Cadence Design Systems Inc (CDNS) Q4 2018 Earnings Conference Call Transcript


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Cadence Design Systems Inc  (NASDAQ:CDNS)Q4 2018 Earnings Conference CallFeb. 19, 2019, 5:00 p.m. ET

Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:

Operator

Good afternoon. My name is Gigi, and I will be your conference operator today. At this time I would like to welcome everyone to the Cadence Fourth Quarter 2018 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. (Operator Instructions) Thank you.

I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence. Please go ahead.


Alan Lindstrom — Senior Group Director, Investor Relations

Thank you Gigi, and I would like to welcome everyone to our fourth quarter 2018 earnings conference call. I am joined today by Lip-Bu Tan, CEO; and John Wall, Senior Vice President and CFO. The webcast of this call is available through our website www.cadence.com and will be archived through March 15th, 2019. A copy of today’s prepared remarks will also be available on our website at the conclusion of today’s call.

Please note that today’s discussion will contain forward-looking statements and that 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 we issued today.


In addition to 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 review results using certain non-GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with our most direct comparable GAAP financial results. The reconciliations are available at the Investor Relations section of cadence.com. Copies of today’s press release dated February 19th, 2019 for the quarter ended December 29th, 2018, related financial tables and the CFO commentary are also available on our website.


Now I’ll turn the call over to Lip-Bu.

Lip-Bu Tan — Chief Executive Officer

Good afternoon, everyone and thank you for joining us today. We are pleased to report that Cadence achieved excellent operating results for 2018, delivering 10% year-over-year revenue growth and 30% non-GAAP operating margin with broad-based strength across our product lines. While the overall macro environment remain mixed, we remain confident in the technology trends including AI machine learning, cloud data center and 5G that continue to drive strong design activity.


Our System Design Enablement strategy is to continue growing our core EDA and IP business; broaden our reach in system companies and targeted verticals; and importantly expand into newer adjacent areas. I’m delighted to report that we have continued to make significant progress in all these areas. We achieved strong growth across our product lines in our core business, which included a breakthrough while wide ranging win with a marquee US semiconductor company.

In Q4 we expanded our relationship with Samsung, through their broader adoption of our digital, custom and verification products. We expanded our long-term partnership with analog devices for their development of mixed-signal solutions for IoT, automotive, medical and industrial applications, including the adoption of several of our new digital and verification products. We made good progress in vertical segments, such as the data center cloud, automotive and particularly in aerospace and defense.


We have won business with some of the top companies in this space, including GE Aviation and BAE Systems. And we finish the year with major core EDA and IP contract with a major aerospace and defense contractor. Earlier in the year we won a significant research contract with DARPA and have made very good progress developing advanced machine learning technologies to enhance automation and productivity. And as we look at expanding beyond EDA, I’m very excited about our new strategic partnership with the Green Hills Software.

Cadence invested about $150 million in Green Hills, representing a ownership interest of approximately 16%. Our investment is important because safety and security are some of the greatest concerns in the increasingly hyper-connected world, especially in the critical industries such as aerospace and defense, automotive and medical.


Green Hills is the leading player in the embedded safety and security software space with its INTEGRITY-178B real-time operating system, having been certified to EAL 6 plus the highest common criteria security level achieved for an operating system. Green Hills products are broadly deployed across multiple application domains, particularly in aerospace and defense. With customers include Boeing and Lockheed Martin and in automotive, with many top OEM and Tier 1 customers, including Toyota and Ford.

We expect to leverage the strength of both companies to drive embedded system security and safety. Open up new market opportunities and accelerate growth for both companies. I will review other highlights for Q4 and 2018 beginning with functional verification which remains the fastest growing challenge for our customers. Cadence verification suite had a good 2018 with revenue growth in the high teens, led by strong demand for Palladium Z1. Palladium Z1 won 22 new customers during the year with significant expansions at several existing customers.


And Protium, our FPGA based prototyping solution also grew steadily. Growing adoptions of our Xcelium simulator was highlighted by several market shipping customers, expanding their commitment to our technology during the year. The IP outsourcing trend continued, and strong execution of our refined IP strategy delivered double-digit growth for our IP business in 2018.

Tensilica had a good year with strong loyalty growth and we maintained our lead in audio applications with growing adoption in vision and key wins in automotive surveillance and augmented reality applications. We have engaged with several customers for our new Tensilica DNA 100 processor which is ideal for embedded inferencing applications, and will be generally available to customers in the first half of the year. For the cloud data center market, earlier in the year we announced the first DDR5 test chip. And in Q4 we begin selling our new 112-gig long-reach 30 IP in 7-nanometer technology.


On digital and finance, we’re particularly pleased with the growing proliferation of our solutions at the most advanced nodes, with market-shaping customers. We grew our relationship with MediaTek to include the full digital flow from synthesis through Signoff. Customers tape out more than 80 7-nanometer designs in 2018, using our digital solutions and we had 23 full flow wins.

