Cadence Design Systems, Inc. (NASDAQ:CDNS)
Bank of America Merrill Lynch Global Technology Conference
May 08, 2012 05:45 pm ET
Geoff Ribar - SVP & CFO
Cadence Design Systems, one of the leading EDA providers to the semiconductor industry. We are going to make a short presentation and then we will open it up for Q&A. Geoff?
Thank you. And I promise it will be relatively short. I am going to briefly talk about EDA, a lot of you, some of you may know, some of you may not know EDA very well, so I’ll give a little bit of background. Then a little bit about major drivers that are driving both our customers’ for our business and then lastly kind of conclude on talking about Cadence specifically.
So first of course this is covered by Safe Harbor, I do advice you to read our financial statements, both in SEC and our last earnings statement. And again we are going to talk about non-GAAP, not just GAAP numbers, again you can check that out in our most recent financial statements to see the differences and I advice you to take a look at them.
So EDA, Cadence is one of the leading providers of EDA tools. Our customers are largely the system and chip companies that you are probably very familiar with. We build the software that allows them to build the chips or the boards that go into their products. We've grown very rapidly and a little bit outside the EDA norm. We grew 23% last year and have made steady progress over the past couple of years.
We support the industry that you all are very aware of. I have been in the semiconductor business or the EDA business for 30 years, coming up. Since maybe the early 80s when the PC business first really started taking out, I find that this is the most exciting time as people use of electronics is dramatically changing.
The rise of mobility I think has been the major trend. You see people using mobility and using things that they never used before. My kids never carry a watch anymore, they carry a cell phone. They don’t watch TV anymore, they watch their computer. I think that growth and that drive in the industry trend is actually very interesting.
Again, I think there is a lot of (inaudible). I think we are actually moving through the fifth wave of computing where first wave was mainframes, then micros, then minis, then PCs and now I think mobility is really driving that.
We’re the industry leader in our particular space and I’ll talk more about that later. We have a ratable business model which means we recognize revenue overtime, not upfront, largely; high and sustainable possibilities with software business with a very nice model and we have very strong cash flow.
So a little bit about the overall trends; I think the key trend that’s really driving our customers is mobility. People are now taking essentially their PCs with them, their PCs, their organizers, their communication devices with them. That’s driving all the rest of these. Apps, obviously has been a key driver and so for the complex software apps allow you to do simple functions in a way you want to do them.
The other side of mobility is of course the cloud. Obviously, you are well aware of the rise of the data centers and the people buy data center services. That’s also what’s clearly driving our business.
And video has become one of the key applications that people are using. That’s obviously driving the clouds and network infrastructure. And then lastly power has become very key; I have IT in my organization and frankly the utility bills for one in our data centers is one of major plus for us. Imagine multiplying that by thousands and you come up with them actually so what they are trying to do, so green tech is clearly driving. So all these trends, but they are all really based in mobility, I think are really driving changes in the business.
And semiconductors is the heart of all this. There is settlement device or settlement industry these days that’s rapidly growing that isn’t dependent on the semiconductors. From Facebook to PC, to tablets to Apple they are all dependent very much on semiconductors and it’s the key to what their business is and that’s clearly driving our business.
And the difference between system companies and chips companies are largely changing pretty dramatically overtime. It used to be that system companies largely brought standard chips of the shelf and then integrated them together to create a device. Now the system companies are really driving back those designs back into the chip companies and saying here is what I want in the chip. Practically examples are Apple or Google or those types of things where they are actually driving requirements back in. What this mean to us is both types of these customers become customer for ours.
And the cost of developing chips have gone up materially. This is rough trend for where we expect the cost of developing companies to be, again I spend my whole life on the chip side, I was NVIDIA’s first CFO; I was CFO at SiRF, Corporate Controller at AMD. I can tell you these costs are pretty real and they are going up pretty dramatically overall in long periods of time. So the key thing is, what does this means for the industry and how is Cadence addressing them.
