Cadence Design Systems' Management to Present at the JPMorgan Technology, Media and Telecom Conference Call (Transcript)

May.16.12 | About: Cadence Design (CDNS)

Cadence Design Systems, Inc. (NASDAQ:CDNS)

JPMorgan Technology, Media and Telecom Conference

May 16, 2012 10:40 am ET

Executives

Geoff Ribar - SVP & CFO

Analysts

Sterling Auty - JPMorgan

Sterling Auty - JPMorgan

Thanks everyone for joining us. My name is Sterling Auty Software Technology Analyst here at JPMorgan; very happy to have with us for another session Geoff Ribar who is the Chief Financial Officer of Cadence.

I am going to go ahead and turn the microphone over to Geoff just to give a brief introduction. I am going to start off with some questions to get us started and bringing the audience questions in very quickly.

With that Geoff?

Geoff Ribar

Hi everybody. So just to brief on Cadence; Cadence is one of the leading EDA companies. EDA companies for those of you don’t know, are unaware. The companies that help chip vendors to build their products; probably the most important part of their chain after their design conception is -- actually the software that we build, our competitors build to allow our customers to build their products.

Cadence has been around for quite a number of years; I think we have had a couple of major management change about three years ago where Lip-Bu Tan came in as CEO. Lip-Bu is vastly experienced in the semiconductors business and in the EDA business and I think over the past three years you’ve seen pretty material changes in the company’s performance, strategy, execution which I think is showing up in our financial results.

Sterling Auty - JPMorgan

Let’s start-off from the high level in terms of the environment. We hear a lot of mix signals of the semi industry and everything from supply constraints to doubled digit growth in R&D spending or for some of the vendors. If we take a step back, what are the metrics that you take a look at in terms of gauging to help the underlying demand and also maybe talk a little bit about what you are hearing from your customers and their interest level on spending?

Geoff Ribar

Sure. I spent 28 of my 30 years working in the semiconductor business; I was NVIDIA, CFO, SiRF CFO, AMD’s Corporate Controller and a couple of private companies you guys probably unaware of. So I know the semiconductor business extremely well.

Semiconductor business, despite what the CFOs and CEOs were gauging as really a quarter-to-quarter business. They have a pretty good visibility in the current quarter when you get out of ways the backlog is somewhat at risk; I guess is the best way of putting it. I think generally right now they are somewhat optimistic; they have seen a major reduction in inventory over the past couple of quarters, but they read the same newspapers that everybody here in this room reads and worry about some of the macro trends playing in.

So I think generally, we’re much more correlated with the number of engineers that our customers have and the number of projects that they are working on and we have only seen positive trends in that environment. We have seen more and more engineers being added and projects still stayed very strong.

And again, if you have a revenue challenge and you are a semiconductor company, you are largely going to try to get new products out the door that’s one of the ways you deal with the challenge. So net, net we’ve seen very little impact from the macro economic concerns as far as our business is concerned, but we pay a lot of attention and we worry about it probably just like everybody in this room.

Sterling Auty - JPMorgan

So when you look at that, when talk about the number of engineers as one driver, how much of the increase in spending or increase in run rate and renewals is also existing engineers needing more additional products to do their job as well as how much of the growth is coming from an existing engineer that maybe uses multiple license of the single product to get his job done?

Geoff Ribar

So historically, I think EDA did deals where we did our [equity] deals where to a large extent where you would give your customers as many licenses as you needed for as much technology as you possibly had. I think over the past five years or so, clearly Cadence has got much more disciplined along those lines.

So what we see driving our business is improved deal quality and improved deal quality means we do less deals which means if you want 100 licenses, we will sell you 100 licenses; we won’t sell you 1000 license; what that allows us to do is our customers and incremental resources, incremental engineers we can sell more licenses.

Also, we are more specific on the technologies that we license as part of the deals; if you want one particular technology from us let’s say analog or custom that’s what we’ll sell you. If you later want digital, we will sell you digital, but at an additional cost.

