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Executives

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

Walden C. Rhines - Chairman of the Board and Chief Executive Officer

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

Analysts

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Richard Valera - Needham & Company, LLC, Research Division

Thomas Yeh - BofA Merrill Lynch, Research Division

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

Saket Kalia - JP Morgan Chase & Co, Research Division

Mentor Graphics (MENT) Q1 2013 Earnings Call May 25, 2012 8:30 AM ET

Operator

All right, ladies and gentlemen. Thank you for standing by. Welcome to the First Quarter Fiscal 2013 Earnings Release Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Joe Reinhart. Please go ahead.

Joseph L. Reinhart

Thank you, Larry. Good morning, everyone. Welcome to Mentor Graphics Fiscal First Quarter 2013 Conference Call. I am Joe Reinhart, Vice President of Investor Relations and Corporate Development. This morning, 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 take your questions.

As a reminder, this conference call contains forward-looking statements. While these statements reflect our best current judgment, they are subject to risk 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 reports. For a reconciliation from GAAP to non-GAAP measures used in this presentation, please refer to today's financial release. This information is available online at the Mentor website. Wally?

Walden C. Rhines

Thanks, Joe. Mentor got off to a fast start this year, substantially exceeding our non-GAAP earnings per share guidance of $0.25 with $0.30 of non-GAAP earnings per share on revenue of $248 million. This is an all-time revenue and non-GAAP earnings record for Q1.

As expected, bookings in Q1 decreased 30% compared to last year. Rapidly accelerating emulation and service bookings late in fiscal 2012 along with some early contract renewals combined to grow Mentors beginning backlog this year to over $200 million, about 3x its typical level. The current forecast supports the $1.1 billion revenue guidance of about 8% growth. We are raising earnings per share guidance for the year by the $0.05 that we exceeded first quarter guidance. This makes our annual earnings growth rate more than double our revenue growth rate.

While there were few major contract renewals this quarter, the increase in annualized run rates for the largest contract renewals that did occur increased 100%, the largest growth in renewal run rate since we began reporting this metric. This comes on top of an increased annualized run rate of the largest contract renewals that averaged 30% in the last fiscal year and 20% the year before. This growth is partly driven by increasing number of designers, but is affected more by the adoption of additional products, especially for the challenges of 28-nanometer chip design and the growing need for products to support embedded software and system design.

It's clear that the semiconductor industry transition to 28-nanometer family of technologies, which broadly includes 32-nanometer and 20-nanometer, is a much larger transition than we've experienced in recent history. Capital investment by silicon foundries, which had been flat for the previous decade at about $7 billion per year, doubled in 2010 to $14 billion, increased again in 2011 to $19 billion and is now projected to sustain this high level through 2012.

Capital spending forecasts for the 3 largest semiconductor companies have increased by almost 50% just since the beginning of this year. The world's 28-nanometer capable capacity now comprises almost 20% of total silicon area and production, and yet the silicon foundries are fully loaded with more 28-nanometer demand than they can handle.

As yields and throughput mature at 28 nanometers, this major wave of capital investment will provide plentiful foundry capacity at lower cost, stimulating a major wave of design activity. Cost-effective, high-yield 28-nanometer foundry capacity will not only drive increasing numbers of new designs, but it will also force redesigns of mature products to take advantage of the cost-reduction opportunity. This should impact overall spending on EDA for the industry, which typically increases in line with semiconductor R&D spending delayed by 1 year.

Semiconductor R&D spending increased 11% in calendar 2010, 6% in 2011 and is expected to increase 12% in 2012. If historical patterns continue, the strong EDA industry growth in 2011 should be followed by a good but lower rate of growth in 2012 and then acceleration in 2013.

Current guidance by the major EDA companies support this prediction, but it probably understates the significance of the 28-nanometer transition that's likely to increase semiconductor R&D funded design activity this year beyond the current forecast.

Now Mentor received some unique benefits from the 28-nanometer transition. First, the dramatic increase in physical verification and resolution enhancement complexity already drove 25% in growth in our design for silicon subflow last year, and even with a lack of major contract renewals in Q1, drove 30% growth into design for silicon bookings this quarter.

