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Mentor Graphics (NASDAQ:MENT)

F3Q 2013 Earnings Call

November 29, 2012 5:00 pm ET

Executives

Joseph L. Reinhart - Vice President of Corporate Development and Investor Relations

Walden C. Rhines - Chairman and Chief Executive Officer

Gregory K. Hinckley - President, Chief Operating Officer, Chief Financial Officer and Executive Director

Analysts

Krish Sankar - BofA Merrill Lynch, Research Division

Richard Valera - Needham & Company, LLC, Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Thomas Diffely - D.A. Davidson & Co., Research Division

Saket Kalia - JP Morgan Chase & Co, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal third quarter 2013 earnings release. [Operator Instructions] And as a reminder, today's conference is being recorded. I'd now like to turn the conference over to Joe Reinhart. Please go ahead.

Joseph L. Reinhart

Thank you, Ryan, and good afternoon, everyone. Welcome to Mentor Graphics Fiscal Third Quarter 2013 Conference Call. As Ryan said I am Joe Reinhart, Vice President of Investor Relations and Corporate Development at Mentor. This afternoon Walden Rhines, CEO and Chairman, will open with a discussion of key trends in our business. Greg Hinckley, our President, will then provide operational and financial highlights, along with guidance. Wally and Greg will then take your questions.

As a reminder to everyone, this conference call contains forward-looking statements. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary. In addition to the factors noted later, these risk factors can be found in our most recent 10-K, 10-Q, as well as the annual report. For a reconciliation from GAAP to non-GAAP measures used in this presentation, please refer to today's financial release. This information is available online at the Mentor Graphics website.

Wally?

Walden C. Rhines

Thanks, Joe. The third quarter of fiscal 2013 was another strong quarter, our 15th in a row of meeting or beating our earnings guidance. Revenue of $268.8 million drove non-GAAP earnings per share of $0.32, well ahead of our non-GAAP EPS estimate of $0.28. Annual run rate of renewals among our 10 largest bookings grew 25% compared to the corresponding contract renewals approximately 3 years ago. Strength in the high-volume 28- and 20-nanometer generations of semiconductor technology is driving good results in the entire EDA industry, and Mentor has shared a net benefit.

The fiscal Q3 reflected some broader strengths in electronic design, particularly in system-oriented design and in the new and emerging applications of EDA. Total bookings substantially exceeded the level embedded in our guidance despite weakness in the Design-to-Silicon product subflow compared to the exceptional record strength of Q3 last year when leading companies were booking their largest orders for 28- and 20-nanometer resolution enhancement.

Custom IC design in Analog/mixed-signal design tools, however, were particularly strong, more than tripling in total from last year. Leading-edge Design-to-Silicon activity has moved to the 14-nanometer node, and tooling for these processes will be evident over the next 2 years. The areas that stand out most strongly this quarter, however, are in integrated system design, new and emerging applications of EDA and the continued growth in China where Mentor is the #1 EDA supplier.

Bookings for integrated system design, which includes printed circuit board, mechanical and manufacturing software, grew faster than any quarter in almost 2 years with strength across all major product lines. Four of the top 5 customers for our expedition printed circuit board design family this quarter were consumer products companies. For the mechanical analysis division, Q3 was an all-time record in both bookings and revenue, with more than 15% of bookings coming from new customers. As the leading provider of software for thermal analysis of electronic products, Mentor's FloEFD products cover a very broad base of users, but automotive applications are a key component of the growth.

New and emerging applications of EDA-to-system design are causing significant growth for the EDA industry. Bookings for products in this subflow grew 85% in the quarter. Embedded software strength this quarter came from enterprise adoption of Mentor's Sourcery CodeBench, growing adoption of the nucleus embedded real-time operating system and embedded automotive applications largely based upon the GENIVI standard.

