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Then in August 2003, a second EDA Commentary was published by the same author that examined how prescient those EDA industry predictions were back in May and discussed the outlook for nine EDA vendors for the rest of 2003 and beyond. In this Electronics IP Industry Commentary, we examine the recent history and future outlook of the remarkable phenomenon of electronics Intellectual Property (IP) providers, a niche that has emerged in its own right to claim a substantial amount of revenue in the more general world of electronics design automation. Dr. Henke offers his thoughts on the subject. "FASTER - BETTER - CHEAPER - SAFER … will the pressure never cease? It would seem not! Every business enterprise faces accelerating change and aggressive competition. High-Technology companies may be the most challenged of all! Rapid growth - shorter product life cycles - fewer people - stretched management resources - increased security … all push both vendors and users to the ragged edge." Familiar words, to be sure. But those who have toiled in high technology for decades argue that these competitive challenges are not recent trends at all; they applied equally in the 1950's and 60's! During the last third of the 20th century, the emergence of automated software and graphics tools to help improve designer productivity across the entire electromechanical spectrum are without doubt direct responses to these ongoing competitive challenges. Moreover, clever designers and engineers have always sought to reuse previous, successful designs and components when confronted with a fresh design challenge. If a solution worked before, why re-invent the wheel? During the early years in electomechanical engineering, when existing designs were still archived on paper, blueprints, or microfiche - whether for an engine connecting rod or for a radio's printed circuit board - design reuse was somewhat awkward. Nevertheless, reconstituting an existing design was still beneficial in terms of both time savings and improving the odds that a new design would actually work the first time. In general, the greater the level of reuse, the better, even if total innovation were occasionally mitigated. Then and now - to be reused, of course, a valid previous design needs to be easily retrieved. With early automated software, however, many designers would often opt to do a fresh design for a new component completely from scratch, rather than endure the hassle of laboriously searching for old design files whose correspondence to the actual part might be in doubt. The emergence of modern automated mechanical CAD/CAM and electronic design automation software systems not only adds speed and efficiency, but also provides convenient part data management tools to track older designs and the multiple versions of the current design under development. Indeed, many of today's mechanical assemblies and electronic circuits are so complex that they cannot be designed at all without design automation tools. Accordingly, the benefits of improved time-to-market via reuse become even more important. Clearly, electronic systems manufacturers who most successfully leverage their own in-house designs for reuse possess a compelling advantage over competition. The existing designs often become so valuable that these assets have been termed, "Intellectual Property" (IP), a moniker borrowed from the legal profession. Not unexpectedly, electronics entrepreneurs quickly identified a market opportunity to license their in-house IP to other companies, creating brand new revenue streams and helping to speed greater numbers of new electronic products to a worldwide market. Today, electronic ASIC, IC, MCM, board and systems designers nearly always face tight time-to-market windows. To meet their development schedules, designers often have no competitive choice other than reuse of their own and/or third party intellectual property! This is especially so when designers seek to place an entire complex system on a single chip (i.e., when SoC designers integrate the functionalities of previously discrete IC's onto a single silicon die). Thousands of successful designs testify to the fact that the extra costs of IP license fees and/or ongoing IP royalties paid to third-party IP providers, are well worth it. IP providers today supply an incredible array of hard and soft reusable cores, design blocks and "integration platforms" for a broad range of digital applications, such as DSP processors, encoders/decoders, bus interfaces, micro-processors, memories, micro-controllers, and related data communication cores. Moreover, soft cores are usually available in Verilog and/or VHDL, which can be synthesized and targeted to almost any semiconductor foundry process. Most available soft cores and IP blocks are fully documented, pre-tested and verified, and support the software tool flows from most leading EDA vendors. Not surprisingly, sizeable consulting opportunities materialized to assist systems designers with the entire complex process. The professional services divisions pioneered by EDA vendors Mentor Graphics and Cadence in the early 1990's, are good examples. Such outside assistance is especially important when SoC designers encounter the often-deleterious physical effects and design rules of technologies that are approaching nanometer scales. How important has electronics IP become? How are the public IP providers doing financially? Electronics IP has become a sizable niche unto itself in recent years. As one indication, just check out the list of some 100 or more current partners on the Design & Reuse e-portal (http://www.us.design-reuse.com/partners), a global collaboration network founded in 1997 in Grenoble, France for sharing design resources in the electronics SoC industry. Another sign of growth and acceptance is the existence of the VSI Alliance and its 4-year-old initiative on Quality Intellectual Property (QIP). See Peggy Aycinena's lead article in the August 25, 2003 EDAcafe Weekly Magazine. In 2000, according to Dataquest/Gartner Group news releases, the worldwide semiconductor IP market totaled $689 million, up 40 percent from 1999 revenues of $492 million. (see Figure 1) The top three IP providers in 2000 (ARM, MIPS Technology and Rambus) represented 40 percent of the worldwide semiconductor IP market that year. In April 2002, Dataquest stated that worldwide semiconductor IP market growth had "slowed" during 2001 to 25%, advancing to $892 million in 2001 compared to $713 million in 2000 (adjusted from the $689 million figure previously reported). ARM, MIPS Technology and Rambus again led the IP market niche in 2001, but by then the three market leaders had begun to yield some market share to smaller IP providers, said Dataquest. For the record, the Top 3 EDA Vendors overall - Cadence, Mentor Graphics, and Synopsys - who also provide IP along with their other major software and services offerings, were not among the top three IP providers in the 1999 through 2001 period, according to Dataquest. Finally, in June 2003 Dataquest reported that the worldwide semiconductor IP market had barely eked out a 5 percentage points growth figure in 2002, from $892 million in 2001 to $934 million in 2002. While ARM and Rambus continued to win and place, respectively, Dataquest estimated that Synopsys' IP revenues allowed Synopsys to claim the "show" position among the top three IP providers for 2002.