Second, industry consolidation of place and route has accelerated adoption of Mentor's Olympus place and route at several of our largest customers. But the largest impact has been in the adoption of emulation. As reported by Mentor, as well as others in the industry, emulation is undergoing a major acceleration in growth. The 28-nanometer transition means that Full-Chip Verification through simulation is no longer possible for leading-edge large chips.

Emulation technology used to be a requirement for a limited number of applications like graphics chips. Today, it's a verification necessity for a large share of the biggest chips. Emulation has changed a great deal since it was a tool for specialists. This quarter, Mentor announced our Veloce2 generation of accelerated verification products. This generation more than doubles the capacity to greater than 1 billion gates, doubles the speed and reduces the power per gate by 40%, all compared to our still very competitive first generation Veloce1 family. While traditional in-circuit emulation is well supported on Veloce2, the trend of leading-edge customers is for the acceleration of Testbenches or co-modeling, virtualize the stimulus rather than plug-in hardware and software debugs for dozens of simultaneous users.

These changes mean that emulation could be set up in a manner similar to a typical IT server farm with users remotely accessing the portion of the emulator capacity they need. And the cost per cycle of emulation is over 2 orders of magnitude lower than simulation on a traditional server farm. Bookings for this newly announced Veloce2 generation have already exceeded half of the total lifetime sales of the Veloce1 generation. After a strong year of growth in emulation last year, we expect to achieve about that full year level of revenue this year in just the first 2 quarters.

Based upon publicly reported numbers, that run rate puts us on track to achieve the #1 market share position this year in the rapidly growing emulation market. What makes emulation so exciting is that a large and increasing share of the usage is systems companies. They use it to debug multichip systems and to develop and verify embedded software.

The emulation business benefits from more than just the 28-nanometer transition. It benefits from the growing complexity of system design and the increasing need for embedded software development verification. The combination of new applications of EDA and system design, rapid growth of emulation and the large design transition to the 28-nanometer family of processes provided the record backlog at the beginning of the year that helped us achieve record Q1 revenue. That growth plus ongoing cost controls made it a record for non-GAAP earnings per share as well and provided increased confidence in our raised guidance for the year. Greg?

Gregory K. Hinckley

Thanks, Wally. Earnings per share was $0.30, $0.10 higher than last year and $0.05 ahead of guidance. First quarter 2013 was the 13th consecutive quarter for which we have exceeded our non-GAAP EPS guidance.

On revenues of $248 million, 8% up from last year, we delivered 65% of incremental revenue and almost 75% of incremental gross profit to non-GAAP operating income. With our laser focus on expense, it is apparent that the operating leverage in our business is powerful.

Non-GAAP operating margin almost touched 18%, 25% ahead of the rate reported last year, suggesting that we are clearly on track to meet our 18% target this year and meet the commitment for next year, that 20% commitment. As expected, bookings declined. We entered this year with record backlog, some of which arose from early renewals, but the majority of the growth in year-to-year backlog was caused by a surge in bookings for our emulation and consulting and training business.

We exited the fourth quarter 2012 with 70% of our internal 2013 emulation revenue plan in backlog and 65% of consulting and training. With early renewals and the exceptionally large backlog for our emulation and services business, we had fewer opportunities to book new business for the first quarter.

That said, we did well with what we had to work with. Bookings achieved in the quarter exceeded the levels incorporated in our first quarter guidance by 30%. Average value of annualized run rate of renewals in our top 10 transactions climbed over 100%, well ahead of the 20% to 45% we typically report.

Most of the other leading indicators were also favorable. Support reinstatements were up sequentially. Decline rates down. New customers were flat to historically high levels. And finally, during the opening weeks of the second quarter, bookings were up 40% over last year. First quarter bookings were down 30%. Book to bill was less than 1, which was expected as we needed to reduce our emulation backlog to allow 90 days of sales and have services backlog to less than 6 months.

Non-GAAP gross margin was 82.7%, 0.5 point higher than last year, evidencing the effect of higher revenue and largely fixed cost of units sold. Operating expense non-GAAP was up 2.8% from last year with almost all the increased acquisition related to Calypto and Flowmaster.