So I think the deal quality is something that's obviously a work-in-progress. It’s a journey. We are going to have to continue working on over a long period of time. We trained our customers really well and the other side of equation we have to un-train them and train them the other way. We have the head of sales and I have reached out to a couple of very large software companies who've gone through similar transitions and understand that this is a journey and requires management discipline more than anything else. So we are really working on that.

The end result as we've seen our run rate, our revenue, and old deals to new deals to go up materially both last year and this year; materially means low-to-mid or mid-to-high single digits type of growth and old deals to new deals and we think that's a pretty important progress that we are making. We are going to continue really working on that.

We did for example our first price rise in 10 years last year and I think that ended up working positively and to kind of sticking in some of the key product lines. So we are really working on the deal quality and really working on that the number of licenses we give out and the amount of technology we give, so we continue to capture more deals.

An example in Q4 of last year, we captured a $10 million verification deal because a customer, one of the top 10 semiconductor companies had run out of verification licenses they did not have it.

Sterling Auty - JPMorgan

I want to touch on one or two more things and bring the audience into the discussion as well. So you started that transition to a subscription model back in the fall of 2008, you know what's left in that transition to get to that “clean” or pass the transition entirely?

Geoff Ribar

So we are mostly done with the transition. Both last year and this year it was very low single digit impact of our growth. Last year we grew 23% and it was very low single digit impact from the model change. This year again, we are forecasting growth of 10% to 13% based on our guidance range. Again, very low single digits impact. We’re done at the end of Q4 this year, so 2013 will be the first complete clean with the model transition totally gone.

Sterling Auty - JPMorgan

And then, when you look across your product lines, in environment that we’re in, can you just maybe from a high level, and then we’ll drill into through additional questions, where do you see your competitive strengths and where do you see the growth dynamics best and what are the areas that you still feel there is room for improvement?

Geoff Ribar

So I’ll talk about maybe four major product lines versus analog and custom; next is digital. Third is verification and fourth I’ll talk separately about our emulation, our hardware business. So analog and custom, we are the leader in this space. I think it’s well understood we’re the leader in this space.

Analog and custom, it’s very complex. It’s more of the art of the EDA; the chip design is analog and custom. So we continue to do very well there. We occasionally get competitive threats, but almost universally we sustain the business. So we’re doing very well in that space and that space is growing because there is a trend as chips get more complex and innovating more functions, so those functions in last case tend to be analog functions.

Most of the interfaces that you’re familiar with, from Wi-Fi, Bluetooth, GPS to the modem itself to even USB tend to have analog interfaces. So as the analog piece become more important, that leads us in to strong design activity in those products.

Digital is a space where our competitor is largely perceived and I think fairly as the biggest provider there. Under the prior management team, before Lip-Bu joined, Cadence was underinvested in digital at both the 40 and the 65 nanometer node. When Lip-Bu joined about three years ago, he immediately started investment in 28 and 20 because that business is critical for us. I think we've seen progress in the 28 and 20. An example of the progress I think that's particularly important is in last fall, ARM taped out their latest and greatest Cortex-A15 with us at TSMC in 20-nanometer. They only did that because our solution was the vast in that particular piece of business.

That's truly important to us not just because ARM's is a too extremely important customer, but because ARM's relationship with all of our customers. So we're making some traction in digital, but it's perceived an area where we need to see new progress. We announced three or four market share wins over the past year in digital. These are all top 10 semiconductor companies where we captured a digital flow for division within theirs or for the big company as a whole. We think that's showing progress. We've still got ways to go.

On verification, verification is spilt between the other two competitors and us pretty equally. This is probably the part of the business that has the lowest switching cost. It means it's easiest to transition from one to another. We think we have a very competitive solution. We think our market share is competitive with everybody else. And an example, earlier this year, late last year, we got that $10 million additional verification business from a customer who renewed their licenses. So we think we're still doing pretty good there in that space.

The emulation space, probably the last one we talk about, this is the hardware space. To me, this is a secular trend. If you're looking at how semiconductor design engineers used to design products, they would have a model, the hardware and software, kind of in their head. And the head engineer would make sure; he or she would make sure that your teams knew how to build the product. The fact of the matter is those chips are far too complex right now and the amount of software is far too big.

