Commentary: Electronics IP Industry - A November 2005 Update

Commentary:

Electronics IP Industry - A November 2005 Update


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


 

In September 2003, December 2003, February 2004, May 2004, August 2004, November 2004, February 2005, May 2005 and August 2005 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 November 2005 Commentary, we look at the financial performances of the "G7" Electronics IP vendors during the third quarter 2005.

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

On September 6, 2005 MIPS acquired First Silicon Solution, a firm that specializes in silicon IP, design services and OCI (On-Chip Instrumentation) development tools for programming, testing, debug and trace of embedded systems in SoC, SOPC, FPGA, ASSP and ASIC devices.

On October 18, 2005 MoSys announced that Dhaval Ajmera has joined MoSys in the position of vice president of worldwide sales and business development. Most recently he was at CEVA where he was the vice president of North American Sales.

Also on October 18, 2005 Virage Logic announced the appointment of James Bailey as VP of worldwide sales. Most recently he was president and CEO of Accenia. Prior to Accenia, Bailey served as a GM in the DFM business unit at Cadence.

On October 28, 2005 ARM announced it has acquired Keil, a leading independent provider of software development tools for the microcontroller (MCU) market. Keil operates jointly through two privately-owned companies, Keil Elektronik GmbH in Munich, Germany, and Keil Software, Inc. in Plano, Texas. The firm has 23 employees and has combined gross assets valued at $4.6 million. It is claimed that currently there are more than 100,000 microcontroller developers using this industry-proven solution.



How did the Electronics IP G7 perform in the Third Quarter of 2005?

On the revenue front, Table 1 below reveals that the G7's combined Q3 2005 performance was up 17.2% year-over-year but down 3.9% from the prior quarter. MoSys had the largest year-over-year increase at 144%. ARM also had strong year-over-year growth at 48%. This was due in large part to the Artisan acquisition at the end of 2004. All other vendors had declining year-over-year revenues. Only MoSys and Virage Logic had positive sequential growth of 35% and 6.6%, respectively. The other firms declined sequentially.



Figure 1 below provides a bar graph of each vendor's revenue for Q3 2004, Q2 2004, and Q3 2005 in sequence.



ARM accounted for 58% of the combined revenues. Rambus accounted for 20%, and Virage and MIPS had about 7% each.

As shown in Table 2 below, in Q3 2005 the combined earnings of the G7 were $24.4 million, a 26% drop from $33 million in the third quarter of 2004, but a 26% increase sequentially from $19.5 million. Only AMR and Rambus had significant earnings. Virage Logic was basically flat while the others had losing quarters. On a year-over-year basis only Rambus and Virage Logic had earnings growth over a million dollars. ARM was the only other vendor not to see a year-over-year decrease in earnings. On a sequential basis Rambus had the greatest absolute growth (+$9.1 million) with Ceva (+$1.7 million) and Virage Logic (+$1.3 million) trailing. MIPS had the largest drop in absolute terms (-$6.5 million).



Q3 2005 Results of Individual Electronics IP Providers:
On October 18, 2005 ARM Holdings Plc reported financial results for its third quarter, the period ending September 30, 2005. Total revenue for the quarter was $58.7 million (US$105 million) compared to guidance of $123 million given a quarter ago. This was a 48% increase over the £39.4 million in the third quarter of 2004 before the Artisan acquisition and a 1.4% increase over the $57.8 million in the prior quarter. Product revenue accounted for 94% of total revenue, while service revenue accounted for 6% of total revenue.

Net income for the quarter was $9.9 million (US$17.3 million), a 2.6% rise over the £9.5 million in the same quarter last year but a 2.5% drop from the $10 million in the prior quarter. Due to currency fluctuation, the drop was greater in terms of US dollars (5.2%).

Approximately 95% of invoicing is in US dollars. In Table 3 below, US$ revenue figures are before acquisition-related changes and other deferred stock-based compensation changes. PIPD (Physical IP Division) is the Artisan part of the business.



