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 Third 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 Al Lindstrom, Senior Group Director, Investor Relations for Cadence Design Systems. Please go ahead.
Thank you, Mike, and welcome everyone to our Q3 2015 earnings conference call. With me today are Lev Vuitton, 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 December 18, 2015. 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 new CFO commentary, which was included in our 8 ks filing today and is available on our Investor Relations website atcadence.com.
Since we are providing the CFO commentary, Jeff's prepared 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 measures, 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 October 26, 2015, for the quarter ended October 3, 2015,
and related financial tables could also be found in
the Investor Relations portion of our website. Now I will turn the
call over to Linfu. Good afternoon everyone and thank you for joining us today. Cadence delivered strong operating results for Q3. Revenue was $434,000,000 up 8% year over year. Non GAAP operating margin was 27 percent, above the high end of our guidance range.
Non GAAP EPS was 0 point the high end of our guidance range. And operating cash flow was $87,000,000 which keep us on track for our guidance of $360,000,000 for the year. Let us first address the environment. Semiconductor business conditions remain challenging and lower semiconductor growth for the year now appears slightly. As we reported last quarter, we remain mindful of the ongoing consolidation in our semiconductor customer base.
While we do not expect a material impact on our business near term, consolidation could pose a challenge to industry growth over the next few years. Now let us turn to the Q3 highlights. Our system design enablement strategy continues to create new vertical opportunities. In Q3, we signed a significant contract with GE Aviation for IP, hardware and system level design services. A biomedical technology company adopted our low power mid signal design flow.
We became the provider for the functional verification environment of a leading automotive chip supplier. And a global automotive supplier significantly expanded its contract for functional safety verification to reduce their effort for ISO 26,262 compliance. In the digital and sign up space, the theme for the quarter was continued innovation, adoption and proliferation of our new products. We expanded our digital footprint across multiple growing industries and across multiple process nodes. We now have over 30 customers using the Inova implementation systems for the advanced node production design.
This includes 7 of the industry's top 10 semiconductor customers, a company where our digital implementation position has increased significantly. In just 3 months since its launch, the JENNA synthesis solution has already been purchased by multiple customers with many more in evaluation. Cadence full digital flow and Spector XPS for full customer verification for their next generation 40 nanometer mainstream products. Innovation continues with the introduction of another digital product, the JUUL's RTL power solution. JUUL's delivers time based RTL power analysis 20x faster than previous solutions.
One of our most exciting announcements of the quarter was that the Nano Electronics Research Institute, IMEX and Cadence completed the tape out of the world's first 5 nanometer test chip using EUV combined with 193 immersion lithography and Quadruple patterning. In sign off, our Tempest timing solution surpassed 200 Kbux, while the Voltus Power solution and Qantas abstraction solution continue to add new of the 10 nanometer design infrastructure. IP is a fast growing part of our business. It's one of the key tenets of our system design enablement strategy. The Neo Tensilica Vision 5 4th generation imaging DSP was introduced in Q3, with significantly improved capabilities and performance.
The Vision P5 already have a major design win, and we believe the Vision market presents a huge opportunity, especially in mobile, ADAS and IoT applications. Design IP had the best quarter ever. 2 major customers, a system company and a semiconductor company have adopted our 1416 nanometer multi protocol 35 for production We also released a broad portfolio of design IP for TSMC 10 nanometer FinFET process, which for which we already have secured multiple design wins. We received the TSMC Partner of the Year Award for Analog Mixed Signal IP. Now let us turn to system design and verification.
Verification
remains a
fastest growing challenge for our customers, who must deliver functionally correct products within ever tighter market windows. Addressing the verification problem requires a holistic approach with the integration of multiple complementary products, which we provide with our system development suite. The suite had an all time record quarter in Q3, driven by the growth in North America and China. The exciting news for the hardware is that we have begun shipping our next generation emulation platform. Purchasers of Palladium XP2, the existing platform, continued at a good pace in Q3 with strong sales to system companies.
Sales of Protium, our FPGA prototyping platform, ramped significantly in Q3. Former Verification had a very strong quarter. A large system company renewed and increased its JasperGold capacity by 50%. This was our largest order ever for formal verification. As companies in China move towards the leading edge, they are adopting formal technology.
