Mentor Graphics' (MENT) CEO Walden Rhines on Q1 2015 Results - Earnings Call Transcript

May.23.14 | About: Mentor Graphics (MENT)

Mentor Graphics Corporation (NASDAQ:MENT)

Q1 2015 Results Earnings Conference Call

May 22, 2014, 05:00 p.m. ET

Executives

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

Walden C. Rhines – Chairman and Chief Executive Officer

Gregory K. Hinckley – Executive Director

Analysts

Sterling Auty – JPMorgan

Krish Sankar – Bank of America

Monika Garg – Pacific Crest Secu

Jay Vleesshchouwer – Griffin Securities

Rich Valera – Needham & Company

Tom Diffely – D.A. Davidson

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Mentor Graphics' First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to our host, Mr. Joe Reinhart. Please go ahead.

Joseph L. Reinhart

Thank you very much, Josh, and good afternoon, everyone. Welcome to Mentor Graphics' First Quarter Conference Call. I am Joe Reinhart, Vice-President of Investor Relations in Corporate Development in Mentor Graphic. This afternoon, Walden Rhines, CEO and Chairman, will open with a discussion of key trends in our business. Gregory Hinckley, our President, will then provide operational and financial highlights along with guidance. Wally and Greg will then be available to take your question.

As a reminder, 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-Qs, and annual report. For 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 website. Wally?

Walden C. Rhines

Thanks, Joe. Results for fiscal Q1 ’15 were better than guidance, largely because of strong revenue growth in scalable verification especially emulation. As a result, revenue grew 11% to $252.2 million and earnings per share of $0.11 non-GAAP were nearly double our guidance. Also as forecast, bookings were weak compared to last year due to an absence of contract renewals and two-thirds of the renewals we did have in the top ten bookings were Japanese semiconductor companies affected by a 20% decline in the yen versus dollar since their last renewal.

On the other hand, the Japanese automotive industry is increasing its interest in EDA and promises to provide significant business as the year progresses. The big story for Mentor’s first quarter is scalable verification particularly emulation and RTL simulation. Excellent improvement in manufacturing efficiency of emulation hardware caused scalable verification revenue to grow 100% during the quarter.

Our announcements at the global press events this quarter of Mentor’s new enterprise verification platform propelled by a totally new integrated simulation and emulation operating system called OS3 is one of our most significant verification product announcements in Mentor history.

Why is the enterprise verification platform so significant? With OS3 emulation truly becomes a verification methodology based upon remote server farms that could be used simultaneously by dozens of hardware and software engineers to verify increasingly complex designs.

For those users who want integrated simulation and emulation, the enterpriser verification platform provides a common user interface and use as much of the same verification IP transactors and Testbenches thus reducing the time required to move from simulation to emulation to volume chip production.

Equally important is the ability of software developers to begin much earlier in the verification process to test their embedded software without monopolizing the emulators. The cost and schedule reductions for complex integrated circuit and system development is dramatic.

Another fact that’s evident in Mentors result is the growth of emulation revenue doesn’t come at the expense of simulation revenues. Both continue to grow as the new integrated methodology grows in popularity.

Methodology changes like the one we’re experiencing in functional verification don’t occur very often in the EDA industry. But when they do, its facilitate years of accelerated growth. This happened with the change in physical verification and design for manufacturing methodologies that created the major market that Calibre now enjoys.

Also impacting Mentor’s scalable verification product category this year, is the acquisition of Berkeley Design Automation, which was completed this quarter. We welcome the outstanding team that has built the fastest growing base of SPICE simulation for analog, mixed signal and memory design.

The ASF mega simulator from DDA compliments Mentor’s analog and mixed signal simulation capabilities in our Eldo and ADMS product expanding our base in the high performance analog and memory markets. Leaders like Qualcomm, Samsung, Sony, Fujitsu, Broadcom, TSMC, NXP and many other companies that have substantial transistor level simulation needs have adopted DDAs products in the past because of both superior performance and accuracy.

We don’t have to look any further than the actual design testimonials in John Cooley’s DeepChip newsletter to see the enthusiasm that DDA has created in the industry as well as the positive reaction of customers to the Mentor DDA combination.