In the quarter, 23 licenses for microprocessors were signed. Eleven new partners took a total of 16 licenses, of which eight were per-use licenses and four were term licenses. A further seven licenses were signed with six existing partners.

ARM partners shipped 405 million units in Q2 2005 (ARM reports royalty revenues one quarter in arrears), the first time that shipments have exceeded 400 million units in a quarter. Year-to-date total shipments are now 1.163 billion, up 29% on the same period in 2004, with mobile shipments growing by 24% and non-mobile shipments growing by 39%. The mobile segment accounted for 64% of unit shipments, compared to 66% last quarter. The total number of partners shipping ARM technology-based product at the end of Q3 is 62.

Warren East, ARM Chief Executive Officer, said: "There are several encouraging trends in these results. Despite some typical third quarter lumpiness in our licensing and Development Systems businesses, we have seen strong licensing activity for our latest ARM11 and Cortex microprocessors and our Physical IP division is starting to deliver on its promise with evidence of technology synergies between ARM and Artisan now translating into products and a further three synergistic license deals being signed during the quarter."

Tim Score, Chief Financial Officer, added: "Record royalty revenues and unit shipments illustrate the market leadership of ARM technologies across a broad spectrum of digital products. Operating margins are consistently above 30% and our cash generation is strong, enabling us both to invest in the innovative technologies that drive revenue growth and to return cash to shareholders via dividends and share buybacks."
On October 26, 2005 Ceva, Inc. reported results for its third quarter, the period ending September 30, 2005. Total revenue for the quarter was $8.4 million, a decrease of 14% compared to $9.7 million reported for the third quarter of 2004 and a decrease of 12% from $9.5 million in the just prior quarter. Third quarter revenue was close to the midrange given for guidance a quarter ago. Third Quarter licensing revenue was $5.7 million, or 68% of total revenue, a year-over-year decrease of 18%. Third Quarter royalty revenue was $1.5 million, or 18% of total revenue, a year-over-year decrease of 5%. Revenue from services was $1.2 million for the third quarters of 2005 and 2004. Twenty licensees shipped 27 million units, of which ~53% were covered by prepaid licenses.

Net loss for the third quarter of 2005 was $0.5 million, compared to net income of $0.6 million for the third quarter of 2004, and compared to a net loss of $2.2 million in the prior quarter (which included $1.6 million in reorganization and severance expenses). Results for the third quarter of 2005 included a reorganization charge of $1.7 million recorded in the operating expenses associated with leased facility requirements, and a gain of $1.5 million reported in interest and other income related to the disposal of an investment.

Gideon Wertheizer, Chief Executive Officer of CEVA, said: "The third quarter was a good indicator of our product strategy and focus. We signed five new license agreements in the quarter, bringing our total to 17 for the first nine months of 2005. Two of the license agreements signed in the quarter were for our flagship CEVA-X DSP core. Both of these licensees are leading companies in the Asia Pacific region. CEVA-X continues to be a strong growth driver for the Company, with 10 licensees to date."
On October 25, 2005 LogicVision, Inc. announced the results for its third quarter, the period that ended September 30, 2005. Total revenue for the quarter was $2.2 million compared with $2.5 million in the prior quarter. Actual Q3 revenue was at the high end of the guidance given a quarter earlier. License and product revenue at $1.3 million accounted for 80% of total revenue while service and maintenance revenue at $900K accounted for 40%. The US accounted for 80% of the business in the quarter, with Japan responsible for most of the remainder. The ETCreate (icBist) products accounted for 83% of total revenue and ETX accounted for most of the rest.

The company exited the quarter with a record backlog of $19.8 million, including $5.7 million of deferred revenues, compared with a backlog of $15.3 million, including $6.3 million of deferred revenues, at the end of the second quarter. Some 90% of bookings in the quarter were attributable to 4 major customers. There were 116 employees.

Net loss for the quarter was $2.9 million compared to a net loss of $1.8 million a year earlier, and compared to a net loss of $2.8 million in the prior quarter.

