Commentary: Electronics IP Industry - A November 2007 Update


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

Group-of-7 ("G7"):

ARM Holdings plc
Ceva, Inc.
LogicVision, Inc.
MIPS Technologies, Inc.
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

On October 29, 2007 the Semiconductor Industry Association (SIA) announced that global microchip third-quarter sales of $67.8 billion increased 5.9% from the like period of 2006, when sales were $64.0 billion. Third-quarter sales were 13.2% higher than the second quarter of 2007 when sales were $59.9 billion. SIA President George Scalise said, “Demand from the consumer products sector was very robust as sales of semiconductors for traditional consumer applications rose by 35% quarter-to-quarter. The two largest demand drivers for semiconductors - PCs and cell phones - continued to show healthy growth.”

On August 27, 2007 MIPS Technologies, Inc. announced that the company will acquire privately-held Chipidea Microelectronica S.A, a leading independent supplier of analog and mixed signal IP. MIPS will pay an aggregate of $147 million in cash, with an additional performance-based milestone payment of 610,687 shares of MIPS Technologies' common stock in 2009.

How did the Electronics IP G7 perform in the Third Quarter of 2007?

Q3 revenue results overall were flat. Table 1 below reveals that the G7's combined Q3 2007 performance was $218 million, an increase of only 1.2% from the $216 million in the third quarter of 2006, and an actual decrease of 4% from the $227 million in the just prior quarter. MIPS, LogicVision and Ceva had only low double-digit revenue growth year-over-year. Virage Logic and Rambus had the steepest declines at -12.6% and -9.2%, respectively. On a sequential basis, Virage Logic was the revenue growth leader at 16.5%. Ceva was the only other G7 firm who managed to achieve an increase (2.5%) in revenue. Rambus had the largest decline at -12.3%, followed by MoSys at -8.3%.

Figure 1 below provides a bar graph of each vendor's revenue for Q3 2006, Q2 2007, and Q3 2007 in sequence.

ARM continues to dominate the G7 with 57.5% revenue share. Rambus remains a strong second at 19%. MIPS was a distant third at 10.2%. The percentages were similar in the just prior quarter.

Table 2 reveals the bad earnings news. The G7 IP Providers had combined earnings of only $7.2 million, down a whopping 56% from $16.3 million in the year ago quarter, and down a huge 59% from the $17.7 million in the just previous quarter. ARM had strong earnings but they were essentially flat both year-over-year and sequentially. Other than ARM, only Ceva managed to have a profit for the quarter. Rambus delivered a dramatic improvement from a loss of $22.6 million to a comparatively small loss of $6.5 million. However, the large Rambus loss last year was due to expenses associated with audit review and restatements. MIPS endured the biggest year-over-year decline in earnings. Both MIPS and Virage Logic moved from net gains to net losses. On a sequential basis Virage Logic, Ceva and LogicVision made modest profit improvement in absolute dollars.

Q3 2007 Results of Individual Electronics IP Providers:
On October 25, 2007 ARM Holdings plc reported financial results for the third quarter and for nine months, the periods ended September 30, 2007. Total dollar revenue in the quarter was $125 million, a modest 4% rise from the $121 million in the third quarter of 2006, and an almost 3% drop from the $129 million in the just prior quarter. Sterling revenue of £62.8 million was down slightly relative to both the prior quarter and the year ago quarter.

Total dollar license revenues in Q3 2007 was $55.1 million, representing 44% of group revenues, a 7% rise compared to $51.5 million in Q3 2006 but a decline of 7% from the prior quarter. License revenues comprised $42.4 million from PD, and $12.7 million from PIPD.

Total dollar royalty revenues in Q3 2007 rose by a meager 2.4% to $50.6 million, representing 40% of group revenues, compared to $49.4 million in Q3 2006. Royalties were up 7% sequentially, reflecting the gradual unwinding of the inventory correction in the industry and generally higher foundry utilization levels. Royalty revenues comprised $42.6 million from PD and $8.0 million from PIPD (including $0.3 million of “catch-up” royalties). Underlying royalties of $7.7 million for PIPD were up 15% sequentially, consistent with higher foundry utilization levels.

Sales of development systems in Q3 2007 were up 2% to $12.3 million, representing 10% of group revenues, compared to $12.1 million in Q3 2006. Consistent with previous years, development system revenues decreased sequentially in the third quarter due to seasonality and are expected to benefit from the normal seasonal Q4 pick-up.

ARM service revenues in Q3 2007 were also down 1% year-on-year at $7.6 million, representing 6% of group revenues, compared to $7.7 million in Q3 2006.

The Processor Division (PD), formerly the original ARM, had total revenues of $85 million, accounting for 68% of total revenue. This was an increase of 13% year-over-year, but a decrease of 0.5% sequentially. During the quarter, ARM signed 17 processor licenses, including its 500th license in total. The quarter was characterized by strong take-up of our latest technology, with seven additional Cortex family licenses and the fourth license for the Mali graphics processor being signed. Seven new companies licensed ARM processor technology for the first time. PD unit shipments in Q2 (partners report royalties one quarter in arrears) increased 7% sequentially and 12% versus Q3 2006 to 694 million units.

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