So there's no person that's capable of doing it. So there's -- emulation is essentially to build a blueprint of the hardware and software upfront, and to run that blueprint and allow the software engineers and the hardware engineers to separately build to their model, with a reasonable expectation when they're both done that the chip works, and the product and the software works together at the back-end of the process.

That's absolutely key, not just for the chip companies but for their customers, the system companies, right, who have time to market requirements that are really critical. So this is how they're dealing with increased -- one of the ways you deal with increased complexity. So we've seen that business last year grow 100%. This year we're seeing flat to slightly down because the comps are a little bit hard, and frankly, that's the one part of our model that's upfront. It's not ratable over a period of time.

So we think it's a secular trend. We think we're the gold standard in that space. We do have competition in that space, but we're doing quite well. And we're doing quite well not with just chip companies, but system companies largely are becoming a bigger and bigger player in this space because their modeling, building a chip isn't much different than building a mobile device or building a PC, right. The complexities are the same. You're working with memory. You're working with processors. You're working with interfaces. You're just working them at one level higher of conception.

Sterling Auty - JPMorgan

All right, one more question and I want to bring the audience in. So we've seen consolidation with Synopsys buy Magma. Did that cause disruption in the industry? Have you seen that disruption benefit you already? What type of impacts do you see from that process?

Geoff Ribar

So we think that deal was a really good deal for us, candidly in the scheme of things. And I have to tell you when the bankers called and told us that our competitor was buying them, both Lip-Bu and I at Sunday morning, we were quite thrilled about it. And I'll tell you why. And I think it's probably a good deal for our competitor too. But Magma was clearly the price leader in this space, and the price leader in a very aggressive way. They had enough front revenue model, which means that they can recognize revenue when they booked a deal.

Both Synopsys and us had moved away from it. So just from a pure pricing perspective, I think that's helped us materially. I think the other thing, and I think this is probably not as understood, is most of our customers want two flows within our business, and particularly the larger customers. In some cases, Magma was number one and Synopsys number two, or vice versa, Synopsys number one; Magma number two. In almost every single case that I can name, those customers are coming to us and asking us for a chance to bid.

Now, the deal closed in Q1 but -- and so, it will take some time before you can -- you have an opportunity to capture that business. But our customers want a second source, and largely we remain the key alternative as a second source. So I think it's giving us a lot of opportunities there. Again, for almost the same reason, I think it was a relatively good deal for Synopsys, just to be clear.

Sterling Auty - JPMorgan

Okay, questions from the audience. A question here?

Question-and-Answer Session

Unidentified Analyst

You were talking a little bit about your emulation business. Can you give us some kind of gauge of how much that business has grown, say over the past five years and how big it is of your overall business and any customers there you can talk about?

Geoff Ribar

Sure. Last year it doubled in revenue from the prior year. We haven't given the exact size of the business, obviously for competitive reasons and we're not required to in the SEC. It doubled last year. This year we're forecasting flat to slightly down. Again, some concerns on the macroeconomic environment.

This is the one piece of our business that is upfront and there are large purchase prices for these things. And we've not been on the other side of the business, so if there's a macroeconomic concern, right off if they come to reality, this is the first thing you shut down. Having said that, we've been in Q1 on the hardware business. We're still forecasting flat or down for the year.

Unidentified Analyst

(Question Inaudible)

Geoff Ribar

So I think we're the gold standard still in this space. And so, I think if you were to look at the top 30 and now include both chip companies and system companies with maybe one or two exceptions, where we have the dominant or the large market share, I guess I should say large market share in those customers. I think we have a competitor, a couple of competitors, one, a private company out of France called EVE, and Mentor has announced its second generation product.

Again, we serve a little bit different markets. Our product is more effective at large number of transistors, large designs, where speed matters. They have a cost advantage for smaller designs and so, in some cases they get in. But when I think of the top 30, we're in a very strong market position and intend to capture it; and that's both hardware or chip and system companies.