James Healy, president and CEO, said that: "Our bookings were the second highest in the company's history and our backlog going into the fourth quarter is very strong at $19.8 million. Since we announced our newest product, LV2005 in June, it has been shipped to 11 customers worldwide. Of these 11, seven evaluations have been successful and four are continuing or just about to start. We remained pleased with the level of customer interest in our LV2005 product."
On October 20, 2005 MIPS Technologies, Inc. reported the results for its first quarter of fiscal 2006, the period ending September 30, 2005. Total revenue for the first quarter of fiscal 2006 was $11.9 million, an 18 percent decrease compared to $14.6 million for the same quarter a year ago and a 16 percent decrease compared to $14.3 in the prior quarter. This quarter's actual revenue was below the guidance of about $14.6 million given a quarter earlier. Royalties, accounting for 67% of total revenue, were $8.1 million, an increase of 20 percent compared to $6.7 million in the same quarter a year ago and a 14% increase sequentially. Contract revenue, accounting for 33% of total revenue, was $3.9 million, a decrease of 51 percent compared to $7.9 million in the comparable period in fiscal 2005.

Net loss for quarter was $3.9 million, compared to a net income of $3.1 million for the same quarter a year ago and net income of $2.7 million in the prior quarter. Beginning this quarter, the Company recognized equity-based compensation expense pursuant to the fair value method under SFAS 123(R). This expense was $6.1 million in the first quarter of fiscal 2006. The quarter's operating expense also included a one-time charge of $570K for acquired in-process research and development expense related to the acquisition of First Silicon Solutions. The quarter's R&D expense also includes a one-time charge of $3.3 million related to the Danish lawsuit settlement.

On September 6, 2005 MIPS announced it had acquired First Silicon Solutions (FS2), a Lake Oswego, Oregon company as a wholly-owned subsidiary. FS2 specializes in silicon IP, design services and OCI (On-Chip Instrumentation) development tools for programming, testing, debug and trace of embedded systems in SoC, SOPC, FPGA, ASSP and ASIC devices.

Casey Eichler, chief financial officer of MIPS Technologies, said: " The growth in our royalty revenue is encouraging as the MIPS architecture continues to be the processor architecture of choice in key growth markets such as digital consumer and networking. We are disappointed, however, by the licensing revenue realized in the first quarter and are taking actions to strengthen and build up our pipeline of prospective licensees. "

John Bourgoin, president and CEO of MIPS Technologies, said: "Although our royalty growth indicates the resumption of a long term upward trend in the shipments of MIPS-Based processors, we recognize a need to take action to facilitate our return to licensing revenues at a level that supports our long term growth plans. I'd like to emphasize that our engineering execution on our next generation products during the quarter was excellent. This is one of the keys to our long term growth, and it is on track. I'm also pleased with the acquisition of First Silicon Solutions during the quarter which broadens the MIPS offering and brings us a world class tools capability in support of our customers."
On November 1, 2005 Monolithic System Technology, Inc. (MoSys) reported its results for its third quarter, the period ending September 20, 2005. Total revenue for the quarter was $4.1 million, a 144% increase from the $1.7 million for the same quarter a year ago and up 35% from the $3.1 million in the prior quarter. Licensing revenue accounted for 78% of total revenue and royalty revenue accounted for 22%. Licensing revenue was $3.2 million compared to $128K a year ago and a 67% increase from the $1.9 million a quarter earlier. Licensing revenue reflected the completion of several existing projects under contract as well as revenue from newly secured license agreements. Licensing revenue was from 17 different chip development projects compared to 11 in the prior quarter. Royalty revenues from 15 customers decreased by $224,000 compared to the previous quarter and by $591K year-over-year, reflecting seasonality in the consumer electronics business and product lifecycle transitions of our customers. Fujitsu accounted for 45% of total revenue and NEC for 17% of total revenue.