So we’re addressing it in a couple of ways; so this is the Cadence strategy. Our core business which is the business that everybody calls EDA is silicon realization. That business takes a design and makes the physical substantiation of that design through a mass making foundry process.
That business remains key and core to us; it’s where most of our profits and most of our cash come out of. But to direct some of the changes, the increased complexity, the increased cost of design the next step up is that to see realization step. What this is saying is if you look at a chip now a billion transistors perhaps more and more of that chip is not being custom designed, it’s going to be based on box or cells or what we are calling IP.
That IP is necessary to produce the product or that chip that you need, but it’s not something you want to differentiate. And a classic example of that most of you aware of is most of your devices have USB port, nobody cares, none of our customers care to have a better USB port than anybody else; all they want to do is have a USB port; they don’t differentiate on it.
So if you look at the design more and more that design becomes an IP. Those are blocks that you can drop in to serve specific functions. Again, three main functions in most chips and its a little bit more complex than it, but three main functions in most chips. One is the processor and you welcome it with IP model for processors that’s what ARM does or MeP does for example.
The second chunk is interfaces; all the interfaces to the outside world, the USB, the PCI-Express, (inaudible) Wi-Fi, Bluetooth etcetera. That’s an area we want to just play in with this strategy.
And memory, we acquired a company about two years ago called Denali; memory again, people don’t want to differentiate on, but memory has become critically important and a place to differentiate. The reason for that largely is the processor speeds much faster than memory speed and a processor without memory, without information come out of memory sits idle, so they keep the overall device functioning; memory is critically important; that’s one of the reason why we bought Denali, because they are very good memory technology and differentiator.
So that’s the highest end, it’s the system side. As chips have got more complex and the software requirements have gone up, the old model doesn’t work anymore. The old model used to be people designed software and people designed hardware depending that shift in parallel and then try to force them together at the back end of the process.
What happens besides the hardware and software engineers hating each other is that it didn't work the way it was supposed to over a period of time. And so, what their people are doing more and more is they're trying to emulate that model of the software and hardware in advance.
They're either emulating it in software or particularly in foreign far business and hardware. That allows the software engineers to go and write software code against the model, and for hardware engineers to write hardware against that to help hardware against that model. And then, they should work together much better. And so we're seeing that become a critical important part of our business and an important part of our strategy.
So within silicon realization, it's just about core EDA stuff. Obviously low power is critical. We talked about mobility. We also talked about it in the server rooms, the data centers, right. Low power is critical. Again, if you look at the bills for data rooms, they are hugely expensive because they produce heat and then you have to cool them back off.
High performance, all right, the speed of the processer has become materially more important. Even in the mobile devices when you're running video, complex video or complex graphics or playing games or whatever else, that performance becomes critical. And certainly, it's always been critical in PCs and computers.
Verification is also critically important. As the chips have gotten more complex, billions of transistors and millions of lines of code verifying that software code or verifying that hardware in advance of producing a chip, which is going to cost you millions of dollars and 18 months produced verifying that design to make sure it works.
Mixed signal used to be that analog piece and the digital piece were largely in different chips. Overtime, as you reintegrated those chips and used those transistors, analog and digital have been forced together. That's a key advantage for us because we, as most of you are well aware, have a very strong position in analog.
Advanced nodes; you've heard some stories that some semiconductors reported, advanced nodes are complex. They're very hard to model. The chemistry and physics is getting hugely complex. The capital cost of per die is actually going up instead of down, despite Moore's law, for the first time in quite a while.
Our ability to help drive that and our industry's ability to help drive that is critical. And lastly, again there's three ways to look at to build electronic systems. One's in a chip; one's in a package, which I'll talk about in a second; and one is actually in a board. The package is called the 3D-IC. It's actually putting a bunch of chips together in the same package.