Sterling Auty - JPMorgan

Can you talk a little bit more about the analog mixed signal, and how can you leverage your strength in analog, and what opportunity does that represent for you?

Geoff Ribar

Sure. So again, as SOCs get more complex, the complexity of the chips they're integrating are almost -- a lot of them are analog mixed signal interfaces to the outside world. Again, we have a very strong market position in that space. As analog becomes a bigger part of those SOCs, what it's allowing us to do is not just to capture the analog, but to capture the digital part of the flow also.

A couple of the digital wins I've talked about were based originally on our analog business or custom business coming in and capturing a piece of it. But it just made sense to use a fully-integrated flow from us. Again, our analog mixed signal works very well with our digital. Our competitors really don't have that opportunity because they don't really have an analog custom business that's strong at all.

So when digital and analog are equally important or analog is at least reasonably important in the chip, that gives a huge advantage to capture market share. And I think we've seen us capture market share as a result of that in digital. Having said that, we've also won some pure, just pure digital flows where it's a 100% digital. So again, I think our digital is catching up but the strength of analog and digital clearly helps us together.

Sterling Auty - JPMorgan

And talk to us a little bit, let's go back to the model transition a little bit. You talked about when you would be free and clear of it, and I want to take this discussion to it. First, let's talk about the margins and what you've discussed publicly about the margin trend. But I also want to talk about the renewal cycle and how we should see bookings and revenue developed going forward. So start with the margin side.

Geoff Ribar

So margins, we've said, will be at mid-20s in 2013, and that means for the full year. That doesn't mean we get there in the fourth quarter. I think we've made substantial progress two years ago or three years ago. Now, we are in a loss position. Last year we were at 9%. In 2010 we were at 9% operating profit. Last year we did 18% operating profit as a percentage of revenue. In Q1 we did 21%. So we're making good steady progress in meeting that goal for the full year.

That's being driven by revenue growth and our ability to leverage the revenue growth by adding operating expenses at a lower level than that. So I think we've done a good job of levering that. We've dropped about 57% of growth last year to the bottom line. This year at midpoint we're forecasting about 50% drop to the bottom line. That's been, as we've gradually recovered from the recession, we're gradually adding some benefits back in.

We'll target kind of 50% as a good expectation I think for investors going forward, that we can target 50% of revenue growth going forward. The other question we get a lot is bookings and how is the booking cycle and those types of things. In the old way, where we used to do business in the [old days] to do business we would have these cycles because we book a lot on these deals which means, until that deal renews, you don’t have any other chance to capture any revenue from that customer right, because you given them all the license they want and all the technology they want.

As we faster restricted that, we’re probably down to maybe five customers’ right, where we have only (inaudible) deals. As we’ve gradually restricted that means the booking cycle itself becomes a little bit less critical because we have abated to book ongoing revenue in between right has you have deals as I mentioned in Q4, the top 10 semiconductor company we booked $10 million additional in bookings in verification.

So I think the booking cycle has become a little bit less important. There are still a couple of really big customers that probably you are very aware in the space who have renewals that still fit in that mode, but I think it’s become less important over a period of time. We’ve also had system companies and its customers not just for the hardware emulation business but also for software tools. So I think that also lessens in over a period of time. So I think we’ve done a pretty good job of getting out of those big swing cycles.

And I think the last thing as we’ve shortened duration that’s the length of the contract; in the bad old days we were sometimes 3.5 to four years long as far as duration was concerned. Last year, we added about 2.5 years; in Q1 we are 2.8, because we booked two large deals who applicable under longer deals, but we’re still forecasting about 2.5 for the year. That means you have shorter steps, you don’t have to take these big steps and have this big drop offs and in between you take a much shorter steps and it also I think adds value over a period of time to us.

Sterling Auty - JPMorgan

So then when you layer that in and you look the revenue growth and its coming through the income statement and will tie tight to cash flow, but when you look at the revenue growth under the model with the circumstances the way you laid out with the contracts, the duration’s etcetera. How sensitive to swings and bookings does the revenue become and is there a kind of normalized growth rate to the income statement that we should start to think about?

