Commentary: Electronics IP Industry - An August 2008 Update


Worldwide semiconductor revenue totaled $67.3 billion in CYQ1 2008, rising only 0.2% quarter-over-quarter, but 5% year-over-year.

Fabless revenue totaled $13.4 billion, which grew 16% year-over-year and equated to 20% of the semiconductor sales total.

The top 10 fabless companies (by first quarter revenue) combined for $7.8 billion, or 58% of total fabless revenue (see Table 1 below):



Semiconductor Industry Association

On August 4, 2008 the Semiconductor Industry Association (SIA) reported that global sales of semiconductors for the first half of 2008 grew to $127.5 billion, an increase of 5.4% over the first half of 2007 when sales were $121 billion. Sales in the second quarter were $64.7 billion, an increase of 3% over first quarter sales of $62.8 billion. Thus far, it appears that increased energy costs have had little impact on demand for electronic products that drive semiconductor usage. SIA President George Scalise said, “Key demand drivers for semiconductors - especially personal computers, which account for 40% of semiconductor sales, and mobile phones, which drive about 20% of demand - continued to show double-digit unit growth.” He added, “In 2008, developing countries - with sales of over 153 million units - will account for half of worldwide PC sales. In mobile phones developing countries are expected to account for 66% of total worldwide unit sales.”

The SIA's Global Sales Report (GSR) is a three-month moving average of “sales activity” tabulated by the World Semiconductor Trade Statistics (WSTS) organization, which represents approximately 66 companies. The moving average for the second quarter shown in Table 2 below has the Americas accounting for only 16% of “sales activity”, Europe very slightly behind, Japan accounting for over 18% and Asia Pacific accounting for over 50%:



How did the Electronics IP G7 perform in the Second Quarter of 2008?

On the IP revenue front, Table 3 below reveals that the G7's combined Q2 2008 performance was $224 million, a SMALL drop of 1.6% versus the revenue of $228 million in Q2 of 2007 and a larger decline of 3.4% from the $232 million in the just prior quarter. Virage Logic had the largest year-over-year percentage growth at 33.5%, followed by MIPS at 22% and Ceva at over 18%. MoSys had the largest year-over-year decline at more than 26%. Rambus was close by with a drop of almost 25%. On a sequential basis MoSys was the percentage leader and the only IP firm to report double-digit (13.4%) revenue growth. MIPS was second at 5.4% revenue growth. ARM endured a modest decline when measured in US dollars (-4.6%). Rambus had a sequential drop in revenue of just over 10%.


Figure 1 below provides a bar graph of each vendor's revenue for Q2 2007, Q1 2008, and Q2 2008 in sequence.


ARM continues to dominate the G7 with 57% relative market share. Rambus and MIPS come next with 16% and 13%, respectively. See Figure 2.


Relative to earnings, Table 4 reveals that the G7 IP Providers had a combined Q2 2008 net loss of -$231 million compared to combined net gains of $15.1 million in the second quarter of 2007, and of $1.3 million in the just prior quarter. The large combined Q2 2008 loss contained two significant write-downs of assets. MIPS wrote down over $100 million related to its acquisition of Chipidea in August 2007, and Rambus wrote down $130 million related to valuation of net tax deferred assets. ARM delivered consistent earnings over the three quarters presented in the table.




Q2 2008 Results of Individual Electronics IP Providers:
On April 28, 2008 ARM Holdings plc announced its un-audited financial results for the second quarter and the first half of 2008, the periods ended June 30, 2008. Total revenue for the second quarter was $128 million, a decrease of almost 1% from the $129 million in the second quarter of 2007, and a drop of 4.6% from the $134 million in the first quarter of 2008. The $128 million in Q2 2008 total revenue was consistent with ARM's forecast given a quarter ago.

Total dollar license revenues in Q2 2008 fell by 28% to $42.8 million, representing 33% of group revenues, compared to $59.3 million in Q2 2007. License revenues were comprised of $30.2 million from PD and $12.6 million from PIPD.

Total dollar royalty revenues in Q2 2008 grew by 28% to $60.7 million, representing 47% of group revenues, compared to $47.4 million in Q2 2007. PD royalties grew by 27% to $51.0 million, compared to $40.1 million in Q2 2007. This Q2 increase was due to increased penetration of ARM technology-based chips across all applications, and continuing growth in the logic and microcontroller industry. Total Q2 PIPD royalties grew 33% year-on-year to a record $9.7 million, including $1.1 million of catch-up royalties. Underlying Q2 royalties, excluding catch-up royalties in both periods, were up by 28% year-on-year.

Sales of development systems in Q2 2008 grew 15% to $16.2 million, representing 13% of group revenues, compared to $14.2 million in Q1 2008 and $14.1 million in Q2 2007. The sequential increase was partly due to a large tools licensing deal, with a tier 1 semiconductor company adopting ARM tools across multiple sites.

As indicated in April 2008, there has been some restructuring of ARM's development systems' product lines which will give rise to a headcount reduction of about 50 within the System Design Division (SDD). As a result, a restructuring charge of £0.5 million has been incurred in Q2 2008. The reduction in headcount will be completed during Q3 2008.

Service revenues in Q2 2008 were $8.4 million, representing 7% of group revenues, compared to $8.4 million in Q2 2007.

The Processor Division (PD), formerly the original ARM, had total revenues of $81.2 million, a drop of 4.9% year-over-year and a drop of almost 11% sequentially. Eleven processor licenses were signed with semiconductor companies in Q2 for ARM7, ARM9, ARM11, Cortex and Mali technology. Q2 also included four significant licenses with major OEMs. Three more Cortex-M3 licenses were signed in the quarter for microcontroller applications.

Year-on-year, reported PD unit shipments grew strongly in Q2 2008. Reported processor unit shipments were 892 million, up 37% compared to Q2 2007.

The Physical IP division (PIPD), the Artisan division established after the acquisition at the end of 2004, had total revenue of $22.3 million, an increase of 4.7% year-over-year and an increase of 6.7% from the prior quarter. PIPD license revenue increased sequentially to $12.6 million in Q2 2008 from $11.8 million in Q1 2008. Sixteen physical IP licenses were signed in the quarter for products across the technology portfolio. PIPD royalties in Q2 2008 were a record $9.7 million, up 6% from $9.1 million in Q1 2008 and up 33% from $7.3 million in Q2 2007. Underlying royalties for PIPD were $8.6 million, up 28% year-on-year. Sequentially, underlying royalties were up 3% despite an estimated 2% decline in overall foundry shipments.

Tudor Brown has become President of ARM and Mike Inglis has become EVP and General Manager of the Processor Division. Both continue as members of the ARM Holdings Board.

In the quarter licensing revenue accounted for 33% of total revenue, royalties for 47%, development systems for nearly 13% and services for 6.6%.

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