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Cadence Design Systems, Inc. (CDNS)

February 27, 2013 7:15 pm ET

Executives

Geoffrey G. Ribar - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Mark L. Edelstone - Morgan Stanley, Research Division

Mark L. Edelstone - Morgan Stanley, Research Division

All right, why don't we get started? So welcome. For those that I haven't met, my name's Mark Edelstone. I'm on our investment banking side of Morgan Stanley. So first off, thanks a lot for joining us at our conference. Happy to have you guys here. Hopefully it's been a good experience for the past few days. Great to have Geoff Ribar, who is the CFO of Cadence. And if you just think about Cadence and the EDA sector, a few hundred billion dollar industry rides on the shoulders of what someone like Cadence does. So tremendous opportunity, the company's done a lot of great things here in the last few years in terms of really tuning the business and driving it, and Geoff's been a big part of that for the company as a whole.

Question-and-Answer Session

Mark L. Edelstone - Morgan Stanley, Research Division

So maybe just starting at kind of a high level, Geoff, sort of talk about what are the drivers that you're seeing today for the company. And what are kind of key things that investors should be focusing on, from just a metrics perspective?

Geoffrey G. Ribar

Sure. So I think some of the key drivers for us on going forward basis, and some of it's also retrospective, is clearly the industry continues to consolidate, right? And that consolidation, down to a smaller number of players, we'll say 3 players right now, from a much higher number. Clearly, in the software business leads to better economics over a period of time. And we've seen a lot of progress in the space as a result of that. Most recently, our competitor bought a price leader called Magma, and I think that's materially helped, and the software business is universally strong as a result of that. I think the second driver is the continued rise of system companies as customers. We've traditionally, of course, sold mostly to semiconductor companies, right? But system companies, for a couple reasons, are now buying stuff from us. The first reason, of course, is they're vertically integrated back into chip design. They're buying the tools, and any of that essentially, just replaces chips that they would buy outside, and so that's kind of a wash for us. But the probably, the bigger area for us, that is, in that addition to our market and our market opportunity, is they're using our emulation boxes, which are basically supercomputers, $1 million to $4 million list priced products to help architect their systems, both the hardware and software well in advance of building a product. That allows them to make sure that the software and hardware will work together when they actually come out, and that's been a big rise for us. System companies are approaching probably 10-plus percent of our business, depending on how you design system companies, so that's clearly been a driver for us. I think another driver for us is certainly our focus on deal quality. This is kind of an internal thing, right, but our focus on deal quality. When Lip-Bu came onboard, that's just about 4 years ago, if you notice when our results started improving, it was about 4 years ago. There's a connection, but he established a deal review board, and that deal review board clearly focuses on some of the long-term historic problems that this the EDA industry had. So we focus on deal terms, pricing, things we're doing, how many license we're selling based on the number of customers. And like, that said, it probably 5% to 10%, and each time we do an old deal to new deal as far with incremental revenue, again not all of that contributed deal quality, some is market share capture, but a lot of it's attributed to deal quality, so that's been a -- I think the material driver. So if I had to say 3, I'd probably pick those 3 as the material driver for our business.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes, just focusing on the real quality and the way you're running the business, because obviously it's a bit -- it's a lot different over last 4 years. And the company's instituted a more conservative structure, both financially, as well as just go-to-market. If -- have all those things you think, all that, kind of easy thing's been done now to drive margins, drive efficiencies, those kinds of things?