Net loss for the quarter was $50K, compared to net income of $5 million a year ago and compared to a loss of $579K in the previous quarter. Last year's revenue included $10 million in termination fees from the aborted Synopsys acquisition agreement.

On October 18, 2005 MoSys announced the appointment of Dhaval Ajmera to the position of Vice President of Worldwide Sales and Business Development. Most recently he was at CEVA where he was the vice president of North American Sales.

Chet Silvestri, Chief Executive Officer of MoSys, commented: "We are pleased with the results of the third quarter as we recorded a substantial increase sequentially and year-over-year in total net revenue and made good progress towards our goal of profitability by reaching break-even in net income. During the quarter, we saw strong interest in our new CLASSIC Macro family of silicon-proven off-the-shelf designs. The introduction of these new products, along with our efforts to enhance and improve our sales and marketing functions should contribute to a continued increase in licensing revenues in 2006."
On October 17, 2005 Rambus, Inc. reported its results for its third quarter, the period ending September 30, 2005. Total revenue was $36.0 million, down 7% over the third quarter last year and down 10% from the previous quarter. Actual Q3 revenue was above the high end of the guidance given a quarter earlier. Contract revenue of $8 million, accounting for 22% of total revenue, was down 3.5% year-over-year but up a very strong 48% sequentially. The latter was due to new contracts for XDR and FlexIO interface. Royalty revenue of $28 million, accounting for 78% of total revenue, was down 8% year-over-year and down 19% sequentially. The decrease in royalties is primarily due to fewer SDRAM and DDR-compatible royalty agreements outstanding during the third quarter of 2005. These royalties were down 10% year-over-year and 28% sequentially. This was due in part to the loss of Samsung royalties. Excluding the Intel cross-licensing agreement, these royalties accounted for 44% of total revenue.

Net income for the third quarter of 2005 was $14.5 million, a 40% increase as compared to $10.4 million in the third quarter last year, and a 170% increase as compared to $5.4 million in the previous quarter. The quarterly earnings per share and net income reflect a pre-tax gain of $18.6 million resulting from repurchases of $105 million face value of its zero coupon convertible notes. Total costs and expenses for the third quarter of 2005 were $32.1 million compared with $28.1 million in the third quarter last year and $34.4 million last quarter. Some $2.2 million of the increase over the prior year period was due to litigation expense. Operating income for the quarter was $3.9 million compared to $10.6 million a year earlier and to $5.6 million in the prior quarter.

Harold Hughes, president and chief executive officer, said: "Our team executed very well in overcoming many of the challenges we faced entering the third quarter. With outstanding progress on patent license renewals and broader customer engagements, we have solid momentum for revenue growth as we finish out the year."
On October 27, 2005 Virage Logic reported the results for its fourth quarter and the year for fiscal 2005. Total revenue for the quarter was $12.8 million, a 16% drop compared to $15.8 million in the same quarter a year earlier, but a 7% increase sequentially from $12 million. This $12.8 million was at the low end of the guidance given a quarter earlier. In the quarter. license revenue was $10 million or 78% of total revenue, a decrease of 18% year-over-year and an increase of $7.5 sequentially. Royalty revenue was $2.8 million or 22% of total revenue, a 12% decrease year-over-year and a 3.4% increase sequentially.

The net loss for the quarter was $28K compared to a net gain of $1.5 million in the same quarter a year earlier and compared to a net loss of $1.5 million in the prior quarter.

For its fiscal year 2005 Virage Logic had total revenue of $54 million, a 0.7% increase from $53 million in 2004. License revenue was $42 million or 80% of total revenue, a 5.2% drop from 2004. Royalty revenue was $11 million or 20% of total revenue, an increase of 33%. There was a net loss in 2005 of $575K compared to a net gain of $1.9 million in 2004.

On October 18, 2005 Virage hired Jim Bailey as VP of Worldwide Sales. Most recently he was president and CEO of Accenia. Prior to Accenia, Bailey served as a GM in the DFM business unit at Cadence.