Geoff Ribar

So I think the booking cycle has become much less important. To me it’s more the backlog and how much we have in the backlog and how that comes out over a period of time in the short duration, there is more rain in the clouds so to speak more water in the clouds so to speak, and so I think our backlog has gone up, but not as fast as revenue has gone up, but that’s because the duration is shorter. If we have the same old duration our backlog would be materially higher. So it’s more rain in the backlog and more revenue in the backlog, so I think that’s material.

Sterling Auty - JPMorgan

And so let’s now take it and go cash flow; so you’ve got the margin profile, you’ve got the revenue growth, so with little impact from the transition, so you’re seeing more pure revenue growth with the margin expansion, is there anything else, how should we think about the growth in cash flow from this point here?

Geoff Ribar

So our cash flow as a percentage of revenue, our operating cash flow as a percentage of revenue has actually been higher and our operating income which I think is generally a good sign.

A couple of reasons for that; clearly our cash tax rate is lower than our projected tax rate; our depreciation and amortization is higher than our current capital investment which is also good and adds to that and I think we have done a good job on working capital. We have taken DSOs over the past couple of years down from 150 plus days to last quarter we were actually at 25 days. So I think we’ve done a pretty good job of managing working capital also.

And having said that, our operating cash flow is expanding and were midpoint this year of $290 million in cash up from about $240 million actually last year. I anticipate that will grow approximately the same as revenue going forward and maybe slightly higher than operating income.

Sterling Auty - JPMorgan

Other questions from the audience? A question here.

Unidentified Analyst

(Question Inaudible) going forward you are at a much more stable point in your cycle here and what do you plan to do with the cash?

Geoff Ribar

So we have about $660 million at the end of the last quarter in cash; about half of that’s in U.S. The major use is particularly of U.S. cash are going to be, we have two converts on our balance sheet. We have $144 million due in December of next year and then $350 million due in June of 2015.

That’s cash over convert even though it’s essentially, well I don’t know, but today it’s essentially in the money, it’s still cash that will convert. So that’s going to be the first use of U.S. cash. We will continue to do M&A. We did a couple small M&A last year. We’re likely to continue to some M&A, so that would be in the next year. Post 2015, we consider share buybacks and dividends once the converts are paid off of U.S. cash.

Unidentified Analyst

(Question Inaudible)

Geoff Ribar

I think that’s our stance right now.

Sterling Auty - JPMorgan

In terms of how the industry is consolidated, I think people view it as you had four major competitors that became three major, including yourselves, do you think, looking at the competitive environment, do you think even if you wanted the U.S. government would allow three vendors to go to two?

Geoff Ribar

So let me take a step back. Once step higher, I joined Cadence about a year-and-half ago. One of my synopses -- that’s a bad word, one of my theories was that the industry was going to continue to consolidate and I think I still believe that to be true and it doesn’t necessarily have to be an organic. I think the reason for consolidation is relatively straightforward.

Unlike most software business, every time we go to new generation of software, 30% to 70% of our code gets thrown away and our competitor’s code get thrown away. We’re not modeling logic and user interfaces, we’re modeling chemistry and physics and each new semiconductor node has materially different chemistry and physics.

So requires, I guess, the way of putting it, as you move to each of the nodes, requires a substantial R&D investment right. So I think that substantial R&D investment means the number of players has to go down over a period of time, unless you would have an end-to-end strategy, you can't capture the revenue back from that R&D investment to pay it over a period of time. So I think naturally that's a trend that's going to force to less and less players.

I think the other trend is clearly people want end-to-end solution. Customers want end-to-end solutions. They have traded out in the past, but I think you are finding that less and less as you are going forward. They want end-to-end solutions. They don't want what we traditionally require them to do to use Oracle for a part of their ERP, SAP for another part, Microsoft for another part, (inaudible) for another part and do it all together that's what we require. I think they want more end-to-end solutions.

