Commentary: Electronics IP Industry - A February 2006 Update
by Dr. Russ Henke and Dr. Jack Horgan
August 2005 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 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 February 2006 Commentary, we look at the financial performances of the "G7" Electronics IP vendors during the fourth quarter as well as the full year 2005.
| ARM Holdings plc
MIPS Technologies, Inc.
Virage Logic Corporation
| Cambridge, UK
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
According to the Semiconductor Industry Association (SIA), worldwide sales of semiconductors set a new record at $227.5 billion in 2005, an increase of 6.8% from the $213.0 billion reported in 2004. Worldwide sales for the fourth quarter were $59.86 billion, up by 2.0% from third-quarter sales of $58.67 billion, and up by 8.6% from sales of $55.10 billion in the fourth quarter of 2004. SIA forecasts that worldwide sales of semiconductors will grow by 7.9% in 2006, to $245 billion.
SIA President George Scalise noted that the semiconductor sales data reflect the continuing shift of electronics manufacturing operations to the Asia-Pacific region in general and to China in particular. He said, "Sales of semiconductors in the Asia-Pacific region reached $9.3 billion in December 2005 -- a 20% increase from December 2004. This region represented 46.6% of the global market for microchips at year's end. The largest share of the market is in China, which has become the world's leading manufacturer of electronics products."
According to industry analyst firm Gartner, worldwide semiconductor revenue is forecast to reach $257.7 billion in 2006, a 9.5% increase from 2005 revenue of $235.3 billion. In 2005, the market grew 7%. So Gartner's figures are slightly higher than the SIA's. Gartner expects a mild slowdown in 2007 with growth of 7%, followed by a cyclical market peak in 2008.
Andrew Norwood, research vice president for Gartner's semiconductor research group, said, "The supply of semiconductor devices is becoming more constrained, and the downward pressure on the average selling prices of devices seen in 2005 has eased. Any lengthening of device lead-times in coming months will be seen as further evidence of a tightening market."
How did the Electronics IP G7 perform in the Fourth Quarter of 2005?
On the revenue front, Table 1 below reveals that the G7's combined Q4 2005 performance was up 20% year-over-year. Percentage-wise, MoSys led the pack with 97% growth. ARM's significant year-over-year growth is due largely to its acquisition of Artisan at the very end of 2004. Ceva, Logic Vision and Virage Logic had year-over-year declines in the vicinity of 10%.
On a sequential quarterly basis, the G7 had revenue growth of nearly 8%. MIPS led the pack with 37%. Rambus and LogicVision both had good growth at 15.5% and 12.3%, respectively. MoSys and Ceva were the only decliners relative to the just prior quarter with drops of 42% and 10%, respectively.
Figure 1 below provides a bar graph of each vendor's revenue for Q4 2004, Q3 2005, and Q4 2005 in sequence.
As shown in Table 2 below, in Q4 2005 the combined earnings of the G7 were $30.2 million, a 92% rise compared to the $15.7 million in the fourth quarter of last year, and a 21% increase relative to the $25 million in the just prior quarter. Only Rambus, MIPS and ARM were profitable in the 4th quarter of 2005. The same three firms were the only ones with improved earnings relative to the quarter a year earlier (last column in Table 2). However, Rambus dropped substantially on a sequential quarterly basis. MoSys and Virage Logic also declined sequentially. MIPS was the largest gainer on a sequential basis with ARM a close second.
Q4 2005 Results of Individual Electronics IP Providers:
The Processor Division (PD), formerly the original ARM, had revenues of $66.5 million, while the Physical IP division (PIPD), the Artisan division established after the acquisition at the end of 2004, had revenues of $21.8 million.
Warren East, Chief Executive Officer, said, "2005 has been another successful year for ARM and we enter 2006 well placed to build on our market-leading position. Q4 was an excellent quarter for our processor division with our new flagship Cortex®-A8 product winning four high-profile industry awards and initial deliveries of the next two Cortex products being made to lead partners. These innovative products underpin license revenues in 2006. We have also made substantial progress in positioning the combination of physical IP and processor IP in order to realize the anticipated financial and technological benefits in 2006 and beyond."
In Q4 2005, 23 licensees shipped 31.5 million units, 15% higher than Q4 in the prior year. Sixteen licensees paying per unit royalties shipped 19.5 million units, the remaining seven licensees shipped 12 million units and were working off prepaid royalties.
Net loss for the quarter was $147K, compared to a net gain of $187K a year earlier and a loss of $530K in the just prior quarter.
Net loss for the quarter was $2.5 million, compared to a net loss of $2.3 million in the same quarter a year ago and compared to a net loss of $2.9 million the previous quarter. During the last quarter, LogicVision announced and executed a restructuring plan, incurring restructuring charges of $0.7 million.
James T. Healy, president and CEO of LogicVision, said, "We are pleased that we are on a growth path again. We had annual bookings of $13.5 million in 2005. This is a 37% increase over 2004 and positions us well for 2006."