Geoffrey G. Ribar

So certainly, the model transition. We went through a model transition starting in 2008 to move from an upfront revenue recognition to a ratable model. Essentially we recognized revenue over the term of the license. That materially changed, of course, our focus on our business. Right now, we don't care whether we book a deal this quarter or not. It has very little revenue impact. That's why we used to care a lot. Again, I spent 28 years on the other side of this equation, and I always bought from an EDA company, historically, on the last day of the quarter because they had tremendous terms and conditions. And that's largely changed because it doesn't really impact revenue. So I think that's been a huge advantage as far as improving our business and improving how we're operating. And so I think that's helped and will continue to help. I do think that there's still plenty of room to go. Have the easy things happened? Maybe, yes. But I think there's still plenty of room to go in deal quality over a period of time. We have -- our industry offers tremendous value to the semiconductor business. Without us, they can't build out a chip, right? They can't build a chip -- without us or our competitors, they can't build a chip. And so that's still tremendous value. I think we sacrificed some of that value in the 2000s for the industry, and in total, grew about 1% a year, while our customers grew double in revenue and probably almost double in engineering headcount and double in engineering spend. So I think we filled substantial room over the next 4 or 5 years to continue to capture that value. And of course, we are working on the other areas, strategic areas, too, that will expand our market opportunity going forward. An example of that particularly is IP, our IP business. One of our competitors has done a quite a good job and started well ahead of us in the IP business. But the IP business is very synergistic with the tool business. We sell to the same engineers, to the same companies, through the same channel. Designs are getting more and more complex, as Moore's law adds more and more transistors. The amount of the chip that's actually custom-designed by our customers is becoming smaller and smaller, and they're replacing a lot of that design with IP, the classic example, of course, is ARM, right? ARM is a classic example, but Synopsys has tools and everything else. Now in IP business, we're going to concentrate everywhere, but not where ARM is, right? We're not going to compete with them on a processor perspective. We'll look at 3 other major areas within IP that matter. One is memory, which leads our sensing memory controllers. Memory is much slower, as many -- or you are probably aware, than a processor, and how you have a memory controller is a material advantage. We bought a company about 3 years ago. It's called Denali, that had a leadership position. We still feel we have that position in going forward. The second area is interfaces. Almost every device these days as a multitude of interfaces: Interfaces to the outside world, interfaces to USB ports, those types of things and again, we're going to concentrate on that area and frankly, our competitors concentrate on that. The last area is subsystems. Probably the classic example of a subsystem company right now is Imagination, with their graphics subsystem, but we'll also look at subsystems, being audio, potentially graphics, but probably not, but at least some of the other -- subsystem areas, WiFi, Bluetooth, GPS, a lot of the other things along those lines, so.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes, okay, so we'll come back to IPM, some of those other drivers here in a little bit. But if you hit on something in terms of dynamics, the semi industry where complexity continues to increase, and effectively, your part of the R&D spend goes on in the industry, if you go back a decade ago, it seemed like the EDA companies were not being valued properly, they weren't growing as well as you think they might, given the transitions industry. Last couple years has kind of changed, and you've been outgrowing the industry, and you're expecting to outgrow it again this year in your core business. What is driving that? What's sort of been the company -- the change in dynamics?

Geoffrey G. Ribar

Sure. So I think first and foremost, there is value in what we provide, right, in what we provide. And I think, with Lip-Bu came on board, and also me from the chip side, right? We largely recognize that value. It's just not a hard sell at the C level suites of our customers, right? They kind of understand it. It's still a hard sell at the producing guy or the person who's budget compares on it. But it's very obvious to our customers how important it is. Every minute of every second where an engineers at work, they're on an EDA tool, except when they're in meetings, right? That's what they do. And usually at night when they leave, they send off a job that runs overnight. So EDA is very, very important to the value of the product that they produce. The chip that comes out the back end is certainly dependent on the design efforts that go in, but it's also very, very dependent on the tool. So the quality of the speed of the processor, the power, the die side, is very dependent on the tools that we provide. So that's extremely important, and a place we add value. So I think that's an example of a place where we can continue to capture value, continue to make progress, and I forgot the rest of the question.

Mark L. Edelstone - Morgan Stanley, Research Division

Well, it's just on why the growth is faster.

Geoffrey G. Ribar

Okay. And our growth probably is faster for a couple of reasons. Clearly, for a long period of time, under prior management team, we didn't invest in the digital business. When Lip-Bu came on board, he immediately decided to reinvestment in the digital business, so we think we've captured market share. We quoted examples in the past couple -- past 4, 5 earnings calls, where we quoted some examples of places we won. Clearly, probably some of you have seen the ARM press release's write-ups, as far as we're concerned. I think the industry consolidation has continued to help us ride it, but both us and our competitors by continuing to help in the pricing environment. And I think our efforts on deal quality, again, have made a difference. So focus on digital, continue access to deal quality and market share capture in some of the key areas where we want to capture market share.

Mark L. Edelstone - Morgan Stanley, Research Division

So I think this year, if I read properly, you're expecting to grow the core business 12% to 14%, which is effectively 2x what I think the semi industry is going to grow. So can you just talk about the confidence in that, based on the business model, to start?

