Commentary: Electronics IP Industry - A November 2006 Update

Due to the continuing internal investigation of past stock option granting practices, Rambus did not release its third quarter earnings. The Audit Committee of the BOD has determined that a significant number of the stock option grants were not correctly dated or accounted for. The vast majority of incorrectly dated grants, both in terms of number of shares of common stock and financial accounting impact, occurred between 1998 and 2001. Rambus preliminarily estimates that the aggregate pre-tax, non-cash stock-based compensation charges in connection with these stock option grants will be in excess of $200 million.

On August 15, 2006, Rambus announced the resignation from its Board of Directors of Geoff Tate, former Chief Executive Officer of Rambus from 1990 through 2005. Mr. Tate was Chief Executive Officer and the sole member of the Stock Option Committee during the period that the Audit Committee had preliminarily concluded that the majority of stock option irregularities occurred.

Rambus has been unable to file its quarterly report on Form 10-Q for the period ended June 30, 2006, and will not be in a position to file its quarterly report on Form 10-Q for the period ended September 30, 2006.

Rambus previously announced that it had received a NASDAQ Staff Determination notice stating that it is not in compliance with Nasdaq Marketplace Rule 4310(c)(14) as a result of being delinquent in its SEC filings, and is subject to potential delisting. Rambus requested and met with the Listings Qualification Panel of The NASDAQ Stock Market on September 21, 2006, to request continued listing. Rambus has not yet received confirmation from the Listings Qualification Panel that its request for an extension to December 19, 2006 has been granted. There can be no assurance that the hearing panel will grant Rambus' request for continued listing. Pending a decision by the Listings Qualification Panel, Rambus' common stock will remain listed on The NASDAQ Stock Market.
On November 6, 2006 Virage Logic Corporation reported financial results for its fiscal fourth quarter and the fiscal year the period ended September 30, 2006. Total revenue in the quarter was $15 million, a 17.5% increase from the $12.8 million in the same quarter a year earlier, but a 2% drop from the $15.3 million in the prior quarter. This $15 million in revenue was below the range given as guidance last quarter. License revenue was $11.3 million, accounting for 76% of total revenue. This was almost a 14% increase year-over-year and a 2.5% increase sequentially. Royalty revenue was $3.7 million, accounting for 24% of total revenue. This was a 32% increase year-over-year, but a nearly 14% decrease sequentially.

Net income for the quarter was $777K, compared with $232K in the same quarter a year ago and compared to a loss of $1.6 million in the just prior quarter.

Total revenue for fiscal 2006 was $59.3 million, an increase of 11% from the $53.4 million in fiscal 2005. License revenue was $43.2 million, accounting for 73% of total revenue and up nearly 2%. Royalty revenue was $16 million, accounting for 27% of total revenue and up 47%.

Adam Kablanian, president and CEO, said: “We are pleased with the progress we made in fiscal 2006 to improve our overall business which puts us in a position to pursue profitable growth. For fiscal 2007, we are focused on generating top-line revenue growth and improved profitability. The improvements we made to our business, along with our leadership position in providing advanced semiconductor intellectual property, should help us execute toward that goal and further establish us as the semiconductor industry's trusted IP partner."

Stock Market Prices of the G7 Electronics IP Providers

As shown in Tables 5 and 6 and Figure 2 below, the combined stock prices for the G7 increased in absolute terms 18% year-over-year, but declined 10.5% sequentially. The average percentage change was up 10% year-over-year and down 7% sequentially. During the recent quarter, the major stock indexes increased 8% year-over-year and increased 4.6% over the prior quarter.

Rambus, MoSys and Virage Logic had the largest year-over-year double digit gains at 44%, 23% and 17.5% respectively. LogicVision was the biggest decliner at -27%. MIPS had a slight drop.

On a sequential basis MIPS was the stock price growth leader at 11%. ARM was the only other company with an increase in share price. Rambus and LogicVision declined over 20%, and MoSys declined 14%.

Forecast Guidance from Individual IP Providers

The forecasts (from the six IP companies who provided guidance) call for year-over-year collective growth of nearly 16% and sequential growth of 2%. MoSys is the most optimistic with a projected percentage growth of 130%. All but Ceva are forecasting double digit percentage growth. MIPS is a strong second place with 26% projected increase. On a sequential basis MoSys, is also the most optimistic at 36% growth. LogicVision is a distant second with a more modest 5.6% anticipated growth rate.

Individual Company by Company Guidance

For guidance LogicVision expects revenue for the fourth quarter to be in the range of $2.7 million to $3.0 million. This compares to $2.7 million in the quarter just completed and to $2.8 million in the fourth quarter of 2005. This would translate into about $10.65 million revenue for 2006, compared to $10.9 million in 2005.

As guidance, MIPS expects revenue for the next quarter to be in the range $19.5 to $21.5 million compared to $19.7 million in the year just completed, and to $16.3 million in the same quarter last year.

As guidance MoSys expects total revenue to be a range of $5.0 to $6.0 million in the fourth quarter of 2006. This compares to $4 million in the quarter just completed and to $2.4 million in the same quarter a year ago. This projection translates into $15.4 million for the year. This compares to $12.3 million in 2005. Royalties from Nintendo are expected to ramp up over the next few quarters.

As guidance Rambus expects revenue in the next quarter to be between $44 million and $47 million. This compares to $45.9 million in the quarter just completed and to $41.6 in the same quarter last year and to $41.6 in the same quarter last year.

As guidance Virage Logic expects revenue in the next quarter to be between $14.6 million and $15 million. This compares to $15 million in the quarter just completed and $13.7 million in the same quarter last year. The forecast includes royalties of approximately $3.6 million to $3.8 million, and license revenue of $11 to $11.2 million.

Comments on the IP business of Cadence, Mentor Graphics and Synopsys:

The Top 3 EDA Vendors in overall annual revenue are also important players in the IP providers' niche. The difficulty in comparing the Top 3 EDA Vendors' IP business to one another is caused by the differences in how each company arbitrarily chooses to define the revenue components of its respective IP businesses. Further, none of the TOP 3 EDA Vendors unbundles profitability of its respective IP-related business lines, precluding IP earnings' comparisons.

EDA Consortium's Market Statistics
On October 2, 2006, the EDA Consortium's Market Statistics Service (MSS) announced that overall EDA industry revenue for Q2 of 2006 was $1,256 million, versus $1,091 million in the second quarter of 2005, an increase of 15%.

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