And in Q3, we have our largest formal verification order so far in China. Our system interconnect business, which include PCB, security system analysis and IP packaging tools, again delivered strong growth with revenue up 9% year over year. Our Allego system in package technology now supports TSMC integrated fan out packaging technology, known as InFO. InFO advanced wafer level packaging technology provides cost effective system scaling to increase bandwidth and will be our ideal solutions for mobile and IoT applications. In summary, Cadence continued to deliver strong operating results in an environment that remains challenging.
The system design enablement strategy is bringing more innovation and an increased vertical focus to our business and solutions. In digital and sign off, we saw continuous innovation, adoptions and proliferation of our new products. We are steadily introducing new products and gaining customers in IP. We have started shipping our next generation emulation platform. And our PCB, system analysis and packaging solutions post another strong quarter of growth.
Now I will turn the call over to Jeff to review financial results and provide our outlook.
Thanks, Lip Bu, and good afternoon, everyone. As Alan mentioned at the start of our call, we introduced our CFO commentary this quarter. As a result, I will be focusing on the quarter highlights and operational drivers in my prepared remarks. You will find all the numbers in the CFO Commentary, which are included in our 8 ks filing today and is also available on our website. The CFO Commentary should be referenced in conjunction with both my remarks and the earnings press release issued today.
Now for the Q3 results. As Lip Bu discussed, the environment remains challenging and the pace of customer consolidation seems to continue unabated. So I'm especially proud
of the way we've been able
to achieve good results in this environment. Total revenue was 434,000,000 up 8% year over year. Revenue exceeded our expectations due to the timing between Q3 and Q4 of certain transactions. As Lipu said, we began shipping our next generation emulation platform. We expect to begin recognizing revenue in Q4.
Total costs and expenses on a non GAAP basis were $316,000,000 up 9% year over year. As previously discussed, the growth in expenses this year reflects the investments we are making in R and D and technical customer support. Non GAAP operating margin was 27%, unchanged from 2014. Results exceeded our expectations due to both the higher revenue and better expense management. GAAP net income per share was $0.25 Non GAAP net income per share was $0.28 up 8% year over year.
In addition to higher revenue and better expense management, lower than assumed interest expense contributed to the better than expected non GAAP EPS. Operating cash flow was $87,000,000 compared to $88,000,000 for Q3 2014. Cash and short term investments were $711,000,000 atquarterend compared to $744,000,000 at the end of Q2. DSO were 28 days. Our new stock repurchase program is off to a strong start.
We repurchased 5,900,000 shares of stock in Q3 for $120,000,000 Our program target remains $1,200,000,000 by the end of 2016 and we expect the pace of repurchases to pick up in Q1 2016 after the final settlement in December of the warrants associated with the convertible debt we retired in June 2015. Now let's turn to our outlook for the Q4. We expect revenue in Q4 to be in the range of $434,000,000 to 4 44,000,000 dollars This expectation takes into account the timing of certain transactions between Q3 and Q4. Also, please recall that Q4 2014 included an extra $15,000,000 of revenue due to the extra week in our fiscal 2014.
This is also a good time
to remind everyone that while our software and maintenance revenue is highly predictable, revenue for both hardware and IP is lumpier, which may contribute to increased variability in quarterly revenue as these businesses grow. Non GAAP operating margin is expected to be in the range of 27% to 28%. GAAP EPS for the 4th quarter is expected to be in range of $0.20 to $0.22 Non GAAP EPS for the 4th quarter is expected to be in a range of $0.28 to 0 point 3 Now for our fiscal 2015 outlook. Bookings are projected to be in the range of $1,870,000,000 to $1,930,000,000 unchanged from last quarter. Revenue is expected to be in a range of $1,695,000,000 to $1,705,000,000 The midpoint is unchanged from last quarter and hardware revenue is expected to increase in 2015 compared to last year.
Non GAAP operating margin is expected to be in the range of approximately 26% to 27%. This is up from our prior expectation of 25% to 26% due to strong execution and expense management. As we discussed last quarter, remember as you think about that next year that our investments in hiring for R and D and technical customer support have ramped throughout the year and we're continuing to do so in Q4. Hence, we will exit 2015 at a higher expense run rate than we are at present.