Most broadly the EDA industry has historically grown revenue primarily when new design methodologies were introduced. Major ways of growth occurred because of the options of EDA for custom IC layout then PCB layout then ASIC design and then IC design and layout for silicon foundry production.

Recent methodology additions that have caused most of the growth of EDA revenue in the past decade a resolution enhancement technology, power analysis and design IC. For the next decade or more, emulation server farms complimenting simulation for hardware and software verification is another such way, bigger than any of these IC-centric opportunities is the accelerating adoption of EDA technology in the design of systems particularly automobiles and airplanes.

Its new methodologies, new customers and new applications that keep EDA industry vibrant, challenging, and growing. Greg?

Gregory K. Hinckley

Thanks, Wally. As Wally said, Mentor closed its first quarter fiscal year 2015 essentially bang on to the element that drove our forecast for first quarter guidance. We then said, emulation shipments would reach near record levels and in fact we did better than that as scalable verification revenues more than doubled year-on-year.

We also said the quarter would show the negative effect of renewals in Japanese semiconductor customers. Two-thirds of the renewals in the top-ten orders in the quarter in fact came from those accounts, and as a result, what with weakness in the yen and continuing restructuring of their IC industry our average renewal declined 10%. That said, we had a good quarter. With emulation manufacturing challenges behind us, we up-sided emulation shipments driving revenues that were $7.2 million over guidance and 11% over last year to a total of $252.2 billion.

On $7.2 million of incremental emulation revenue, we delivered a $7.4 million upside to operating income and a little upside to non-GAAP EPS guidance to ongoing strict attention to cost control. Q1 fiscal year 2015 was the 21st consecutive quarter in which we delivered non-GAAP EPS ahead of guidance.

Bookings declined year-over-year as the first quarter had little in the way of renewal opportunities and most of what we did have were small in Japanese-based. Combined with the top compare of record IC renewal quarter last year, overall bookings declined 50% and the book-to-bill dropped below 1.0.

Fortunately, we are done with most of our Japanese IP renewals for the year and our Japanese systems business was up 60%. On the revenue side, recent strengthening of the yen compared to an average 102.3 yen per dollar for the first quarter point to a possible strengthening of our Japanese Support revenue through the remainder of the year.

During the first quarter, we paid $50 million dividend, repurchased approximately 2 million shares for $45 million and acquired Berkeley Design Automation. Cash and equivalents declined $121 million from year end to $176 million.

Fully diluted shares outstanding remained flat while basic shares outstanding decreased by about $2 million from the end of the year. Both basic and fully diluted shares outstanding are expected to decline over the first half of fiscal year ‘15.

Now for more financial details. Bookings declined 50% from our all time Q1 record in fiscal year 2014, all of the decline was centered in Design-To-Silicon and virtually all in the Silicon company accounts. Last year, eight of our top ten customers were semiconductor companies and Design-to-Silicon grew fourfold, 4X. That was truly a difficult compare and this year the category returned to a more typical if still a weaker level.

Absent any meaningful renewals this quarter, Design-To-Silicon dropped 85%. System company business was tremendously strong, up about 20% in bookings to a first quarter record and represented approximately 80% of total bookings in the quarter. System companies drove better results in the three remaining categories. Integrated system designs was up 15%, new and emerging was up 5% and scalable verification was flat.

Integration systems design benefited in the quarter from the introduction of the new Xpedition platform, which optimizes advance PCB system design productivity. By geography, bookings were down 35% in the Americas, down 35% in Europe and down 80% in PAC rim after the strong IC quarter last year. Japan was up 5% in spite of the effects of a weak yen and weak renewals.

Product bookings were down 55% as I said before and services were flat. Product bookings were 45% term, 35% perpetual, and 20% subscription compared to 75%, 15% and 10% last year. As mentioned earlier, term bookings were down on low renewal opportunities this quarter compared to last year. Increased perpetual reflects higher levels of emulation business. Top ten customers were 35% of bookings versus 65% last year.

Average deal length remained just over three years comparable to last year on a much, much higher mix of system customer renewals. Leading indicators were generally positive this quarter. Support reinstatements were up 50% and support declines were down 35% and in the case of support declines, lesser is better.