We are actively engaged with very early adopter customers on their 5-nanometer designs. And we delivered two 3-nanometer test chips in 2018. On the custom analog front we have growing adoptions of both our Virtuoso RF and photonic solutions. And one of the very last remaining large customers that was not using our flagship Virtuoso Layout solution committed to adopting it.


Last June we introduced Cadence Cloud in collaboration with major cloud industry players; Amazon Web Services, Microsoft Azure and Google Cloud. We are pleased with the adoption momentum as we continue to lead the industry transition to the cloud. Now before turning it over to John let me quickly summarize my comments.

Continued execution of our System Design Enablement strategy, led to a broad strength across our product lines and particularly in aerospace and defense vertical. I’m very excited about our new strategic partnership with Green Hills Software, the leader in embedded safety and security software. And it was a good year for our verification suite products and as well as our IP business.


With that, I will now turn the call over to John, to review the financial results and provide our outlook.

John Wall — Senior Vice President and Chief Financial Officer

Thanks Lip-Bu and good afternoon everyone. Cadence exceeded all of its key operating metrics and delivered strong financial results for the fourth quarter and fiscal year 2018. Before we get into Q4 results, let me remind you that Cadence adopted the new revenue accounting standard known as ASC 606 for fiscal 2018. The numbers I present today for our fourth quarter and 2018 are based on these new rules unless otherwise stated. 2018 was our transition year to ASC 606. And to provide a more direct comparison against our 2017 results we show our quarterly and annual results under both sets of rules for 2018.


Now let’s go through the key results for the fourth quarter and the year starting with the P&L. As reported, total revenue was $570 million for the quarter and $2.138 billion for the year. Q4 and 2018 both benefited from the shift in timing of revenue recognized on some hardware systems that we previously expected to deliver in 2019. As a result, non-GAAP operating margin was just over 31% for the fourth quarter and just over 30% for the year. GAAP EPS was $0.35 for the quarter and $1.23 for the year. And non-GAAP EPS was $0.52 for the quarter and $1.87 for the year.


For the old rules which can be directly compared to 2017, total revenue for the fourth quarter was $579 million and $2.146 billion for the year. And also benefited from the earlier-than-expected delivery of hardware systems in Q4 2018. As a result, non-GAAP operating margin was just over 30% for both Q4 and the year. GAAP EPS was $0.36 for the quarter and $1.25 for the year. Non-GAAP EPS was $0.51 for the quarter and $1.88 for the year. The recurring revenue mix for the full year was approximately 90%. The mix for Q4 was approximately 85% slightly lower than usual, due to the extra hardware systems delivered in Q4.


Now turning to the balance sheet and cash flow. Cash totaled $533 million at year-end. Toward the end of December we drew down $100 million on our revolving credit facility to fund the investment in Green Hills Software. As a result, debt outstanding at quarter-end was $450 million. Operating cash flow in Q4 was $132 million and $605 million for the full year. DSOs were 48 days. Under the old rules, DSOs were 46 days. Our DSO target for 2019 remains 45 days. And during Q4, we repurchased $100 million of Cadence shares.

Now for our guidance, note that we had completed the transition to the new revenue accounting rules. So going forward all numbers will be reported on an ASC 606 basis. For fiscal 2019, we expect revenue in the range of $2.27 billion to $2.31 billion representing growth of approximately 7% at the midpoint compared to 2018. We expect non-GAAP operating margin of 30% to 31%. GAAP EPS in the range of $1.33 to $1.43, non-GAAP EPS in the range of $1.97 to $2.07.


We expect operating cash flow to be in the range of $640 million to $690 million, and we expect to use approximately 50% of our free cash flow to repurchase Cadence common stock during 2019. For Q1 we expect revenue in the range of $565 million to $575 million. Non-GAAP operating margin of approximately 30%; GAAP EPS in the range of $0.36 to $0.38; and non-GAAP EPS in the range of $0.48 to $0.50.

You will find guidance for additional items as well as further analysis in the CFO commentary available in our website. In conclusion, I’m pleased with our execution, financial performance and progress across all of our businesses. Our investments are paying-off and our System Design Enablement strategy is driving results and creating value for customers and shareholders.


And with that operator, we’ll now take questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from John Pitzer from Credit Suisse. Your line is now open.

John Pitzer — Credit Suisse — Analyst

Hey, good afternoon guys. Thanks for let me ask the question. Congratulations on the solid results. Gentlemen, I just want to go through the gross margin for December and then how we should think about it in March? For the December quarter was that all just the impact of having higher hardware sales or was there anything else going on in there? And as you looked at the mix toward the March quarter, I know you gave us, up margin guidance but how do we — we think about gross margin sequentially in the March?


John Wall — Senior Vice President and Chief Financial Officer

Yeah, John, gross margins consistently being like 90% or 91% every quarter and it dropped to 88% for Q4. That was entirely due to the shift in Palladium Z1 hardware shipments that shifted from 2019 into 2018. For Q1 and for 2019 we do expect to go back to normal.