One of our competitors with perfect legitimate strategy is concentrated just on some point tools. I think they are going to be challenged going forward as people want more end-to-end solutions. So despite what the US government wants or the companies want, I think there's a natural force, the force of the industry to continue to consolidate; I think Magma candidly recognize that they had a point tool strategy; I think their ability to fully leverage their investment and capture their R&D investment back with financial results wasn’t there, so I think they made a wise choice to do that.

I think I won’t talk about them yet, it’s better for them to thank about, but I think there's going to be some pressure on the business strategy going forward. And so I think naturally the industry will consolidate overtime without an inorganic and I can't really comment on it.

Sterling Auty - JPMorgan

Okay. Other questions from the audience? Can you talk a little bit, a question over here?

Unidentified Analyst

(Question Inaudible)

Sterling Auty - JPMorgan

Could you just give us a sense of what you think the company can grow at organically beyond the….

Geoff Ribar

Sure. So you know I am a believer that EDA can grow faster than probably most people out there in the audience, and so really most people in this space. EDA is absolutely critical to our customers. When their engineers come in the morning, the first thing you do is turn on their EDA tools. The last thing they do when they leave is turn their EDA tools off. Their under EDA tools every minute of every second, expect when there are meetings during the day.

If the EDA industry shut down tomorrow, the semiconductor business will disappear the day after. Right now I'm exaggerating a little bit. And then, the system companies would be materially impacted the day after that. We're critically important. I think we've done a poor job of capturing value over an extended period of time. Part of that was the business model. Part of that was management discipline.

I think if we continue to maintain that and certainly within the C-suites of our customers, they understand the value that our tools bring. Our tools bring the value and not just the ability to create the product, but the ability to create the best product comes out of the tools. And so, I think we need to capture that value. Having said that, I think EDA can grow faster. We've grown 23% last year. We're forecasting 10% to 12%, 10% to 13% this year.

I don't see why the industry can't sustain that. Obviously, we're not giving guidance for Cadence specifically, but I think that's a reasonable target for the company to aim for, and for the industry to aim for.

Sterling Auty - JPMorgan

How do you extract that value when you have customers who are used to buying product for such a long period of time? They're big customers, obviously. How do you change that paradigm, yourselves and your competitors?

Geoff Ribar

Yeah, it's a little hard. Just to be clear, it's really hard. You do things like price increases. You do things like having the contracts, improving the deal quality of the contracts. It's day-by-day, piece by piece. It's a journey, not something that happens immediately. Again, the head of sales and I talk to the two large ERP companies, right, at the senior levels and walk through the process a day. It's not a perfect analogy.

But they obviously went through a transition as their industry went from multiple players down to essentially two. They did a good job over an extended period of time of capturing that value. Right now, the head of sales and I review every single contract, right, that's done for the deal terms and deal quality. Lip-Bu reviews -- the CEO reviews all of the major contracts, right. We're out there paying attention to that. We get a lot of grief, frankly, back.

But it's management discipline, right. We have to take the issue off the sales people and make it a management issue. And we just have to work it, explain it and work it overtime. It's not going to be immediate but I think last year, when I looked at the old contracts that fell off and the new contracts that we put in place, those numbers were up 5% to 10%, with an increased revenue in 5% to 10% on old contracts versus new contracts.

Now, that's not a 100%, doesn't affect 100% of our business because we didn't renew every contract last year. But that type of thing, that type of opportunity I think remains continue to available. But I think it will take some time. It's not going to be immediate.

Sterling Auty - JPMorgan

So I just want to follow up on that because I think that's a key point. I think there has been a perception, you're right; myself included that EDA as an industry is a 4% to 6% growing industry. So if you're saying you have 5% to 10% increase in kind of run rates on the business plus price increases, you're suggesting that maybe we should go back to the old beliefs that maybe EDA is high single-digit, low double-digit as an industry. Not trying to put words in your mouth.