New customers were up about 15% in number and 25% in average transaction value with impressive growth in PAC Rim and Japan. New customers in North America and Europe were about flat. Average annual run rate of renewals in the top ten shrunk 10%. Excluding the effects of currency growth would have been positive, but still below our normal expectations. Finally, emulation activity continued and is robust.

Revenue mix by geography was 50% North America, 25% Europe, 15% Pac Rim and 10% Japan. Services and support were effectively flat, with support up 5%. Foreign exchange was unfavorable to revenue by about $1.5 million, all of which can be attributed to the depreciation of the yen.

Non-GAAP gross margin of 78% was down five points from 83% last year due to mix as we shift record levels of emulation. Emulation has a considerably lower gross margin than software and will lower total gross margin as it proportion in revenue increases. Since fiscal year 2012, our emulation gross margin has been steadily rising.

Non-GAAP operating expense was up 6% due to investments in R&D and technical selling headcount. FX was favorable to expense by about $0.5 million. Headcount increased about 5% year-to-year or engineering and technical sales related with about 25% of that due to acquisitions. Special charges were $5.9 million about two thirds litigation and one third restructuring related. Our non-GAAP tax provisions remains at 17%.

Now, the balance sheet. Cash equivalent and short-term investment decreased to $121 million sequentially to $176 million at quarter end with a large portion of cash offshore. While there are seasonal shifts in domestic versus offshore cash we can’t repatriate material amount of cash in a tax-efficient manner if necessary. Operating cash flow for the quarter was an $11 million outflow compared to a $12 million dollar inflow last year.

Credit accounts receivable were $147 million, down $33 million sequentially. Short-term unbilled receivables were $274 million, down $1 million sequentially. Trade day sales outstanding were 52 days, an increase of 12 days from last quarter and an increase of 2 days from last year. Total day sales outstanding were 150 days, an increase of 48 days from last quarter and an increase of 4 days from last year. The quality of receivables remains excellent with receivables greater than 90 days past due less than $500,000.

Factored receivables were $10 million in the quarter compared to $1 million last quarter and $9 million last year. Capital expenditures were $6 million for the quarter compared with $9 million last quarter and $4 million last year. Depreciation of property plant and equipment was $9 million for the quarter, up $1 million from last quarter and equal to last year.

Now to guidance. For the second quarter of fiscal 2015, we are forecasting revenue of approximately $250 million and non gap and gap runs for share of about $0.15 and $0.07 respectively. The $250 million Q2 revenue number coupled with first quarter results is consistent -- consistent with the guidance provided in February in which we projected an approximate 40%, 60% split between the first half and second half revenues in fiscal year 2015.

Design-to-Silicon which was comparatively very soft in the first quarter due to a small portfolio of renewals has significant -- significant contract expirations in the second half of the fiscal year and we expect robust Design-to-Silicon bookings.

Further, emulation gross margins have been improving in part due to manufacturing efficiencies and in part due to favorable pricing, a trend we expect to continue throughout this year.

For the full fiscal year 2015, we ratified the previous guidance of revenues of about $1.237 billion; non-GAAP and GAAP earnings per share are expected to be approximately $1.75 and $1.46. Wally?

Walden C. Rhines

Thanks, Greg. Transition to emulation-based verification methodologies by semiconductor and systems companies grow results well above guidance in Q1. Major new products introductions in enterprise verification, as well as the acquisition of Berkeley Design Automation add substantial strength to Mentor's product offering.

We expect to benefit from this transition as well as the new generation of PCD design technology as we move toward another year of record revenue and non-GAAP earnings. Today, we’re also announcing a quarterly dividend of $0.05 per share. Dividend is payable on June 30th, 2014 to shareholders of record as of the close of business on June 10th, 2014.

Finally, after years of service on the Mentor Graphics Board of Directors, Kevin McDonough has decided to retire. In his place, the Board has nominated Jeffery Stafeil, currently the Executive Vice President and CFO of Visteon Corporation, a Fortune 500 Tier 1 automotive supplier who brings a wealth of experience in the automotive industry as well as years of experience in corporate finance and governance.

We’re grateful for the insights and guidance that Kevin has provided to Mentor Graphics. Now, let's take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sterling Auty from JPMorgan. Please go ahead.

Sterling Auty - JPMorgan

Thanks. Hi, guys.

