, the consolidations, for us, I think there's a trend. We just have to expect that. 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.
I guess a couple 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 although they were 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. Those are some of the factors we looked in, and looking at that, we don't see an impact in 2016 for us.
Got it. All right. As a follow-up, when you look at your customers, they seem to be slowing down Moore's Law. No matter which way you dissect it's probably not at the same pace as like several years ago. I'm kind of curious, if they are slowing it down and kind of moving to the tick-tock schedule, is there an opportunity for you guys to lower your R&D? I mean, at 33%-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.
Yeah. Let me try to answer your question. First of all, I think in terms of our customer, I should break down to two parts. One is the semiconductor side, one is the system side. On the semiconductor, when they consolidate, that mean that you really want to drive more the unique solution that can win in the marketplace, continue their strength in the leadership. They will be really driving more advanced node more efficient in terms of driving the result and performance. That's why our innovative products, with that in mind, when we do all this innovative product, to really providing the solution to help them in terms of their productivity, time to market, and also the runtime and the performance PPA, that is critical for them.
Also the whole system SoC, in terms of mixed signal, the digital and analog come together and also how to verify and in a very holistic way will be very important to their time to market. That is the first part. Second part is we are very excited in the whole system companies that we mentioned quite a few times, and that is our system design enablement strategy. IP is a very critical part of that. More than that, there's a sea change in the industry in terms of application-driven design. Just give you an example, like cloud is a big example, that people, customer are starting to look at kind of the workload, looking at what application, the IO, big data, analytical, and there's a sea change in the architecture changes.
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. Some of this system company, I call it market-shaping 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. All right. Very helpful. Thanks a lot, Lip-Bu.
Sure.
Your next question comes from Richard Valera from Needham & Company.
Sorry. Thank you. Geoff, just wanted to ask you about how you're thinking about the leverage in the business longer term. Looks like you're guiding for effectively negative leverage in the business this year, 26%-ish op margin off of 26.7% last year. 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. Just want 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? When might that be?
Yeah, Rich, good question. We are really focused as our strategic priority on developing innovative products. We want our customers to be successful, we are attempting to proliferate our solutions with these market-shaping customers. For example, I think you can see some of our digital successes that we highlighted during the past year with very good customer names, strong growth in our digital business, particularly with the top targeted customers, also overall. We believe that's the best long-term focus for shareholders and the best long-term return for shareholders. We are concentrating on that as our strategic priority.
Got it. Your verification business was the strongest it's been from a percentage of total sales in, I guess, two years in the fourth quarter. Wondering 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?
Yeah, this is Lip-Bu. Let me try to answer that, Geoff will few more detail. Overall, we are very excited about our Z1, as I mentioned, the most successful launch of any Cadence emulator. A couple of reason. One is clearly, it's the first true emulator in the market with the enterprise class reliability, also the capacity is five times in term of throughput capacity improvement. Clearly, we have a lot of overwhelming positive feedback from customer. I mentioned more than 10 customer already place order, some already repeat orders coming. We are shipping as fast as we can produce. Something that we are really excited and in term of respond to the customer, this is something that customer really want in term of true capacity improvement and performance improvement, speed, footprint, and cost of ownership.
That is something really important for them. Beside, I think that the latency, this Palladium XP II remain very strong.
Great. Just one more for me, if I could. Geoff, I think you said $920 million or so left on your buyback, which would nominally be over four quarters. Should we think of that as a pretty linear buyback over those four quarters?
Yeah. We've bought back $240 million on our current plan. We have $960 million that remains. As you know, we tend to buy pretty linearly, and that'd be one.
Got you. All right. That's it for me. Thanks, gentlemen.
Your next question comes from Gary Mobley from The Benchmark Company.
Good afternoon. Thanks for taking my question. I had a question on the divergent trends in backlog and deferred revenue. 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, yet your deferred revenue at year-end was down about 8% year-over-year. What's the dynamic explaining that?
Yeah. 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 up front, 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, 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 de-emphasizing any portion of the IP portfolio?