During the quarter, we made no acquisitions and purchased no stock. Our remaining share repurchase board authorization is $110 million. We expect purchases over the year to offset share issuances from equity compensation programs.

Now for more financial details. Design-to-Silicon bookings benefiting from the IC industry's ramp of 28- and 20-nanometer technology was up 30%. All other product lines were down. Scalable Verification, most affected by the emulation activity, was down 20%. New and Emerging was down 40%, affected by the strong backlog that we had in our embedded software services business, and Integrated Systems Design was down 20%.

Geographically, Pac Rim was up 15%, while North America, Europe and Japan declined 45%, 30% and 50%, respectively. Bookings were 50% term, 25% perpetual and 25% subscription compared to 40% term, 40% perpetual and 20% subscription last year. Perpetual bookings dropped with reduced levels of emulation bookings in the quarter. Top 10 customers were 35% of total bookings compared to 45% last year. Average contract length was unchanged to approximately 3.0 years.

Revenue mix by geography was 50% North America, 20% Europe, 20% Pac Rim and 10% Japan. Support revenue was up 8% year-on-year, meaningfully above the 4% to 7% growth that we have experienced over the last decade. Strong renewal growth last year and new customers adopting emulation are the largest contributors to this growth, trends we see continuing this year. Base business trends business [ph] less than $1 million was again soft, up 1% in count but down 20% in value. Currency, principally the yen, was favorable to currency by about $1 million.

First quarter OpEx non-GAAP was 64.9% compared to 68% last year. GAAP sales, general and administrative expense was 38.6% of revenues, down from 40.7% the prior year. Currency, principally the euro and rupee, was favorable to expenses by $2 million. Although FX is expected to have a muted favorable effect in the second quarter due to ongoing hedge programs, continuation of FX rates at the current levels will have a positive benefit to the second half of the year.

Headcount, net of additions from the acquisition of Calypto and Flowmaster, was down by 10 people. Personnel, what people cost and what we spend on them, is, by far, our largest operating expense. Controlling the headcount is our most important lever in controlling operating expense.

In fiscal 2012, for example, revenue grew 11% while staffing grew by only 1.4%. Other income and expense non-GAAP was a $3.3 million expense, essentially interest expense net of interest income. Special charges were $1.1 million and were all restructuring related. Our non-GAAP tax provision remained at 17%.

Now the balance sheet. Cash and equivalents decreased $12 million to $135 million at quarter end due principally to higher levels of capital expenditures, as well as payments on short-term debt. Operating cash flow for the first quarter was a $6 million inflow compared to a $9 million outflow last year. Trade accounts receivable was $118 million, down $16 million sequentially.

Short-term unbilled receivables were $237 million, up $16 million sequentially. Trade days sales outstanding were 43 days, an increase of 5 days from last quarter and a decrease of 11 days since the first quarter a year ago. Total days sales outstanding were 129 days, an increase of 29 days from last quarter and 3 days from last year.

The quality of these receivables remains excellent with no receivables net of reserves greater than 60 days outstanding. Factored receivables were $8 million in the first quarter compared to $1 million in the fourth quarter and $12 million last year.

Capital expenditures were $12 million for the first quarter compared with $16 million last quarter and $6 million last year. As previously discussed, we're investing in 2 new data centers with the first one just coming online and the second one in active construction. These 2 projects, which are environmentally very green, will help us avoid spending tens of millions of expense dollars operating numerous small data centers worldwide.

Depreciation and amortization of property, plant and equipment was $8 million for the first quarter, same as last quarter and last year.

Now for guidance. For the second quarter, we are forecasting revenue of approximately $240 million, an increase of $26 million or 12% over the second quarter a year ago. EPS, non-GAAP, is expected to be about $0.17, up over 50% from last year. Second quarter 2013 non-GAAP EPS does reflect the more than doubling of emulation shipments versus this first quarter as we accelerate delivery of the new Veloce2 emulator. For the entire year, fiscal year 2013, we are reaffirming our revenue guidance of approximately $1.1 billion and are raising our non-GAAP EPS by $0.05 to $1.37. Wally?