It's worth highlighting some of the applications that are driving this automotive adoption of EDA system design products. In the mechanical analysis division, design of new LED headlight systems by companies like Daimler-Benz is done with Mentor's TeraLED thermal analysis tool. In embedded software, the GENIVI standard is driving Mentor-based programs aimed at instrumentation and infotainment at the leading Tier 1 suppliers. Mentor is a member of the GENIVI Board of Directors, working with representatives from the major automotive companies and Tier 1 suppliers like Delphi, Visteon and Bosch to standardize automotive infotainment software interfaces.

More broadly, there's a revolution going on in automotive design that goes far beyond LED headlights and infotainment. The AUTOSAR 4.x standard is spreading across the worldwide automotive industry, with more than 100 vehicle platforms now in design. Mentor has achieved a leading position in the conversion of the automotive industry to the AUTOSAR standard. Leading Tier 1 automotive suppliers like Bosch, DENSO and Continental have initiated major programs using Mentor's AUTOSAR VSx family of software tools.

Mentor's automotive bookings grew 30% this quarter, and other automotive design tools for network analysis grew strongly, especially in China. Speaking of China, the automotive and telecom industries in China continued to be major contributors to growth of design activity. The China portion of our business grew over 20% this quarter, reflecting ongoing strength of demand and broadening of the applications for which Mentor products are used.

The other area of new and emerging products that provided strong bookings growth in Q3 was ESL or Electronic System Level design. When combined with Calypto, Mentor has enjoyed a market share more than half of the high-level synthesis market according to Gary Smith EDA. This quarter alone represented about 80% of a previous record bookings for an entire year. ESL synthesis growth is being driven heavily by the large number of high-resolution video applications that are being developed.

Q3 was a strong quarter in another record year. While benefiting from overall EDA industry strength, Mentor's business was helped by our unique position in system design and the emergence of new applications for EDA.

Greg?

Gregory K. Hinckley

Thanks, Wally. The quarter closed, if anything, better than expected. Bookings were down, but the cause of that was comparison to an incredibly strong bookings quarter last year for the Calibre product family. Production orders from foundry fabs for the 20- to 28-nanometer node led to bookings growth last year for Design-to-Silicon, which includes the Calibre family, of 55%. That was not sustainable and, in fact, other product lines showed very satisfactory results, with integrated system design and new and emerging up strongly and scalable verification flat.

As Wally said, financial results for the quarter were again solid and represented the 15th consecutive quarter for which we exceeded our non-GAAP EPS guidance. On revenues of $268.8 million, up 7.3% from last year, we delivered non-GAAP EPS of $0.32, $0.04 ahead of guidance and more than 25% better than last year. On year-over-year revenue growth, approximately 70% of incremental revenue dropped through to operating income. We continue to contain expenses, helped by favorable FX rates, foreign exchange rates, and the effect is powerful operating leverage. Non-GAAP operating margin was 18.2%, 26% ahead of the rate reported last year. Year-to-date, that margin is 16.6%, suggesting we are on track very clearly to meet our 18% commitment for this year.

Leading indicators remained positive through the quarter. Support reinstatements were up again at 35%, perpetual declines down 15%, this, by the way, declines dropping. That's good. Services continued at near record levels, and emulation was a record for our third quarter. New customers were flat in number at 131, but up more than 20% in value. Finally, and arguably most importantly, growth in the average run rate of our largest contract renewals was, as Wally said, 25%. This is consistent with what we need to support top line growth in the 8% to 10% range.

Non-GAAP gross margin was 82.1%, down from the 84.7% last year but up from the 81.8% that was embedded in our guidance. During the quarter, we shipped record levels of emulation, up 4x the level of the same quarter last year. These results demonstrate the progress we are making in hardware production and delivery, as both shipments and gross margins are steadily improving. We expect further improvement in the coming quarters. Non-GAAP OpEx, operating expense, fell 2.6%, largely due to favorable foreign exchange rates. Headcount was up 2% year-to-date and was all research- and development-related.

