Electronics IP Industry View - How important is the Intellectual Property market?

Company Jan 2 close Aug 29 close Ratio Aug29/Jan 2
Cadence 11.66 14.22 122%
Mentor 7.68 20.23 257%
Synopsys 46.92 68.21 145%
Total Top 3 EDA Vendors 66.44 102.66 154%

Figure 6 - Closing US$ Prices on Jan 2 and Aug 29, 2003 for Top 3 EDA Vendors

Index Jan 2 close Aug 29 close Ratio Aug29/Jan 2
DJIA 8608 9416 109%
NASDAQ 1385 1810 131%
S&P 500 909 1008 111%

Figure 7 - Closing Averages of three stock indices on Jan 2 and Aug 29, 2003

The foregoing figures reveal that the Group-of-8 IP providers in sum slightly outpaced even the tech-laden NASDAQ (137% versus 131% YTD), with ARM and Rambus more than doubling their stock prices, and LogicVision and ParthusCeva also doing well.

Buoyed by Mentor Graphics' remarkable stock price increase in the period covered, the Top 3 EDA Vendors performed YTD even better as a group than the Group-of-8 IP providers, despite the relatively meager price rise of Cadence shares. Note that both Mentor Graphics and Synopsys outpaced the NASDAQ.

Conclusions of this Electronics IP Industry Commentary:

Over the last decade, motivated by necessity and innovation, design reuse in electronics has become almost mandatory and the electronics IP market niche has come to represent a significant revenue portion of the overall design automation industry.

Not unlike the slowdown in overall electronics design automation industry itself, the previously rapid year-over-year revenue growth of the IP market slowed to a single digit percentage in 2002. Based on the guidance from the IP providers as well as from analysts following the niche, the rest of 2003 will probably show flat IP provider total revenue performance as well. IP provider profitability also remains a lingering concern.

Further, neither the financial performance of the IP providers in trailing revenue or earnings, nor their performance guidance for the foreseeable future, can explain the unusual and remarkable rise in IP provider equity share prices during the first 8 months of 2003 - percentage rises that have outpaced even the tech-heavy NASDAQ's climb. Of course, as we saw in the August EDA Commentary, it's equally difficult to explain the YTD upsurge in equity markets in general, given the unending succession of enervating economic & political episodes in the US this year alone.

According to the SmallCap MarketWatch Newsletter of September 2, 2003, for the last 52 years September has been the biggest historical percentage loser for the S&P 500 and the Dow Jones Industrial Average. Also, during the past fifteen years, September has been worst month of the year for the NASQAQ Composite, per the same Newsletter issued August 4, 2003.

We'll soon see if the strong electronics IP provider stock price rises discussed above can withstand such a losing month, or whether in fact the stock indices themselves will continue to rise despite the shaky economy and ongoing record unemployment in the United States. (See the comments on US jobs in the box below).

But there are those who argue that the EDA IP provider niche contains inherent strengths that suggest an annual growth rate over a multi-year term of some 15%. See for example Figure 8 below.

Figure 8 - Independent IP Provider Revenues (In-Stat)

Comments on US Jobs
Depressingly, the US job news continues to disappoint: On September 5, 2003, the US Labor Department reported that another 94,000 US jobs were cut in July, versus analysts' "expectations" that an allegedly "improving economy" would create 12,000, a swing of 106,000 in July alone. Some 44,000 of the job losses in July were in US manufacturing, extending that critically beleaguered sector's losing streak to 37 consecutive months. Per an AP report on September 6, "Many economists now believe the lack of new jobs means structural changes are occurring in the economy instead of cyclical ups and downs. The United States is losing market share to global competitors." In the same story, AP's Leigh Strope said, "Some reports estimate 5 million jobs, many of them high-paying, will be lost to other countries by 2015." (Commentary author's note: "Say, maybe these economists and writers have been reading EDAcafe News!").

Of course if one believes that other countries cannot absorb as many jobs as US companies seem willing to export, and if one is willing (and able) to hang on for "just a few more years", there may be some hope around the corner: US Baby Boomers retiring! In a September 2003 Business 2.0 article entitled, "The Coming Job Boom", author Paul Kaihla argues that this presumably-inexorable demographic force (Figure 9) will soon "put a squeeze on the labor supply that will make it feel like 1999 all over again."

Figure 9 - Prime-age workers (ages 25-54), in millions (Business 2.0)


1 Small numbers of the data points presented in this EDA IP Industry Commentary differ slightly from similar numbers published by industry analysts such as Dataquest. This is due to several effects, such as how one is able to combine results from vendors with different fiscal years and staggered quarterly reporting periods, how one converts results in foreign currency to US dollars and whether one reports pro forma or GAAP figures. Specifically, the numbers in this report follow GAAP by excluding revenues of acquired companies prior to the date of acquisition. The information supplied by the author is believed to be accurate and reliable, but the author assumes no responsibility for any errors that may appear in this Commentary.

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