Yeah. I mentioned that in that, first of all, in the last few year, we kind of grew the business from zero, slightly small, to all the way to 12% of the revenue, then growing at 17% last year. It's time for us to kind of refine our strategy to focus and make sure that it's a sustainable and it's scalable growth, and also for customer delight. I think those are the things that we put into the factor, and then so that we project a more moderate growth for this year.
Again, remember, as we said last year, we grew at 17%, very close to what our plan was.
If you remember, in our IP business, there's a three portion. One 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 surveilling. Very broad application. We are very excited. We are continuing to invest on that. Our design IP for all the industry standard IP, we continue to invest in that. 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 JasperGold that we just launched, with very responsive from customers. I think we try to make sure that we're really providing a 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 seen, 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. Despite that, you're managing to grow your bookings and deferred revenue 8%-10% per year. I was wondering if you have taken a stab or care to take a stab today at sort of commenting on what % of your customers are in the budget you tend to occupy now and how that's trending.
Yeah. 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. I mentioned earlier, a couple of pocket opportunity. You highlight PC slowdown, that is true. We see some of this new application coming up really strong, in the video-related area, in terms of the IoT, and then most of this in the image vision-related area, automotive, in terms of ADAS, autopiloting. All these are driving a lot of data and sensor to the cloud. That's why I mentioned earlier about the big data analytics. It's across multiple vertical market, all the way to medical, video surveillance.
They want to have all this data to improve their business, even in the retail stores. I think those going to be driving the silicon development and also driving the system company doing vertically integrated. I think those are the opportunity for us that on the two side, one is a stronger consolidation company that will continue to grow with them and proliferate with them. There's a new breed of system enablement, because we are uniquely positioned for our tool, our IP, and then the system integration and the hardware-software co-design, co-verification. 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.
Can I take 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 with our customers.
Congratulations on the good execution in a tough environment. Thanks, guys.
Thank you.
Your next question comes from Jay Vleeschhouwer 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. Perhaps the business was not up year-over-year as you had guided. Perhaps we're over-inferring from the cost numbers, but could you comment on whether or not you did in fact increase that business?
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? A couple of other questions.
A couple 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?
Yeah, Jay, is a good question. Let me try to answer your questions. As I mentioned earlier, we revolutionized our digital flow from ground up, the Innovus is our implementation. Genus our synthesis, the Tempus is our sign-off, Joules for our power and our design. A couple of things, just to give you a little bit history. Nine months ago, we announced the Innovus. We launched the products. Right now we have more than 60 customers, six-zero customer worldwide. The eight of the top 10 semiconductor are adopting the flow. Genus, we launched the products about six months ago. After the launch, we have more than 40 customer, four-zero customer adopting. Clearly in our Tempus, I think we have an announcement that we surpassed 200 tape outs. In Q3, we announced that.
We are approaching more than 100 customers. Voltus, that is a power sign-off. 17 out of the 20 top-tier semiconductor company are adopting, and well over 100 customer overall. We are really excited that yesterday we launched our Modus Test Solution that reduced the SoC test time. Clearly, it's 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 or products. That is very critical for the customer success. We are excited. GlobalFoundries, TI, Microsemi, Sequans, they're all adopting the Modus. Very well-received from the get-go that we just launched. I think overall, it is a very exciting time for us. Truly is a very breakthrough technology that we have in the digital flow.
By the way, we also double, triple down on the most advanced node. With Arm using the completely digital flow, integrated flow, we have more than 10 full flow wins in 2015. All in all, I think clearly it's not just for the new customer, also replacement of some of the existing tool providers.
A follow-up, if I may, on Modus, 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 million TAM, and that includes hardware. The question is: Is that a large enough space to address now to have warranted the investments in R&D and presumably now the sales resources for a relatively small TAM that has also proven over the years to be pretty lumpy and inconstant? 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? Then I'll wrap up. Thanks. On the corporate side.
