Commentary: Electronics IP Industry – A May 2008 Update

On April 23, 2008 Rambus announced that it has signed an agreement for DDR engineering services and a memorandum of understanding for future development of MirrorBit Flash memory solutions with Spansion.

On April 8, 2008 Rambus announced that Dr. Kevin Kennedy has decided to step down as Chairman and a member of the Company's Board of Directors, effective July 1, 2008, unless a replacement Board member is named earlier. Dr. Kennedy indicated that his planned departure is due to personal reasons. Dr. Kennedy has served as a director of Rambus since 2003, and Chairman since June 2006. Dr. Kennedy currently serves as chief executive officer and a member of the Board of Directors at JDS Uniphase.

Harold Hughes, president and chief executive officer at Rambus, said, “While we delivered revenue at the high end of our guidance, we're nevertheless unsatisfied with the year-over-year result. Our challenge now is to translate our recent legal victories into renewed licensing momentum for our patented innovations and leadership products."
On April 30, 2008 Virage Logic announced financial results for the second quarter of its fiscal 2008, the period ended March 31, 2008. Total revenue was $14.7 million, an increase of 39% from the $10.6 million in the first quarter of 2007 and a 4.5% increase from the $14.1 million in the fourth quarter of 2007. The $14.7 million was above the guidance range given last quarter. License revenue was $12.1 million, or 82% of total revenue, was a 55% increase year-over-year and almost 13% increase sequentially. Royalty revenue was $2.6 million, a decrease of 6.8% year-over-year and a decrease of almost 22% sequentially.

On a geographic basis, Asia accounted for 45% of total revenue, North America 38% and EMEA 17%.

In the second fiscal quarter, the majority of physical IP revenue came from newer process nodes. Specifically physical licensing revenue from 45nm and 65 nm accounted for 49% of sales in the quarter, while 90 nm accounted for 22%, 130 nm and above accounted for 20% and other accounted for 9%. There were nine new customers in the quarter.

Royalties from the mature technologies 180 nm/130 nm nodes accounted for 64% of royalty revenue, while 90nm/65 nm process nodes contributed 46%.

Net income in the quarter was $632,000 compared to a loss of $1.8 million in the first quarter of 2007 and a 42% decrease compared to a gain of $1.1 million in the just prior quarter. In the previous quarter there was a one time benefit from truing up stock based compensation expense for executives who had left the company. This reduced that expense to $416,000 compared to $1 million typically. The resumption of social security taxes added around $500,000 in expenses in the quarter.

On April 17, 2008 Virage Logic announced the appointment of Dr. Alex Shubat to the newly created position of chief operating officer. Dr. Shubat, Virage Logic's co-founder, previously served as the company's chief technical officer. Virage Logic also today announced the resignation of chief marketing officer (CMO), Pete Rodriguez, who is leaving to join another semiconductor industry company as CEO. The company will not replace the CMO position but instead will look for an executive vice president of sales to lead the global sales organization. In the interim, Dan McCranie, the firm's CEO, will serve in this capacity until a replacement is named and Brani Buric, Virage Logic's vice president of product marketing and strategic foundry relationships, will continue to lead the marketing organization.

Dan McCranie, president, chief executive officer and chairman of Virage Logic, said, "License revenue increased 13% sequentially, and 55% year-over-year. This is the highest license revenue the company has posted in 12 quarters. Total revenue, which includes royalties, increased 4% sequentially and 39% year-over-year. The growth in license revenue is a direct result of our efforts in the past year on two key initiatives:

-- Being first to market with next generation advanced technology products. Our recent introduction of 40nm SiWare memory compilers and logic libraries underscores our ability to develop and bring to the semiconductor market our feature-rich products at the most advanced foundry nodes.

-- Broadening our product portfolio. Examples of this include the 'productization' of our enhanced memory compiler and yield analysis tools for sales to our IDM customers, the expansion of our product portfolio to include advanced DDR memory interface IP, and the availability of our compiler and library offerings at all the major semiconductor foundries.”

Stock Market Prices of the G7 Electronics IP Providers

As shown in Tables 5 and 6 and Figure 3, the combined stock prices for the G7 increased in absolute terms 18% year-over-year and decreased 13% sequentially. The average percentage change was down over 24% year-over-year, and decreased 8.2% sequentially. This compares unfavorably to a decrease of 4.5% for the major stock indexes year-over-year, and a decrease of 10.5% sequentially.

On a year-over-year basis Rambus was the growth leader as its stock rose almost by double digits (9.7%). CEVA was second with an increase approaching 6%. MIPS and MoSys had the largest stock price declines in the vicinity of 50% while LogicVision and ARM had drops around 30%. On a sequential basis LogicVision was the growth leader at 59%. Rambus was a distant second with a gain over 11%. CEVA had the largest decline at -37% followed by Virage Logic at -31% and ARM at -29%.

The poor Q1 2008 performance of the stock values of the G7 IP vendors is not surprising in light of the overall US economy. The US economy barely grew at an estimated snail's pace of just 0.6% in Q1 2008. It marked the second quarter in a row of such feeble growth. Meanwhile, US wages and benefits were down 0.6% in Q1 2008.

Also, US consumers have understandably turned more cautious. Their spending rose at just a meager 1% clip in Q1 2008, as soaring energy and food prices are straining everyone's wallets. That's down from a 2.3% growth rate and was the slowest since Q2 2001 -- when the US was suffering through W's first recession.

No wonder a growing number of economists believe the US economy is now in W's second recession and is contracting.

Forecast Guidance from Individual IP Providers

MoSys did not provide revenue guidance for the next quarter. The six IP vendors who did so expect the group's combined revenue to grow 1.3% year-over-year and decline nearly 2% compared to the quarter just reported. Rambus is the only firm expecting a revenue decrease (-27%) year-over-year. MIPS and Ceva are the most optimistic with projections of 19% and 16.5% growth respectively. On a sequential basis Rambus is again the most pessimistic. Ceva is also forecasting a sequential decline. The remaining firms see modest growth relative to the last quarter.

Individual Company by Company Guidance

As guidance ARM said, “ARM has made an encouraging start to 2008 with sequential revenue growth in PIPD and positive momentum in both PD and PIPD royalty revenues. We remain cautious in the short term given the uncertainty in both the semiconductor industry and the wider macroeconomic environment. Against this backdrop and given the potential impact of industry seasonality on royalty revenues, total dollar revenues in Q2 are unlikely to be higher than Q1. However, consistent with our guidance in February, assuming no marked deterioration in the trading environment, we continue to expect to increase dollar revenues in FY 2008 by at least the growth rate achieved in 2007.”

ARM generated $134.3 million in the quarter just reported and $129.2 in the second quarter last year. The growth rate for all of 2007 was 6% and for 2Q 2007 it was 8%.

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