$7.7 Non GAAP EPS is now expected
to be in the range of $1.06 to $1.08 which is up $0.07 at the midpoint from our initial guidance for 2015 due to strong execution and expense management. We expect operating cash flow to be approximately $360,000,000 unchanged from last quarter. You will find additional guidance for the additional items in the CFO commentary. So with that, operator, we'll now take your questions.
Your first question comes from Gary Mobley from Benchmark.
Hi, guys. Thanks for taking my question. This is my first call first question on your call. So hopefully, I don't ask it in the wrong way or offend anybody. But I wanted to start out by asking about the sequential decrease in deferred revenue.
Is there anything to read into that as far as customer licensing activity?
No. For us deferred revenue is really just cash that we've collected upfront and we work very hard to match our cash collections with our revenue. So that's nothing it's just a normal variability with that.
Okay. I appreciate the fact that you haven't changed your outlook for total bookings for the year, but have you seen any early indication as to how your customer consolidation, in particular on the semiconductor side, has impacted the licensing pipeline, whether it be shorter license duration or maybe just in general hesitation on your customers' parts to commit to licensing activity?
This is Zhe Peng from the analyst classes. Clearly, the environment, the semiconductor business condition continues to be challenging, as I mentioned. Clearly, the softer semiconductor growth for the year, semi and lastly. Saying that, I think clearly the ongoing consolidation in our customer base will continue. That potentially will have challenge in the longer term.
But we do not expect any material impact in the short term. And then so overall, I think we see consolidation will continue and the pace will continue. But meanwhile, I think it's a great opportunity for us to continue driving new products, new solutions that meet the customer challenging requirement in terms of design. And also we see a new breed of system company that are engaging heavily with us. That's a great opportunity in some of the verticals.
So overall, we don't see any significant
Okay. I appreciate the response. And there's an extension to that response. I'm not asking you to name any specific licensing opportunities with the system OEM, but could you share with us your opinion as to how the consolidation in the semiconductor industry might increase verticalization amongst your system OEMs? In other words, taking on more responsibility for SoC designs as a part of overall system design and how that impacts your business long term?
Yes, good questions. Let me try to answer. So clearly, I think the consolidation, the increase in the system OEM, the system company, those are great opportunities for us, because we have a whole suite of product and offering that is made their requirement. So first of all, I think clearly our much improved digital flow, we can talk more about it. And then secondly, our customer analogs have been continuing to be moving to the advanced node.
And our IP portfolio has been increasing substantially and in the systems engagement. And then also our PCB, security, system analysis, hardware, software, co design, co verification. So we kind of call it the system design enablement that we provide, turned out to be a very welcome solution from a system company. They want to look at the entire stack beside the tool, beside the IP and also the hardware and software design, so that time to market will be critical success for them. And we have the key solutions they're looking for and that's something that we are very excited.
Okay. That's it for me. Thank you.
The next question comes from Rich Valera from Needham and Company.
Thank you. Lipo, I just wanted to clarify your comments on the impact of M and A. So you're saying you're not seeing anything short term. What is it that you're thinking you're going to see long term? Are you just saying it could be a headwind to the industry in general?
I just wanted to clarify what you were saying about the longer term potential impact from semiconductor M and A?
Sure. I think it's a very good question. And clearly, as I indicated earlier, we don't see any short term behavior changes. I think it's more the impact in the longer term. The main reason I'm saying that because it's longer term, the EDA is very complex, very difficult to predict.
We're clearly seeing that more consolidation and the customer have a greater economic power and that also have the energy and our engineering synergy that will result with the fewer ED Assist. System. Saying that, clearly, it's a great opportunity for us when we have the whole portfolio of solution that we can provide them. To them is very important, it's time to market and then help them to stop their most complex design in the 16, 14, 10 and 7 nanometer. And we believe we have the right solution, the best product in the marketplace to provide that solution for them to meet their time to market challenges, especially in the hardware, software, packaging, system design, envelope that they can analyze and the power is critical and then some of the massive parallelism is critical for their success and that's where we're signing to
find. Great. Thank you for that. I had a couple of questions on your emulation box, the shipping the new box. Congratulations on that.