And the rule of thumb I'm going to give you is approximate. But a chip is 10 times better than the package, and a package is 10 times better than the board as far as performance is concerned. So if you can't put it all on one chip, putting it all on one package has a material advantage. It's still hard to do but 3D-IC, that's why you hear so much about it and why it's so important.
On the system realization, the SoC realization side, again, this is the IP side. Here's the areas we're aiming for. Obviously, ARM is a strategic customer of ours. We're not interested in the processor space. But we are very interested in the memory subsystems and the interface systems.
And it's not just by the way of IP itself, it's actually verifying that IP against a particular fab process, a particular node, a particular foundry. You have to verify that IP within a particular design to make sure it works. You plug it in, if it doesn't work, you have a failed chip. So we're concentrating on those particular areas.
And lastly, I talked about the system realization on the software side. You can see kind of the concept here. Again, this is starting the design process a step earlier than it used to be, either in software or hardware. Creating the model of the chip, creating the model of the software, developing it over a period of time, and this is our solution for that.
Again, it's become a critical part of our business, and more and more of our customers are buying it. Not just the chip companies but frankly the system companies are paying a lot of attention. That is dangerous and a complex product.
So, a little bit about Cadence. We have a ratable business model, which means a vast majority of our revenue is recognized overtime. We book a contract and we recognize that overtime. But one exception is largely the hardware business. Our hardware business, you ship a box, you recognize revenue when you ship a box.
But we're more than 90% plus ratable. That's been the change over that past three years. As a result, we have good visibility into revenue. We come into the year with about 80% of our revenue in backlog in [SoC], and we come into a typical quarter with 90 plus percent of our backlog -- our revenue in backlog.
Our backlog has gotten stronger over a period of time. This is at the end of last year, we were 1.7. We were 1.7, by the way, at the end of the prior year, but the average duration in that backlog has come down. It means we have more revenue in 1.7 over the short-term than the old 1.7.
So if we would have kept the same duration, the backlog would have been materially higher last year. But again, for business reasons, deal quality reasons, we really forced that -- not forced, but we have allowed that term to come down over a period of time. And you can see the steady progress in the low right-hand side as part as revenue is concerned.
EDA has had a historical problem with deal quality, which some of you who have been investors in this space before recognize. Part of that was a lot of the companies, Synopsys included and certainly Cadence, used to recognize revenue upfront. That always got encouraged due to do a deal and get a deal done no matter what the terms and conditions were.
Software, again, we essentially have a 100% margin. As both Synopsys and us have changed to a ratable business model, we're still trying to catch up with our customers as far as deal quality is concerned. So we've worked on certain key things; clearly, reducing the term of the deal. We no longer have to take a longer deal because it doesn't give us any more revenue.
Definitely we don't have to give anything up to get a longer term. We've concentrated on discount run rate to surrogate for revenue, but making sure the old deal and the new deals, that the new deals have higher revenue. And we don't want to renew things earlier. Again, that used to be a way to pull in revenues by renewing things earlier.
So we're concentrating on all three -- on all four of these and we manage these metrics. The end result is our deal quality. And so, ratio of doing an old versus a new deal has gone up materially last year, materially this year in that mid to high single-digits as a result of our concentration on that. And that's a big deal for a company of our size.
Our target model is the mid-20s. We've told everybody in our guidance that we're going to get there in 2013 for the full year. It means we're not going to be there just one quarter there but for the full year. We've driven a very steady improvement. Two years ago, the '09 year, we were in a loss position. In '10, we were at 9% operating margin.
Last year, we were at 18% margin. In Q1, we were at 21% margin. You've seen steady improvement in our operating performance, and I think we've seen relatively good execution, I think, from the company; something that we've really focused on improving.
Operating cash flow has also been very good. We did $240 million in operating cash flow last year. Our guidance this year is 275 to 305. We see a steady improvement. By the way, that's higher than our operating margins. So I think that's a good sign for investors. Our DSOs have come down materially.