Now for more financial detail. Bookings were down 30%, both in product and services. Product was weak only in the Design-to-Silicon product group and only in comparison to an extremely strong quarter a year ago caused by production orders for 20- to 28-nanometer resolution enhancement technology product for leading edge fabs and foundries. Design-to-Silicon was down 65%. Scalable verification was down 5%, while integrated systems design was up 35% and new and emerging up 85%. Of note, we enjoy great success in the quarter within the new and emerging category with both Catapult C and AUTOSAR product lines.

Consulting, though down, part of our services offering, enjoyed the second highest booking for our third quarter in Mentor history, nearly double the booking of Q3 fiscal 2011 for example. Bookings geographically were down in all regions: North America down 15%; Europe, 10%; Japan, 40%; and Pac Rim, 55%. Product bookings were 70% term, 20% perpetual and 10% subscription compared to 80% term, 15% perpetual and 5% subscription last year. Top 10 customers were 55% of bookings, down from 65% last year. Average deal length was approximately 3.5 years, increasing with the much greater concentration this quarter of system companies in the booking mix.

Parenthetically, a Catapult C transaction booked by our subsidiary, Calypto, was one of our top 10 bookings of the quarter. Clearly, pairing the attributes of high-level synthesis with sequential logic equivalence checking has resonated within the electronics industry and validated the merger between the Calypto and Mentor products that happened last year.

Revenue mix by geography was 50%, North America; 20%, Europe; 20%, Pac Rim; and 10%, Japan. Support revenue was a highlight for the quarter. It was up 6% year-on-year for the second quarter in a row. 6% is at the high end of the 4% to 7% growth that we have experienced over the last decade.

Currency was unfavorable to revenue by about $1 million. Operating expense was $4.5 million less than last year and $3.3 million favorable to guidance. Much of the decrease came from the favorable foreign exchange in EMEA or Europe, Middle East and Africa and India, where Mentor has large staffs of research and development engineers, which was the cause of a $5.4 million year-on-year decline in research and development expense. Currency was in total favorable to OpEx by $4.7 million.

Other income and expense was a $3.3 million expense, essentially interest expense net of interest income. Special charges were $1.1 million and were related principally to cost reduction initiatives. Our non-GAAP tax provision remained at 17%.

Now the balance sheet. Cash and equivalents increased $13 million to $160 million at quarter end. Operating cash flow for the quarter was $18 million, an $18 million inflow compared to a $10 million inflow last year. Trade accounts receivable was $172 million, up $73 million sequentially. Short-term unbilled receivables were $233 million, down $9 million sequentially.

Trade days sales outstanding were 58 days, an increase of 21 days last quarter and an increase of 17 days since the third quarter last year. Total days sales outstanding were 136 days, an increase of 8 days from last quarter and an increase of 31 days from last year. The quality of receivables remained excellent, with no receivables net of reserves greater than 60 days outstanding.

Factored receivables were $11 million in the quarter compared to $1 million last quarter and $17 million last year. Capital expenses were $13 million for the quarter compared to $11 million last quarter and $8 million last year. Depreciation and amortization of property, plant and equipment was $9 million for the quarter, $1 million greater than last quarter and last year.

Now guidance. Let me start by offering a few comments about fiscal year '14. As discussed in previous conference calls, we expect to end fiscal year 2013 with backlog down from the record fiscal year 2012 backlog of $218 million. With lower year-end backlog, we expect a less linear revenue year in fiscal year 2014. We currently anticipate a first half versus second half revenue split of approximately 40%, 60% or similar to what we saw in fiscal year 2011. We remain committed to delivering a 20% non-GAAP operating margin in fiscal year 2014. This, by the way, is an approximately a 17% GAAP operating margin, which is very competitive -- which is a very competitive level in our EDA industry. Consistent with past practice, fiscal year '14 guidance will be provided with our fiscal year 2013 fourth quarter earnings release. This is tentatively scheduled for February 28 of next year.

Now the current year guidance. For the fourth quarter of fiscal year 2013, we are forecasting revenue of approximately $343 million and non-GAAP EPS of about $0.55. For the year ending July 31, 2013, we are...