One, just wanted to get a sense of how you see the manufacturing ramp for that going? Where you stand with your contract manufacturing partner? Are they up to speed? And how you think that trajectory goes? And then if you can talk at all about what kind of order book you have for that new box?
And when do you think you maybe catch up with that production, assuming you do have some backlog already built up?
Yes, good question. We are extremely pleased with the Q3 that we're able to have begun shipping our next generation immunization platform. We expect to recognize the 1st revenue in Q4 and we are delighted to see the bookings building up. And so I think as we expected and predicted that we organized the team with a very strong operation manufacturing with contract manufacturing in place. So this time around, we are able to scale in more efficiently.
And so I think to answer your question, we have the right management team in place for the manufacturing ramp. And the order is coming in very nicely and we're happy with that. And then our first recognition of revenue in Q4.
And this revenue is the expected revenue is already included in our guidance.
Great. I mean, Jeff, would you be
willing to say anything
at this point? I mean, one, I'm guessing no, but would you say, do you think emulation revenue is up sequentially in Q4 versus Q3? And then any thoughts on emulation revenue in 2016 versus 2015 at this point?
Sure. The things that we've said is we expect emulation revenue to be up in 2015 versus 2014, which we already said. At this stage, we're not ready to guide 2016, of course. We'll do that in the Q4 earnings call.
Okay. That's it for me. Thanks, gentlemen.
The next question is from Jay Vleeschhouwer from Griffin Securities.
A couple of short term product questions. First, following up on Rich's question just now about emulation. For the business to be up year over year, which you reiterated would be the case, would it be fair to say that in Q4, you would probably have to have a record quarter ahead of what you did with Emulation in Q4 of 2012 and Q4 of 2013 to eke out some gain for the year. In October, the month just ending, of course, that Genus would become generally available commercially and that you would ship a new version of Innovus 15.2 as well. Could you talk whether talk about whether either of those two events for Genus and Innovus occurred?
I'll take the emulation question. Again, I think what we're again what we're going to say is 2015 is up over 2014 for emulation. And that's all we're going to say at this particular point in time.
Yes. And then on the digital question that you have, and then first of all, we are very delighted with our Innovus penetration, Only 6 months since we launched the product, as I mentioned in my remarks, over 30 customers using the Innovus for advanced node production design and then include 7 of the industry top 10 semiconductor companies and they have increased significantly evaluating on our solution. And then quite a few of them evaluating on our solution and then quite a few of them already have multiple of the chase with us and we are delighted with the progress that is making. And then the other part, we are really excited, the IMAX, the 5 nanometer test chip and are using Inovus. So Inovus clearly is proliferating very rapidly across all the top customers, and we're delighted to hear that.
So I think all in all, I think clearly, we are working on the Innovent, as I mentioned, the 2.0, we don't ever stop. We continue to work on it. And then the time time we're going to launch, we will announce that. But so far, we continue to really make sure the tool is well received by the customer in the most advanced notes and then make sure it's stable, make sure that it's really working well. The customer can proliferate across all the product line, all the engineering team.
Okay. Maybe we can talk about the issue of semi customer consolidation in the context of EDA consolidation. Over the last number of years, as you know, EDA has become increasingly consolidated. The big three, including yourselves, now have well over 80% of total industry revenue, was not that long ago about 75% or so. So your increase in consolidation has occurred as your customers have become increasingly consolidated.
But now the question becomes how much more consolidation can there be in EDA to perhaps help offset the consolidation among your customers? When you break down the remaining, let's call it, dollars 900,000,000 or so of EDA revenue that is not paid in Synopsys and Mentor, 4 or 5 companies account for the bulk of that, ANSYS, Zukin, Keysight, Altium and of course, Trent is gone now. So that leaves you lots of little companies that probably wouldn't be all that material, if you were to acquire them, among the remaining non big 3 companies. So I guess the question is how are you thinking about further consolidation that would be meaningful from a revenue and technology standpoint for you in EDA and perhaps where did that then lead you to perhaps doing something outside of EDA as Synopsys has done with Coverity?
Yes, good questions. And clearly, our customer is consolidating, but this is a great opportunity for us. As mentioned earlier, we continue to double triple down on our product development. I'm very pleased and very proud of my team. The last 2 years, we have 12 new products organically developed.
