Commentary: Electronics IP Industry - A February 2009 Update

Year-on-year total dollar royalty revenues in Q4 2008 increased 32% to $76.0 million, representing 51% of group revenues. Royalty revenues comprised $65.5 million for PD and $10.5 million for PIPD.

PD royalties were up 19% sequentially in Q4 2008, due to particularly strong smartphone and microcontroller shipments.

PIPD royalties of $10.5 million include $1.0 million of “catch-up” royalties. Underlying royalties for PIPD were up 2% sequentially, slightly ahead of foundry utilization levels in Q3 2008.

Sales of development systems were $12.9 million in Q4 2008, down 17%, and representing 9% of group revenues.

Service revenues were $7.7 million in Q4 2008, down 5%, representing 5% of group revenues.

The Processor Division (PD), formerly the original ARM, delivered total revenues of $108 million, an increase of 24% from the year ago quarter and a 19.6% increase from the prior quarter. ARM signed 21 processor licenses in Q4. The quarter was characterized by licensing of ARM technologies across the portfolio. In Q4, six new companies licensed ARM processor technology for the first time. Reported PD unit shipments grew 20% sequentially buoyed by growth in automotive, Bluetooth, digital consumer, microcontrollers, storage (HDD and Flash) and Wi-Fi. Reported processor unit shipments were 1.2 billion in the quarter, up 46% compared to Q4 2007.

The Physical IP division (PIPD), the Artisan division established after the acquisition at the end of 2004, had total revenue of $20.3 million, an increase of 4.1% from the same quarter a year earlier but a 5.1% decrease from the preceding quarter. ARM signed 12 physical IP licenses in Q4 for technologies at all process nodes from 180nm to 28nm; and for a wide range of ARM products. Demand for leading-edge physical IP continues as ARM signed a further agreement with an IBM Common Platform partner to develop and license 32nm and 28nm physical IP.

Five licenses for physical IP at the 45 and 40nm process nodes were signed with tier-1 semiconductor companies, such as STMicroelectronics.

Underlying PIPD royalties in Q4 2008 increased 13% year-on-year to a record $9.5 million, ahead of foundry revenues that were up 5% in the equivalent period. ARM continued to expand market share in as underlying royalties were up by more than the improvement in utilization rates at the foundries. PIPD catch-up royalties were $1.0 million compared with $0.3 million in Q4 2007.

In December 2008, ARM acquired Logipard AB, a leading video processor and imaging technology company, from Anoto Group AB. Logipard has offices in Lund, Sweden and has existing licensing deals in place with a global mobile phone manufacturer. The company has changed its name to ARM Sweden AB. The privately-owned designer of power-efficient video encode and decode acceleration technologies for the mobile and consumer markets is the leading provider of video IP to one of the world's leading mobile technology suppliers for platforms used by LG Electronics and two other leading mobile handset OEMs. The Logipard video IP has shipped in more than 30 million mobile phone units to date.

The acquisition of video processor technology builds on the success of the ARM Mali graphics processor, and it enables ARM to provide customers with an integrated multimedia platform, which is becoming increasingly important in devices such as mobile computers, portable media players and digital TVs.

Net income for the quarter was $27.9 million, an increase of 39.5% from the $7.9 million in the fourth quarter of 2007 and a 25.4% increase from the $22.2 million in the third quarter of 2008.

Warren East, ARM Chief Executive Officer, said, "We are pleased to see ARM technology being increasingly utilized in innovative consumer electronics products, leading to the highest ever group revenues for both the fourth quarter and for the full year.

We saw strong demand for new ARM technology, with industry leaders continuing to license our latest generation processors and physical IP. ARM has built a base of more than 580 processor licenses that is driving long-term royalty growth.

We are encouraged to see that the inherent operating leverage in the ARM business model, combined with sound financial discipline and the recent strengthening of the dollar against sterling, has given rise to earnings growth in 2008 of more than 20%."