Geoffrey G. Ribar

Sure. When we come into a year, and this is overall, we have about 70% to 75% of our business already in backlog, and unlike our customers, our backlog is very stable. We don't have cancellations in our backlog with the possible exception of the hardware business. Our software, there's very, very viable backlog and very strategic backlog and that really impactful backlog. I think the second thing is when we come in a quarter, we have 90-plus percent of our backlog x -- or our revenue already in backlog. Again, the software ratable model makes a big difference. When we book a deal between now and the end of this quarter, it has very little impact, so we have to come into the year with backlog already in place, and revenue already well-established.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes, so I would think, if I were running a company, that I could come into a year and have 70% of my revenues booked and knew where they were coming from, or 90% of the quarter, I'd probably manage the business in a very differently way than you might for an ordinary business, where you have very little visibility. So can you just talk about what you guys do there, and the confidence that gives you from an earnings perspective, and just the things you can really do to tune that business, to set it up for the longer term success?

Geoffrey G. Ribar

Yes, we had a dinner last with some of the CFOs and some of the Morgan Stanley shareholders at the conference. And it's really interesting, because they're sweating the quarter, right? And they're always sweating every quarter. I've been on the other side. You always sweat every quarter. Honestly, of course, I'm not talking about guidance, but we don't sweat the quarters. We don't have to set the quarters. We can pretty much go into the year and define how much we can invest in the various different areas, how much we can invest in organic and inorganic, and have a relatively -- confidence level that we're going to get the revenue numbers and make it through the numbers. The classic example of this, 2 of our customers actually went bankrupt last year, and we almost got same amount of revenue that we would have anticipated coming from banks that -- out of bankruptcy. Large part of that is because the engineers got reabsorbed by other companies in other places, and really dependent more on engineers, but it gives us a huge amount of confidence in cash flow, a huge amount of confidence in revenue, and a huge amount of confidence in our operating profits. And we can kind of look out, even into the future years, some right, and one reason we're able to claim mid-20s, several years ago, is we could pretty much see how the revenue was going to come out, plus or minus obviously a wider guide band as you look in out years. So it helps us manage and operate the business, and -- materially better than the old model that the EDA business used to operating on.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes, okay. So maybe just talk about then, how you think about growing the business over time. So and take a longer-term look, as again, you have so much flexibility. So what should people expect Cadence to look like, say in 5 years?

Geoffrey G. Ribar

Sure. So one of the things that Lip-Bu's really done since he's been there is really define the strategy. We probably have 3 core pieces to our strategy. First and foremost is the core EDA business. This is the traditional Cadence, the traditional -- where Synopsis would play. In that space, almost all our growth will tend to be organic. There's not a huge amount of opportunities left out there for companies that are of any material size or scope. We're going to pretty much continue to grow that organically. I continue to see pressure on consolidation in the core EDA space, down to fewer players. The amount of investment you have to make to go to each new node is material. And you really have to capture a lot of revenue out of it, so it puts pressure on this much smaller players that they can't make the investment to move to the next new node because they don't capture the revenue on and don't have an economic return. So I think, continued consolidation is likely there, continued focus for us in deal quality. The next part of our business, we talked about a little bit earlier is IP. Again, IP is becoming increasingly important. It's growing much faster than the core EDA business. Again, customers designed 30 -- or approximately 30% of the chip are custom-designed, the rest are buying IP or using internal IP for that. I only see that business continuing to grow in a going-forward basis. And that consists -- of course it has to have IP and the software that supports it. And then you also have to -- have to have the verification IP to make sure that IP works in the particular function. So it's a growth area for us. And it's clearly, it's a growth area overall for the IP industry, ARMs, growth, Imagination, all that's pretty obvious. Kind of the last area for us is, the time-to-market for chips really hasn't changed much from 18 to 24 months, and that market time's required by their customers. But the complexity of chips' gone up, the amount of software content's gone up materially, and how do the companies deal with that, how the semiconductor companies deal with that. They need more tools, first and foremost, and they practically need more tools at the front end of the process. This is our hardware emulation business, partially, but we also have a software business that tried to do emulation also. That's really creating the architect or the blueprint of the hardware and software and making sure those things are going to work in the back end of the process. It used to be that, that was kind of done manually in somebody's head, and then the hardware and software guys would try to force the things together at back end. You can't do that anymore to achieve 18 to 24 months, and so people are using those tools. And that's also, by the way, where the system guys playing out this space. So that's become increasingly important to us, and again, we'll continue to look at our customers' increasing needs for software engineers and see if we can find some ways to help them, and so those are all the growth opportunities, of course, going forward. I expect we'll be targeting a bigger TAM in 5 years than we currently are, and we're working on that, both a bigger TAM in our core businesses, but probably addressing some of the newer business I just talked to in IP or systems software side.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes. Okay, so you're going through a little bit of a mix shift this year, as you focus less on services and build the IP business. So maybe just talk about those dynamics for a little bit.