A couple year -- about three years ago, I think we were at 175 days. When I joined, we were at about 75, 80 days. We're now down -- last quarter we were down at 25 days. Our long-term guidance is 25 to 35 days. I think that's generating a lot of cash and improved the balance sheet materially. You can see cash at $660 million. About half of that is in the U.S. and about half of that's international. And our debt is 495. That's due in 2013; 145 of it. And 350 is due in 2015.
Guidance when we announced Q1 we raised guidance across the board. We raised guidance on bookings, we raised guidance on revenue, we gave guidance on operating cash flow, we gave guidance on operating margin and we raised guidance on EPS. I think we are doing a good job of executing on our business. We had a very strong Q1 in bookings. Our hardware business is stronger than we anticipated in Q1, but I think we're making really good traction and I think we continue to execute very well.
So lastly we are in a business that's supporting and a bunch of key businesses are growing very rapidly. We have demonstrated over the past couple of years that we can grow faster than our customers. We won't always say that's going to be true. We are also growing faster than the industry. We believe we are one of the leaders in technology and innovation, a very complex product line, a very complex business. We know what our results are going to be based on having a lot of it come out of backlog and we are demonstrating sustainable profitability and cash flow growth.
With that we will head to (inaudible).
And maybe to get a sense on that. And maybe I'll just start out the Q&A and then open it up. You know one of the things the industry in the last couple of years we have seen really strong growth. Can you help us understand like what is driving that growth and in your view what is the long-term growth rate for industries (inaudible)?
Yes so I'm actually a believer in EDA. I joined from the semiconductor space where I think 28 of my 30 working years were in the semiconductor space. I know how important EDA is to the semiconductor space. The whole semiconductor business is very dependent on the EDA space producing products. When an engineer comes in first thing in the morning, the first thing you do is turn on their EDA tools. The last thing they do when he or she leaves is turn off their EDA tools or run something overnight. When they are not in meetings, they are on EDA tools. It produces the quality of the product, it produces the dye size, the performance, the cost of the product comes out of the EDA tool and of course clearly the design that our customers come up with.
I think that value hasn't been fully recognized and captured over a long period of time. Some reason because of the business model, some reason because of probably lack of business discipline but I think that opportunity remains there. So I believe industry can be a much higher grower I think probably than most people believe. We did 23% growth last year; I think that's pretty amazing for an EDA space. I think if I had asked people a year before nobody would have guessed we had done 23%. We are guiding 10% to 13% this year based on our guidance range right I think that's again very good growth.
And I believe our competitors are going to grow very fast also. I think the industry is also consolidating, I think that only can help the space overall over a period of time. So I think the industry can grow faster than probably people expect. The number of engineers are going up with our customers. The importance of the tools are going up, they are buying more tools early in the process and later in the process. It's an execution issue, an explanation issue to our customers. It's going to be a journey, not a sprint to get there.
And you know when you look at Cadence specifically; obviously you guys have like your modern transition. So that's kind of add like probably a tailwind from your growth standpoint and you are guiding to a mid-20s of margins for next year. So let's take the midpoint and say this year guidance would be like somewhere like 11% to 12% revenue. What kind of revenue level are you assuming to get to the mid-20s?
Yes so the model, first on to the question you didn't ask. The model change last year was a small percentage of the 23% growth, very low single digits. This year it's a very low percentage of our growth. We haven't specifically guided what it takes to get to the mid-20s as far as revenues growth is concerned. To us it's kind of our imperative we are going to get there, right we have committed as a company as an organization that we are going to get there. It's not totally dependent on revenue growth because we expect revenue growth to get there, but sale and revenue growth we would find other ways to get there; it's a very important strategic goal.
And what are the things I mean like you kind of highlighted in your presentation to that many of the fabless guys running into like challenges from a manufacturing standpoint. The foundries, you feel like yield issues at the foundry or at the chip manufacturer eventually slows down design and it is a negative for EDA?