Walden C. Rhines

Thanks, Greg. Fiscal Q1 was another record quarter. It was helped by the rapid adoption of the 28-nanometer family of technologies and the need for both physical verification and functional verification using emulation to handle the ever-growing complexity of chips. Veloce2 bookings already exceed half the entire lifetime sales of Veloce1, and the demand has caused a growth in backlog and lead times that will drive another strong quarter in Q2.

Our increase in earnings guidance for the year reflects our demonstrated commitment to control costs as revenue increases. And our combination of chip, systems and software solutions provide a diversity of market opportunities that continue to grow.

Now let's take some questions. Larry?

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from the line of Jay Vleeschhouwer.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

I'd like to ask, first, about the bookings and some clarification there, please. A year ago, in Q1 fiscal '12, your total bookings were up by something more than 5%. But the product bookings within that, if I recall correctly, were approximately flat. So you're saying now that bookings were down about 30% versus a relatively low number for bookings last year, according to our calculations, your Q1 bookings for product last year were not much more than 10% of annual bookings, so relatively low or should have been an easy compare. So if you can just clarify that.

Gregory K. Hinckley

Yes, Jay, give me a second.

Walden C. Rhines

Yes, product bookings were up, Jay.

Gregory K. Hinckley

Product bookings were up, but it was a modest increase last year in the first quarter. As I say, we entered the year with a backlog that was triple our historical level. We said at the time that some of that was contracts that otherwise would have renewed in the first and second quarter. We closed those in the fourth quarter. We had substantial growth on those contracts in the fourth quarter. We were at a point where our emulation business and our services business are a significant portion of our backlog. We have a need to be able to ship to emulation customers within 90 days or approximately 90 days from the receipt of the purchase order. We ended up with a long, long, long backlog with somewhere around 70%, 75% of our total year's expected emulation revenue already in backlog and 65% of our consulting and training, where it is expected that we start beginning deliveries within 6 months. So we frankly had fewer opportunities because we had already booked business, and we need to work down the backlog that we had as we exit the fourth quarter. But bookings were weak because...

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. So just on that point, and then a couple follow-ups. You mentioned Design-to-Silicon bookings were up, I believe, 30% year-over-year, though, again a year ago, the bookings for that segment were down 45%. So you're still below where you were in the Q1 bookings for Calibre or the whole segment 2 to 3 years ago. Could you perhaps talk about what your thoughts are on Design-to-Silicon for the fiscal '13 as a whole?

Walden C. Rhines

Well, Jay, we don't give forecast by product or subflow for the total year. I would say that while it's true that the first quarter last year was not that strong, the total year was indeed strong, 25% growth. And so the growth we're reporting now at a 40% -- 30% growth last year, we're now reporting a 25% growth in the first quarter despite the fact that there was over $200 million backlog in fourth quarter is actually a reflection of strength. And it was strength in both resolution enhancement and in the standard offerings for Calibre.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. And then with respect to emulation, which you highlighted, could you talk about how the profitability of the hardware business in this cycle? You might compare it to previous cycles. Emulation is, of course, necessarily substantially less profitable than the software-only business, but is there any reason to think that Veloce2 could be more profitable than its predecessor?

Gregory K. Hinckley

Yes, Jay. We have -- it's -- on the gross margin line, it is fair to say that hardware has a gross margin that is approximately half of what software is. But the volumes can be much greater. So we are already at the point where our emulation volumes look to be somewhere between 2x to 4x higher than what were the peaks in terms of volume for our emulation business with Veloce1 and well above what they were for the prior products. So the combination of high volumes and very acceptable gross margins will cause us to be a very satisfactorily profitable business in all likelihood at around what the company averaged.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

All right. Lastly, sorry to take up so much time, but in an earlier call, you talked about new methodologies in addition to new tools and capacity in connection with the move to new advanced nodes. This was in connection with Intel having spoken, for example, and Samsung and GLOBALFOUNDRIES about new methodologies for the new nodes. My question now is could you talk about the kind of investments that you're making in support and services to help customers add new methodologies? You announced the new DFM analysis business. Could you perhaps speak more broadly about the investments that you need to make on that side of the business to support methodologies? Synopsys spoke along these lines, for example, in their call the other day.