Geoffrey G. Ribar

Sure. We have a great services business. It's 1 of the areas that traditionally Cadence has been pretty strong on, but the Services business isn't highly scalable, right? This is we -- we'll take an engineer, a very talented engineer and help give him to a customer to help design a particular part of a chip or a chip. And when they're done, we get paid the person's salary plus a margin on the salary, but then we don't get to capture that IP and that stuff going forward. So we've taken a portion of our Services business and are dedicating the people to develop IP that we can sell over and over and over again. Again, these are some of our highest skilled engineers in our company. They tend to be analog mixed-signal people, which those of you who are familiar with the semi-conductor business, are the secret sauce in a lot of companies. These guys are very talented, and we're going to use them to develop IP for interface IP and some of the subsystem IP and we'll use them that. In the meantime though, that lowers our services revenue by about $20 million this year over last year, what shows up in our overall growth rate. But in the long run, much more scalable, much more profitable than our current business, and a pretty good business decision, we think.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes and so organic growth there, and then, also you bought Denali, you mentioned. You just bought a company called Cosmic Circuits out of India. So what should we expect for the IP business over the next few years, as you basically look to build it out? How much will be organic? How much do you think you fortify through M&A and so on?

Geoffrey G. Ribar

Yes, so -- yes, I think in the IP business, we'll do both things. We'll build some organically, both from moving the service people, but also resource we already had there, and continuing hiring. We'll also look at acquisitions. As semiconductor companies largely have stopped being funded by BCs [ph], and that's a trend, particularly in the U.S. but also broader in the world, there've been a lot of IP companies that [indiscernible] and have an engineering group of 5 to 10 engineers. You can go and create a pretty good chunk of IP, and get that IP in the marketplace. So we'll look at acquiring some of those people who already developed IP, the [indiscernible] time's materially small, or getting the revenue is materially smaller, and putting those IP through our channel has huge, we believe, synergies, synergistic impact, because we have a very good channel. Again, this is the same people we sell to on a tool basis, so we think that's a great opportunity for us. And that should grow much faster than our core business.

Mark L. Edelstone - Morgan Stanley, Research Division

Right, and 1 of the interesting dynamics, I don't know if you would agree with this view, but, we've seen Moore's Law from the beginning of time in this industry, smaller, faster, cheaper. And we're getting at least 1 change here that's happening. Most, I think, believe that 28-nanometer, that's the last node where the costs per transistor doesn't decline when you go to 20. And until we get to 450-millimeter, it seems like we're going to be in a position where there's more things being thrown at it, going to try and get transistors at 14 nanometers, for example. And so it feels like, for the first time ever in this industry, that the pace of change at the node level's going to slow. But it seems to me, it would be a great boon for IT at 28, effectively. You'll get a lot of just reuse out of that. So do you -- would you concur with that deal?

Geoffrey G. Ribar

Yes, I mean obviously, Moore's Law, slowing down and Moore's Law dying is a constant debate, that I think that the industry's having. I do think there are increasing challenges really, because it's the corollaries of Moore's Law. As you said, they have the transistor cost increasing, right? And maybe human ingenuity will continue to solve that. I still have hope they'll continue to solve it. But if manufacturing can't provide the better products, the design has to, right? And so the design, I think, means EDA, right? That clearly -- current -- clearly, the designers are the customers. So we think generally, it's an opportunity for us, right? The 28-nanometers extending longer, there are 20 being a missed node, or people moving to 16 or 14, we'll clearly have to pay attention as we develop IP and which ones we develop it at. But again, for us, if they can't manufacture it, they got to design it, and that plays with our strength.

Mark L. Edelstone - Morgan Stanley, Research Division

Right. And so it just seems like, in general, there should be a secular trend here, for the foreseeable future, where the richness of your business should actually probably improve, and your growth probably accelerates at the margin as IP becomes a bigger piece?

Geoffrey G. Ribar

Yes, we agree.

Mark L. Edelstone - Morgan Stanley, Research Division

Okay. How should people track that? What would be the metrics to be thinking about as investors look to kind of model that out?