Walden C. Rhines

Hi, Sterling.

Sterling Auty - JPMorgan

So, in terms of the emulation strengths, can you describe to us how much you might be benefiting from just Cadence being wrong in their emulation cycle and still waiting for their upgrade? So in other words, how much of the strength that are you seeing is picking up incremental new customers that you have had before versus continued upgrade and upsell to existing Mentor customers?

Walden C. Rhines

Yeah Sterling, this is Wally here. I’ll take that. The success is coming from a variety of factors and you mentioned some of them. Probably, the biggest one for the whole industry is this transition I talked about, and if you just look at the total revenue for hardware acceleration. Over the last decade, you see a very flat level at about $150 million through 2010 and then all of a sudden, it more than doubles to the level we've seen the last three years. So that's one factor.

Another is the unique customers that are moving into emulation. We've had multiple customers in the last two quarters that have never ever bought anything from Mentor, and they’re now $5 million per year emulation customers, so that's another factor. Yet another is the fact that the major IP providers are standardizing on Veloce.

Of course, that's been true for ARM for quite some time. This quarter, Imagination announced their move to Veloce and other leaders have been regularly moving in the direction of what is really a next generation verification. That is the ability to use an emulator remotely to move away from in-circuit emulation to new capabilities and particularly to do embedded software development, which has brought in an enormous crowd of developers. So it's true that Veloce is very young, just about two years since we introduced it. But I think these other factors actually are even more important in why the revenue and bookings have grown so well.

Sterling Auty - JPMorgan

And then just as a follow-up, so Cadence was at our tech conference saying that it felt like the environment felt healthier. Synopsys and Art last night saying, hey, some of the indicators look a little bit better. And now looking at the results that you have, it feels like across the segment things are healthier. Do you think that that's a representation of where your customers' health are, or do you think it's more because of technologically they have to do this spending that they are stepping up at this point?

Walden C. Rhines

Well certainly, to give you a sample of our customers, if you take the 15 largest customers that we do substantial business with, their results were all -- were largely very good this quarter. More than two-thirds of them came in above their EPS estimate numbers and only two were below and as for those they do give the guidance -- give guidance looking ahead the majority regarding add or above, so it seems that in the macro level the environment is looking reasonably positive.

If you get down to the more specifics about the EDA industry, I think you see that we are in the stage of more than one transition. We got transitions I mentioned in addition to verification. And then as Greg highlighted in his comments, the leading indicators that we looked at like new customers and the others highlighted were all pretty positive this quarter. Support reinstatements, up 50% is big, support declines down also good, and the new customer transaction up 25%. So I’d have to say looking forward is generally positive.

Sterling Auty - JPMorgan

Great. Thank you.

Operator

Our next question comes from the line Krish Sankar with Bank of America. Please go ahead.

Krish Sankar - Bank of America

Yeah, hi, thanks for taking my question. I had a couple of them. Wally, you insinuated about the trend to the emulation business. Two-part question to that A, number one, when you start seeing more and more customers use emulators to bring up or wrap up their software, are they looking purely at speed of throughput of the emulator or rather looking beyond that? The second thing is, how sticky is the market share in emulation relative to your core EDA business?

Walden C. Rhines

Okay. So the first thing on the people who bring up there embedded software. Certainly it is true that beyond a very minimal verification of embedded software stimulation is simply not fast enough. Emulation is fast enough and not only can you boot operating systems but you can run checks on entire protocol stacks. But what’s even more significant is if you have architecture like Mentor’s, then you can run the software developers season environment that is just like the real silicon and can experience 100 megahertz kind of interaction with the software base.

So that all makes it attractive to do as much development -- or as much verification of embedded software as early as possible just to accelerate the development. And the issue of how sticky is the architecture? The user of emulation have been pretty loyal to their customer base and so I think you see changes when there is a really fundamental driving difference that says they need to change. Mentor has the lead at the one point. We stumbled some. Lead went to one of competitors and it’s really been this last transition that has allowed us to move into such a strong position.

Krish Sankar - Bank of America

Got it. Very helpful. And then just one final question. When you look at some of the other technologies that are coming up in terms of transistor, one of the things we keep hearing is a fully depleted SOI. Just kind of curious, the EDA tools, the way they are in the current format, can they handle FD-SOI process? Is it just more about run times and iterations, or is there something that needs to happen?