And so clearly, we're going to continue driving the innovation culture within Cadence nonstop and we continue to drive the innovation culture and development with inside. And then saying that, clearly, we continue to look outside and clearly the M and A, we really focus on the disciplined approach to our M and A. We have to really have to fit our culture, our strategy that we plan to build in that system design enablement strategy we already laid out. And then clearly have to have a differentiated technology and clearly we can bring in top management teams and then technical talent that can augment our current team and of course has to be really providing a return on investment that is attractive to us. So all in all, I'm saying is that continue focus on our internal development, work closely with the Tier 1 customer, and so that we can learn from them and drive the solution that they need.
And then the other part is now using the M and A to augment and supplement our internal development when it makes sense. So I think overall, we have this very balanced approach and we review with our Board, with our management team, make sure that every investment acquisition we make has a synergy and execute well for us and that we're not just buying for revenue. And we're really focused on the product, the technology and the customer needs.
Last one for me, if I may, for Jeff. Would it be fair to say that the larger than expected revenues in Q3 owing to the timing effects was related to IT and specifically IT services engagements?
No. I think what we're going to say is that there was timing of certain transactions between Q3 and Q4 that allowed us to exceed Q3 and still keep the second half of the year unchanged.
Okay. Thank you.
Thank you.
Your next question comes from Gus Richard from Northland.
Yes. Thanks for taking my question. It looks like R and D expenses are coming down a little bit in the second half. Is that a function of the maturing of your new digital tools that you're supplying?
Yes. If they are coming down, it's because of shutdowns and vacations and those types of things. We are continuing to make investment, as I think I said in my prepared remarks, which will lead to our run rate and
And then, And then in terms of the emulation products, can you just describe what triggers rev rec in the 4th quarter? You've obviously shipped some tools. Are you waiting on customer acceptance? Or how is that going to work for you since it's a capital equipment?
Yes, I think it's again, it's great news that we're shifting our next generation emulation platform. We will recognize we expect to recognize revenue starting in Q4. There is of course acceptance criteria that has to be met for revenue accounting and hardware.
Okay. And after the first article, does that RevRec change going forward and then it will be a little bit smoother in terms of recognizing revenue?
The acceptance criteria remains very similar.
Okay. All right.
And could you just talk
a little bit about the growth of overall EDAs you see it over the next couple of years? It looks like the core digital implementation has grown about 4%. Is that kind of what you think the industry growth rate is going to be? And how do you think you can do, vis a vis that in terms of market share?
Yes, because of how we round in those schedules, it looks like it's 4%. The digital revenue was actually up 7% year over year. And as always, there's a lot of noise in quarterly revenue at the product group level. So it's up 7% year over year and we're of course not commenting on long term EDA growth.
And then Gus, just to add on to what Jeff mentioned earlier, clearly our customer facing a lot of challenges in terms of the complexity of design. And then clearly, when they move down the geometry to 14, 16 and then some of them are moving to 10 and 7, and then clearly double triple patterning needed. And then ETA becomes so essential for their design. And that's where we see the opportunity and we need to triple down in some of our solution to provide the needed solution they're looking for. And so I think we're looking for after the opportunity.
Okay, got it. Thank you so much for taking my question. Sure.
Your next question comes from Monica Garg from Pacific Crest Securities.
Hi. Thanks for taking my question. Since you've released the new emulation platform, could you maybe talk about how do you expect the benefit on your operating margins with the new platform?
Yes, obviously, Monica, we're not going to be guiding individual product categories and product gross margin at this stage.
Okay. Then, Jeff, you still have more than $1,000,000,000 kind of $1,000,000,000 left in share repurchase, which you announced last quarter. Maybe could you talk about how do you plan to finance the same?
Sure. We've been consistent in saying that the repurchase program was funded by U.
S. Cash on
hand, future U. S. Cash flow and additional debt. Also, there's a lot of course a lot of time between now and then the 2016 and don't forget we have 250 dollars undrawn credit facility also. The repurchase program.
And then the last one here, the service revenue has ramped in 2015, almost up 30% plus year over year. Maybe kind of you can you talk about any particular reasons for that?
No. Services revenue is going to be just based on business demand and how the business demand comes out. So we're quite happy with our business there and they're doing quite well with that business.