Walden C. Rhines

January '13.

Gregory K. Hinckley

January -- sorry, January 31, 2013, we are forecasting revenue of about $1.1 billion and non-GAAP EPS of approximately $1.39. This guidance represents an 8.4% increase in revenue and a 23% growth in non-GAAP EPS from fiscal year 2012 results. Fiscal year 2013 non-GAAP operating margin -- income margin is expected to exceed our beginning of year target of 18%.

Wally?

Walden C. Rhines

Thanks, Greg. This quarter was an all-time revenue and EPS record for a third quarter. Integrated systems design and new and emerging applications of EDA were particularly strong with all-time record bookings for Q3. Ongoing control of expenses will allow us to exceed this year's 18% operating profit goal, and the exceptional growth in bookings for new application areas such as AUTOSAR development and thermal analysis, offer promise for increasing diversification and growth in the years ahead.

Now let's take some questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Krish Sankar with Bank of America.

Krish Sankar - BofA Merrill Lynch, Research Division

I had a couple of them. Wally, when I look at your fiscal '14, 20% off margin target, do you feel like your expenses are, at this point, most of the work is done and it's pretty much the drop-through is going to come from the EDA or the Mentor's top line growth? Or do you feel like there's still more -- there's a few more things levers to pull on your cost side at this point?

Walden C. Rhines

Well work is never done, but the plan for next year, which we will discuss end of February, will depend, of course, on the ending backlog and the outlook for bookings, all of which will have more visibility into -- after the fourth quarter and know what all we have to do to achieve our 20% goal.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. All right. And then along the path of emulation, it seems like now that EVE is part of synopsis, and you guys had some misgivings around those patent infringement. Just kind of give a sense of can you tell what does acquisition mean from a competitive landscape? And also, do you have any update on the patent infringement at EVE?

Walden C. Rhines

Yes, well first, I can't comment on an ongoing litigation, so that part I can't talk about. As far as the overall market for emulation, the growth has been really remarkable for the whole industry really the last 2 years, and it doesn't seem to have let up. And so I'm sure that the synopsis view to EVE as a way to get into that business, for us, we view emulation as a very positive business going forward. And of course, we support an integrated flow that does more than just emulate products. It's a software -- embedded software development tool. It's an independent server. It's a lot of other things that aren't provided by the low-end emulators that others can provide.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. And then just a final question from my side. Based on your Jan quarter of fiscal fourth quarter guidance, what kind of bookings are you baking in your expectations? Are you expecting a bigger year-over-year decline? Or what kind of bookings would you expect for Jan?

Walden C. Rhines

Yes, we don't provide bookings forecast in our reports. We only can give projections for our revenue and EPS.

Operator

Next question comes from the line of Rich Valera with Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

First question on emulation. I think if I heard you right, you said you saw a record bookings quarter for emulation, it was a record third quarter. So I was wondering, does that complete your bookings plan for the year to get to double your emulation revenue? In other words, are you booked to double your revenue at this point? And two, I guess to just sort of speak of the fact, it doesn't sound like you're seeing any hesitation at all in the emulation market despite the choppy macro environment. Just want to sort of confirm that.

Gregory K. Hinckley

Yes, business, Rich, continues strong. We continue to expect to book business in the fourth quarter. It could be a very big fourth quarter. And the business is going very well, and we view the level of business that we did in the third quarter as a positive leading indicator because in past times, we had seen that hardware business slipped when the chip companies were cutting back on their engineering expense. And we're seeing nothing like that right now.

Richard Valera - Needham & Company, LLC, Research Division

And as far as the bookings numbers, they're down 30% off and then obviously best comp. Year-to-date, I guess every quarter has been down, some more than others. And it would appear you're having [indiscernible] down bookings year-over-year. And yet I think you said in the prepared remarks you see that it supported your current bookings at the sort of 8% to 10% growth on the top line. So I was wondering if you can help us bridge the current bookings you're seeing and, I guess, the backlog you had, et cetera, entering the year and how you sort of see that supporting the 8% to 10% growth.