On February 3, 2009 CEVA, Inc reported financial results for the fourth quarter and the year ended December 31, 2008. Total revenue for the quarter of 2008 was $10.0 million, an increase of 21% compared to $8.2 million reported for the fourth quarter of 2007, but the $10 million was a decrease of 1.9% from the $10.2 million in the just prior quarter. Licensing revenue for the quarter was $4.6 million or 46% of total revenue, an increase of 15% from $4.0 million reported for the fourth quarter of 2007 but a decrease of nearly 23% from the $6 million in the previous quarter. Royalty revenue for the quarter was a record high $4.3 million accounting for 43% of total revenue, an increase of 41% from $3.0 million reported for the fourth quarter of 2007 and a 30% sequential increase from the third quarter of 2008. Revenue from services and support was $1.1 million or 11% of total revenue, down 6% compared to $1.2 million for the fourth quarter of 2007 but up 19% sequentially.

During the fourth quarter of 2008, CEVA concluded six new license agreements, all of which are for CEVA DSP cores, platforms and software. Target applications for customer deployment are 2G and 3G handsets, smartphones and mobile multimedia products. Geographically, four of the six deals concluded were in Europe, one in the U.S. and one in the Asia Pacific region. Of the license deals concluded, two are with strategic customers. One of the strategic agreements is with a large merchant chip supplier in the handset market who signed a comprehensive agreement for the use of CEVA DSP cores in low-end and mid-range handset products. The second strategic agreement is with a leading Asia-based semiconductor company in the consumer market who is expanding into the handset market targeting the 3G segment.

In the quarter CEVA customers shipped 80 million units. Of these, 65 million units were from customers paying per unit royalties, and 15 million were from customers still on prepaid royalties. The total was 11% higher than the previous quarter's 72 million units (54 million and 18 million), but 7% lower than the preceding quarter.

Net income for the quarter was $960 thousand, compared to a net loss of $251 thousand in the year ago quarter, and compared to a net gain of $1,403 thousand in the just previous quarter.

Gideon Wertheizer, Chief Executive Officer of CEVA, said, "I am very proud of CEVA's progress during 2008. It was an outstanding year for the Company from both a strategic and a business perspective. Not only have we gained considerable market traction in the handset, portable and consumer electronics markets, but as a result of the industry-wide migration to CEVA DSP cores, our technologies are now in mass production at Nokia, Samsung, LG Electronics, Sony Ericsson, Sony Electronics and many others. I believe that our market position and strong business fundamentals will allow us to keep growing, even in the midst of uncertain economic times."

Yaniv Arieli, Chief Financial Officer of CEVA, stated, "The fourth quarter of 2008 delivered another significant milestone for CEVA with record high royalty revenue of $4.3 million. This continued royalty progress is clearly reflected in the Company's record full year 2008 financials with total revenue up 22% year-over-year to $40.4 million, combined with significant profitability and net income per share improvements. The Company also managed to generate positive cash flow of $8.3 million during 2008, strengthening our balance sheet considerably. As of December 31, 2008, CEVA's cash balances and marketable securities were $84.6 million.”

Arieli concluded, "In the context of the current economic downturn, we recently made adjustments to our 2009 expense levels to ensure the sustainability of our financial progress by reducing overall expenses by approximately $1.0 million"
In early December 2008 LogicVision confirmed receipt of an unsolicited, non-binding proposal from Virage Logic Corporation to acquire all of the outstanding common stock of LogicVision for $1.05 per share, subject to due diligence and the negotiation of definitive agreements. LogicVision decided that the offer was inadequate and was not in the best interests of LogicVision's stockholders. LogicVision announced that its Board of Directors had adopted a Stockholder Rights Plan intended as a means to guard against abusive takeover tactics. Virage Logic withdrew its proposal on December 17, 2008.

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Review Article
  • Great Aricle November 14, 2009
    Reviewed by 'Gary Smith'
    Russ & Jack,
    Great work. This really puts IP in perspective. I'm writing a Research Viewpoint on competitive business models and one comment I've read on this is something like "The leader in IP was profitable, number two lost money and the rest were all small." I'd like to quote that in my report, unfortunately I can't find the quote and I don't know who said it. Can you guys help me find it ?

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