Electronics IP Industry View - A February 2004 update

Forecasts from Individual IP Providers

For guidance, ARM said "The number of new products available for licensing and the momentum behind ARM's royalty revenues give us confidence that 2004 will see meaningful year on year dollar revenue growth. In the short term, dollar revenues in the first quarter are expected to be similar to those achieved in the seasonally strong fourth quarter.  If the recent further weakening of the U.S. dollar against sterling persists, however, this will inevitably have a further negative impact on Q1 revenues when these are translated into sterling, and when compared with Q4 revenues."

Artisan CFO Joy Leo stated that guidance for F2004 was unchanged from prior forecast, but would be at the upper end of EPS range. Revenue was projected to be $89 million up 30% over F2003 with expenses in the range of $69 million to $70.3 million. EPS are expected in the range of $0.55 to $0.57. For the next quarter Artisan expects license revenue of $16.1 million and royalty revenue of $4.7 million for a total of $20.8 million. This would be a sequential drop, but an increase from the $16 million for the same period a year ago. Net income should be in the range of $3.2 million to $3.7 million or $0.11 to $0.12 EPS.

In providing guidance Ceva CEO Chet Silvestri said "Exiting our standalone business has effectively removed about $1 million in revenue per quarter. Given that, we expect first quarter revenue to be in the range of $9 million to $9.5 million and operating expense of $7.7 million to $7.9 million (headcount had been reduced from 240 to 205). We are forecasting breakeven in the first quarter. For all of 2004 we are targeting top line growth year over year of 10%. Fueling this growth is the continued strength of our DSP business. Gross Margin should be 85% and we are target to be profitable for the full year. In summary, we are well positioned to achieve our top line profitability goals for 2004."

LogicVision's guidance for upcoming quarter is for revenues of approximately $2 million, a drop from $2.4 million revenue in the corresponding period a year earlier. The firm expects a net loss of between $2.5 million and $2.75 million or -$0.16 to -$0.18 EPS. This would be an improvement from the nearly $3 million loss a year earlier. LogicVision entered the year with a backlog of $18.5 million including $7.2 million in deferred revenue.

"We continue to be encouraged by the success of our key account strategy to win larger, multi-year contracts and by customer enthusiasm for our products. However, selling cycles are often lengthy, customer order timing is not predictable and once an order is booked, there can be a time lag before any revenue recognition takes place," said James T. Healy, president and CEO of LogicVision. "Fourth quarter bookings were very favorably impacted by one large order, and although we expect future large orders, we do not necessarily expect them to occur on a quarterly basis."

For guidance for the next quarter, MIPS suggests that total revenue should be modeled up 3% to 5% (~$11.1 million) with flat royalty and increased contract revenue compared to this quarter. For the year revenue should lie between $43 million and $45 million up 10% over 2003. Operating expenses should be in the range of $10 million to $10.4 million per quarter in the second half of F2004 for a total in the range $46 million to $47 million including restructuring charges. Net loss for the year is expected to be in the range of $0.07 and $0.10 per share.

CEO Bourgoin commented "I am pleased to report that MIPS has surpassed its financial plan for the first half of F2004. We are profitable once again and we are reporting strong results in our key business metrics. While there are still some challenges, I am optimistic about the future. Through the recession, we continued to develop important new products and continued to add key new licensees. Royalty for new licenses are becoming a significant part of our revenue stream and our new products are in a strong position to drive our license base during fiscal 2004."

MIPS CFO Eigler added "While royalties continue to be strong, it is difficult to see what inventory is in the channel and how that inventory will move to the channel over the next couple of quarters."

Having failed to meet its initial guidance for Q4 2003, MoSys management decided to limit its guidance for the next quarter to be business already booked by year end. Accordingly, the firm anticipates total revenue in the range from $4.5 million to $5.5 million. The company ended the year with orders in excess of $5 million in licensing fees that will be recognized during the year. The majority of the revenue will be form licensing activity. This represents approximately a 50% increase over the last two quarters. Mosys expects operating expenses to range from $3.6 million to $3.8 million, up approximately 10% from the fourth quarter. Mosys is restricted under confidentiality agreements from commenting on the status of specific contracts.

Rambus guidance for the next quarter is for revenue to be in the range $32 to $35 million. This compares to $32.3 million in the current quarter and to $23.5 million in the first quarter of 2003. Rambus expects expense to be between $22 and $26 million. This compares with expenses of $21.3 million in the current quarter and $23.6 million for the first quarter of 2003 (when litigation expense was $7 million).


The patent infringement case filed in August 2000 by Rambus against Infineon will go to re-trial in May 2004 after a favorable ruling from the U.S. District Court. Litigation expenses in the quarter had dropped by about 50%. They are expected to be in the range of $3 to $5 million in the next quarter. This suit and others are related to charges that Rambus deceived industry standards-setting group in the early 1990s so that it would receive royalties from other memory manufacturers. "Should Rambus prove that the memory makers have violated its patents, royalties annually could amount to 2% to 3% of the entire DRAM market," said Erach Desai, who follows the company for American Technology Research.

Virage Logic currently expects to be profitable on a pro forma basis with total revenues in the range of $12.0 million to $12.4 million, an anticipated increase over the first quarter of 10% to 14%. Total expected revenues for the quarter are anticipated to include royalties of approximately $1.5 million. In addition, the company expects total pro forma operating expenses to increase sequentially by approximately $600,000 to $1.0 million (404 compliance, strategic new hires, and a specific large custom deal).

CEO Adam Kablanain said "With improving industry trends and growing adoption of out semiconductor IP platform offering, we believe that F2004 will be an inflection point for Virage Logic. We are seeing signs that customers are now less cautious about the economy and more willing to invest in new design and tools. Customers are beginning to ramp up production of completed designs utilizing our memory, logic and I/O. This bodes well for our licensing and royalty revenue over the next few quarters, which have already shown sequential improvement."


Figure 4 Quarterly Forecast of Group-of-8 (G8)

Using the midpoints of guidance the combined forecast for the Group-of-8 for the next quarter is $154 million, essentially flat sequentially, but up 16% from the corresponding period a year ago. On a percentage basis LogicVision is the only major forecast decliner on a sequential basis. Virage Logic is the only firm predicting more than 10% growth sequentially. On a year over year basis MoSys and LogicVision are predicting significant drops in revenue, while Arm, Artisan, MIPS, Rambus and Virage Logic are all forecasting significant double digit growth.


Comments on the IP business of Cadence, Mentor Graphics and Synopsys


The overall Top 3 EDA Vendors are also important players in the IP providers' niche. For example, we mentioned above that Dataquest recognized Synopsys' IP and IP-related revenues for 2002 (~$73 million) to be deemed sufficient for Dataquest to characterize Synopsys as the Number 3 IP player worldwide. Mentor Graphics' recent annual IP revenues from its Inventra Division are estimated to be in the $30 to $35 million class. Cadence, which does not explicitly appear in Dataquest's list of the top ten IP providers at all, nevertheless chooses to define a revenue reporting category called, "IP Creation", in which Cadence reports as much as $293 million of IP-related business in 2001, $260 million in 2002, and $109 million so far in the 1H 2003. If this Cadence "IP Creation" revenue were aggregated the exact same way the revenues of, say, ARM Holdings, plc were aggregated, then Cadence would rank right up there neck and neck with ARM. The difficulty in comparing the Top 3 EDA Vendors' IP business to one another is caused by the differences in how each company arbitrarily chooses to define the revenue components of its respective IP business. Further, none of the TOP 3 EDA Vendors unbundles profitability of its respective IP-related business lines, precluding IP earnings' comparisons.

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