Electronics IP Industry - An August 2005 Update
by Dr. Russ Henke and Dr. Jack Horgan
February 2004 and
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 known as 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 2005 Commentary, we look at the financial performances of the "G7" Electronics IP vendors during the SECOND quarter 2005.
ARM Holdings plc
MIPS Technologies, Inc.
Virage Logic Corporation
San Jose, CA
San Jose, CA
Mountain View, CA
Los Altos, CA
Recent Electronics IP News Highlights
On June 13, 2005 Rambus Inc. announced it had terminated a licensing agreement with Samsung Electronics and added Samsung as a defendant in Rambus' pending patent infringement suit in the U.S. District Court. In the suit, Rambus charges that the defendants' DDR2 memory devices and GDDR2 and GDDR3 graphics memory devices use Rambus patented inventions. In a separate suit filed, Rambus named Samsung as a defendant in claims alleging infringement of Rambus' patents by Samsung SDRAM and DDR DRAM memory types as well as controllers that work with those memory types. Samsung has counter-sued, asking the court to declare four Rambus' patents "invalid and unenforceable."
On July 28, 2005 MoSys announced the appointment of Chet Silvestri as CEO. Last December co-founder Dr. Hsu had resigned, citing health problems.
How did the Electronics IP G7 perform in the Second Quarter of 2005?
On the revenue front, Table 1 below reveals that the G7's combined Q2 2005 performance was up a remarkable 30% compared to the same quarter a year ago, but down a modest 1.1% from the previous sequential quarter.
The leader in total revenue and in year-over-year revenue growth is ARM. The company had acquired the number two vendor Artisan at the end of last year. Rambus also enjoyed double digit growth over last year. Virage Logic was the largest year-over-year decliner (-13.7%). On a sequential basis, MoSys was the only IP vendor with double digit growth (+14.3%). The IP vendors with the largest sequential declines were LogicVision at -31% and MIPS at -15%.
Figure 1 below provides a bar graph of each vendor's revenue for Q2 2004, Q1 2005, and Q2 2005 in sequence.
ARM holds 57% market share with Rambus a distant second at 21%. MIPS, VirageLogic and Ceva follow with 8%, 6% and 5%, respectively.
As shown in Table 2 below, in Q2 2005 the combined earnings of the G7 were $19.4 million (10.4% return on sales). Combined earnings were up 4% from the $18.7 million in the second quarter of 2004 but down 11% sequentially from $21.9 million. Ceva, LogicVision, MoSys and Virage Logic all had net losses in the quarter. Year-over-year ARM had the largest growth in earnings. Ceva and Virage Logic switched from a net gain to a net loss. Four of the seven had declining earnings from the prior quarter.
Q2 2005 Results of Individual Electronics IP Providers
License revenue was $28.0 million representing 48% of group revenue. License revenue consisted of $18.1 million from the original ARM business and £ 9.9 million from PIPD. Twenty licenses for microprocessor cores were signed in the second quarter of 2005. Nine new partners took a total of nine per use licenses. A further 11 licenses were signed with 11 existing partners.
Total royalty revenues in the second quarter were £20.1 million, representing 35% of total group revenues. Royalty revenues comprised $17.0 million from the original ARM business and $3.1 million from PIPD.
In US Dollars, revenues for the quarter were $105.5 million, up 21% on the aggregate ARM and Artisan revenues of $87.3 million in Q2 2004. This was consistent with the forecast given a quarter earlier. At $81.9 million, dollar revenues from the original ARM business were 25% ahead of Q2 2004. At $23.6 million, dollar revenues from the Physical Intellectual Property Division (PIPD), the former Artisan business, were up 7% on Q2 2004.
Warren East, Chief Executive Officer, said: "We are pleased to report 22% growth in dollar revenues across our business in the first half of 2005. Strong licensing activity in Q2, both in the traditional ARM microprocessor business and in the Physical IP business, gives us increased confidence in the potential for sustained growth in royalty revenues into the future."