Geoffrey G. Ribar

So I think the -- we'll trend to do press releases when we can do press releases, right? Press releases are one of the hardest things to get, and -- out of the semiconductor companies, I think, for good reasons. I think you'll continue to see us announce things, even without press releases, mentioning customers. I think you'll see us continue to announce more and more IP choices and things like that. I think you'll see us continue to do some M&A in that space, and so I think that's kind of how you track it. Eventually, at some point we'll start reporting it when we're required to.

Mark L. Edelstone - Morgan Stanley, Research Division

Questions, at all from the audience? Yes.

Unknown Analyst

So my question is regarding the pipeline and having that 70% visibility for the year and 90% for the quarter. As you go throughout the quarter and the year, how much did that change over time, as far as what you saw at the beginning of the quarter or year versus what actually happens? Meaning, are there orders canceled? Or when you stay that, does that does that mean that most of them are on perpetual licenses, etc.?

Geoffrey G. Ribar

Yes, so most of our business is subscription-based, so we recognize our revenue over the term of the license. We don't do much perpetual, right, or whatever else. And generally, what happens is, our backlog almost never -- our softer backlog almost never gets canceled, it's almost impossible to cancel, right? We would have risk to our revenue model and everything else, so we just don't cancel it. All our contracts say non-cancelable, but our customers have been well-trained over years not to come back to us and ask for that, because it just doesn't happen. The only place our backlog can disappear in on hardware side of the business, right, which is that front part of our model. The reason we're at 90%, not a greater percent is probably because of the hardware business when we enter a quarter, and it -- that's at least partial to the year. So backlog, very solid in this business. Much different than the semiconductor business, materially different than the semiconductor business, and it only goes up throughout the quarter and only goes up throughout the year. So it's a very nice business model to have and we like it a lot.

Unknown Analyst

You talked about companies looking at jumping 20 and go to the [indiscernible] 2016, '14. Is there EDA or IP implications that help you from that? Secondly, I guess a lot of the companies are looking at packaging solutions to get around the [indiscernible] of Moore's law. Again, is there a risk or a threat to the spend on the core EDA business from that?

Geoffrey G. Ribar

Yes. So as nodes are complex, it takes more work for the EDA industry to develop the tools. We always hope and -- to get paid for that, and that's an opportunity for us. Particularly for us in the digital space, as people move to the new nodes, since we didn't really play under the prior regime at 32, 40 or 65, each time you move to new modes and design move to new nodes, it gives us increased opportunity to improve our market share. So that's also a help for us. The 3D-IC, which is actually the packaging option for it, we're generally considered the leader in that, I think by far. Again, it's not quite as good as putting all the functionality in a chip, but it's the next best thing. And we have efforts that I think we've publicized with TSMC. TSMC views us as extremely important in helping with that. Our customers tend to look at us as an opportunity for us there, so it's a trade-up of one type of tool for another type of tool for us. There may be pricing differences, but we consider that also, a net opportunity for us.

Mark L. Edelstone - Morgan Stanley, Research Division

Any other questions from the audience? So you look at the business, and obviously you -- it's got lots of visibility, secular growth opportunities. So what are you worried about?

Geoffrey G. Ribar

Yes, so of course, the CFO's job is to worry, right? That's what we're paid for. So I think right now, the decision and the efforts for us back to the operating profits we were at, I won't say the decisions were straightforward, but we were clear on what -- where we had to get, right, as far as the business is concerned. And so, in some ways it was simpler, right, to get where we are. Now we've faced with some opportunities, right, and opportunities of course, mean choices, and how we deal with those choices is clearly, something that we spend a lot of time on and a lot of management's time focusing and Lip-Bu spends a lot of time focusing on. But we're aware of the opportunities and how we're going to spend the resources and money. In the short run, of course, I'll always worry about the hardware business. It's the upfront part of our business. Those boxes are expensive, $1 million to $4 million-types of list price boxes. I've been on the other side where I've canceled orders in those businesses. So that's -- we're always going to be a little bit cautious on that. And then internally, I'll always worry about complacency, right? Getting comfortable with where we are. We can't be comfortable where we are. We have to continue to progress as the businesses as -- and then, frankly, as an industry.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes. So now, the converse of that though, is again, looking at the positives, it is a cash machine, so your free cash flow is really quite strong, gives you opportunity to delever if you want or to continue to drive M&A and/or share repurchase. So how should investors think sort of the long-term there?