All right. Thank you so much.
Next question comes from Sterling Auty from JPMorgan.
Yes, thanks. Hi, guys. Wanted to start with, can you actually quantify for us the timing impact in terms of the revenue? So how much revenue came into the Q3 from the Q4?
Well, we kept the year unchanged, Sterling. I think that's probably the best way to look at it, right? So how the numbers played out were kind of based on time between Q3 and Q4, but we're not going to specify which how much.
And then there was a question a little bit earlier, but I just wanted to ask it this way. When you look at the last palladium cycle, how many quarters does it take to get to either peak revenue or fully ramped revenue?
So I think that the key point is how we did in the last time, 2011 and 2010 2011 was materially different than we are at this time. The cycle is clearly different based on the fact in 2010 2011 we were coming out of the Great Recession. We also were had when emulation first became requirement once you get under 40 nanometer. So we expect this cycle to be different of course than that cycle was. We are seeing strong customer demand, building a good backlog and we expect healthy adoption rates.
But we want you to be keep that in mind.
Okay. And then can you give at least some qualitative color as to you talk about the strength in the IP business in the quarter? How much of that would have been stuff that benefited primarily the Q3 versus a lot of your IP business is still ratable as well. So how much benefit would we see kind of in the Q4 and into 2016 from the strength in the IP business this quarter? Yes.
So the IP business was up about 27% quarter over or year over year, right, from the prior Q3. That business is lumpy as I mentioned in my prepared remarks and will likely continue to be lumpy. There is some part that's recurring and there's some part that's lumpy. And so the revenue will fluctuate more as we continue to grow that business. So maybe that's a little bit of a qualitative comment.
Hopefully that helps.
Okay. And last one from my side. The warrant settlement in December, the last part of the bond, just because there's been lots of questions around it. Can you go ahead and give just some color around what the logistics around that look like in terms of how it settles, any cash impact, if any, etcetera?
Sure. So the warrants settled from the early part of September to the early part of December. Their net share settled, so no cash involved with that. And a potential dilution is already in the share count. So I think those are probably the 3 the main points, Sterling.
Thank you.
Your next question comes from Tom Diffely from D. A. Davidson.
Yes, good afternoon. So first, I guess, Lip Bu, is there something you can give us a little more color on the capabilities of the new emulation tool as per the previous version or the competitive landscape? Sure.
Clearly, we continue to improve on our performance and the power. And most important, clearly, we will provide you more detail when we announce the new platform in Q4.
Okay. I mean is there a certain customer type or chip type that it's designed for initially or is it a fairly broad all encompassing?
It's broad. And clearly, I think not just the semiconductor company in the high performance complex design, they need this hardware emulation. And then system company really appreciate that because they can find the box earlier that can help them tremendously in that time to market. So anything that below 14 nanometer complex design, this is almost a must have we have a very strong footprint. Clearly, our product development, all our clear leading customer has exposed to it, they love it and so we continue to build up the booking.
Okay.
And I guess switching gears then, when you look at IoT as a potential driver going forward, obviously there'll be simpler chips but very high units. How do you view IoT as a potential incremental driver for EDA?
Good question. So I think clearly IoT is very exciting. But I think a couple of factors will drive the growth. 1 is IoT, a lot is connecting and collecting data and then mostly go to the cloud. And so that whole cloud big data infrastructure and that is more stronghold and we are delighted in a lot of our digital and verification portfolio that we can provide and helping our customer to succeed on that.
And then on the IoT side, really the low power is critical. And also clearly the IP block become very important to them. We announced the new Tensilator Vision P5. And then so Tensilator being a programmable engine clearly have a huge opportunity for IoT application, because it's something that you can programmable and then see what sticks and then what really providing the solution, the diagnostic or monitoring the data that can collect into from human being and then go out to the cloud. So that kind of high speed connectivity, wireless capability will be critical.
So our IP design IP benefit from it. And then clearly our digital, a lot of those design are mixed signal. And so clearly the mixed signal analog become critical. And of course, all have to be within the power envelope. And that's where our packaging become very exciting.