Net loss for the second quarter of 2005 was $2.2 million, as compared to net income of $500K for the second quarter of 2004 and $627K the prior quarter. This included a reorganization and severance charge of $1.7 million associated with the previously announced plans to reduce operating expenses, primarily those related to general and administrative functions, and a one-time impairment charge of $0.5 million principally arising from the decision to cease the CEVA Bluetooth technology line.
Ceva's main strength has been in DSP cores. They are now moving into application platforms in three markets: multimedia cellular, GPS for cellular and storage for consumer electronics.
Gideon Wertheizer, CEO of CEVA stated: "During the last few weeks we have concluded our strategic plans with two main objectives:
The continued focus on the development of highly integrated DSP based platforms composed of hardware and software for three main markets: Multimedia for mobile phones and consumer products, GPS for mobile phones and automotive and Serial ATA (SATA) for consumer electronics and servers.
Increased efficiency in the day-to-day operations of the company. In this respect we identified cost savings of approximately $2 million for 2005 relative to the company's previous 2005 operating expense guidance of $36 million to $37 million."
Net loss of the quarter was $2.8 million compared to net losses of $2.2 million in the same quarter of 2004 and $1.8 million in the prior quarter.
James Healy, president and CEO, said, "Our bookings nearly doubled from Q1 to Q2. Q2 bookings were below plan, largely due to a million dollar-plus order that was delayed until next week after the quarter's close. We expect to see our bookings regain momentum in the next couple of quarter."
For fiscal 2005, total revenue was $60 million (an increase of 26% from fiscal 2004), the best year in its history. Royalty revenue of $29 million increased 24% while contract revenue of $31 million increased 28%. There were 10 new licenses in the quarter and 43 new licenses in the year. Net income for fiscal 2005 was $13.4 million compared to a net loss of $1.5 million in fiscal 2004.
Casey Eichler, MIPS CFO, said, "We are pleased with our annual revenue growth and return to fiscal year profitability. With ten new licenses this quarter, bringing our total to 43 for the fiscal year, we realized 28 percent growth in our annual contract revenue. Although license fees were lower than expected this last quarter, the digital consumer and networking markets in which the MIPS architecture is so successful, continue to offer growth from which we expect to benefit."
John Bourgoin, MIPS President and CEO, said, "Fiscal year 2005 was marked by the strongest revenue growth in our seven year history, despite a soft fourth quarter. Our 24K core family continues to beat the competition in the market, and our new multithreading technology has strong promise as a winner and driver of growth in fiscal year 2006."
Net loss for the quarter was $579K compared to net losses of $4.1 million and $790K the prior year and prior quarter, respectively. Expenses included a restructuring charge of $114K related to closure of the Canadian research and development facility in the fourth quarter of 2004.
On July 28, 2005 MoSys announced the appointment of Chet Silvestri as chief executive officer. Most recently, he held the position of CEO at CEVA. Additionally, he served as CEO at Arcot Systems, Inc., COO of Tripath Technology, Inc. and president of the Microelectronic Division of SUN Microsystems, Inc., with responsibility for R&D, sales, manufacturing and marketing of the company's SPARC microprocessors and chipsets. He has also held senior management positions with MIPS and Intel. Silvstri succeeds Mark Voll who had temporally filled the position after the resignation at the end of December by Dr. Fu-Chieh Hsu, co-founder of the company. Dr. Hsu had cited recent health problems as the reason for his resignation.
On June 29 the firm announced that it had relocated its headquarters to a larger space and for less rent.
Net income for the second quarter was $5.4 million (13% of revenue), compared to $8.3 million in the second quarter last year and $4.4 million in the previous quarter. Total costs and expenses were $34.4 million compared with $24.4 million in the second quarter last year and $34.7 million last quarter. Litigation expenses accounted for $5.2 million of the increase.
Rambus is in active negotiation with several firms on patent license renewals.
CEO Harold Hughes said, "We have taken important and necessary actions to protect our intellectual property while we work on patent license renewals. We are very encouraged by the growing interest we are seeing in our advanced high-speed interface designs, particularly in our XDR memory interface as well as the momentum we are seeing with our PCI Express solutions."