Gregory K. Hinckley

So what we were saying was that we comment each quarter on the growth in terms of annual fees of our top 10 contracts, okay? In this quarter, we said that it was up 25%. That was an improvement over the prior quarter, the second quarter, fairly significant improvement. We view, once again, the growth rates of our renewal contracts to be leading indicators of what is going on in our business. A 25% growth within our top 10 contracts is sufficient if it extends to the rest of our renewals as we go forward to support a 8% to 10% annual growth rate. That's what I was commenting on.

Richard Valera - Needham & Company, LLC, Research Division

Got it. And then one final one for me with respect to the linearity you're expecting in the next fiscal year. It seems like you've made some pretty good progress there. This year, I think, will be a record in terms of the percentage of revenue you get upfront relative to recent records. But getting back to 30%, that's a pretty major step back, and, in fact, it's lower than most of the years preceding fiscal '12, [indiscernible] out. I'm just wondering sort of what is driving that relatively severe shift to the back-end loaded year. And I kind of -- do you think that the -- whatever structural things you put in place to help linearity are still working as expected or it's just sort of an anomalous year here that you're expecting in '14?

Gregory K. Hinckley

We entered the year with something like 20% of the total revenue plan in backlog. We just won't have that this year. So we have -- more of our business will -- we don't have the backlog to ship from in the beginning of the year, and we have a renewal profile that is actually fairly similar to what we've seen in years prior to a year ago. And so in fiscal year 2011, I think we had about a 40-60 split. So we've been at 40-60 more frequently than we've been at 45-55. And when I say that it's going to be 40-60, I'm not saying it's going to be 40.000. I'm saying that there's a range of precision around 40, but it's going to be closer to 40 than it is to 45. And it's going to be closer to 60 than it is to 55, but it's going to be less than it was last year, which was we made great progress on linearity last year. We've talked about it all this year. We've taken a step back on linearity, Rich.

Richard Valera - Needham & Company, LLC, Research Division

I guess my question is, is this what you see as a normal year? I mean, just trying to figure out, is there something...

Gregory K. Hinckley

There's nothing unusual this year. The only thing that's unusual about this year that we're dealing with is we don't -- we have vastly less backlog than we had entered into this last year. Most years, we've been at somewhere around -- somewhere between 41, 42 and the remainder being in the other half of the year. And we're going to be more like where we've been. We will not have the progress that we made this last year, fiscal year 2013, in terms of linearity.

Operator

[Operator Instructions] Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Wally, Greg, I'd like to ask about 2 of the areas that you noted for the strength in the quarter, embedded systems design and ESL through the first half of the year [indiscernible] particularly strong for you or in terms of overall industry results to those 2 categories. So could you talk about what caused the inflection or the strength in the third quarter and the sustainability of the strength that you've seen in those 2 areas?

Walden C. Rhines

Jay, you said ESL, did you mean new and emerging?

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

No, ESL specifically, which you cited as part of [indiscernible].

Walden C. Rhines

Okay. So as we highlighted before, the ESL strength was heavily influenced by Calypto. The -- as Greg noted, we had a very strong booking there and then, of course, the other ESL products within Mentor. With regard to the ISD or the Integrated Systems Division, it was strong across the board. It's hard to point to any single thing because everything was quite strong. And I think you can relate back to the comments made earlier that we have a lot of systems customers this quarter and more than in the previous 2 quarters and so that caused very strong growth.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. On the second quarter call, you talked about the gross margin leverage you are seeing -- we're seeing in the hardware-based emulation. Could you talk about any further gross margin leverage you've seen in emulation, particularly as you've ramped up Pacific volume? And any other margin leverage that you've seen in other smaller areas given the strength in Calypto, for instance. Is that becoming an increase in a profitable business for you as well?

