Electronics IP Industry - A November 2006 Update
by Dr. Russ Henke and Dr. Jack Horgan
In their September 2003, December 2003, February 2004, May 2004, August 2004, November 2004, February 2005, May 2005, August 2005, November 2005, February 2006, May 2006, and August 2006 Electronics IP Industry Commentaries, the authors examined the recent financial histories and future outlooks of the remarkable phenomenon of Electronics Intellectual Property (IP) providers, a niche that has emerged in its own right to claim a substantial amount of revenue in the world of Electronics Design Automation. We had arbitrarily selected eight (8) publicly-traded companies originally (then called the “Group-of-8” or “G8”), as representative of the current financial state of the Electronics IP industry. At the end of 2004, ARM completed its acquisition of Artisan Components, Inc., thereby reducing our “G8” to “G7”. Accordingly, in this November 2006 Commentary, we look at the financial performances of the “G7” Electronics IP vendors during the third quarter of 2006.
ARM Holdings plc
MIPS Technologies, Inc.
Virage Logic Corporation
San Jose, CA
San Jose, CA
Mountain View, CA
Los Altos, CA
For the “G7” companies above, we assume that all of their revenues are Electronics IP sales and directly related IP services.
Recent Electronics IP News Highlights
On August 2, 2006 the Semiconductor Industry Association (SIA) reported that worldwide sales of semiconductors totaled $20.5 billion in August, up over 10.5% from August 2005. SIA's Global Sales Report (GSR), a three-month moving average of sales activity, is shown in the following Table 1.
Both MIPS and Rambus failed to provide earning results for the most recent quarter. 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.
On October 31, 2006 ARM announced it had acquired SOISIC, a Physical IP company based on Silicon on Insulator (SOI) technology. The privately-owned company has offices in Grenoble, France and Santa Clara, California and has net assets of approximately Euros 250,000. The Grenoble office will become a new design center.
How did the Electronics IP G7 perform in the Third Quarter of 2006?
On the revenue front, Table 2 below reveals that the G7's combined Q3 2006 performance was $216 million, a healthy increase of nearly 22% from the $176 million in Q3 2005 but flat relative to the just previous quarter. On a year-over-year basis, MIPS was the clear leader with 65% growth, with Rambus in second place with 27.5% growth. LogicVision, ARM and Virage Logic had around 20% growth. On a sequential basis MoSys was the revenue growth leader at 73%. MIPS and Rambus grew over 5%.
Figure 1 below provides a bar graph of each vendor's revenue for Q3 2005, Q2 2006, and Q3 2006 in sequence. ARM continues to dominate the G7 with 56% share. Rambus is a strong second at 21%. Virage Logic and MIPS have high single digit shares.
As mentioned in the news highlights, Rambus and MIPS did not report earnings for the quarter. The remaining five firms (as shown in Table 2 below) had combined earnings of $14 million. This compares to $24.8 million for those five in both the prior year and prior quarter. ARM dominates these figures. ARM earnings were relatively flat year-over-year but dropped 32% sequentially.
Q3 2006 Results of Individual Electronics IP Providers:
Total license revenues in the second quarter were £27.9 million, representing 43% of group revenues, compared to £25.9 million in Q3 2005. Total royalty revenues in Q3 2006 were £26.2 million, representing 41% of total group revenues, compared to £21.4 million in Q2 2005, an increase of 23%.
Sales of development systems in Q3 2006 were £6.5 million, representing 10% of total group revenue, compared to £5.8 million in Q3 2005, an increase of 12%. Service revenues in Q3 2006 were £4.2 million, representing 7% of total group revenues, compared to £3.6 million in Q3 2005.
The Processor Division (PD), formerly the original ARM, had revenues of $75.3 million, an increase of 19.5% compared to the same period last year, but an decrease of 1.1% compared to the prior quarter. ARM partners shipped 621 million units in Q2 2006, up 53% on the comparable period last year and up 12% sequentially. The Physical IP division (PIPD), the Artisan division established after the acquisition at the end of 2004, had revenues of $21.2 million, an increase of 21% year-over-year and an increase of 8% sequentially. In the quarter, ARM signed a further 20 licenses for physical IP bringing the total number of licenses to 263. Of the 20 licenses, four were platform licenses to foundries. The PD division accounted for 75% of the combined revenues and the PIPD division for 25%.
Warren East, ARM Chief Executive Officer, said: “Having reported a strong second quarter in July, we are pleased to have achieved record dollar revenues, up 20% year on year, in the third quarter. We continue to execute well on licensing across the business with three more Cortex family licenses and three more 65nm physical IP licenses being signed in the quarter. Additionally early in Q4, the Physical IP division completed the licensing of leading-edge 45nm technology to IBM, Samsung and Chartered, representing a further significant milestone towards our longer term goal of licensing our Physical IP products on the most advanced processes to the wider semiconductor industry. With licensing and royalties performing well, we are confident of achieving a solid Q4 in line with current market expectations.”
As announced in May this year, Sir Robin Saxby retired from the ARM board on 1 October 2006, when he became President of the Institute of Engineering and Technology (IET). During his year as President of the IET, he will remain associated with ARM as Chairman Emeritus.
On October 25, 2006 CEVA, Inc. reported financial results for the third quarter, the period ended September 30, 2006. Total revenue for the third quarter of 2006 was $7.9 million, a decrease of 6% compared to $8.4 million for both the third quarter of 2005 and the second quarter of 2006. This $7.9 million was at the low end of range given as guidance last quarter. Licensing revenue for the third quarter of 2006 was $5.5 million, a decrease of 4% compared to $5.7 million for the third quarter of 2005, and an 8.3% decrease form the prior quarter. Royalty revenue for the quarter of 2006 was $1.4 million, a decrease of 7% compared to $1.5 million for the third quarter of 2005, but flat compared to the prior quarter. Revenue from services was $1.0 million for the third quarter of 2006, a decrease of 17% compared to $1.2 million for the third quarter of 2005, and a 9% decrease sequentially.