Geoffrey G. Ribar

So we have to convert through at the end of this year of $144 million of [indiscernible] money that has to be paid back, and U.S. cash flow would do that. We have a 2015 convert due in June of 2015. It's been the money, but it's a cash settled convert, meaning we have to pay off the $350 million in cash, and the dilution mechanism isn't a warrant mechanism. We'll pay that off also with U.S. cash flow. We will continue to make an organic and inorganic investments in the company. Post 2015, we'll consider share repurchases or dividends to return money or cash to shareholders. Again, all of those things have to be out of U.S. cash. About half of our cash is U.S. and-- about half of our cash flow is U.S., the other half is international, so.

Mark L. Edelstone - Morgan Stanley, Research Division

Yes and how about hurdle rates? How you think about that when you're looking at -- because clearly you're going to probably look to find other tangential markets as well, given the consolidation's already happened in your core business. So how do you guys think about hurdle rates and things?

Geoffrey G. Ribar

Yes, so hurdle rates, I think are always an interesting thing. A lot of people use one weighted average cost of capital for the company, right? And assume, if anything, any M&A or any internal investment has to meet that. I think you have to be a little bit more sophisticated. Clearly some investments have more material risks if they're not a core competency of a company, if they're kind of outside your area of knowledge, international versus domestic, whether the company that you're looking at acquiring has already achieved technical proof, or also market proof makes the big difference, right? And so we tend to have a relatively sophisticated look at hurdle rates in companies that are more risky in acquisition-base what -- tend to have much higher hurdle rates and whatever else. And it's true of internal investments also right? So -- and again, to me it always matters whether it's related to a core competency or not of a -- if you get it far away from core competencies, it's always a real scare to me.

Unknown Analyst

Can you talk about your longer-term operating margin targets? Where do you want to get to?

Geoffrey G. Ribar

Sure. So we said mid-20s about 3 or 4 years ago. I guess now -- and I mean, we obviously achieved them. I think what we've said about going forward is we expect to drop 50% of the revenue growth to the bottom line. So you guys can do the math based on what you expect for our long-term revenue growth. We haven't guided beyond 2013, but you can kind of do -- work it out. Eventually, of course, that equation slows down our stops. We'll probably keep engineering relatively stable. It's really an important part of our business. We require a lot more investment than a lot of technical software companies or a lot of software companies, because we're modeling chemistry and physics, right, within it, and so that takes -- a lot of code gets thrown away from node to node. So we'll probably keep engineering, but we continue to lever SG&A and it -- over time, hopefully we'll continue to make some progress in engineering.

Mark L. Edelstone - Morgan Stanley, Research Division

Other questions from the audience? Okay. What would be -- just if you think about -- you've been, sort of 4 years now, just think about, what was the -- a couple things that you learned about Cadence that you don't think people would necessarily know that you could share that would maybe just help to enhance someone's knowledge of the company?

Geoffrey G. Ribar

Yes, so, I think one of the things that wasn't as apparent to me but it was one my theories for joining was the value in the software and engineering groups that exist within the EDA business. It's almost impossible for somebody to start from 0 and have any kind of impact on the business. They can't get to scale. They're don't have the channel. They don't have all the material amount of investment to develop. I mean we sell lots and lots of tools. Everybody says digital and analog, but there's lots of subsets of tools within those. So the complexity of the model makes it very hard for somebody else to come into the business from outside, even a well-financed company that's in technical software, for their ability to come in and capture value. I think the other thing that constantly impresses me is the value of our channel. We have a great sales channel. I'd put it up against anybody in the EDA space, and I'd probably put it up against a lot of the technical software space. These guys know the business, guys and girls know the business. They know the technology, they know the customers inside and out. And Lip-Bu's connections to those customers at the highest, highest level are extremely valuable to us. It's not just that he can call them up, I'm Cadence business. They call him up on their business. And he gets a chance to sell Cadence on top of it. So I think that the channel from top to bottom is a huge, huge benefit for Cadence. It's something that I think is a vastly underestimated by investors or the street.

Mark L. Edelstone - Morgan Stanley, Research Division

Okay. So value-added products, secular growth, margin expansion and barriers to entry. Sounds like a pretty good way to end the session here. So thanks, Jeff. I appreciate you guys' questions. Thanks a lot for being here.

Geoffrey G. Ribar

Thank you.

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Source: Cadence Design Systems' Management Presents at Morgan Stanley Technology, Media & Telecom Conference (Transcript)
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