Electronics IP Industry - A May 2007 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, August 2006, November 2006 and February 2007 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 May 2007 Commentary, we look at the financial performances of the “G7” Electronics IP vendors during the first quarter of 2007.
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
Synopsys and Magma Design Automation have announced the companies have agreed to settle all pending litigation between them. As part of the settlement, the parties agreed to release all claims in both California and Delaware and to cross license the patents at issue in these jurisdictions as well as any related applications. Both companies further agreed not to initiate future patent litigation against each other for two years provided certain terms are met. Magma also agreed to make a payment to Synopsys of $12,500,000 toward the settlement of this dispute. All other terms of the settlement are confidential.
On May 2, 2007 Mentor Graphics announced that Maria M. Pope will join the company as vice president and chief financial officer, reporting to president, Gregory K. Hinckley. Previously, Pope held various senior management positions at Pope & Talbot, Inc., most recently vice president and general manager of the Wood Products Division. She has also held financial management positions at Levi Strauss & Co. and at Morgan Stanley & Co. (An unreported portion of Mentor Graphics' business is related to Electronics IP).
How did the Electronics IP G7 perform in the First Quarter of 2007?
On the revenue front, Table 1 below reveals that the G7's combined Q1 2007 performance was $222 million, an increase of 7.5% from the first quarter of 2006, but a decline of 3.4% from the just prior traditionally strong 2006 fourth quarter. ARM was the year-over-year percentage growth leader in US dollars at +14%, with LogicVision close behind at +12%. The largest decliner was Virage Logic at -30%, followed by MoSys at -11%. On a sequential basis, all firms had declining Q1 revenue compared to the usually solid fourth quarter. MoSys had the largest Q1 revenue drop at -37%. MIPS and Virage Logic had Q1 drops of more than -8%.
Figure 1 below provides a bar graph of each vendor's revenue for Q1 2006, Q4 2007, and Q1 2007 in sequence. ARM continues to dominate the G7 with 58% share. Rambus is a strong second at 23%. MIPS was a distant third at 9%. The percentages were essentially the same in the prior quarter.
Turning to Q1 earnings, the picture is not as bright as revenues. Rambus and MIPS did not report earnings for the quarter. The remaining five firms (as shown in Table 2 below) had combined earnings of $14.6 million, down 14% from the same quarter a year earlier, and down 32% from the previous quarter. ARM was the only firm with a net profit for the current quarter.
Q1 2007 Results of Individual Electronics IP Providers:
Total dollar license revenues in Q1 2007 grew by 24% to $54.3 million, representing 42% of group revenues, compared to $43.7 million in Q1 2006. License revenues comprised $37.4 million from PD and $16.9 million from PIPD.
Total dollar royalty revenues in Q1 2007 grew by 8% to $53.4 million, representing 41% of group revenues, compared to $49.3 million in Q1 2006. Royalty revenues comprised $45.0 million from PD and $8.4 million from PIPD. Against the backdrop of an overall semiconductor industry inventory correction, underlying PD royalties grew 5% sequentially and 16% compared to Q1 2006. Total PIPD royalties of $8.4 million included $1.5 million of catch-up royalties.
Sales of development systems in Q1 2007 were $13.5 million, representing 11% of group revenues, compared to $13.9 million in Q1 2006. Service revenues in Q1 2007 were $8.0 million, representing 6% of group revenues, compared to $6.0 million in Q1 2006.
The Processor Division (PD), formerly the original ARM, had total revenues of $82 million, accounting for 64% of total revenue. This was an increase of 16% year-over-year and an increase of almost 3% sequentially. Reported processor unit shipments were 724 million, up 3% sequentially and up 27% compared to Q1 2006. ARM7 family shipments, comprising 63% of total shipments, were up 11% sequentially. ARM11 family shipments grew 76% sequentially and now make up just over 1% of total shipments. The ARM9 family accounted for 36% of total shipments for the quarter. The Physical IP division (PIPD), the Artisan division established after the acquisition at the end of 2004, had total revenue was $25.3 million, accounting for almost 20% of total company revenue. This was an increase of 14.5% year-over-year, and a decrease of nearly 9% sequentially. ARM signed 13 physical IP licenses in Q1 2007, including the first license for silicon on insulator ('SOI') physical IP arising from the acquisition of SOISIC in October 2006.