On June 13, 2005 Rambus announced it has added Samsung Electronics as a defendant in its pending patent infringement suit in the U.S. District Court for the Northern District of California. In the suit, Rambus charges that defendants' DDR2 memory devices and GDDR2 and GDDR3 graphics memory devices use Rambus' patented inventions. In a separate suit filed today, Rambus named Samsung as a defendant in claims alleging infringement of Rambus patents by Samsung SDRAM and DDR DRAM memory types as well as controllers that work with those memory types. Rambus also terminated Samsung license agreement prior to its scheduled June 30 end date. Samsung has counter-sued in the same court that presided over a five-year patent battle between Rambus and Infineon. Samsung's complaint seeks a court order declaring four Rambus patents "invalid and unenforceable" and cites similar issues to those raised by Infineon.
During the quarterly conference call, CEO Hughes said, "Patent license renewal negotiations did not go as we had hoped. We reluctantly took legal action against Samsung because we could not reach an agreeable solution."
On July 7, 2005 Rambus announced the latest version of its high-bandwidth XDR memory interface technology, named XDR2. The XDR2 memory interface uses a micro-threaded DRAM core and circuit enhancements that enable data rates starting at 8GHz, making it five times faster than today's best-in-class GDDR graphics DRAM products. The XDR2 memory interface is targeting applications that require extreme memory bandwidth, such as 3D graphics, advanced video imaging, and network routing and switching applications.
License revenue by process node was 28% at 130 nm, 44% at 90 nm, 15% at 180 and 150 nm, 8% at 65 nm and 5% other. Standard IP accounted for 66% of license revenue and custom IP for 44%.
International sales accounted for 61% of total revenue. Asia and Japan accounted for 43%. UMC accounted for 13% and TSMC accounted for 12% of total revenue.
Recently, Virage Logic signed another 65-nm agreement (making a total of 4 agreements), booked a total of nine new 90nm agreements, signed a total of three new direct royalty-bearing agreements for the STAR Memory System, signed four new ASAP Logic and IPrima Foundation semiconductor IP platform agreements, and recorded revenue under licensing agreements from 45 customers -- 37 existing and eight new.
Adam Kablanian, Virage Logic's president and chief executive officer, said, " We are disappointed with our financial results for the third quarter. During the quarter, we continued to experience order slippage due to customers' delayed commitments, as well as operational issues, which have impacted our ability to ship against existing orders." He added, "While the issues that impacted our third-quarter results are disappointing, our overall pipeline continues to be healthy, and we believe that our lead on advanced process nodes remains strong. " The operational issues were inability to convert orders received late in the quarter at advanced process nodes to revenue and unanticipated customer requests for variance of IP at advanced process nodes.
Virage Logic is looking for new VP of Sales.
Stock Market Prices of the G7 Electronics IP Providers
As shown in Tables 3 and 4, and Figure 2 below , the combined stock prices for the G7 were down in absolute dollars 14% year-over-year and down 16% from the prior quarter. The average percentage changes were down 12.5% year-over-year and down 15.7% sequentially. During the same period the major stock indices were essentially flat.
On a year-over-year basis, MIPS and Virage Logic stocks both increased by low double digit percentages. With the exception of ARM (-7%), the remaining firms saw stock prices dip over 25%. On a sequential basis, only ARM stock managed a small increase. Of the remainder, only Virage Logic managed to stay in single digit percentage loss.
Forecast Guidance from Individual IP Providers
The next quarter's forecast figures shown in Table 5 below are for the midpoint if a range was specified. Combined G7 growth year-over-year was forecast at nearly 30%, but the quarter-over-quarter forecast was a more modest 6.4% due to seasonality. ARM's large projected growth over 2004 is due to the Aritisan acquisition. MoSys is the only other IP vendor forecasting year-over-year growth. All others are projecting double digit declines. On a sequential basis, MoSys and ARM lead the pack with VirageLogic trailing at 8% growth. Rambus, LogicVision and Ceva are expecting double-digit quarter-over-quarter declines.