Yeah, good questions. I think you're absolutely correct. It's $150 million TAM market, but clearly going to be more and more bottleneck now in term of customer want to be able to ship products. It's our fully integrated flow that we are emphasizing. 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. The customers spend a lot of money on the testers. Using this actually can augment that to really drive some of the design success, 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. 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. Also related to that, is there anything unique or specific about the development of your systems customer base in terms of incremental or new investments or organization that you need to make to grow that part of the customer base further?
Yeah, Jay, good questions. We have a very successful sales kickoff, that we have a team come together 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. The message is really work closely with our customer, providing the solution, make them successful. The big chunk of our portion is talking about the whole system design enablement strategy, how can we proliferate into some of the market shipping customer. We mentioned earlier in the past, last quarter about General Electric some of the automotive, aviations and the whole cloud infrastructure, big data. I think we are excited about the opportunity to us.
How can we proliferate our product and then continue to drive excellent execution to make sure the customer successful.
Thank you very much.
Thank you.
Your next question comes from Gus Richard from Northland.
Yes, thanks for taking my question. Lip-Bu, you had highlighted a couple of vertical markets, avionics, automotive, et cetera, early on. I was wondering if you could give a little color as to how you engage with those customers. 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?
Yeah, good questions. I think this vertical market is very dear to my heart. The way I understanding to do successfully is to listen and understanding their requirement, look at the holistic way, how can we help them to make sure they're successful in the whatever application they want to drive, whatever the productivity they're looking for, the vertical integration that they are planning to do, try to learn what they try to do, the solution they try to provide. The best way to success is collaborating with them, look at our portfolio, see how can we strengthen that, how are the pieces that we don't have, either we organically developing that or through M&A to get that so that we can provide an overall solution to meet their requirement.
This is a very exciting time for my team and myself to learn new things. Along the way, we try to adopt what is the best practice and also learn what are the requirement they have. They all have different requirement in term of redundancy, safety function that they need to have. How can we incorporate our tool and IP to provide a holistic, secure environment solution for them. I think those are the way we're going to grow the business with them to work closely and collaborate with them.
Thank you. 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 your new digital design flow? What do you attribute the outperformance to?
I think clearly, we still a long way to go. I mean, we are continuing to be humble and work hard with customer. I think the one single point that I can point to, I always believe the best product win. So we continually to innovate, continue to drive, listen to the customer carefully, responding to the customer needs, closely collaborating with our customer and also our IP and foundry partners, even the equipment semiconductor company, to work closely with them, make sure that we're providing the solution in a very proactive way, suggest solution and learn from them. All in all, I think this is something that we continue to do 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. First, on the emulation side, you released a new platform end of last year. Last time when you had a new platform, you had seen significant growth in that segment. Could you kind of walk us through what kind of growth we should expect in 2016 in the emulation segment?
Yeah. Good question. 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.
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. We want to make sure that we have provide overall solution to our customers.
I just want to kind of ask again what Krish had asked in the beginning. This year you have reiterated number of times, a lot of consolidation are closing, a lot of big consolidations, they are closing this year or they have closed, and you're very sure that is going to impact the revenue growth this year. 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?
Yeah. Again, Monika, we said we don't expect and see any implications for 2016. 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. Second is there are going to be market share shifts. Third, will there be engineering synergies within those customers? We've navigated, we believe, quite well over a period of time under the past acquisitions. That, 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 to customers in a way that we've been quite successful with. It's very hard for us to quantify two years out what the exact impact is going to be.
Okay. Just the last one here for me. Service revenue increased significantly in 2015. Was it any reclassification of revenue in that segment?
Sometimes some of our revenue that's IP is considered services if there's enough customization of that IP, that some of the things that we'll call IP will also be called services.
Got it. Thank you so much.
As a reminder, if you would like to ask a question, press star one on your telephone keypad. Your next question is from Sterling Auty from JPMorgan.
Yeah, 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 the revenue, and then from an emerging start that we have through M&A and also organic growth, we reached that stage now, so we have 12% in term of growth. Like any of the new business, you're starting to look at the performance matrix and then see how can we sustain and scalable in term 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 then it's scalable, and then we can have the good business for us.