John Pitzer — Credit Suisse — Analyst

That’s helpful. And then Lip-Bu, maybe I can ask you the question you guys continue to put up solid results. And I think one of the strength of your model in the EDA industry is just the lack of volatility, despite some of the volatility that your customers are enjoying or going through right now. If you look at the guidance for growth for this fiscal year of about 7% year-over-year, how do you think that’s being impacted by the macro, by some of the uncertainties in China? What could it be, if you think some of these (technical difficulty) kind of resolve themselves? And what end markets that you participate — you think, you being most impacted by the macro backdrop right now?


Lip-Bu Tan — Chief Executive Officer

Thanks, John for the questions. And clearly we have less volatility because we are very focused on the design, front-end of the development. And even though the environment kind of mixed but we remain confident that in some of these AI machine learning, cloud data center, 5G autonomous driving, they are driving a very strong design activity and especially we are very focused on the market-shaping customer and then also in other STEs strategy that we put in place, that provide not only the opportunity into the system and the vertical markets that we serve and that open up a tremendous opportunity for us, so that we can drive better success and engaging with our deep leading customer.


And in term of the end market impact, clearly Asia Pacific is a very good opportunity and good growth for us. We can continue to benefit that. And then so some of these challenges that we see, we’re much more in the design front-end. So we don’t see some of this manufacturing impact — some of the company we have.

John Wall — Senior Vice President and Chief Financial Officer

And John, it’s John Wall here. You’ll see some revenue mix by geography information on Page 4 of our CFO commentary. On that, you’ll see that Asia ticked up to 28% for 2018. Of that 28%, just under 10% of that was from China, I know you asked that in the last call.


John Pitzer — Credit Suisse — Analyst

Perfect. Thanks guys. Congratulations.

John Wall — Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from Mitch Steves from RBC Capital Markets. Your line is now open.

Mitch Steves — RBC Capital Markets — Analyst

Hey guys, thanks for taking my question. I just really had two. The first one is actually just focusing on the hardware. So obviously you guys gave out a very, very good full year guide but what is embedded in terms of hardware assumptions there? I’m not looking for exact numbers, but I mean it’s been kind of three or four years in the cycle now, and so what’s kind of the expectation of that business relative to the rest of core EDA?


Lip-Bu Tan — Chief Executive Officer

Yeah, so let me get started first. Clearly the functional verification is very challenging for our customers, as I mentioned. And then we really providing the Cadence verification suite and that providing a very nice platform for our customer, providing the whole verification suite, not just the hardware and also the Xcelium, the Jasper, the VIP, for the whole package, turn out to be very compelling for customer. And on the hardware side, we have a great 2018 and we won 22 new consumers. The demand is very strong from our existing customer to increase the capacity.


And for the advanced node design, customers just love that scale and more predictable and find the but earlier and that’s critical for their design.

John Wall — Senior Vice President and Chief Financial Officer

And Mitch, in related to your question with regard to what’s included in guidance for 2019 — I mean 2018 was a very strong year for functional verification. And of course it benefited from that shift of hardware revenue that we thought — we were originally expecting to deliver in 2019 and we delivered it in 2018. So that’s going to give, make 2019 a tough compare for functional verification.


Mitch Steves — RBC Capital Markets — Analyst

Got it. And then secondly in terms of the margins here, I mean you guys have been above 30% now twice in a row. I guess you kind of had a longer-term target being around this range, so I mean, is it essentially coming up now, if you guys get a higher revenue base, let’s say three or four years out?

John Wall — Senior Vice President and Chief Financial Officer

Yes, Mitch, we are very pleased with our results for 2018. I feel very confident and happy with our guidance for 2019. And actually there was an operating margin impact of that shift in hardware revenue from 2019 and into 2018 on both years, but we’re very pleased with the progression we’re making.


Mitch Steves — RBC Capital Markets — Analyst

Got it. Thank you.

Operator

Thank you. Our next question is from Rich Valera from Needham & Company.

Rich Valera — Needham & Company — Analyst

Thank you. Understanding Lip-Bu that you’ve seen really good demand in the AI and I think autonomous electrified vehicle areas. Both of those areas have had a lot of start-ups that have emerged over the last few years. I’m just wondering with some of the market turmoil and weaker demand particularly in China, have you seen any of those start-ups experience stress or potential attrition in the current environment?


Lip-Bu Tan — Chief Executive Officer

Yeah. So I think, Rich, it’s a good question. AI machine learning is very near to my heart, because I think we’re moving into this data-driven economy. And its very broad application to medical, to the data center, to the intelligent and energy management and across all the vertical. And so the impact is significant. And we addressing not just for the start-ups. I think start-up, I think you saw some of them raise a lot of money, the (inaudible) and many others. And so I think they’re continue to do well.