Individual Company by Company Guidance
ARM's guidance for full year 2005 dollar revenue growth was revised to 15-20%, or about $123 million. This compares to $105 million in the quarter just completed and $70 million in the same quarter of 2004 before the Artisan acquisition. Expectation for full year 2005 show sterling revenues and profits unchanged. Dollar revenue was projected last quarter to grow at least 20% in both underlying businesses in the full year 2005.
Ceva 's guidance for Q3 was described as "cautious" by CEO Gideon Wertheizer (due to issues related to pace of cellular GPS and 3G deployment, and use of hardwired chips) is for revenue in the range of $8 to $9 million compared to $9.5 million in the quarter just completed and $9.7 million in the third quarter in 2004. Guidance for the full year is in the range $36.5 to $38.5 million, compared to $38.5 million for 2004.
LogicVision's guidance for the next quarter calls for revenues in the range of $2.1 million to $2.2 million, compared with $2.5 million in the quarter just completed and with $2.7 million in the same quarter in 2004. Net loss for the quarter is expected to be in the range of $3.7 million to $3.9 million, compared to a net loss of $2.8 million in the quarter just completed.
As guidance MIPS said that total revenue in the next quarter should be modeled as flat to up 5% over last year, or about $14.6 million the same as in same quarter a year ago. They pointed to summer holidays and seasonality as factors. Their served market is experiencing some softness. While not losing deals to competitors, MIPS is seeing some customer projects moving out or being canceled. Quarterly expenses are projected to be up $500K on a non-GAAP basis. Expensing of stock options will begin for MIPS in 1Q FY2006.
As guidance MoSys anticipates revenue for the third quarter in the range of $3.5 to $4 million, compared with $3.1 million in the quarter just completed.
Rambus guidance for the third quarter is for revenue to lie in the range of $32 to $35 million, with operating expenses in the range of $31 to $34 million, and with litigation in the range of $8 to $10 million. This compares with $40 million in the quarter just completed and to $38.9 million in the third quarter of 2004. The firm expects revenue to rise in Q4 due to Infineon royalties coming online.
Virage Logic currently anticipates total revenues of approximately $12.8 million to $13.0 million compared to $11.9 million in the quarter just completed and $15.3 million in fiscal 2004. Expected total revenues for the quarter are anticipated to include royalties of approximately $2.6 million to $2.8 million.
Comments on the IP business of Cadence, Mentor Graphics and Synopsys:
The Top 3 EDA Vendors in overall annual revenue are also important players in the IP providers' niche. The difficulty in comparing the Top 3 EDA Vendors' IP business to one another is caused by the differences in how each company arbitrarily chooses to define the revenue components of its respective IP business. Further, none of the TOP 3 EDA Vendors unbundles profitability of its respective IP-related business lines, precluding IP earnings' comparisons.
EDA Consortium's Market Statistics
On June 13, 2005 the EDA Consortium released its latest Market Statistics Service report for the overall EDA Industry for Q1 2005 ( Tables 6 & 7 ).
During Q1 2005, CAE accounted for 47% of industry revenue, IC Physical Design & Verification for 29%, PCB/MCM 9%, Semiconductor IP 8% and Services 8%.
Walden C. Rhines, chairman of the EDA Consortium and chairman and CEO of Mentor Graphics Corporation., said, "The industry continued to tread water in the first quarter. Continued weakness in North America offset the mild improvements in Japan and the Pacific Rim."
During Q1 2005 North America accounted for 45% of industry revenue, Europe 18%, Japan 24% and ROW 12%.
In June the EDA Consortium appointed John Bourgoin, CEO and President of MIPS Technologies, Inc., to its board of directors to serve the organization through April 2006.
The EDA Consortium is the international association of companies that provide tools and services that enable engineers to create the world's electronic products. EDA is the critical technology used to design electronics for the communications, computer, space technology, medical and industrial equipment and consumer electronics markets among others.
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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. 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 Fellow of ASME International. An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this article. Jack's career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Since May 2003 the authors have now published a total of thirty-one (31) independent articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADcafe and EDAcafe. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net .