So I guess my view is it's not necessarily a negative, it's not necessarily a positive for EDA I could argue both sides of it. You know the problems are what the problems are as far as the capacity and our customers' ability to deal with it and the foundry's ability to deal with it. I know they will solve the problem because they always have solved the problem before, every other generation. I have been around since long before there were nanometers, long before there were submicron. I have been around the industry for a long time. I have heard of these problems before and eventually they get solved. I think in the short run it probably increases our business a little bit right if there is yield problems and things like that because they try to put more engineers on, need more licenses et cetera over a period of time. It's not a perfect equation because it depends on contracts, it depends on where the problem and where the issues are. Over the long term if their problems never get solved of course it will have a negative impact on us, but again I'm not a believer in that.
Along the lines of improved contract renewals, can you talk about how much of old (inaudible) deals are still left? How much of that still potentially need to be worked through the timing around that?
So we still have some very large, very important customers that get kind of all you can eat deals. All you eat deals for those of you who are unaware means that we are not limiting our contract and the number of licenses we grab or the number of engineers who can use the tool or the number of tools. It means one of all those things. There is still some, but it's in the single digits now and the people get those types of contracts much more of the contracts are much closer to the number of engineers you have, much closer to the number of tools you want, you buy specific which gives us upside as they add engineers where we -- the company or the industry needs to get upside than previously.
You touched a little bit around the industry consolidation. Any thoughts around your strategy for M&A you view this is something would be looking at in the future, are there any particular product areas that you feel like you need to get into clearly had leadership position for a while?
Yeah so as far as M&A is concerned in a core area there is really not that many opportunities that remain. Most of the companies are quite small in this space. You know but we will continue to look at that. I mean again we believe in an end-to-end solution and are some places that we could use some things but most of those companies are quite small. More likely M&A over the period of time will likely be in the IP area. Again IP area we think is critical, again most of those companies aren’t that big, but we think that's the area we consider and also the system realization area, there are opportunities perhaps there. Again we tend to be focused and pretty disciplined. I think as probably most of you are aware who have read you know some of the deals that have happened recently in the space. We tried to really be focused on discipline; our shareholders also we care a lot about that.
Like you have mentioned that in the quality there is really just three priorities you are working at. So this brought revenue transition back in ’08 coupled with the recession you guys were the number player in the EDA and now yes you are too. Do you see regaining that market share and eventually become number one again? Thanks.
So again, we have a strong competitor is that I think is a very good competitor, but I think every company can aim to be number two, I think aim to be number one. It’s stale strategy if you ended at number two. So we hope to.
Just you know one other things is I think TSMC probably (inaudible) from one of the learnings they had and indeed challenges from 40 to 28 nanometers was like basically resting the number of designs, they give to the fabless side and essentially it seems like you are the only one designer at 20 nanometers. So is that – what does this mean from their standpoint and does it mean that it’s more challenging for your guys or is it more easy for you guys to design (inaudible).
Yeah so, you know Cadence is materially underinvested in digital and 65 and 40 under the prior management and do not use that as a strategy. Lip-Bu, nor I and the rest of the management team think that that was a good strategy. We believe we have our own solutions and a strong position in digital.
With that mandate when Lip-Bu joined the targets we could aim for was 28 and 20 and so we’ve put a substantial amount of resources in catching up in 28 and 20. An example of that, where we were successful last fall we announced with ARM, with TSMC that we were ARM’s choice for the Cortex-A15, their latest and greatest product; we staked out using a pure Cadence flow at TSMC. So obviously having 28 and 20 work eventual is a key benefit we think to us in our competitive position vis-à-vis synopsis and digital.
And from last year this has driven some of the market share numbers and I think because I knew that in your prior calls also word about gaining incremental shares; where are most of the share gains comes from; is it digital or is it analog?
So I think the market share within EDA is always a little bit complex because some companies have different revenue models that makes it hard to understand. But generally, when you are going faster which we did last year and we’re guiding this year to grow faster, we are clearly gaining market share enough.