I think this kind of the phase 2 of the growth, and we try to redefine and then reclassify and then really tie into our overall matrix with the company.
That makes sense. In terms of the emulation contribution, specifically to the upfront revenue versus the ratable, you still have greater than 90% coming from ratable sources, just kind of curious, how that mix is going to get impacted here as you get that spike in the emulation business.
We've said that we expect Q1 to 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 that's always part of our hardware business also, which is ratable over a period of time. 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 Diffley from D.A. Davidson.
Yeah, good afternoon. Another, I guess question following up on the previous one. When you look at the projected ramp of emulation over the next year or two, what do you think, if any, would be the impact on the overall corporate margin structure?
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 improvements in margin in that particular business, right? Strong revenue and good margins.
Okay. Both margin dollars and percentages you think go up over time with that?
Yeah. It's all baked into our guidance as we're giving our guidance.
Yeah. Okay. 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 rate was for the industry, and if there were any particular segments that were particularly weak during the year.
Yeah, I mentioned earlier the negative growth is the semiconductor industry.
Okay.
That is published information. Clearly, they're projecting this year is a very low single-digit growth. That's for the semiconductor industry.
Remember, 40% of our business is now system companies.
Right. I was wondering if you had a similar number for the EDA industry, specifically.
Yeah. I don't think I have it offhand. I think clearly you can just add up the three big guys plus a few others, and like PDF and others. I think you should able to get that, the growth rate.
Yeah.
Okay. You talked about nine new products released last year. How does that compare to the cadence in previous years? Which one or two products do you think are the major revenue drivers going forward?
Yeah, I think First of all, I'm very proud of our innovating culture that we implementing at Cadence. That engine is really going very rapidly, and that culture is I'm very happy to see that. The nine new technology differentiating product, sometimes it's very hard for you to be telling who is your favorite child.
Okay.
They're all very good. Clearly, you can see that they now do 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, some of the innovation is happening now. We are excited about it. Augment with a great acquisition like Jasper. On the custom analog, we continue to drive some of the innovations. The PCB business is also growing nicely with our Sigrity acquisition. All in all, I think we are excited about it. Out the gate in 2016, we already have first new product coming up. Modus Test is very breakthrough technology. We are excited. Customer love it. Stay tuned.
We have a few more coming up for this year. We are just excited about this innovating culture meanwhile, using the M&A to augment that.
I guess you really can't choose between your kids there.
No, I can't choose.
Yeah. When you look at the M&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&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. In addition, the timing of the corporate mergers doesn't necessarily reflect the timing of the contract renewals for us either.
Right.
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 Srinivasan 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-
Yeah.
We didn't understand.
From the adjacent areas like medical or automotive, what would be the total contribution for revenues from the adjacent industries?
First of all, we didn't have that breakdown for the call. I think Geoff 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 staging down the road, we may provide that. Overall, we are excited about that opportunity. The system company contribute 40%, it will be growing. We are excited about, and we have a complete, very nice portfolio that able to support a solution for the system company to drive some of these application-driven changes that they are planning to do.
Okay. Just one more question. Do you have any comments on the five-nanometer work done at imec? Anything that you noticed, anything important?
Yeah. As I mentioned earlier, we are pushing the envelope in the advanced node to be ahead of customer requirement for adoptions. Our tool have to be there to be ready. We are heavily engaged on the tool and IP front on not just the 10 nanometer, seven nanometer, we are also doing research on the five nanometer. The one that we highlight, last quarter, we announced that with imec. This is quadruple patterning, using the EUV on the five nanometer. We are delighted they chose us to be the platform of choice to work with them on the five nanometer. We will continue the effort to be on the leading edge of the advanced nodes.
I will now turn the call over to Cadence President and CEO, Lip-Bu Tan, for closing remarks.
In closing, 2015 was a year of great success, 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 fourth quarter 2015 earnings conference call. This concludes today's call. You may now disconnect.