Walden C. Rhines

Not only can they Sterling -- not Sterling -- Krish. But in fact they have and they have -- we have done FD-SOI designs with Mentor Graphics tools, when they really very ambitious, very large chip and it took about six weeks from the time they released the standard bulk CMOS design to when they then enhance that and did it in FD-SOI. So, in terms of the actual technology the difference is are much less than FinFET.

On the other hand, we have many, many FinFET customers that have made the decision to move with FinFET and FD-SOI clearly has not yet gained a substantial share of that market. So, I think the majority of our effort has been differentiating ourselves with FinFET, and if FD-SOI is successful, that’s great, that will grow things further.

Krish Sankar - Bank of America

Got it. Thanks a lot guys.

Operator

Our next question comes from the line of Monika Garg with Pacific Crest Secu. Please go ahead.

Monika Garg - Pacific Crest Secu

Thanks for taking my questions. The first question is, you had a speed on Q1 which you now raising your full-year guidance. Is it just because more to do with the timing of [revenue recognition] that Q2 is slightly light?

Gregory Hinckley

Monika, Greg. Absolutely, we’re only one quarter into the year. So we’ll let some more time pass this year before we take another look at guidance for the year.

Monika Garg - Pacific Crest Secu

Then Berkeley Design Automation, the company acquired, could that have any impact on either the OpEx or the revenue on any significant level?

Gregory Hinckley

Look, we believe it will be accretive acquisition, but I think it’s too early to determine the magnitude.

Monika Garg - Pacific Crest Secu

Then I have a question on emulation side. Synopsys, a couple months back, released a new emulation platform. Do you think that kind of heats up the competition in the market and you have enjoyed a very strong growth last two years? Do you think that could impact that? And --yes.

Walden C. Rhines

Well, Monika, we’ve experienced extensive competition throughout the period that we’ve been in the market which is most of our history back to 1988 when we started. So, there are indeed three big suppliers and there have been three significant suppliers in the market now for quite some time. So, I think, things are not going to change appreciably in the foreseeable future.

Monika Garg - Pacific Crest Secu

The last one on the emulation side, could you talk about what is your installed base of the emulation tools and how many [average] do you think customers basically kind of renew pervious generation of emulation?

Walden C. Rhines

Okay. I don’t have a number for you on the installed base. Billions of gates certainly -- actually tens of billions of gates, but it’s a broad based. We have users who use relatively small emulators, and then we have people who use our double Maximus 2 billion gate system. So quite a range.

Gregory Hinckley

Wally. We’ve been shipping, Wally, the industry has about $300 million worth of product a year and machines are probably still competitive at five years. So, the total installed based today in terms of dollars, in terms of the product cost is probably somewhere between 1.2 and $1.5 billion, but its growing.

What we’re seeing Monika is lots and lots of new customers, people who have never imagined using emulation at six months, 12 months ago. Last year we had 15 new customers. In the first quarter we added three more. We are selling -- we sold in the third quarter of last year an emulator to a semiconductor company that only have $60 million of revenues.

So it’s -- as Wally said, it’s a complete step function in terms of need and demand.

Walden C. Rhines

And we sold two big emulators to companies that had no revenue. Anyway. Does that take it Monika?

Monika Garg - Pacific Crest Secu

Yes. That’s good. Just last one, if you said 1.5 billion kind of installed base, when do you think the industry renew this kind of -- this whole installed base?

Walden C. Rhines

Well, so the capacity is proportional to the -- usually the square of the number of gates that have to be verified. So every three years we double the number of transistors per unit area and actually that’s every two to three years. And then the complexity of verification typically goes up as the square of the number of elements. So you can use that as sort of a guideline for how much it has to grow. The cost brigade doesn’t come down, but there is a net growth in total.

Monika Garg - Pacific Crest Secu

Thanks so much.

Walden C. Rhines

Call Joe if you want some more help on that explanation.

Operator

Our next question comes from the line of Jay Vleesshchouwer with Griffin Securities. Please go ahead.