We haven’t seen any shakeout yet, and then — because the application market is so big. And on the other hand some of the very big company, that in the hyperscale player and also some of the system player, they are deploying massively into the AI machine learning R&D development, we’re delighted to support them with our tool and IP. And clearly we have a lot to offer. Beside our two EDA tool, we actually apply the machine learning into our tool. We see significant improvement on that and customer love it, and encouraging us continue to go (ph) down on it. And other part is clearly our Tensilica, they turn out to be a very, very important for the embedded inference applications and also for the augmented reality applications. So the DNA 100 have been very well received. We’re excited about it. So I think overall stay tuned, I think this AI machine learning impact is going to be a new compute, not only the training and also the inference side.


Rich Valera — Needham & Company — Analyst

Got it. And then maybe this if for you John, I wonder if you could give us the growth rates for the functional verification and IP segments in 4Q? And then if you would be willing to say, with respect to 2019 where you’d expect them to grow relative to the 7% that you put out as sort of the corporate bogey?

John Wall — Senior Vice President and Chief Financial Officer

Sure, Rich. Yeah, I mean for functional verification, it was high-teens that — for actually it was high-teens for functional verification and mid-to-high teens for IP for the year-end 2018. Let’s see for the — and then in relation to next year, I think keeping the point out here is that, we pretty much in inline quarter for Q4, with the addition of that hardware shift, that came out of 2019 into 2018 (ph). So therefore for 2019, I think the knock-on impact there is, we think it’s a tough compare for a functional verification, but we think the rest of the businesses should all perform strongly to get us to average at 7%.


Rich Valera — Needham & Company — Analyst

Got it. Okay. Thank you.

Operator

Thank you. Our next question is from Tom Diffely from D.A. Davidson. Your line is now open.

Tom Diffely — D.A. Davidson — Analyst

Hey, good afternoon. So first quick question for John. When I look at the guidance, the non-GAAP guidance it looks like there is an unusually high impact from taxes going from GAAP to non-GAAP. Curious what was behind that?

John Wall — Senior Vice President and Chief Financial Officer


I’ll have to get back to you, on that Tom.

Tom Diffely — D.A. Davidson — Analyst

Yeah. Okay. All right. And then maybe Lip-Bu, it sounds like you had some nice wins in the aerospace/defense market. How big is that market for your core products? And what is it behind your products? Or what enabled you to gain some share in that space?

Lip-Bu Tan — Chief Executive Officer

Yeah, so I think clearly we are excited in aerospace and defense space area. This is a vertical that we had targeted. And we don’t have the breakdown in term of the market potential, but you can see that there is a lot of activity, especially in the AI machine learning development. That’s why we are excited about our contract with DARPA and also we have couple of very significant customer, they are working with us. And we mentioned a couple of them that we have successful. And then also we signed a very big major aerospace and defense contract with a full significant EDA and IP contract. So I think overall we will be excited about this vertical. We kind of focused on three verticals; car data center, automotive and aerospace and defense. And so this is the one that we have a very good 2018.


John Wall — Senior Vice President and Chief Financial Officer

And Tom, just come back to you on the difference between GAAP and non-GAAP tax impact. It’s mainly to do with share-based compensation, but with the share price doing so well this year we picked up a lot of share-based comp expense that we could use in our tax return. But that’s not in our non-GAAP results but it’s in our GAAP results.

Tom Diffely — D.A. Davidson — Analyst

Okay, that is helpful. And finally when you look at the Green Hills acquisition, and it sounds like their initial focus is on the aerospace/defense market as well. It sounds like, it’s your belief that, with this technology, kind of developed for this really security critical space that you’re moving over into the cloud and to their automotive sectors, is where (inaudible) goes eventually?


Lip-Bu Tan — Chief Executive Officer

Yeah, Tom I think first of all, this is not an acquisition and this is a strategic investment, that we’re making of $150 million investment for 16% of the company, and I’ll join the Board. And I think this is something that we are very excited. First of all, it tie in very well with our system design enablement strategy. And that we now, we try to expand beyond our core business. This embedded software is the nearest adjacency and this is a next level up to the system stack being close tied to the underwriting hardware. And then this is exploring the new opportunity for us, that’s above $3 billion estimate, $3 billion embedded system safety and security.


And then with this hyper-connected wall, this safety and security become a critical challenge for many of the industry, especially the critical industry like the aerospace, automotive, industrial and medical. They are very well positioned, as I mentioned in my script that they have been certified at the highest EAL 6 plus security level. And so we are very excited. This will open up a lot of door for us, in term of combining the Green Hills and Cadence expertise and that providing that very unique differentiating value to our customer and shareholders.

Tom Diffely — D.A. Davidson — Analyst


Okay. That’s helpful. Appreciate it. Thanks.

John Wall — Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from Jay Vleeschhouwer from Griffin Securities. Your line is now open.