And a lot of customers are using our PCB and then also our security. Security enabled to analyze a system level so that you don't have to do the re spin because you can predict the power and the performance more accurately. And then same thing with our new product called JOSE that can provide a whole RTR or power estimation that is critical for IoT. So I think all in all, some of this vertical market, we are very excited because we are building up all the building blocks needed, providing the solution to our customers.
Okay. And then how long do you think it takes for that to really get hot?
How long can you get that?
How long until this market really is a robust market for you? It sounds like you get putting all the pieces in place, but at what point do you think both the units and also the infrastructure is going to create a big business for you?
Yes, I think clearly, it's just in the early stage of evolutions. Clearly, if you look at Fitbit and then some of this gear through from Samsung and Apple Watch, they are all starting into the flow of detecting the data that can be useful for data analytics. Firstly speaking, I think the business model need to be clear in terms of my personal belief that data analytics or big data will be the big driver. And so I think you're going to see that proliferating very rapidly in terms of healthcare, in terms of the fitness. And then over time, people are going to come up with a better solution to keep us more aware of our, the well-being and also more connected to our community, our family members.
And to me, that is a very holy grail of moving that. And then the other part is also the IoT link up to some of the not just smart devices, connected device and also some of the thumb devices can be connected. And so that low power is critical. And then that's where I think Cadence solution will be shining and then providing to the customer in the low power environment, providing the relevant data that they need.
Okay. That's helpful. And then Jeff, over the next couple of years, when you see an increase in your business moving towards IP and hardware, how do you view that impact on the margin structure?
So Tom, it's a good question and it's something we think about all the time. But right now, we're not guiding beyond 20 15. We'll let you know a little bit more when we guide 2016 in
January, February timeframe. Okay. Thanks. Your next question comes from Mahesh Svanghayanaria from RBC Capital Markets.
Yes. Thank you. Jeff, you're increasing the operating margin guidance by 100 basis points. That's pretty significant. So can you talk about a little bit what is driving that?
I mean, one of the things you talked about vacations and time off or shutdowns, but pretty sure that's not the only thing. Is it timing of your projects are moving out or what drove that upside?
No, I think the timing of our projects remain on track. I think it's been strong execution, foreign exchange and expense management have clearly contributed. We will continue to ramp expenses in R and D and in technical customer support through the year and obviously into Q4 also. So just remember that we will exit 2015 at a higher expense run rate than recurrent they're running. Again, for us it's been strong execution thus far, foreign exchange and expense management.
So I mean, in terms of expense ramp, would you be done by end of 2015 or the pace will continue into 2016 in terms of Yes,
we're not guiding 2016 at this stage.
Okay. And then in terms of the revenues, if I look at the segment, of course, there is rounding issues. But this year, you're doing strongest in IP up to about 20% and followed by functional verification more than 10%. Is that how we should be looking at going forward? Those are the long term or are those the strongest growth segments
for you?
So again, a couple of points. We don't guide individual segments, Mahesh. It's just something we don't do. And clearly, right we're not guiding 2016 at the stage either. Stay tuned for January, February timeframe.
Okay. Let me try asking different way. You've talked about a significant market share, potential significant market share gain in digital design. And so the question is, when do we see that in numbers? Is it something because of the I mean, the way you recognize the revenue, should we be seeing that 2 years down the road, 3 years down the road?
How do you how do when do we see those in the numbers from the current growth rate?
Yes. There's always going to be a lot of noise in the quarterly revenue at the product level group. But fundamentally, winning and proliferating will precede the revenue growth and revenue ramp in digital. And just to give you the numbers, again, we were up 7% year over year in digital. So quite happy with how we're doing.
Okay. Okay, thank you.
Your next question comes from Krish Sankar from Bank of America.
Hi, thanks for squeezing me in. I have two quick questions. One for Jeff. On the mechanics of the buyback, with the warrant settling between September 10 December 10, is it fair to assume the $120,000,000 in buyback in Q3 was done before September 10 and any buyback in Q4 will start after December 10?
No, we Krish, we pretty much buy on a regular basis. We do not want to have us being in the market impact the warrant settlement, but we pretty much buy on a steady that's going to be WAP on a daily basis when business is open.
Okay. All right. Other questions for Lip Bu. I mean, I think it's been spoken about quite a bit now about semi consolidation impacting maybe in the long run you guys. I'm just trying to figure out, if you look at it, some of these M and A deals that have been announced have not yet completed yet.