Source: Dataquest/Gartner Group. Even though the percentage growth has slowed over the last several years, the IP provider niche has clearly emerged as a significant revenue contributor to the overall electronic design automation marketplace. Delving Deeper To probe further into the IP provider market niche, we have arbitrarily selected eight (8) publicly-traded companies (hereinafter known as the "Group-of-8" or "G8"), as representative of the current state of the electronics IP industry. Group-of-8 (G8):
For the G8 companies above, we will assume that all of their revenues are electronics IP and directly-related IP services. How has the Group-of-8 (G8) IP providers performed financially? Figure 2 lists the revenue records of the selected G8 IP providers for 2001 and 2002. Based on this set of numbers, three of the companies (Artisan, Monolithic and VirageLogic) showed substantial percentage revenue growth, one grew only slightly (ARM), and four (LogicVision, MIPS, ParthusCeva, and Rambus) were down year-over-year. The full Group-of-8 revenues were relatively flat between 2001 and 2002.
(US$ Sources: company financial statements & filings) By studying the G8's 2001 and 2002 revenue performance by quarter, other trends emerge, as in Figure 3. Note that the revenue figures for first two quarters of 2003 are also included in Figure 3.
(US$ millions) The G8 Total line in Figure 3 confirms the overall IP providers' slowing growth from 2001 to 2002 implied in the foregoing discussion. Note also that 2003 YTD also appears quite flat compared with 2002. Graphs 1 and 2 below depict a visual rendering of the individual IP provider revenue data from Figure 3. The graphs clearly reveal that only Rambus, Artisan and ParthusCeva are showing up-ticks in recent quarters.
The companion to the Revenues numbers shown in Figure 2, are the corresponding Earnings for similar quarterly periods. Note that neither Figure 4 below nor Graph 3 (depicting Figure 4) exhibits a pretty earnings picture. Only half of the G8 are consistently profitable in the last 3 or 4 quarters (ARM, Artisan, Monolithic and Rambus), and even their profits are not huge in absolute terms.
