Commentary: Electronics IP Industry – An August 2010 Update



WORLDWIDE “CREEPING DOUBTS”:

Apparently, creeping doubts about the worldwide economic recovery from the near collapse of the financial system in 2007 (which collapse we recall was mostly due to lax regulation between 2001 and 2007), is not limited to 2H 2010 semiconductor sales.

As this Electronics IP Commentary “goes to press,” we observed a widespread decline on August 11, 2010 of all three major stock markets based in New York (The Dow lost 2.49%, the S&P 500 gave up 2.82% and the NASDAQ Composite suffered a drop of 3.01% of their respective values).

Each of the three indexes mirrored the NASDAQ:


From a New York Times article on August 11, 2010 by GRAHAM BOWLEY and CHRISTINE HAUSER, entitled, “Market Drop Signals Fears About Global Recovery”, we have the following (paraphrased) text:

As economic recovery wavers in the United States, evidence is mounting that growth abroad is also slowing and may be unable to sustain the fragile rebound here.

Concerns about flagging global growth weighed heavily on Asian stocks today, while European markets opened flat. Japan's Nikkei index dropped more than 2% before recovering some of those losses, which came after steep declines August 11 in American and European equities.

Those market drops followed a spate of developments signaling a slowing economy both in the United States and abroad. On August 10, Federal Reserve officials warned that the pace of recovery in the United States had slowed. Then on August 11 came news from China suggesting its fast-growing economy was cooling. And later that day, the Bank of England reduced its already diminished forecast for the British economy.

Finally, new trade figures from Washington showed that American exports were faltering, a sign that hard-pressed domestic manufacturers could not rely on overseas markets to ease their pain at home.

Given the uneven rebound in the United States, and now signs that the world's other economic engines are slowing, economists say Americans may confront high unemployment and lackluster growth for some time to come.

“This is going to be a long slog,” said David H. Resler, the chief United States economist at Nomura Securities International.


How did the Electronics IP G5 perform in Q2 2010?

Table 1 reveals that the combined G5 total revenue in Q2 2010 fell nearly 33% from its sequential predecessor Q1 2010 quarter, which was not surprising when one recalls Rambus' gargantuan revenue result in Q1 2010, mostly from the Samsung settlement. Year over year, however, Q2 2010 was close to 45% larger than Q2 2009 for the combined G5 revenue total, with all 5 vendors contributing to that growth.


Table 2 below shows that three vendors delivered positive earnings in Q2 2010, enough to offset losses from MoSys and Rambus. Of course, it was not enough to allow the group to deliver in Q2 2010 a sequential profit improvement vs. Q1 2010, once again due to the Rambus Q1 earnings anomaly. However, the Q2 2010 G5 combined profit was more than enough to outclass the loss total of Q2 2009 by some $46 million improvement.



Q2 2010 Results of Individual G5 Electronics IP Providers:



On July 27, 2010 ARM Holdings plc announced its unaudited financial results for the second quarter ended 30 June 2010, demonstrating continuing progress in executing its strategy with multiple design wins taking ARM further into new markets.

Revenues in Q2 2010 converted to US dollars were approximately $149.9 million, up 4.6% over sequential Q1 2010 and up some 42 % year over year compared to Q2 2009.

Total dollar license revenues in Q2 2010 increased by 22% year-on-year to $47.0 million, representing 31% of group revenues. License revenues comprised $36.6 million from PD and $10.4 million from PIPD.

Total dollar royalty revenues in Q2 2010 increased by 67% to $82.3 million, representing 55% of group revenues. Royalty revenues comprised $72.5 million from PD and $9.8 million from PIPD.

Royalty revenues are recognized one quarter in arrears with royalties in Q2 generated from semiconductor unit shipments in Q1. PD royalty revenues in Q2 2010 included a catch-up royalty payment of $9.0 million in respect of certain shipments made between 2007 and 2010. This catch-up royalty was identified by the customer as part of ARM's ongoing royalty auditing process. PD underlying royalties of $63.5 million increased 54% year-on-year. This compares with industry revenues increasing by less than 40% in the shipment period (i.e. Q1 2010 compared to Q1 2009), demonstrating ARM's market share gains over the last 12 months.

Total PIPD royalty revenues of $9.8 million included $0.2 million of catch-up royalties. Underlying royalty revenues increased by more than 80% year-on-year, reflecting the rebound in the foundry industry.

Sales of development systems in Q2 2010 increased 30% year-on-year to $13.4 million, representing 9% of group revenues. Due to seasonality, revenue for development systems in Q3 is often 10% to 20% lower sequentially.

Service revenues in Q2 2010 were up 4% to $7.6 million, representing 5% of group revenues.

Earnings in Q2 2010 reached $32.8 million, up 8.3% sequentially over $30.3 million in Q1 2010 and up 46.4% year over year vs. Q2 2009.

ARM progress against strategy in Q2 2010
  • Growth in mobile applications - ARM opportunity increased as smartphone growth continues and ARM technology-based mobile computers begin to come to market
    • Average of 2.6 ARM®-processor based chips per mobile phone
    • 4 processor licenses signed for mobile phone and computing applications
    • Major semiconductor company becomes the third lead-licensee for the “Eagle” Cortex-A™ class processor.
  • Growth beyond mobile - Increased share in target markets such as consumer electronics and embedded products
    • Strong year-on-year growth for shipments of ARM-based chips into digital TVs, disk drives and microcontrollers
    • 13 processor licenses signed for a broad range of applications including intelligent sensors, networking, smart energy meters and solid state drives
    • Leading microcontroller company, Freescale, announced their first major family of ARM-based microcontrollers
  • Growth in new technology outsourcing
    • 3 licenses for royalty-bearing platforms of physical IP at both advanced nodes and mature nodes
    • TSMC licenses physical IP for 28nm and 20nm early in Q3
    • 3 companies further their commitment to Mali™, ARM's graphics processor
  • Microsoft signed a multi-year architecture license to be at the forefront of working with ARM technology, across a broad range of businesses, addressing multiple application areas
Warren East, Chief Executive Officer, said, “We are pleased to report strong underlying revenue and profit performance in the first half, in improved trading conditions compared with one year ago. Our strategy remains on track for growth in mobile, non-mobile and new technology outsourcing. Major semiconductor vendors and consumer electronics companies are making long-term commitments to using ARM technology in their future products. Freescale, Microsoft and TSMC all recently announced adoption of ARM's latest technology which will further increase ARM's market penetration, and royalty potential, in a broadening range of end applications. ARM continued to gain share in the quarter with shipments of ARM-based chips growing faster than the industry in all target markets."

Outlook


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