So is it fair to assume based on the time lag, any impact on EGA budgets would be more of a 2017 event, not a 2016 event? Is this the right way to think about it?
Yes, I think that's a good question. I think the consolidation I mentioned earlier is getting bigger and bigger and clearly, we watch that carefully and we are very proactive. So we continue to engage with acquiring company and also being acquiring company and make sure that we have a very strong footprint going forward. And clearly, some of this consolidation, the first thing they cut out to drive efficiency in some of G and A, that will be obvious. And then in terms of engineering side, we watch carefully in terms of how they are locating and the resources.
That's usually the last thing they want to change. And but even if they let go some of the engineering talent, it will grab by some way somewhere else because good talent. So I think we're kind of keeping track of the talent where they go to, make sure that we continue to engage and then providing the solution to them. So I think it's very hard and very complex to predict, but we keep a very close eye and proactively. So we're reaching out to the acquired company and so that makes sure that we continue to increase our footprint and providing the best solution.
And clearly, they're going to drive some of the engineering synergy, and it may result in fewer EDS sick, but hopefully not at our expense. So hopefully, we will continue to increase because we have a best solution for them to design the most complex chip that they can depend on us.
Got it. Then if I could just squeeze in one last, how many contract manufacturers do you have for the current new emulation platform?
Yes, we don't provide that and purely from the competitive point of view, but we have a very strong reason that driving the whole supply chain. And clearly, we have the whole mapping out even when we start the developing of the product. So we are very strong in terms of plan and execution. And I have very regular from him. So I think clearly all in good places.
And of course, we're also managing the risk associated with him, managing the risk. And so I think you can read between line. We have a very strong plan in place for the
Our final question comes from Farhan Ahmad from Credit Suisse.
Thanks for taking my question. I just had a very high level industry question. Libbu, you kind of highlighted some of the concerns around more and more ME in the semi space. I wanted to get some insight into how much of your revenues are coming from semi customers versus some of the new systems company that are doing semiconductor design. And you kind of started the call by highlighting some of your wins in aerospace, autos and biomedical.
Semi design. And that's something that's not captured in the semi revenues. Semi design. And that's something that's not captured in the semi revenues. So I just wanted to understand if you can provide some commentary around that, that will be really helpful.
Yes, very thoughtful question. So I think a couple of things, Pahan. I think as I mentioned, the consolidation will be continued. Meanwhile, we have been emphasizing on this system design development of the enablement and that basically providing the entire vertical solution stack and then from IP, tool and PCB and the whole system design and verification. And we strongly believe that is a strategy important and successful going forward to meet the requirement on some of this vertical that you mentioned earlier.
We are very excited about some of this vertical. As I mentioned earlier, the IoT, the cloud infrastructure and then the massive cloud infrastructure building up And then the automotive is part of the connecting devices. And then some of the medical field and DNA sequencing and all this big data required in terms of cancer treatment and a few others. And then those can be a clear application for some of our IP portfolio and then some of our EDA flow and also some of our hardware PCB and system analysis requirement. So all these tie in really well and synergistically providing a solution to address some of this vertical.
And answer your question, the system company right now is more than 40% of our business. And then some of that is very hard to categorize because some of the system company also have a semiconductor subsidiary. And so we have to be very careful how to quantify that. But overall, in general, is fast growing increasing and also we have the right choice of platform for a lot of system company. We mentioned one in our remarks in the GE Aviation.
That is a very good example of EDA and then the hardware emulation and even some of the high end system level design services that we can provide a solution to them and that is critical for some of these vertical markets.
Thank you. That's all I had.
I will now turn the call over to Kadant's President and CEO, Lip Bu Tan, for closing remarks.
In closing, I'm very proud to highlight that the Great Place TO Work Institute has recognized Cadence and our hardworking employees by including Cadence in our India 2015 List of World's 25 Best Multinational Workplaces. I would like to thank all our employees, shareholders, customers and partners for their support. Thank you all for joining us this afternoon.
Thank you for participating in today's Cadence Design Systems 3rd quarter 2015 earnings Conference Call. This concludes today's call. You may now disconnect.