Walden C. Rhines

Yes, Jay, this is Wally. It's certainly true that there's a methodology shift that's come with the 28-nanometer node that is particularly tied into functional verification that brings together the various aspects. So embedded software, high-level ESL, RTL-based design, all coming together in a verification environment that has emulation as its hub, simulation tied into it, embedded software development tools that cater to the embedded software developer and the ability to take high-level ESL and directly synthesize it. So I think that's the big methodology change that integrations required. I believe we'll be the first to have a complete smooth operation in that methodology.

Operator

Next question comes from the line of Rich Valera.

Richard Valera - Needham & Company, LLC, Research Division

I know you mentioned there weren't that many renewals in the quarter, but can you give a sense of how many deals comprised that 100% increase in renewal run rate average?

Walden C. Rhines

Yes. So what we do for calculating the change in annualized run rate for renewal is, first of all, we take the 10 largest orders every quarter. And then we pick the ones that represent renewals and then calculate the annualized run rate compared to the last contract. This particular one involved 3 renewals that averaged 100% growth compared to the prior contract 3 years ago.

Richard Valera - Needham & Company, LLC, Research Division

Great. That's helpful. And then looks like the revenue was a little bit lighter than you'd forecasted for the quarter. Was that just sort of lumpiness and timing? Anything specific to point to there?

Gregory K. Hinckley

Yes. I'll just start off with saying that it was lighter than what our forecast was, but we did report record revenue for the quarter. And Rich, while we expected bookings to decline during the quarter, they were, in fact -- and that had to do with what we've booked in the fourth quarter. The fact is, is that bookings were up 30% from what we had embedded in the guidance. And what we were dealing with in the quarter was a transition from Veloce1 to Veloce2. And the tradition -- the transition went as transitions often do. So we had challenges partway through the quarter that are certainly now behind us, and so what we ended up doing is shipping more software than we anticipated in the quarter and less emulation. We reaffirm our $1.1 billion of revenue for the year, and we're confident about that. So there is no slowing in the momentum of our business.

Richard Valera - Needham & Company, LLC, Research Division

Good. Just to be clear, so it sounds like you had some maybe initial start-up issues shipping Veloce2, and that's what caused the lightness. But that's behind you, so we would expect those shipments to pick up going forward.

Gregory K. Hinckley

That's correct.

Richard Valera - Needham & Company, LLC, Research Division

And just to clarify another emulation comment you made, I think this was you, Greg, but did you say that you expected to have an equal amount of emulation revenue in your first 2 quarters of this year that you had all of last year?

Walden C. Rhines

No, that was me, Rich. And I'm sorry, yes, we did say in all of last year, right. We said half of the lifetime of Veloce1, what we said in the first 2 quarters, that's right. We will ship this year in the first 2 quarters more -- roughly the same, actually, a little more than what we did last year in total emulation.

Gregory K. Hinckley

For the entire year.

Walden C. Rhines

Right.

Richard Valera - Needham & Company, LLC, Research Division

So can you say what you're expectations are then for the back half of this fiscal year with respect to emulation? Do you expect to maintain that run rate? Or would you expect some ebbing of that run rate from those exceptional first half levels?

Gregory K. Hinckley

Rich, we think that, well, when we exit this year, that our revenues will be such that we can claim a #1 market share in emulation. So there is no slowing in the pace of bookings in the business or our shipments.

Richard Valera - Needham & Company, LLC, Research Division

No, I understand that. I'm just wondering if the guidance for the year is predicated on maintaining the same type of run rate in the first quarter or maybe if this is kind of the first half has a bit of a surge related to the initial shipments, the sort of backlog of shipments around Veloce2.

Gregory K. Hinckley

Right now, we're expecting that the second half of the year will be approximately equal to the first half.

Richard Valera - Needham & Company, LLC, Research Division

Great. And then one finally, one final one for me, if I could. Greg, you mentioned with respect to your leading indicators that they were mostly positive. I wasn't sure which ones were maybe not quite as positive than you might like, if there were any.

Gregory K. Hinckley

We thought they were all very reasonable. So support reinstatement's up. Decline rate's down. New customers, flat to historically high levels. And we were encouraged by the fact that during the initial first few weeks of the quarter, bookings were up strongly compared to the same time a year ago in the second quarter.