Jay Vleeschhouwer — Griffin Securities — Analyst

Thank you. Good evening. Lip-Bu, could you talk about the evolution of your mix of semiconductor and systems customers over the last couple of years? And perhaps more importantly talk about any discernible differences in, how you serve those customers or how they behave as customers in terms of buying patterns? What they select in terms of their total mix, one versus the other? We also noticed that over the last year you have been significantly increasing your openings for AEs which is suppose the case in EDA, but especially so for you over the last year, would that for instance be largely connected to your systems business, particularly domestically? Or is that a broader requirement for AEs globally? And then I had a follow-up.


Lip-Bu Tan — Chief Executive Officer

Yeah, thanks so much Jay for the two very important questions. So first question you have about the semiconductor to the system company and even service provider, the differences of supporting them. Clearly they are all demanding customer. We love them. And in terms of system companies there are some differences. They are looking at the total performance, power envelope and a system modeling and requirement. And we are very well positioned for providing that. Beside the EDA tool, we also have the packaging PC board layout and system modeling and system simulation. That is very, very compelling for them to come to us.


And then the other part, we also understanding their requirement better in terms of how to serve them and support them. And then they are very much time-to-market is more important to them. And then we able to meet their schedule, meet their timetable and then deliver the product from the system level they’re more comprehensive and that they are satisfying the requirement that is critically important to them. And then also as you can tell, many of our service provider, they also building up their silicon and subsystem ASIC model to meet their requirement. And we’re excited about doing that.


So I think overall, we have both semiconductor and systems side we are doing very well. The semiconductor side, I highlight a couple of them. Samsung, clearly broader adoptions of our tool. MediaTek adopting our full digital flow from synthesis to Signoff. And of course we are very, very excited about our marquee semiconductor US company. And that explain to you why we have increased of the rec (ph) for the AE, because the demand requirement to support this iconic game changing opportunity for us, we have to support them. And then in a very timely fashion, we have to meet their requirement on performance and then scalability. And that’s why we increasing our AE support that we need to drive the success here.


Jay Vleeschhouwer — Griffin Securities — Analyst

As follow-up you mentioned Protium and Xcelium but could you speak more broadly about the momentum you’re seeing would be (inaudible) portfolios for instance Genus, Pegasus, Tempus, Voltus. Is the momentum you’re seeing in digital largely Innovus (ph) for PNR? Or are you in fact seeing broad adoption of the other newer products in digital that you’ve introduced over the last few years?

Lip-Bu Tan — Chief Executive Officer

Yeah, so I think it’s a good questions. And clearly we mentioned earlier the hardware emulation and the Protium also it steadily are increasing adoptions. We’re very pleased with that. In terms of the digital flow, clearly I think you had point out our Innovus place and route is very successful. Very many leading market-shaping customer are adopting them. And then we also excited about, for example MediaTek from Synthesis Genus, to all the way to Tempus and also same thing with Samsung, broader adoption for our full digital flow and that we are excited about.


So I think in that, we kind of want to be the best of tool in every category and beside the place and route, sometimes it take time, to the maturity and now our Synthesis Genus, I think to take-off. And then, now our Signoff starting to take-off, because that is a very critical in terms of production. Signoff is very critical, it take a little bit longer time. Finally, I think we’d turn the corner. We have 23 full flow win for 2018, stay tuned. We are working very hard on 2019. We have more to exciting to share with you as the time go by.

Jay Vleeschhouwer — Griffin Securities — Analyst


Thanks very much.

Lip-Bu Tan — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Gal Munda from Berenberg Capital Markets. Your line is now open.

Gal Munda — Berenberg Capital Markets — Analyst

Hi. Thanks for taking my questions. The first one, I’d just like to expand a bit on what Jay said and be a bit more specific just in terms of the contribution in the growth of each, semi versus systems. How have you seen that developing in 2018? And maybe if you can kind of share maybe, John, what proportion of revenue today represents versus maybe last few years?


Lip-Bu Tan — Chief Executive Officer

Yeah. I think as I mentioned earlier both are doing very well for us. The semiconductor side as you can tell, over time we will share with you some of the marquee and market-shaping customer. They are the leader in their sector and we are winning and we are broadly proliferating in the most advanced notes. Clearly because of the performance, the scalability, the PPA and runtime, and they are very happy to see the performance we have, using the parallelism and also using our AI machine learning approach. And now moving to the cloud, and that they can see significant improvement in the scalability to look for.


On the system and service provider, we are very excited. We have a lot of opportunity in front of us and we are engaging heavily and stay tune from time-to-time we will highlight our success. Stay tuned.

John Wall — Senior Vice President and Chief Financial Officer

And Gal, the mix of our business that comes from systems companies is approximately 40%. That’s been pretty consistent over the last two or three years. That’s because the system’s business is growing but so is our semiconductor business.

Gal Munda — Berenberg Capital Markets — Analyst


That makes sense. Thank you. And then just as a follow-up I’d like to focus a bit on the cloud obviously which is growing probably very fast. If you can maybe help us from a lower base and just like to understand what the base is now? And how do you think this opportunity to grow maybe in the mid-term, how big the addressable market is? Thank you.