Adam Kablanian, Virage Logic's president and chief executive officer, said: "After experiencing order slippage and operational issues which impacted our results for the previous two quarters, we met our prior outlook for revenues and slightly exceeded our bottom-line expectations for the fourth quarter. Furthermore, we extended our lead on advanced process nodes by signing 12 new 90 nanometer (nm) agreements. We also saw continued customer adoption of our IPrima Foundation semiconductor IP platforms. Our pipeline is healthy, and we remain committed to improving our financial results in the quarters ahead."



Stock Market Prices of the G7 Electronics IP Providers - down for Q3

As shown in Tables 4 and 5, and Figure 2 below , the combined stock prices for the G7 were down 13% in absolute dollars year-over-year and down 9.5% from the prior quarter. The average percentage change was down 0.7% year-over-year and down 7.9% sequentially. During the same quarter, the major stock indexes grew 9.5% year-over-year and nearly 4% sequentially. Arm, MIPS and MoSys had good stock price growth year-over-year, while Ceva, Rambus and Virage Logic dropped considerably. On a sequential basis only MoSys had positive growth from the previous quarter. Virage Logic suffered the largest percentage drop sequentially.





Forecast Guidance from Individual IP Providers

The next quarter's forecast figures shown in Table 6 below are for the midpoint if a range was specified. Combined G7 growth year-over-year was forecast at 30% while quarter-over-quarter growth is forecast as a more modest 7.4%. On a percentage basis MoSys is the most optimistic at 207%. Rambus, ARM and MIPS are also projecting growth of over 30%. Ceva, LogicVision and Virage Logic see double digit declines year-over-year. On a sequential basis MIPS is the most optimistic at 69%. Rambus is the only other vendor projecting double digit growth. MoSys sees the largest percentage decline at -9.2%.



Individual Company by Company Guidance

ARM's outlook for Q4 2005 is that year-on-year dollar revenue growth will be approximately 15% compared to the combined revenues of ARM and Artisan in the fourth quarter of 2004. Note that ARM's acquisition of Artisan occurred at the end of 2004. Full year 2005 normalized sterling earnings per share is expected to be in line with current market estimates.

For guidance Ceva expects fourth quarter revenue to be in the range of $8 million to $9 million compared to the $8.4 million in the quarter just completed and compared to $10 million in the same quarter in 2004. Operating expenses for the fourth are expected to be in the range of $7.8 million to $8.5 million compared to $9.9 million in the third quarter. For the year 2005 revenue is expected to be in the range of $35.8 million to $37.2 million.

For guidance LogicVision expects revenue in the fourth quarter to be in the range of $2.3 million to $2.4 million compared to $2.2 million in the quarter just completed and compared to $2.7 million in 2004. A net loss for the quarter is expected in the range of $2.9 million to $3.2 million.

For guidance MIPS expects revenue in the next quarter to be an increase in the range of 25% to 35% over the $15.5 million in the same quarter a year ago or about $20.2 million compared to $11.9 million in the quarter just completed. Royalty revenues are expected to grow between 5% and 10% year-over-year and license fees are expected in the range $6.5 million to $7 million. The FS2 acquisition should be neutral or slightly accretive for the remainder of fiscal 2006.

For guidance MoSys expects revenue in the range of $3.5 to $4 million compared to $4.1 million in the quarter just completed and compared to $1.2 million in the same quarter a year ago.

As guidance Rambus expects revenue for the fourth quarter to be in the range of $39 million to $43 million compared to $36 million in the quarter just completed and compared to $28.6 million in the fourth quarter of 2004. They expect operating costs to be in the range of $33 million to $37 million with litigation expense to be in the range of $9 million to $12 million for the quarter.

For guidance Virage Logic expects revenue in the next quarter, the first quarter of fiscal 2006, to be approximately $13.6 million to $13.8 million compared to $13.7 in the quarter just completed and compared to $15.9 million in the fourth quarter of 2004. Royalties in the next quarter are expected to be between $2.9 million and $3.0 million.



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