Jay Vleesshchouwer - Griffin Securities

Thank you, good afternoon. I’d like to clarify or try to triangulate on a couple of things having to do with your booking performance, and as well as, your booking thoughts for the year. So would it be fair to say that with the 55% decline of product bookings year-over-year, you’re about back or were about back to where you were two years ago first quarter of fiscal ’13 in terms of the absolute amount of products bookings?

And would it be fair to say as well, that with 85% decline in DTS bookings, you’re back to where you were about three years ago in Q1 of 2012, in terms of a fairly low level of absolute bookings for DTS. And if both of those are true, is it possible that for the fiscal year even when you get the major renewals our of Asia, lets says in the back half of the year, that you could grow DTS bookings or grow total bookings versus fiscal ’14?

Gregory Hinckley

Jay, I'm quite quasi-prepared for the question. So I did look back three years ago the first quarter and our bookings in the first quarter this year are slightly better, but only slightly better than what they were in the three years ago. In terms of Design-to-Silicon, I didn’t anticipate that question, so I have to talk to you once we break off from this conference call. Wally, you have an answer.

Walden C. Rhines

Yeah. Well Jay, I think one thing to look at as Greg noted, a single quarter in a business that has large purchases is not very meaningful and of course as we’ve indicated the big orders are to come later in the year. But if you just look over those last three years since the renewal, the EDAT market data shows that we reached an all time high market share for the Calibre standard products last year and gained share over all three years.

The resolution enhancement market share grew nine points over the last three years and yield in enhancement market share grew 17 points over the last three years. So there’s been consistent growth and I think we have to look a year at a time at the very least to get meaningful numbers.

Gregory Hinckley

And as we said, we’re expecting a very strong second half of this year.

Jay Vleesshchouwer - Griffin Securities

Right. Now, with the Scalable Verification bookings having been flat, but emanation shipments having been apparently quite strong, was that largely a function of having shipped against backlog that you had at that end of Q4?

Walden C. Rhines

Absolutely.

Jay Vleesshchouwer - Griffin Securities

Okay. Wally, over the last half year, you’ve been fairly acquisitive, starting with Oasis, and then BDA, the more recently Nimbic, could you talk about the thinking behind all of those collectively? You touched on BDA, but could you also speak about perhaps all of them. And do they in anyway complement each other? Are they -- or besides complementing what you already has internal at Mentor?

Walden C. Rhines

Well, certainly BDA and Nimbic are two very different kinds of acquisitions. BDA is really in the mainstream of EDA verification for integrated circuits and is deeply engaged with the big semiconductor companies. And people particularly who are doing high performance analog and memory design whereas the Nimbic acquisition is much, much smaller, it’s focused on EMI analysis for chip board and packages.

It’s an area that’s very much apart of what we do in our integrated system design strategy. So it’s a key element of technology that allows us to enhance solutions there, brings in bunch world-class PhD developers and offers the opportunity for future growth.

So, different kinds of acquisitions, but they fall in our general guideline categories which are -- we want to focus on areas where we are demonstrably number one in segments or sub-segments that can be clearly identified. And two, we want to take advantage of changing trends. The Nimbic is an example of moving more and more capability into system design and BDA, it’s the strong growth in the overall analog mixed signal business.

Jay Vleesshchouwer - Griffin Securities

Great, and lastly.

Walden C. Rhines

You also said Oasis, I think…

Jay Vleesshchouwer - Griffin Securities

Yes.

Walden C. Rhines

OASIS, really fills out the flow for our physical design and as you know we recently have substantially enhanced that flow and the one question was what about synthesis and particularly for embedded cores and other thing, OASIS was just so compelling because we use their synthesis in our physical design and we were producing results that were substantially superior to the normally used commercial synthesis tools, and with that plus filling out the flow somewhat different strategic, but here in the mainstream of EDA and all of these with very unique technologies that is recognized widely in the industry as being unique.

Jay Vleesshchouwer - Griffin Securities

Lastly, in automotive, the impression of the Company’s positioning there is that it’s largely been confined to cable and harness. Perhaps that’s a miss impression. But could you talk about in what ways you’ve been able to penetrate the automotive cam beyond cable and harness perhaps at the IC level, at the systems level, and in any ways?