Gregory K. Hinckley

Well, we're talking about gross margin line. So what you have is traditionally less revenue minus cost of goods sold. Calypto for all intents and purposes has no cost of goods sold. So it's 100% gross margin. So the more we ship, the higher our gross margin gets. And that's true for all the rest of the software products. In terms of the single largest point other than volume-driven effect upon gross margin, we made a substantial progress this year on the efficiency of manufacturing of our product, given -- shown by the fact that we shipped approximately 4x as much as we did, I think I said, the prior year. And our gross margins were quite healthy this quarter. And I also said that we still have room for improvement. Pricing in emulation is -- seems to be quite favorable.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. A couple last things. Any comment on the impact of early renewals, anything pulled in Q4, Q3 or first half of next year pulled into second half of this year.

Walden C. Rhines

No. Nothing in particular.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. And last question on Calibre. I understand the tough comp to last year's third quarter, particularly given the strength of Asia Pac business on Calibre last year. Any thoughts on Q4 business for Calibre or how that might look going into next year, particularly given what you talked about at the Design Automation Conference that at 20-nanometer, verification costs roughly double from 28, which I would assume would necessitate some substantial increases in consumption for Calibre.

Walden C. Rhines

Jay, I think you're absolutely right. The amount of verification and the diversity of things that Calibre is required to verify has increased substantially. What we're dealing with here is the lumpiness associated with megadeals that are far larger than we have historically dealt with, and so it causes big bumps up and down, particularly in resolution enhancement. But the overall base business, as you know, is extremely promising because design rule checking is far more now -- it now involves all sorts of parametric checks, and that's a very promising and growing business for Mentor.

Operator

Next question comes from the line of Tom Diffely with D.A. Davidson.

Thomas Diffely - D.A. Davidson & Co., Research Division

First, I was wondering if you could comment on the pricing or the competitive environment you posted value acquisition has had -- increased via the sanity in the marketplace.

Walden C. Rhines

Well -- so the pricing is tough to trace down to product line that specific. What I would say is that the Magma acquisition did improve the selling environment substantially for, I think, all the competitors in place and route. And that's normal. Whenever a significant company is taken out of a business, customers reassess and decide among the existing vendors who they'll go with, and everyone profits from that. And presumably, that does have a positive effect on pricing as well.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. How long does it typically take for a little bit of share shift to go into competitors merged together?

Walden C. Rhines

It's a continuous process.

Thomas Diffely - D.A. Davidson & Co., Research Division

Yes. Okay. And then also, Wally, when you look at the automotive market itself, how big could that be? And then what's the current penetration? And how long do you think it will take [indiscernible] environment?

Walden C. Rhines

So we normally bounce between 10% and 15% of our revenue into what we would categorize as automotive. And the market is -- the potential market is enormous. The current market certainly is in the $100 million plus kind of range, but it's -- automotive companies and aerospace companies move slowly. And they are, I would estimate, at about the point the semiconductor industry was in the early 1970s in terms of their conversion to Electronic Design Automation. So we have probably another 20, 25 years of strong growth as they move to automation.

Gregory K. Hinckley

Let me add to that. We have a traditional play, which was in printed circuit board. From that, we expanded into cable and wire harness. That's a significant market for us, but still we have lots of opportunity to expand. We're also in megatronic simulation, connection between electrical and mechanical effects in an automobile. Wally spent most of his time talking -- and we've got a presence in embedded software infotainment and so forth, which is the console that you see inside of automobiles, being able to control radios and GPSs and the like. But what Wally spent a bunch of time talking about was AUTOSAR, which is a new standard for automotive networking, and that has just begun to roll out within the automotive industry. I think Wally mentioned that there are something like 100 companies.

Walden C. Rhines

More than 100.

Gregory K. Hinckley

More than 100 companies. And we think that there could very well be incremental TAM this next year of somewhere between $80 million and $100 million alone. And we're in a -- if we have -- although we're not prepared to forecast it, we are in the position to be a substantial beneficiary from that opportunity.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And as that becomes a bigger part of your business over time, does that have an impact on the operating margin structure you currently have built?