Lip-Bu Tan — Chief Executive Officer

Yeah. We mentioned earlier, last June in that deck, this is the largest industry conference and exhibition. And we launched our Cadence Cloud with three major leaders; Amazon, Microsoft and Google. We are excited about that partnership in collaboration. We have adoption momentum and we are very pleased with that. And clearly we’re taking the lead in terms of industry transition to the cloud. And it’s not just for the sake of cloud, it’s really focused on driving the performance and the productivity for our customers. And we work very close with our customer with the selected cloud enabler and so that we are providing and really focused on driving the performance and productivity of our customer, and provide them the security that it can scale within the organizations (ph).


Gal Munda — Berenberg Capital Markets — Analyst

Okay. Do you maybe have an idea of what proportion of the workloads in the future kind of move on to the cloud for those customers? Or is that kind of we’ll have to wait and see?

Lip-Bu Tan — Chief Executive Officer

I think you have to wait and see, because it’s still early, only last June. And we have growing momentum of adoptions. And we want to make sure that we really drive the performance and productivity from the customer. And then clearly the simulation characteristics work load is now quite broadly adopted by some of the customer to the cloud. And then the Palladium Cloud is also happening. So we kind of doing, two-by-two and then driving the performance and just make sure that our customers see the benefit of having that.


Gal Munda — Berenberg Capital Markets — Analyst

Thank you very much.

John Wall — Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from Gary Mobley from Benchmark. Your line is now open.

Gary Mobley — Benchmark — Analyst

Good afternoon, gentlemen. Thanks for taking my questions. A couple of questions about your IP business. The first one relates to, well it’s just really more of a verification of growth in the IP business. That roughly $8 million revenue haircut from ASC 606 was almost all of that in the IP business and hence with the growth of the IP business has been more like 13% versus 12%?


Lip-Bu Tan — Chief Executive Officer

So Gary, the IP business grew 16% in 2018 — approximately 16% in 2018. And in terms of the shift from 605 to 606, that’s the $8 million, the reason that it’s $8 million and not $40 million as we talked earlier in the year, was because we kind of underestimated our ability to write business under the new rules, in a very, very consistent revenue timing way. So we ended up with very much the same revenue timing. So the $8 million difference was kind of spread across all businesses, it wasn’t all IP in the end.


Gary Mobley — Benchmark — Analyst

Okay. Alright, that’s helpful. And with respect to the proliferation of open source process or IP, how is that impacting the ability to license it in Tensilica course with RISC-V and midst now being open architected options out there? How from a strategic standpoint do you guard against or invest in this adoption of open source?

Lip-Bu Tan — Chief Executive Officer

Yeah, I think clearly, Tensilica is a very strong position in the audio, as I mentioned. And I now moving into vision and also automotive, so variance and augmented reality. So it really depend on the applications. And in some cases we coexist, and in some cases, we shine. And so, clearly we are excited about our IP, it is a double-digit growth plus, and then the Tensilica DNA 100 is very well received for the embedded processing. And then RISC-V is another architecture, and our tool support all the different architecture. And so we are coexisting very well. We support them.


And then, the IP is, we embrace open source and then clearly we support any different architecture. But more really, right now we are moving toward, I call it, to remain specific workload-specific processor and application. And so we open with that. And also I think the other big opportunity is this high-speed connectivity. So the high-speed SerDes 112 gig SerDes, at the 7-nanometer for the long reach that is very well received. And in the data center and cloud this is a must-have and it’s silicon proven. We’re excited about that opportunity also.


Gary Mobley — Benchmark — Analyst

Okay, alright. Thank you guys.

Lip-Bu Tan — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Monika Garg from KeyBanc Capital Markets. Your line is now open.

Monika Garg — KeyBanc Capital Markets — Analyst

Thanks for taking my question. First I’m looking for more details on your partnership with Green Hills. What are you looking to achieve with the partnership? Could you talk about products what you’re looking to develop with them? And when do you expect revenue contribution from this?


Lip-Bu Tan — Chief Executive Officer

Yeah, so Monica first of all, I’m very excited about this and I call it a world-class toward the security and safety embedded system. And clearly they have a lot to offer. These are real-time operating system and also software development tools. And either way and then with this very proprietary partitional (ph) architecture that protecting what you already need to protect in a very highly reliable security and performance. And we’re excited about it, and we take ownership in it.

I just joined the Board and we are exploring a couple of area of collaborations. First of all, is the go-to-market. This is a very good software and then how do we proliferate into some of the different vertical, defense and aerospace clearly is their stronghold. And besides that clearly in the automotive and medical there is many area that we can explore how to go-to-market. And then secondly, the technology collaborations in term of clearly we are the industry leader in providing the end-to-end EDA and semiconductor IP solution. They are very strong in embedded safety and security software solution, that denote — that each one bringing something really unique and we can leverage our respective strength and collaborate in multiple fronts.