Walden C. Rhines

Yes. So, our history goes way back in the automotive industry. Our original big customers were in fact automotive companies. So print and circuit board was always a big part of that business. It was in fact that base that caused Mentor people to see the opportunity for doing capture of the electrical design of automobiles and that let us into the cabling business starting in 1992, and its grown ever since. Those are the core EDA pieces of business.

But the faster growing and rapidly new emerging markets are in network verification for all sorts of testing that has to be done, safety analysis for ISO 26262, the safety standard. Our embedded test, we’re building self tests, is becoming widely used by semiconductor companies that are into the automotive market.

And more recently in the last decade or so, we’ve build up the base of embedded software particularly focused on infotainment and we’ve also been the leader in AUTOSAR-based development which is becoming the new standard for how you automate the development and design of automobiles and that is one of the most exciting pieces of the total.

Jay Vleesshchouwer - Griffin Securities

Thanks very much.

Operator

Our next question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Rich Valera - Needham & Company

Thank you. And I jumped on the call a bit late, so I apologize if some of these have been asked already. But understanding you’re renewals were heavily dominated by Japan this quarter, can you give any sense of what the non-Japan renewals were up on a percentage basis, was that statistically significant number?

Walden C. Rhines

We did not. They weren’t statistically significant, Rich. We said that we had very little in way of renewal period and two-thirds of them were Japanese.

Rich Valera - Needham & Company

Okay. I’m not sure if you commented on this either, but any thoughts on bookings growth for all of ‘15 qualitatively, if you’re willing to go there? I would assume you would expect to grow bookings for the year, but I’m wondering if you’re willing to comment on that.

Walden C. Rhines

Not willing to comment on it.

Rich Valera - Needham & Company

Okay. And did you talk about leading indicators like you normally do Greg.

Gregory Hinckley

Absolutely and we said that they were generally positive. So we had -- historically it maybe not as good an indicators is it once was, but it use to be that emulation move up and down with the help of the IC industry. But we had a very -- we’re having very strong times in emulation, demand is robust.

We track new customers, because we think that new customers, they tend to be smaller companies and they are most sensitive to the electronic economic cycle. And so, we’ve traditionally seen that when that part of the business improves than so does the entire industry, so we had new customer were up 15% in number and 25% in average transaction value.

And while we talked about how bookings were weak and so forth, if that was really concentrated among IC accounts. In fact, we had really strong results among systems companies. Our bookings from system companies in the quarter were up 20%. They were at a first quarter record and this is no small part of our business, because I also mentioned that 80% of our entire bookings for this particular quarter were system companies not IC companies.

Rich Valera - Needham & Company

Right. How about support reinstatements declines that’s a number or metric you sometimes look at?

Gregory Hinckley

It’s very strong this quarter. Reinstatements which is companies that have declined or have not -- our support contracts haven’t other than under our leases or term deals tend to be one year support contracts. And so, each year you go through the renewal period and we have customers that for one reason or another decline support. It can be just their financial health.

And then subsequently with -- if they again sign up with support and pay the back support that they had failed the support to pay, we track that, that was up 50% in the quarter, so it was meaningful and the declines were down 35%.

So I think in terms of reinstatements and declines this was probably the most favorable quarter that we’ve had in a couple of years at least, maybe three years.

Rich Valera - Needham & Company

Got it. And then for the rest of the year, Greg, it sounds like you expect a very strong second half in terms of renewals and hence bookings, any color you’d be willing to give as far as renewals and/or bookings you’re expecting in the second quarter?

Gregory Hinckley

No. But I did say that, we gave our revenue number.

Rich Valera - Needham & Company

Understood.

Gregory Hinckley

Okay. And we expect the revenue split this year to be 40% first half of the year, 60% the back half of the year. Support is about 30% of total revenue and is relatively flat over the course of the year. So it says that we’re going to have very strong revenues in the second half of the year and therefore bookings need to be very strong.

Rich Valera - Needham & Company

Sure.

Gregory Hinckley

Bookings in second quarter last year were up 80%, so the chance of beating that this year is relatively low.

Rich Valera - Needham & Company

I see. Just wondering if -- so you have a very tough comp which would make it kind of -- understand the year-over-year comparison might not be meaningful. Just wondering if maybe in lieu of that, you’d give something like a sequential bookings number in 2Q when you report, just so we can some sense. And I’m expecting bookings will be materially better in the second versus the first, but I’m just wondering if you would plan to give a metric that would let us discern that.