(US$ millions)
G8 performance guidance for the near future: From news releases published by the G8 IP providers, and related SEC filings, we can paraphrase their performance guidance for the foreseeable future: ARM Holdings plc (Cambridge, UK 7/22/03): "Underlying momentum in the business is supported by the level of licensing negotiations in progress, the recent introduction of new development systems products and the positive trend in royalty revenues. With inventory issues in Asia likely to impact our royalty revenues in the second half and given the Company's exposure to weakness in the US dollar, with 90 to 95% of ARM's revenues being in US dollars, we anticipate that despite the underlying momentum, revenues in the second half of 2003 will remain at similar levels to the first half with the third quarter possibly being weaker than the fourth quarter due to seasonality." Artisan Components, Inc. (Sunnyvale, CA 7/17/03): "Financial Guidance for the fourth [fiscal] quarter [i.e. next quarter] Revenue of $19.45 million and net income of $2.388 million, [both up sequentially], and for the fiscal year ending September 30th revenues of $68.475 million and net income of $7,193 million." LogicVision, Inc. ( San Jose, CA 7/21/03): "We are expecting revenues to be comparable or slightly higher than Q2 revenues of $1.4 million. We are expecting net losses and earnings per share to be comparable to or slightly less than Q2 results of loss of $4 million. We expect bookings to increase in Q3 leading to improvement in revenue and net loss for Q4." MIPS Technologies, Inc. (Mountain View, CA 7/23/03): Casey Eichler, chief financial officer for MIPS Technologies, said, "Our restructuring plans are on track to be completed by the end of September and we reiterate our guidance for breakeven by the December quarter." John Bourgoin, Chairman & CEO, said, "During the course of this [past] year, we took some difficult, but appropriate, actions to reduce spending which we believe will set the stage for profitability during the second half of fiscal 2004. We have also strengthened our development capability in key product areas such as synthesizable cores, and we expect to add to our industry-leading synthesizable core product offerings during the coming quarters." Guidance for 1Q F2004 is total revenue $9.5 to $10 million and total expense $15 million to $15.5 million (including $2.4 million restructuring and $1.4 million amortization of CAD tools). For F2004 revenue $43 million to $46 million. Net earnings 8 cents to 11 cents. Subsequent news: On August 26, MIPS Technologies Filed a Proposal to Combine Outstanding ``MIPS, MIPSB'' Common Shares. On August 29, MIPS Technologies, Inc. announced that it had elected Anthony B. Holbrook as its non-executive Chairman of the Board of Directors, effective August 28. Holbrook has been a member of MIPS Technologies' Board of Directors since the company's IPO in 1998. Monolithic System Technology, Inc. (Sunnyvale, 7/17/03): Guidance for the third quarter of 2003: expects to report revenue in the range of $4.5 million to $5 million compared to $4.47 million in 2Q. Wall Street analysts on average were expecting the Company to report revenue of $5.41 million for the third quarter of 2003, according to Reuters Research (July 17, 2003). ParthusCeva, Inc. (San Jose, 7/22/03): Chet Silvestri, Chief Executive Officer of ParthusCeva, commented: "I am pleased that ParthusCeva has achieved operating profitability and positive net income in the second quarter, driven by robust licensing performance with six licensing agreements signed. We achieved continued strong adoption of our open-standard DSPs, including two with semiconductor companies ranked in the top five worldwide. I am also delighted with 41% quarter-on- quarter growth in royalty revenues, as our licensees successfully ship products containing ParthusCeva technology. We have sustained our licensing momentum in the first weeks of the third quarter. This momentum, underpinned by a portfolio of new DSP and platform products we plan to launch in the next couple of quarters, gives us confidence that we can achieve our corporate goals of profitable growth and technology leadership." Rambus, Inc. (Los Altos, 7/14/03): Rambus estimated revenue for Q3 would be roughly flat between $28 million and $30 million. It expected non-litigation expenses would be between $17 million and $19 million vs. $17.5 million in Q2. The increase is mainly due to investment in XRD and Redwood projects. Rambus said litigation expense is always difficult to predict because it does not control the timeline nor requests form the court not does it control actions taken by its adversaries which causes the company to incur expense. Rambus expects litigation expenses in Q3 to come within a broad range somewhere between $5.5 million and $8.5 million, vs. $6.4 million in Q2. Virage Logic Corp. (Fremont, CA 7/24/03): The company currently expects total revenues in the range of $9.7 to $10 million. The company currently anticipates that royalties will approach approximately $1.0 million for the fourth quarter. In addition, the company expects total pro forma operating expenses to be reduced sequentially by approximately $200,000 from those of the third quarter of fiscal 2003. Net interest income and the company's effective tax rate are expected to remain fairly consistent on a sequential basis. How have the G8 electronics IP Providers fared in the 2003 YTD stock markets? In Figure 5 below, we list the Group-of-8 IP provider companies' stock prices on January 2, 2003 and August 29, 2003, along with the ratio of the latter price over the former, expressed as a percentage. The same data for the Top 3 EDA Vendors are shown in Figure 6. Finally, listed in Figure 7 are similar numbers for the Dow Jones Industrial Average (DJIA), the NASDAQ Composite (NASDAQ), and the Standard & Poor's 500 (S&P 500) indices.
* Price on Jan 31, 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.
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. Comments? Feedback? Tell us what you think about this topic, or share any additional information you may have on the subject! Submit your comments to: EDAtoolsCafe-Editor@ibsystems.com. About the Author Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. During his corporate career, Henke operated on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and currently serves on the SME International Board of Directors. He is also a member of the IEEE and a Fellow of ASME International. An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan contributed extensively to this article. Jack's career included Applicon, Aries Technology, CADAM, MicroCadam and IBM. Further information on HENKE ASSOCIATES is available at http://www.henkeassociates.net. |
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