Geoff Ribar

I think you have to let us prove it, frankly. Over the scheme of things, I think we're working pretty hard on execution. I think our competitors are working pretty hard on execution. I think we have to prove it a little bit. Here there's been some, probably some of the other management teams have said this. Again, I think we've executed pretty well over the past year and a half. I think we need to continue doing that going forward. But I do believe there's an opportunity that exists for us and for the space altogether.

Sterling Auty - JPMorgan

Okay, are there questions? Let's talk a little bit about the IP part of the business. How is that -- you made the Denali acquisition, how is that as a segment? How is the incremental investment? What's the growth opportunity from here, and should that become a bigger part of the business? Actually, I feel like (inaudible) with that multi-part question.

Geoff Ribar

So, the IP business is a business that Synopsys had done a great job, and they started the IP business quite a period of time ago. The reason IP business has become more and more important is you've got these increased complexity in design, the amount of chip that the designers of our customers are actually working on became smaller and smaller of the total period, right? That differentiates smaller.

There's a lot of things you have to have in those chips that you can't differentiate on. Everybody needs a USB port. Does any of our customers try to differentiate in an USB port. Of course not, they just need to have one, right. It's not a differentiating type of thing. That's a classic example. But it's being true over memories, even true over processors. ARM, whole business is based on that. So as you look at what people are actually trying to do, they're trying to impact memory.

They're trying to impact all the interfaces that are required and they're looking at processors for IP. To simplify designs, still the design cycles that they have to meet, the time the market cycles they have to meet. So IP is absolutely critical for them to do that. That's one of the key things. Emulation is the other one, we talked about earlier, to help them do that, to meet the time to market. Memory is very complex. Processors, we have no interest in playing them.

We support ARM and ARM's infrastructure. We think they're extremely important to us. So we have no desire to compete with ARM in any shape or form. We view them as strategic. And memory side, though, is probably a lot of you are aware, our memory is much slower than processor speeds. And so, you have these massive powerful processors sitting here, waiting for memory. And so, why we acquired Denali is to deal with that.

Denali has some techniques to deal with that. Memory runs at 400 megahertz. The processors are running 1 gigahertz and above. You don't want to have your processors idle sitting there. And so, Denali helps us deal with that. Denali has actually done much better than expectations when we acquired them. We track on a regular basis. We report to our Board on a regular basis how the acquisitions are doing vis-à-vis how they're supposed to do.

But we will continue making investments in IP. We'll do some organically and we will also do some inorganically. Again, we will probably constitute interfaces, memory, those types of things and stay away from processors.

Sterling Auty - JPMorgan

And then I want to throw out a question for the geographic side. Everybody is concerned about what's happening in Europe. I think you have a unique position from a geographic perspective and where your exposures are. How do you see the different regions performing and what are the areas that you need to be healthy for you to do well?

Geoff Ribar

So I think the rise of the China is well understood and it's well -- it's happening in the semiconductor business. I think there's two companies now in China that is semiconductor companies that are over $1 billion in revenue, Huawei, which is high silicon semiconductor business and Spectrum I think is over $1 billion now in revenue. I think that's coming more and more. If you look at where startups are being funded, they're not being funded in the U.S. or in Europe.

They're being funded in Asia, and particularly in China. So I think China is coming in this marketplace. We're uniquely positioned through our CEOs. Contact list or whatever you want to say about China, I think we're uniquely positioned. And I think China is continuing to grow and that business is continuing to grow. Having said that, I think European economic issues don't necessarily affect European semiconductor companies.

Most of those guys sell to the same market that the U.S. semiconductor companies sell to, the same markets Japan and Asian semiconductor markets sell. They go into these same end products right. Maybe a little bit higher in Europe but the reality is it's more the consumption of the mobile devices, the consumption of the PCs, the consumption of the cars, consumptions of home appliances that matter over a period of time.

And I think that affects all semiconductor companies, little bit maybe uniquely but not that materially uniquely from one geographic region to another.

Sterling Auty - JPMorgan

With that, I'd like to thank Geoff for joining us for our 40th Annual TMT Conference. Geoff, thank you.

Geoff Ribar

Thanks Sterling.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!