  Commentary:
Electronics IP Industry – An August 2007 Updateby 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, November 2006, February 2007 and May 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 August 2007 Commentary, we look at the financial performances of the “G7” Electronics IP vendors during the second quarter of 2007. Group-of-7 ("G7"):
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 July 30, 2007 MOSAID Technologies Inc. announced that it has concluded the sale of certain assets of its Semiconductor Intellectual Property product development business to Synopsys for US$15.3 million in cash. The payment is subject to a US$2 million holdback for one year. Synopsys has also hired the Ottawa-based Semiconductor IP product engineering team. As covered in this website's weekly editorial on Patent Licensing - MOSAID in mid-May 2007, this sale follows the firm's sale of certain assets of its Systems Division's ATE business to Teradyne, Inc. for $20 million in cash. MOSAID intends to focus on its core patent licensing competencies. Revenues from continuing operations for fiscal 2007 (ended April 30, 2007) were CDN$59.9 million, up 56% from CDN$38.5 million in fiscal 2006. Net income from continuing operations for fiscal 2007 was CDN$20.5 million, compared with CDN$14.6 million in the prior year. How did the Electronics IP G7 perform in the Second Quarter of 2007? On the revenue front, Table 1 below reveals that the G7's combined Q2 2007 performance was $228 million, an increase of 5.5% from the second quarter of 2006 and a 2.3% increase from the first quarter of 2007. MoSys was the revenue percentage growth leader at 85%, with MIPS a strong second at 30%. ARM and LogicVision grew around 10%. Virage Logic was the largest decliner at minus 26.5%. Rambus declined slightly. On a sequential basis, MoSys at 38% was again the percentage growth leader, with MIPS at 24% and LogicVision at 17% also showing good growth. Rambus was the only decliner.
Figure 1 below provides a bar graph of each vendor's revenue for Q2 2006, Q1 2007, and Q2 2007 in sequence. ARM continues to dominate the G7 with 57% share. Rambus is a strong second at 21%. MIPS was a distant third at 10%. The percentages were similar in the prior quarter.
Turning to profitability, Rambus did not report earnings for the quarter. The remaining 6 firms (as shown in Table 2 below) had combined earnings of $17.7 million, down 36% from the same quarter a year earlier, but up nearly 11% from the just previous quarter. ARM and MIPS were the only firms with a net profit in the quarter above $1 million. ARM dominates here as it does in terms of revenue. However, ARM's net income year-over-year is down 32%, due in large part to $5.3 million profit on the disposal of an available-for-sale security in the year-ago quarter. MIPS net income in the quarter was impacted by a $3 million charge associated with its stock option investigation and resulting financial restatement.
Q2 2007 Results of Individual Electronics IP Providers:
Total dollar license revenues in Q2 2007 grew by nearly 15% to $59.3 million, representing 46% of group revenues, compared to $51.7 million in Q2 2006. License revenues comprised $45.3 million from PD and $14 million from PIPD. Total dollar royalty revenues in Q2 2007 declined by 1.5% to $47.4 million, representing 37% of group revenues, compared to $48.1 million in Q2 2006. Royalties in the quarter were affected by a combination of normal seasonality, the semiconductor industry general inventory correction and lower foundry utilization levels. Royalty revenues comprised $40.1 million from PD and $7.3 million from PIPD, which included $0.6 million of “catch-up” royalties. Underlying royalties of $6.7 million for PIPD were broadly flat compared to underlying royalties in Q2 2006 while overall foundry industry revenue declined by approximately 15% over the same period, indicating encouraging market share gains. Sales of development systems in Q2 2007 were up 9% to $14.1 million, representing 11% of group revenues, compared to $12.9 million in Q2 2006. Service revenues in Q2 2007 were up 20% to $8.4 million, representing 6% of group revenues, compared to $7.0 million in Q2 2006. The Processor Division (PD), formerly the original ARM, had total revenues of $85.4 million accounting for 66% of total revenue. This was an increase of 12% year-over-year and an increase of 3.6% sequentially. During the quarter 15 licenses were signed including three Cortex family licenses, four ARM11™ family licenses and one license (third in total) for the Mali™ graphics processor. Q2 licensing activity underpins further penetration of non-mobile markets as a high proportion of licensing in the quarter was for applications outside of the mobile phone market. PD units shipments in Q1 (our partners report royalties one quarter in arrears) declined 10% sequentially to 648 million units, although this was an overall increase of 17% versus Q2 2006. ARM9 shipments accounted for 40% of total units, including 17% relating to ARM926 shipments. ARM11 shipments again increased sequentially, comprising over 1% of total shipments.
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