In terms of the technology collaborations, clearly we can explore a collaboration with our verification suite, our IP and others, so that we can serve our system vertical markets together in a more effective way. And also we can also look at some of the joint core marketing activity in the future. So all this is now, we just have this agreement finalized and we have a multiple meeting to explore how can we do and how do we prioritize that, so that we can really increase the revenue from both companies. And I’m excited about it. And then the consumer that we exposed to, can’t wait to get us together to work on it. And so something that we stay tuned and then we will be report as we go.


Monika Garg — KeyBanc Capital Markets — Analyst

Alright. Thanks. Then John, you just posted 10% goal for 2018, but you’re guiding 7% midpoint for 2019. Are you being conservative? I mean even if I adjust for $15 million revenue from emulation from 2018 to 2019, you’re still in kind of there like 9% less than 2018 and guiding like 7.5%-ish for 2019?

John Wall — Senior Vice President and Chief Financial Officer

Yeah, Monika, I think the thing to remember there is that a shift in hardware revenue from 2019 to 2018 while it benefits 2018, has doubled the impact on 2019. Like I say, it was an inline quarter with the exception of that so you’re talking about a $20 million shift from 2019 into 2018. It’s got a 1% impact to revenue growth for 2018. So without it we’d be closer to 9% revenue growth in 2018, but has double the impact, it’s like a $40 million swing on 2019. 2019 would be 9% revenue growth, if that $20 million of hardware revenue had fallen into 2019 instead of 2018.


Monika Garg — KeyBanc Capital Markets — Analyst

Got it. And then if I look generally CapEx for Cadence has — is somewhere around $60-ish million range but you are guiding to $90 million 9-0 for 2019. Kind of any specific hard expenses for 2019, you’re thinking about?

John Wall — Senior Vice President and Chief Financial Officer

Yes, that’s correct Monika. That we are investing in R&D and field engineering resources to support expansion of our footprint and market-shaping customers. And that’s what you’re seeing flow through there on the CapEx side.


Monika Garg — KeyBanc Capital Markets — Analyst

Does it should normalize back to $60-ish million range by 2020 then?

John Wall — Senior Vice President and Chief Financial Officer

Well it’s hard to say. We’re not guiding 2020 right now.

Monika Garg — KeyBanc Capital Markets — Analyst

Got it. Then the last one, I mean we have seen very strong operating margin improvement last two years, almost 400 bps. You are guiding to 50 bps to 100 bps for 2019, is that the way to think about longer-term margin expansion? Thank you so much.


John Wall — Senior Vice President and Chief Financial Officer

Again we’re not guiding beyond 2019 and everything we know is included in our guidance.

Monika Garg — KeyBanc Capital Markets — Analyst

Alright. Thank you.

Operator

Thank you. Our final question comes from Sterling Auty from JPMorgan. Your line is now open.

Sterling Auty — JPMorgan — Analyst

Yeah, thanks. Hi guys. Thanks for squeezing me in. Just a couple of questions here. One of the questions I still get a lot from investors is helping them understand as they go through the earning season and see the differing results whether it’d be AMD on one end or Nvidia on the other end. Can you help give a sense as to your exposures across the semi-landscape? And how they should put that into context?


Lip-Bu Tan — Chief Executive Officer

Sterling, that’s a good question. And as I mentioned earlier, it is a very mixed environment. Clearly we are supporting the customer and we are clearly the leader in the industry. And so far we are very happy with our engagement with them. And they are the leader in their sector so we kind of highlight to you, that is our high priority to support that. In terms of the exposure, I think we heavily engaging with some of these leading sector. AI machine learning that I mentioned earlier, the cloud data center, infrastructure that we are very well positioned there.


And clearly in automated driving on the Tier 1 and OEM, and then also the 5G, some of the leading customer and we are engaging and ranging from cellphone all the way to the infrastructure provider. And so overall, I think we are well positioned, we are very diversified, very broad in term of our customer base. And clearly — the new area that we are excited is the whole FTE System Design Enablement, that we are increasing our system companies and also some of the vertical market, like aerospace, defense. And then clearly the automotive side we have a lot of success there. And then also clearly one thing that over time we’re going to be also expanding is a medical related, that’s not a big area of opportunity for us. So overall I think we are very broad, we don’t expose to any specific sector or specific company. And then the design activity remain very strong across semiconductor system and vertical market.


Sterling Auty — JPMorgan — Analyst

Alright, great. The other hot topic in terms of conversations, is what synopsis reported their fourth quarter, they came out and gave a three-year margin target. And I think one of the earlier questions on the call was alluding to. I just want to hit it head on. You guys were one of the first ones to give a margin target back when you started your subscription transition all the way back in 2008. Given the success that you’ve had and over 30% operating margins as you pointed out is there a thought in — when if you decide to might we expect you to come out and kind of give an update to a new long-term target whether it would be three years in the future or five years et cetera?