Some of that is what I’ll argue is improved deal quality, some of that is the tailwind related to the business model change, but some of that is market share and that's largely for us after becoming digital and our analog market share as most people are aware very strong. So it’s partly going to come in digital, verification and those areas as we are gaining market share it is.
We announced a couple of wins in Q2 of the year ago. We announced another win in Q1 of this year. We announced a verification win in Q4 of last year. So we are announcing those wins over a period of time.
I think in the past you said that when you move to a new node in terms of the EDA code, it drives 80% or 90% of the revenue, because really the physics and the chemistry is different. Is that continuing to be the case?
Its more like 30%, more like 30% to 70% of the code had to be rerun, because again you are modeling chemistry and physics and it varies from node to node, but except for 20 and 22 right, it’s a much more complex node, you know Intel has announced in fact (inaudible) such things. That makes it harder to do and that means you throw away more code…..
From the high end of…
Yeah, that's more likely to be in the high end.
So again, any view on where '14 might fit on that kind of range now or is it too early?
Yes, too early to ask the CFO. Probably if we had the technical guy, he would probably answer better. But yeah, it's probably still a little bit early.
Just a little thing. I'm not sure whether it's the right question to ask the CFO, but I will just ask it anyways. In this industry transitions that are coming up, you have a -- since it is already happening, the EUV, the things are looking -- things that are coming up, what does it mean from a EVA standpoint? Is that incremental opportunity or is it like more less of an opportunity because as complex as we are, once you start doing it, it becomes a very huge cost benefit to the customer.
Yeah. So I guess there's two -- there's some real positives for us for that trend, and there are some challenges for us in that trend. The real positive is as you move to each new node; the chips get much more complex. The software gets more complex. The amount of tools you need, the amount of engineers you need to create a design goes up materially. And so that's a benefit to us.
The one real disadvantage is there may be less designs of more complex nodes. Our customers so many times are consolidating, right, as probably you are well aware. They're not generally doing it to eliminate engineers but they are consolidating. And that can mean there's less designs going forward. So mostly good but there's some challenge with perhaps a few less designs going forward.
And in terms of your guidance I think you guys highlighted that emulation sales would be essentially flat this year. It is not going to grow even though your overall revenues will grow 10% to 12%. Can you just give us a sense why is that the case? Is that to do with like savings or is that to do with more customer explosion? Is there something else going on?
So last year emulation business, or what I also sometimes call the business, grew at 100%. A very strong business. Again, I believe it's a secular trend and emulation is more important because, again, that's where you model the software and hardware in advance. It's also a business, the one part of our business, that has a very short lead time.
It's one part we have revenue where we recognize upfront. So we guided this year to be flat to slightly down. Q1 exceeded our expectations. We exceeded guidance. We kind of raised the guidance for the year. We still have the same kind of view. This business is subject to competition and subject to macroeconomic conditions.
It's one of easier things for our customers to cut if things go south for them. Again, I believe it's a secular trend. I believe those boxes, whether they're ours or our competitors', are used nearly 24x7. Again, I bought those boxes unless the times those customers are very important to engineers and to design process. So we'll see how it plays out but right now we're seeing flat to slightly down in that business.
And in terms of the consolidation for [indiscernible] and Synopsys, and now -- can you talk a little bit about how any of you -- what else is going on there from the merger standpoint and how you guys are benefitting from it, and maybe change the incremental opportunity for you?
So I think there's two major benefits for us. Magma or Lava, everybody is probably aware of, who knows the space, was the price leader in this space and the tools that they produced. With them going away, I think that releases that pressure. I think the second thing is almost all of our customers want at least two choices, right, for most of their tools and most of their tool set.