Walden C. Rhines

Yes, I’m prepared to say there’ll be materially better in the second quarter than they were in the first.

Rich Valera - Needham & Company

Okay. Fair enough. Okay. Thanks gentlemen

Operator

(Operator Instructions) Our next question comes from the line of Tom Diffely with D.A. Davidson. Please go ahead.

Tom Diffely - D.A. Davidson

Yes, good afternoon. Wally, maybe another question on emulation. You talked a bit about the next generation being emulation server farms. Is that going to be something that Mentor Graphics owns and leases out perhaps, or is that something that the customers would own?

Walden C. Rhines

Today, we have offered that capability from time to time. Customers have all elected to own the emulators. There are number of reasons that have been cited. First of all, large share of our customers are big companies and they can afford to have big server farms and so they don’t get a great economy from sharing the resource.

Others and most of them are quite sensitive to security issues and so, even though I believe we have a very good story for the security of data. People still are somewhat reluctant. But I do think over time as we’re seeing more and more small companies -- I mentioned we had two really major purchases by companies with no revenue.

I think you’re going to see more and more of it and we are certainly pleased to offer that capability in the future. It’s just hasn’t taken off yet.

Tom Diffely - D.A. Davidson

Okay. And then when you look at most advanced emulators today, what is the relative speed versus the actual silicon? And if you get to higher speeds, does that create even bigger opportunity to design more software concurrent with the chip design?

Walden C. Rhines

Yes. Typically high-end emulators that have a great deal of visibility run in the megahertz range. Their designs of course, that’s run up to 2 megahertz, some that run slower. That’s for real time emulation where you’re utilizing the full visibility. The thing that is unique is that if you got software developers who are developing on the system.

They can run their software against the system and then go offline and interact real time. And so, as time goes forward the principal reason that people use to build the FPGA cards and do other verification, while there were some who wanted to check at a slightly faster speed, most of it was for software development, and I think that need has been solved.

Tom Diffely - D.A. Davidson

Okay. All right. And then, is there still ongoing litigation between yourself and EVE?

Walden C. Rhines

Yes, there is.

Tom Diffely - D.A. Davidson

Okay. So, I guess you can’t talk much about that then.

Walden C. Rhines

That’s correct.

Tom Diffely - D.A. Davidson

And Greg, you talked about headcount being at 5% with only a quarter that from the acquisitions and most that been engineers, what division, what projects has that been slated for?

Walden C. Rhines

Certainly emulation, certainly in our physical design group.

Tom Diffely - D.A. Davidson

Okay.

Walden C. Rhines

Those two.

Tom Diffely - D.A. Davidson

All right. And you also talked a little bit about the capability of repatriating some cash at a low rate, can you give us a sense for what kind of an effective rate you would have due to your tax structure?

Walden C. Rhines

Very, very, very, very low.

Tom Diffely - D.A. Davidson

Okay. Is there any reason why you don’t repatriate some then just to have it on hand hearing case there’s acquisitions that come up?

Walden C. Rhines

We’ve done some of that in the past. We also point out just for the record that we have $125 million untouched revolving credit equipment, so we have no shortage of liquidity.

Tom Diffely - D.A. Davidson

Al right. Great. Thank you.

Operator

We have no further questions at this time. Please go ahead.

Walden C. Rhines

All right, Josh thank you very much. And ladies and gentlemen, thank you for joining us this afternoon for a follow up calls Greg and I will be available. The best way to reach us is by calling Monte Coller at 503-685-1462 and Monte will make sure that Greg or I get back to you in a timely fashion. Josh, if you could please provide the replay number for the listening participants. Thank you very much and have a great afternoon.

Operator

Ladies and gentlemen this conference will be made available for replay after 4 pm today through May 29, 2014 at midnight. You may access the AT&T Executive replay system at any time by dialing 1-800-475-6701 and entering the access code of 326835. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-635-3844 access code 326835. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive teleconference. You may now disconnect.

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Mentor Graphics (MENT): Q1 EPS of $0.11 beats by $0.05. Revenue of $252.2M (+11.3% Y/Y) beats by $6.3M.