Lip-Bu Tan — Chief Executive Officer

Yeah, Sterling very good questions. If you are following me for the last 10 years, I will continue to guide you at the time that we see it. And if you’ll recall we initially guiding you from a very disaster year 2008 and 2009. And then — then we starting to point to 13 and then point to the mid-20 and then now we are reaching 30. And then stay tuned. And at the right time we will highlight to you where we are going. We continue to drive efficiency, R&D, G&A in every sector and then meanwhile we also continue to invest for the success for the long-term shareholder. And clearly you can see that we have been investing in the right place and you can see that our digital implementation has lot of success right now. Our custom analog continue to be at the leadership. And we’re investing in the future in the 5-nanometer, 3-nanometer with a leading customer.


We are moving to the cloud and we’re moving to the SDE and then we also focus on some of the vertical systems and service provider and those big investment. And so we continue to drive efficiency and drive success. And then with the AE support, stay tuned, when the right time comes we will guide you the longer-term operating margin that we like to shoot for.

Sterling Auty — JPMorgan — Analyst

Excellent. Just one little housekeeping question for John. The Green Hills investments I didn’t catch, how does this actually get accounted for? What will we actually see in the non-GAAP income statement in terms of where it’s accounted? And I think just general sense of the revenue run rate at Green Hills at the moment?


John Wall — Senior Vice President and Chief Financial Officer

Sterling, we’re not disclosing anything about our revenue run rate at Green Hills, they’re a private company. But we’ll account for the investment in Green Hills using the equity method of accounting. So you’ll see our portion of Green Hills results flow through the other income and expense line for GAAP only. So it won’t be in our non-GAAP results. Green Hills is profitable as a broad based to top customers and especially proliferate — and is especially proliferate in industries where the highest levels of safety and security are required which is aerospace and defense and automotive. But, yeah, there will be nothing in our non-GAAP results, it will show up in GAAP only, on our other income and expense line.


Sterling Auty — JPMorgan — Analyst

Got it. Thank you guys.

Lip-Bu Tan — Chief Executive Officer

Right. Thank you.

Operator

Thank you. And we have a follow-up question from Mitch Steves from RBC Capital Markets. Your line is now open.

Mitch Steves — RBC Capital Markets — Analyst

Hey guys, thanks for putting me back in. Just really quickly, one of the other topical items has been the kind of the US-China trade dynamics. Have you guys seen any change in terms of your sales there or any sort of, I guess different negotiations? Or is it still essentially business as usual?


Lip-Bu Tan — Chief Executive Officer

Yeah. I think Mitch, good question. We have been well in China and we continue to representing, continue to representing a growing opportunity. And China remain committed to build out on domestic semiconductor industry. And so we are well positioned there and we are supporting our global customer throughout. So I think stay tuned. Business as usual, and we continue to support our customers.

John Wall — Senior Vice President and Chief Financial Officer

Mitch, we’ve seen steady growth in revenue in China. If you — I’ll refer you to Page 4 of our CFO commentary. There you’ll see in Asia, Asia drove 24% of our revenue in 2016, 27% in 2017, 28% in 2018 but of that roughly 8% of 2016 revenue is China, 9% of 2017 revenue was China and now it’s just under 10% in 2018.


Mitch Steves — RBC Capital Markets — Analyst

Perfect. Thank you.

Operator

Thank you. I would now like to turn the call back over to Lip-Bu Tan, CEO for closing remarks.

Lip-Bu Tan — Chief Executive Officer

Thank you. In closing, through continuous innovation and execution, our System Design Enablement strategy has positioned us to capitalize on multiple technology ways and further proliferating our solutions with the broader base of consumers. We are proud of the innovative and inclusive culture we are building at Cadence. The strength of our culture is highlighted by the recognition we’ve received from Fortune Magazine a few days ago, as we are proud that for the fifth year in the row, we make the list of Fortune Top 100 Best Companies to Work For.

I would like to thank all of our shareholders, customers and partners, Board of Directors and our hard-working employee globally for their continued support. Thank you all for joining us this afternoon.

Operator

Thank you for participating in today’s Cadence fourth quarter 2018 earnings conference call. This concludes today’s webcast. You may now disconnect.

Duration: 58 minutes

Call participants:

Alan Lindstrom — Senior Group Director, Investor Relations

Lip-Bu Tan — Chief Executive Officer

John Wall — Senior Vice President and Chief Financial Officer

John Pitzer — Credit Suisse — Analyst

Mitch Steves — RBC Capital Markets — Analyst

Rich Valera — Needham & Company — Analyst

Tom Diffely — D.A. Davidson — Analyst

Jay Vleeschhouwer — Griffin Securities — Analyst

Gal Munda — Berenberg Capital Markets — Analyst

Gary Mobley — Benchmark — Analyst

Monika Garg — KeyBanc Capital Markets — Analyst

Sterling Auty — JPMorgan — Analyst

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