Operator

Next question comes from the line of Krish Sankar.

Thomas Yeh - BofA Merrill Lynch, Research Division

This is Thomas Yeh calling in for Krish Sankar. A little bit more on emulation. Can you help us understand the nature of the strong growth that you're expecting to see? How much of the growth is driven by competitive wins in new customers versus existing customer adoptions from Veloce1?

Walden C. Rhines

So the growth is across the board. The biggest change is the increase in systems companies. And I think it's safe to say that every emulation win is a competitive win, that is people are making a substantial investment in emulation. So they evaluate all the alternatives before they make a purchase.

Thomas Yeh - BofA Merrill Lynch, Research Division

Okay. That's helpful. And then in regards to margins, is it safe to assume that next quarter's guidance is largely just the nature of product mix and that operating expenses can stay at these low levels?

Gregory K. Hinckley

That's correct.

Thomas Yeh - BofA Merrill Lynch, Research Division

All right. And then a final one for me. Can you give us some additional details around what kinds of conversations you might be having with some potential new customers looking for a second source following the LAVA acquisition by Synopsys, which segments in particular some of these conversations might be taking place?

Walden C. Rhines

Yes. Well, as I mentioned, the consolidation in place and route has a beneficial effect. There are -- as I highlighted, some of our largest customers, of course, will increase their usage if they had a hybrid flow of Mentor with Magma that, of course, just gives us the opportunity to make it a full-flow Mentor. And even if they had simply a Mentor standalone with another supplier, then it will increase our share of the total and presumably also could increase Synopsys' share.

Operator

And next question comes from the line of Tom Diffely.

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

Like to focus here on the margins. You mentioned that you're on track for 18% this year, and you're still confident in 20% this year. So I'm just curious, if you kind of step back and look at that, how do you think that margin progresses? Is it product mix versus revenue growth or cost controls? What's the biggest component there?

Gregory K. Hinckley

Tom, we actually are talking about hitting 18% this year and 20% next. And we were pleased that we almost hit 18% in the first quarter, and that was the combination of everything you described there. So it's more volume; it's, as I said, laser focus on expenses and I think that the less significant product mix we have, volume is good in all cases.

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

Okay. So when you go out to next year, does it require a nice jump in revenue? Or are you willing to, I guess, get more aggressive on the cost side to get there even with just a modest revenue growth?

Gregory K. Hinckley

I think it will be -- we expect, I think, when we described in the past that we need to have revenue growth that is about at what the industry is expecting, kind of high-single digits.

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

Okay. All right. And then, Greg, when you say that there was some favorable impact from currencies, it sounded like the yen helped to your revenue, and then euro was beneficial to the costs. Is that how...

Gregory K. Hinckley

That's correct.

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

Okay. And then the second half, you said you're going to benefit from hedges. Is that mainly a euro comment?

Gregory K. Hinckley

No. We benefit from the absent hedges, but we will hedge in the future. But right now, what happens is as we exited the first quarter, the euro, the pound were all very weak. And what we have is we have more euro expenses, more British pound expenses than we have euro revenues and pound revenues. For better or for worse, the large European companies have traditionally procured their purchases from the EDA industry and actually shipped their goods in U.S. dollars. So we have a surplus of U.S. dollars from these accounts and a surplus of euro and pound expenses. So we hedge those positions 90 days out. So it takes us 90 days to benefit from a change, favorable change in currencies. And it takes us a 90-day period before we see the effect of adverse currencies. And all that's because of our hedging program.

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

Okay. Great. And then a couple times you mentioned you expect to be of the largest in emulation this year. Could you share with us what you think the market share was between you and Cadence last year?

Walden C. Rhines

I don't have those numbers with me, Tom, but I can look them up. The problem is last year, those numbers for Cadence have not been published. They come out with Gary Smith EDA in the third quarter, and so -- but we can again estimate on our own, and I can look that up for you.

Operator

[Operator Instructions] And we have another question from the line of Saket Kalia.