In the third quarter of 2006, ten new license agreements were signed, bringing the total to twenty-six new license agreements signed in the first nine months of 2006. Of the ten new license agreements, seven were for CEVA DSP cores and platforms, two for CEVA SATA technology and one for CEVA Bluetooth technology
Net income for the quarter was $341K. This compares to losses of $520K and $217K in the same quarter last year and in the previous quarter, respectively.
Yaniv Arieli, Chief Financial Officer of CEVA, stated: "Despite a traditionally challenging third quarter in terms of licensing revenue due to the summer vacation season, we managed to achieve significant milestones with regards to reaching our profitability goals. The last time CEVA reported Non-GAAP positive operating income was six quarters ago, in the first quarter of 2005. We continue to monitor our expenses closely and put more emphasis on top line growth. Our balance sheet continues to be robust with positive overall cash flow of $0.2 million for the third quarter of 2006 and as of September 30, 2006, our total cash, investments, deposits and cash equivalents totaled $63.8 million."
New orders in the quarter totaled $3.8 million. The firm exited the quarter with a backlog of $21.4 million, compared to $19.9 million backlog at the end of the prior quarter. Approximately $9.4 of the total backlog is expected to be recognized as revenue ratably over the next 12 months.
As previously announced, MIPS formed a special committee of independent members of its Board of Directors to review the Company's historical stock option grant practices and the Company's accounting for its option grants. Due to the continuing internal investigation, MIPS is not releasing first quarter fiscal 2007 earnings at this time.
John Bourgoin, MIPS president and CEO, said: "We had an excellent first quarter, with revenue up 65% year-over-year; this is the highest revenue level since early 2001. MIPS earned strong royalties from three key market segments: digital TV, consumer, and broadband. Our strength in those and other markets drove MIPS-Based unit shipments to 90 million last quarter, continuing our impressive royalty growth."
During the quarter, MoSys announced a technology license agreement with Fujitsu Limited, under which MoSys' 1T-SRAM technology is licensed to Fujitsu on its advanced 65nm production process. Another significant deal was concluded after the quarter closed. MoSys recognized revenue from 13 chip developments.
Net loss for the quarter was $2.9 million, compared to a net gain of $50K in the third quarter of 2005 and a net loss of $2.1 million in the second quarter of 2006.
Chet Silvestri, Chief Executive Officer of MoSys, said: “During the third quarter, we continued to make progress on our 65nm and embedded flash initiatives. The agreement with Fujitsu at 65 nanometers is a milestone for MoSys as it further validates the scalability of our technology at the most advanced process nodes and positions our technology for additional adoption into high volume consumer devices. We also signed our first 1T-Flash flash license during the quarter. In addition, we anticipate our royalties beginning to significantly ramp in the fourth quarter and continuing into 2007 as the Nintendo Wii video game console, and other licensees' products, are introduced into the market place."
On the same day, MoSys announced the settlement of all outstanding litigation with UniRAM related to the trade secret misappropriation and patent infringement suit filed in 2004 by UniRAM. Under the settlement agreement, the companies agreed to dismiss all outstanding claims and counterclaims with prejudice. MoSys will pay UniRAM $2.4 million, and receive a complete release of all claims as well as a future fully paid license for itself and all of its licensees. The settlement amount was included in the third quarter results.
Revenue for the third quarter was $45.9 million, up 28% over the third quarter last year and down 6% from the previous quarter. This $45.9 in revenue was above the range given as guidance in the last quarter. This increase over the third quarter last year was driven by new product licensing revenues and patent licensing revenues from agreements announced earlier this year. (Note that the $10 million quarterly royalties from Intel ceased in the previous quarter).
Cash, cash equivalents and marketable securities increased by $5.3 million in the third quarter to an ending balance of $421.2 million as of September 30, 2006.
Harold Hughes, president and chief executive officer at Rambus, said: "We delivered a strong quarter with year-over-year revenue growth. The key, as always, is signing important licensing deals like our latest agreement with Toshiba. Toshiba's licensing of the XDR memory architecture demonstrates our momentum in helping customers bring great products to market through our leadership solutions."
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.
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.
EDA Consortium's Market Statistics
During Q2 2006, CAE accounted for 41% of the total revenue, IC Design and Verification for 27%, PCB and MCM for 7%, Semiconductor IP for 19% and Services for 6.1%.
Aart de Geus, chairman of the EDA Consortium and chairman and CEO of Synopsys, said: “It was a strong quarter for the industry, with revenue up again in all regions and nearly all categories. This continued growth reflects a healthy environment for the semiconductor industry as a whole.”
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About the Authors:
Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. The number of client companies for Henke Associates now numbers more than forty. During his corporate career, Henke operated sequentially on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and served on the SME International Board of Directors. He is also a member of the IEEE and a Life Fellow of ASME International. In April 2006, Dr. Henke received the 2006 Lifetime Achievement Award from The CAD Society, presented by CAD Society president Jeff Rowe at COFES2006 in Scottsdale, AZ.
An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this November 2006 Electronics IP Industry Commentary. Dr. Horgan's prior corporate career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Dr. Horgan is also an editor of EDAcafe Weekly.
Since May 2003 the authors have now published a total of forty-six (46) independent articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADCafé and EDACafé. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net.