Gregory K. Hinckley

The more revenue you run through our income statement, the healthier and more profitable we get.

Walden C. Rhines

The cost of goods sold is negligible.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then finally on the emulation, have you seen any share shifts as far as the products go themselves? Or is it really just a refresh cycle for you in the Veloce2 end customers, just getting that to speed of what they need?

Walden C. Rhines

No. I would say that a very large share of our growth in emulation bookings has been new customers or customers that were using some other emulation solution that have switched.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. When we look at the different, I guess, packages out there between yourself and the lower-end EVE and [indiscernible], it seems like each have kind of your own specialty areas that you do your best in. But the Veloce2 now is starting to move in other directions then to each get a market share.

Walden C. Rhines

No, that's true. The older high-end emulator is focused strictly on in-circuit emulation. So you plug in wires and the emulator behaves like a chip. The modern generation of emulators is largely virtual where the interfaces to peripherals are all in software, and they are platforms around which you develop an entire system, including the embedded software. And so they have the ability for dozens or even more than 100 people to work on a single emulator to do software development and debug, and they also accelerate both the test benches and the design itself. So they really are attacking a totally new and much broader market than traditional emulation.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. Is there some way to quantify how much businesses with new system customers that went around last time and how much is just old customers buying more?

Walden C. Rhines

I don't have an exact number, but it's somewhere probably between 25% and 50% of our total.

Operator

Our next question comes from the line of Saket Kalia with JPMorgan.

Saket Kalia - JP Morgan Chase & Co, Research Division

Just a few here, if I may. Wally, can you talk a little bit about just the semiconductor R&D environment in general? With some of the mixed results we've seen out of the semi guys, especially this quarter, have you seen any hesitance from your customers? And do you think the healthy EDA environment that we've seen so far is going to continue into next year?

Walden C. Rhines

Yes. So the semiconductor executives, in general, have been somewhat negative. About 1/3 of our leading customers are projecting down years or have reported down years this year. And the overall semiconductor industry is not likely to grow this year, possibly a modest decline. For next year, the analysts project mid single-digit growth, but the general attitude is less positive. And as you noted, the thing that most affects us is R&D spending, which was up 10% this year for the semiconductor industry, but I doubt that it will grow that much next year.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay. That's very helpful. To -- just to move to the business segments. Great results in ISD and it sounded like that was the strength in broad-based, particularly from the systems companies. Was there a particular sector of systems companies that drove the strength in that business? And as you look at the pipeline for that, going to the fourth quarter and 2014, do you think that we'll stay at the sort of $80 million level? Or should we kind of think about that $60 million run rate that we've seen in past years?

Walden C. Rhines

Yes. So with regard to your first question, the business tended to be computing and telecom. And actually, consumer products to a lesser extent for the -- who makes up the systems sector and for projecting the bookings, we'll be talking about that, our projected plan for 2014, at the February 28 call.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay. Let's just move to Design-to-Silicon for a second. Obviously tough compare there year-over-year. But how did your pool of renewals look for that business in 2014? And I understand you can't talk quantitatively, even qualitatively will be helpful.

Gregory K. Hinckley

Saket, all we're prepared to say is, is that the portfolio of renewals that we have for next year are better than what we had this year, and we'll provide even more color on that when we get up to February 28 of next year. But it's a stronger renewal year than we had this year.

Operator

Okay. And we have no further questions in queue.

Walden C. Rhines

Thank you very much, operator, for hosting this. And please give the information dial-in for the conference call repeat purposes.

Operator

Okay, ladies and gentlemen, as I mentioned earlier, today's call was recorded for replay. It starts today at 4:00 p.m. Eastern Time -- excuse me, 4:00 p.m. Pacific Time and goes through December 6 at midnight. You can dial in at 1 (800) 475-6701 and enter the access code 271877. International participants may dial into the United States with (320) 365-3844. That does conclude today's conference. I want to thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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