Saket Kalia - JP Morgan Chase & Co, Research Division

So Greg, I just wanted to dig into the revenue shortfall a little bit more this quarter. Were you able to recognize the amount that you expected from backlog in the quarter just given the big build that you had last year? And then from what it sounded like before, it sounded like the shortfall was just kind of focused in emulation. Were there any other products that came in lower than you expected?

Gregory K. Hinckley

All other products in terms of revenue came in, if anything, slightly higher than expected. We had a strong booking quarter compared to what our opportunities were, Saket. Our bookings were up 30% lower than we intended, and so given the fact that we shipped less in the first quarter because of transition effects in emulation, we actually have a stronger backlog going into the second quarter that we anticipate.

Saket Kalia - JP Morgan Chase & Co, Research Division

And on that last point, that sort of sounded like the backlog would be stronger going into the second quarter, but it looks like the second quarter revenue guidance is about in line with where you were previously planning. So in the second quarter, are there any other products that are maybe weaker than you would have originally expected?

Gregory K. Hinckley

None, no.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay. Quick question on FX. Relative to your guidance, how favorable was it to revenue expenses?

Gregory K. Hinckley

It was favorable to revenues by about $1 million, and it was favorable to expenses by about $2 million year-over-year.

Saket Kalia - JP Morgan Chase & Co, Research Division

How about relative to your guidance?

Gregory K. Hinckley

It would be approximately flat to guidance because we have hedges in place.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay. And then last kind of series of questions. You mentioned that last year benefited from some early renewals. Does your guidance this year rely on any early renewals?

Walden C. Rhines

So what we said last year is there were some early renewals. But the backlog grew more than the amount of the early renewals. So in any given year, it's hard for us to predict if a customer will want to renew early. Frequently, they do. And so when we put the plan together, we don't normally depend upon that.

Gregory K. Hinckley

So last year, as we exited, everything that happened in terms of early renewals was in ending backlog. And I think it is fair that this year's guidance essentially assumes that we will have the same kind of results, Saket, that to the extent that we book something ahead of its scheduled expiration that would be carried forward in backlog.

Operator

We have another question from the line of Jay Vleeschhouwer.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Just a clarification following up on Saket's question. In Q4 especially last year, a substantial amount of the backlog build was for emulation and the Calibre. But the question is to what extent did that emulation backlog, as you left fiscal '12, was that for Veloce1 or were customers aware of Veloce2's imminence, and so the backlog is comprised of Veloce2? Or if not, as you moved into the beginning part of this year and announced Veloce2, are you basically swapping 2 for 1 for those customers who might previously have ordered the earlier generation of product?

Gregory K. Hinckley

Jay, we were booking Veloce2 primarily in the fourth quarter. We made the announcement after we were already taking orders.

Operator

And we have another question from the line of Rich Valera.

Richard Valera - Needham & Company, LLC, Research Division

Just a follow-up on the place and route business. Haven't heard that mentioned in a couple quarters. Just wondering how that business has been trending over the past year or so. Can you say if that business grew last year and if you would expect it to grow this year given some of the potential opportunities out there?

Walden C. Rhines

Yes. So the answer is it did grow last year. The -- we don't forecast by product line for the current year, but let me provide some inputs. Right now, we are resource limited, taking advantage of all the opportunities that have occurred because customers where we had our strongest installed base want to increase that base because of industry consolidation. That, combined with an increased level of investment on our part, will allow us to serve our customers with more resource in the coming year. And whether that produces the revenue in the current year or next year, it is yet to be seen.

Operator

There are no more questions in queue, sir.

Walden C. Rhines

Okay. Thank you very much, Larry. And ladies and gentlemen, thank you for joining us this very early morning. Greg and I will be available for follow-up calls if you have any. The best way to reach us is by calling Monte Koller at (503) 685-1462, and she will make sure that either Greg or myself will get back to you in a timely fashion. Larry, if you could please provide the replay numbers for our listeners. Thank you very much, and have a good Memorial Day weekend.

Operator

All right. And ladies and gentlemen, this conference is available for replay after 5:00 p.m. today through June 1. You may access the AT&T Executive replay system at any time by dialing 1 (800) 475-6701 and entering the access code of 248794. That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

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