Net income for the quarter was $2.4 million, a decrease of 32% from the $3.5 million a year ago but an increase of $3.8 million from the net loss of $1.5 million in the just prior quarter. Beginning in the September 2005 quarter, the Company recognized equity-based compensation expense pursuant to the fair value method under SFAS 123R. This expense for this quarter was $2.1 million. Expenses in the prior quarter included $3.3 million in a settlement with 32 former Danish employees and the union that represented them.
On November 7, 2005, MIPS promoted Brad Holtzinger to the position of vice president of worldwide sales. Mr. Holtzinger, most recently vice president of sales, the Americas at MIPS Technologies, succeeds Jack Browne, who assumes the position of vice president of marketing. On January 4, 2006, MIPS promoted Mervin S. Kato to the position of chief financial officer. Mr. Kato was most recently vice president of finance and corporate controller.
Merv Kato, chief financial officer of MIPS Technologies, said, "We are pleased with our second quarter results and the return to more normal levels of licensing activity." John Bourgoin, president and CEO of MIPS Technologies, said "We are particularly pleased that a significant portion of our license revenue came from new technology products, indicating that our superior value proposition is well-recognized. Our royalties in the markets other than video games reached record levels, indicating ongoing and broad based growth in the production of MIPS-based products worldwide. "
Chet Silvestri, Chief Executive Officer of MoSys, said, "Although the revenue deferral impacted our actual results for the fourth quarter, we are pleased with the strength in overall bookings, the increase in new projects within the consumer multimedia and cellular handset market segments and the achievement of positive cash flow. The majority of fourth quarter bookings were for our new family of CLASSIC Macros, which began initial shipments during the quarter."
There have been significant management changes at MoSys. In October 2005, Mosys hired Dhaval Ajmera as VP of Worldwide Sales. He was previously VP of North American Sales at CEVA. Also in November, MoSys hired Hem Hingarh as vice president of engineering. Prior to joining MoSys, Hem was vice president of engineering at Hellosoft, Inc., an IP licensor of embedded system software for convergence mobile platforms. Also in November, MoSys announced that Mark Voll, the company's vice president of finance and administration and chief financial officer, is leaving MoSys to pursue another career opportunity. Recall that Chet Silverstri joined MoSys as CEO at the end of July 2005, having been CEO at CEVA.
On January 2, 2006 Rambus announced the signing of a five-year patent license agreement for $75 million with Advanced Micro Devices, Inc. which grants AMD a license to Rambus patents.
Net income for the quarter was $9.4 million, a 43% increase over the $6.5 million a year earlier but a 35% decline from the $14.5 million in the just prior quarter. Rambus reported a pre-tax gain of $5.4 million on the repurchase of $35 million face value of its zero coupon convertible notes during the quarter.
Harold Hughes, president and chief executive officer at Rambus, said, "We are pleased with the results for the fourth quarter. We achieved record revenue and finished the year by signing an important patent licensing agreement with AMD for which payments will begin in 2006. We built a strong foundation this past year with achievements that demonstrate the value of our technology and give us a solid start to the new year."
On January 23, 2006, Rambus was authorized by its Board to repurchase up to an additional five million shares of its outstanding common stock over an undefined period of time.
In early February 2006, Rambus announced that Robert K. Eulau, VP and CFO, will resign from Rambus effective March 2, 2006 to pursue another opportunity.
Net loss for the quarter was $242 thousand, compared to a net gain of $1.8 million in the first quarter of fiscal 2005 and compared to a net loss of $28 thousand in the prior quarter. Net loss for the quarter included $1.9 million of stock-based compensation expense. Without the adoption of FAS123R, the company would have reported a net loss of only $95,000.
Adam Kablanian, Virage Logic's president and chief executive officer, said, "We believe that our strategy of capturing both 90- and 65-nanometer designs during this current upturn in the semiconductor industry is beginning to pay off as royalty revenues begin to ramp. At these advanced process nodes, our products hold a commanding technological lead over our competitors and offer customers key yield improvements and time-to-market advantages in implementing designs that utilize Virage Logic's semiconductor intellectual property."
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 33% in absolute dollars year-over-year but up 12% from the prior quarter. The average percentage change was down 31% year-over-year and up nearly 5% sequentially. During the quarter, the major stock indexes grew 1.2% year-over-year and nearly 2% sequentially.
ARM, with a rise of 1%, was the only firm whose stock price improved year-over-year. LogicVision had the steepest decline in stock price at -57%, while MoSyS had the smallest decline at about -12%.
On a sequential basis, Rambus and Virage Logic had substantial gains at 34% and 27%, respectively, with CEVA trailing at 21%. LogicVision had the largest sequential decline at almost -31%.
Calendar 2004 Electronics IP Vendor Performances
Note that the G7 IP providers have different fiscal years. The section below compares the last four reported quarters, nominally the calendar year 2005.
