Commentary: Electronics IP Industry - A February 2007 Update

Commentary:

Electronics IP Industry - A February 2007 Update

by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates



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, August 2006 and November 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 February 2007 IP Industry Commentary, we look at the financial performances of the “G7” Electronics IP vendors during the fourth quarter of 2006.

Group-of-7 ("G7"):

ARM Holdings plc
Ceva, Inc.
LogicVision, Inc.
MIPS Technologies, Inc.
MoSys
Rambus Inc.
Virage Logic Corporation
Cambridge, UK
San Jose, CA
San Jose, CA
Mountain View, CA
Sunnyvale, CA
Los Altos, CA
Fremont, 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

According to Peggy Aycinena in an article that appeared in the Sunday EDAcafe Weekly published on February 12, 2007, IP was front at center last month at DesignCon in Santa Clara, showcased in no less than 5 different panels that discussed numerous topics including: how to select IP, how to encrypt IP, how to verify IP, the current state of the art with respect to analog/mixed-signal IP, and the business impact of IP quality on market growth for the industry. If you missed Peggy's article, go to:


At the end of January 2007, both IBM and Intel separately announced a new technology called “high-k metal gate” that will dramatically reduce transistor-gate leakage current, a major obstacle in moving to new processor nodes.

Gordon Moore, Intel co-founder, said in a statement, "The implementation of high-k and metal materials marks the biggest change in transistor technology since the introduction of polysilicon gate MOS transistors in the late 1960s.” Intel believes it has a lead of more than a year over the rest of the semiconductor industry with the first working 45nm processor of its next-generation family of products. Intel has replaced silicon dioxide with a thicker hafnium-based high-k material in the gate dielectric. Intel has also developed new metal gate materials.

IBM has been working with partners AMD, Sony and Toshiba. IBM has inserted the technology into its manufacturing line in East Fishkill, NY and will apply it to products with chip circuits starting in 2008. The creation this transistor component with the new material was accomplished without requiring major tooling or process changes in manufacturing.

In a separate announcement, Intel said it has built a better microprocessor using "superchips” that can boost video, graphics of personal computers. To read the entire article by Tom Abate of the Chronicle (February 12, 2007), click on:

On February 2, 2007 the Semiconductor Industry Association (SIA) reported that worldwide sales of semiconductors totaled $247.7 billion in 2006, up over 8.9% from the $227.5 billion in 2005. Worldwide sales in the fourth quarter were $65.2 billion, an increase of 9% over fourth quarter sales in 2005 of $59.9 billion and an increase of 1.9% over the third quarter 2006 sales of $64 billion. SIA's Global Sales Report (GSR), a three-month moving average of sales activity, is shown in the following Table 1.


SIA President George Scalise said, "2006 was the 'Year of the Consumer' in the electronics industry. Sales growth was largely driven by popular consumer products such as cell phones, MP3 players, and HDTV sets - all products that have proliferated as semiconductor technology has enabled dramatically lower costs coupled with improved functionality.” The press release noted that in 2006, cell phone shipments exceeded one billion units, more than 34 million MP3 players were sold, about 235 million PCs shipped, and US sales of HDTV units more than doubled. SIA forecasts 10% growth to $273.8 billion in worldwide sales in 2007.

On December 28, 2006 EVE, Inc. announced that it has acquired Tharas Systems, Inc., a provider of hardware accelerator solutions (Hammer) for complex chip verification. This will complement EVE's hardware emulation offering for verification. EVE is based in Palaiseau, France with US headquarters in San Jose, CA. Tharas was based in San Jose. Most of Tharas 20 employees are now EVE employees. Terms of the deal were not announced.

How did the "Electronics IP” G7 perform in the Fourth Quarter of 2006?

On the revenue front, Table 2 below reveals that the G7's combined Q4 2006 performance was $230 million, a healthy increase of 19% from the $193 million in Q3 2005 and a more modest 6.6% increase from the $216 million in the just-previous quarter. On a year-over-year basis, MoSys was the clear percentage growth leader with 109% growth. Rambus and MIPS had strong year-over-year gains of 28% and 24%, respectively. Virage Logic was the only revenue decliner at -16%. On a sequential basis, MoSys was the again the revenue percentage growth leader at 24%. Rambus was the only other IP vendor with more than 10% growth. Virage Logic was the only sequential decliner at -23%.


Figure 1 below provides a bar graph of each vendor's revenue for Q4 2005, Q3 2006, and Q4 2006 in sequence. ARM continues to dominate the G7 with 57% share. Rambus is a strong second at 22%. MIPS was a distant third at 9%.


Turning to earnings for the fourth quarter, we note that Rambus and MIPS did not report earnings for the second consecutive quarter. The remaining five firms (as shown in Table 3 below) had combined earnings of $23 million. This is over a 9% rise from the $21 million for those five firms in the same quarter of 2005 and a 46% rise compared to $15.8 million in the just-previous quarter for those five firms. Not surprisingly, ARM dominates these figures. ARM's earnings grew nearly 3% year-over-year and 32% sequentially.

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