Where Magma was one and Synopsys, two, or Synopsys one and Magma two, it gives us an opportunity. Almost all of those customers have at least opened a door for having conversations with us. We will see how it plays out. Again it will take some time but we think that gives us an opportunity, but I think it's good for the industry too by the way. So they giving better (inaudible) because we have to use our balance sheet.
Longer topic of M&A. I think pre-crisis or something around the (inaudible) made a big one for (inaudible) then like obviously it didn’t work out. I am just trying to understand when you guys look at and then you did the Denali acquisition, from acquisition like mentality standpoint, what is like the metrics that you guys use, as far as the financial metrics is there certain product synergy is it more about like the quality of the product is it more about -- is it like you know that company alone cannot execute those, so we can do a better job what are the things that you guys usually do?
Yes, so just to be clear that the last thing with Mentor was the prior management team, so we won’t talk about obvious specifics, the prior management team. Obviously we care a lot about the technology that the company we acquired brings we did two acquisitions that we disclosed last year up, I will put that in quotes, that it was closed last year. Those were both largely technology acquisitions that helped benefit our core EDA and filled in some technology holes. We’ll largely evaluate acquisitions based on our strategy, again within the core to make sure we have an end to end solution. In the IC space sort of IP space obviously we’re going probably look at some acquisitions there to take that strategy that’s new relatively new business for us and then the systems area again we'll look at the acquisitions to build it out. We do have a great channel and we think that lot of times we can take somebody else's product and put it through our channel and drive incremental revenue over a period of time and but there are some challenges in EDA with some of the prior contracts and how that revenue gets recorded. So but generally that's how we look at it. It's more from a strategic and using our channel and related to at least a core competency that we have and that I can understand.
And is there anything you guys are look at things like that will be accretive in one year, two years from now and or in 13?
So I guess the one thing we look is the commitment to get to the mid 20s operating profit at least in our (inaudible) so anything would be against that I believe an accretive acquisitions versus dilutive acquisitions. Generally that's not as quite as hard as investors probably think because cash isn’t earning anything for most of us. Again, we will frugal what it and be what you call so accretive versus dilutive is probably too easy on the target for investors to look at. I think you should evaluate us against tougher criteria like valuations, like how we do and execute this acquisition.
Too long (inaudible) I mean you guys wouldn't disclose it but obviously Denali is now fully integrated into Cadence, can you tell me like what percentage, like what range or percentage of your revenue is Denali at this point?
No we stopped breaking out Denali. We do have a very robust process where we report to our board twice a year on how the acquisitions are done against our original targets, both business targets and financial targets and Denali is exceeding in both cases. I think I'd also want to mention that the person who ran that business Sanjay has now still part of Cadence but moved over to role advising (inaudible). We bought in Martin Lund who ran a large business, the networking business at Broadcom to run the SoC business. So again we continue to make investments and expect to continue to make investments in that business, but Denali has exceeded our expectations thus far.
And then obviously you have spoken quite a lot about M&A, is it fair to assume that that's the primary use of cash in this line?
So we have two converts. One that's out of the money due in 2013, that's $145 million. We have a cash settled convert in 2015 that's in the money with some warrants attached to it, that leaves some dilution. Both of those have to be retired out of US. Again, even the 2015 that's in the money as the cash settled converts; we have to settle the cash. Our US cash is about 50% plus our cash flow that we do generate between now and then it will be largely used for that and then in M&A. Subsequent to that we will be obviously listen to shareholders and you know what else we should be doing.
You know only one other question from my end, you spoke about the [EV] like the longer term like five years from now (inaudible) when it comes to your chip making customers are like you know like the bigger wafer size, does it have an impact on the EDA design or you guys are agnostic to it.
The bigger wafer size doesn't have a material impact. Again we mostly work on the all of our competitors and us work on designing the particular chip and so the size of the wafer. I mean you have some impact I would hate to argue a technology issue but I doubt it's going to have a material impact in EDA.
Alright thank you very much Geoff. We really appreciate the input. There is no other questions from audience. Thank you.
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