The combined revenues for the G7 in "calendar" 2005 were $748 million, an increase of 27% year-over-year. ARM was by far the leader at 54%, due mostly to its acquisition of Artisan at the end of 2004. Artisan had $84 million in revenue for 2004. Note if Aritisan revenue were included in the figure for 2004, the year-over-year increase for the G7 would have been only 11%. MoSys and Rambus gained over 10%. Ceva, MIPS and Virage Logic had single-digit percentage declines.
The combined earnings of the G7 for calendar 2005 were $104 million, a small increase over the $101 million in 2004. Combined earnings were approximately 14% of combined revenue, down from 17% in 2004. Again ARM has the greatest improvement relative to 2004. Artisan had net income of $15.5 million in 2004. Rambus was the only other firm to show a rise. MoSys had the largest decline.
For 2005 ARM had total revenue of $232 million, a 52% increase from the $28 million in 2004. Product revenue was £217 million, accounting for 94% of total revenue and a 57% increase year-over-year. Service revenue was £14.7 million, a 4% increase from 2004. In terms of US dollars, total revenue was $418.7 million, a 14% increase on the aggregate pro forma ARM and Artisan revenues of $367 million in 2004, and 18% up on the aggregate actual revenues of $355 million. Net income for 2005 was £41.9 million, a rise of 50% from the £28 million in 2004.
For 2005 Ceva had total revenue of $35.6 million, a decrease of 5.4% from the $37.7 million in 2004. Licensing revenue was $24 million was 64% of total revenue and down from $26.2 million a year earlier. There were a total of 27 new license agreements in the year 2005, compared to 24 agreements in 2004. Royalty revenue was $6.8 million, an increase of 13% from the prior year. Shipped units by licensees increased 8% to a record 115 million in 2005, compared to 106 million shipped in 2004. Net loss for 2005 was $2.27 million compared to a net gain of $2.3 million in 2004.
For calendar 2005 LogicVision had total revenue of $10.9 million, an increase of 7.8% from the $10.1 million in 2004. Net loss for year was nearly $10 million, compared to a net loss of $8.4 million in 2004. For the calendar year 2005, MIPS had total revenue of $59.4 million, up 4.3% from the $56.9 million in calendar 2004. Net income for the period was $5.8 million, compared to $10.4 million in the prior year.
For calendar 2005 MoSys had total revenue of $12.3 million, a 13.5% increase from the $10.8 million in 2004. License revenue was $7.7 million, accounting for 63% of total revenue, an increase of 70%. Royalty revenue was $4.5 million, accounting for 37% of total revenue, a decrease of almost 15%. Net income for the year was $2.6 million, compared to $11.6 million in 2004.
Rambus had total revenue for the year of $159 million, up nearly 10% from the $145 million in 2004. Revenues from royalties were $130 million, accounting for 82% of total revenue and were up 8.5% from the $120 million in 2004. Contract revenue was $28.9 million, accounting for 18% of total revenue and was up 17% from the $24.7 million in 2004. Net income for the year was $33.7 million, just barely over the $33.6 million in 2004.
For calendar 2005 Virage Logic had revenue of $52.9 million, a decrease of 5% form the $55.7 million in calendar 2004. Net loss for the year was $789 thousand, compared to a net gain of $2.1 million in calendar 2004.
Stock Prices for the Year
Forecast Guidance from Individual IP Providers
The forecast from the six EDA companies who provided guidance calls for year-over-year and sequential growth for the next quarter at around 5.6%
Individual Company by Company Guidance
During the analysts conference call ARM expressed confidence that next year would be an improvement, in line with market expectations. They expect more synergistic revenue from their two divisions. They see royalty momentum in both PD and PIPD.
For guidance Ceva expects revenue for the next quarter to be in the range of $7.5 to $8.5 million, compared to $7.7 million in the quarter just completed. Ceva expects revenue for the full year 2006 to be in the range $35 to $37 million.
As guidance LogicVision expects revenue in the next quarter to be in the range of $2.2 to $2.3 million, compared to nearly $2.5 million in the quarter just completed. Net loss in Q1 is expected to be in the range of $2.0 million to $2.2 million.
As guidance MIPS expects revenue to grow 10% to 15% over the quarter just reported. Royalty revenue should increase 5% to 10% and license revenue 15% to 20%.
As guidance MoSys expects revenue in the next quarter of $3 million to $4 million compared to $2.4 million in the quarter just completed and compared to $1.2 million for the same quarter last year.
As guidance Rambus expects revenue in the next quarter to be in the range of $41 to $43 million, compared to $41.6 million in the quarter just completed. This quarter would be the first one to include expense of stock options. Litigation expense is expected to be in the range of $8 million to $10 million.
As guidance Virage Logic expects revenue in the next quarter to be approximately $14.5 million to $15.0 million. Expected total revenues for the quarter are anticipated to include royalties of approximately $4.0 million to $4.5 million.