Sunday, May 1, 2011

Understanding the Semiconductor IP Companies

ARM, MIPS, Tessera, Rambus, InterDigital, Patriot Scientific and Mosaid (Toronto) derive a majority of their revenue from licensing intellectual property (IP) to semiconductor manufacturers. IP revenue is also a significant fraction of the revenue stream for Qualcomm (33%), Silicon Image (20%) Synopsys (13%), Cadence and Mentor Graphics.

Think of their business model as software development, sales and support with no exposure to the supply chain and yield headaches that periodically strike semiconductor manufactures and shock their shareholders.

The customers of these companies often face make-versus-buy decisions….do I invest time and money to design my own widget, or do I buy the building block from an IP vendor? Both options present different technical and financial risks and the IP companies work to compel you, with both stick and carrot, to buy! 

Companies like ARM and MIPS invest heavily in R&D and deliver critical new technologies for highly competitive consumer and communications infrastructure markets, some (Mosaid, Patriot Scientific, InterDigital) are exploiting patent portfolios through licensing and litigation, and others (Tessera and Rambus) are a mixture of both models.

Quick comments on a few of these companies:

ARM Holdings (ARMH) – I’m very bullish about ARM’s continuing global technology contributions and revenue growth for embedded microprocessors. They are a well respected vendor, highly responsive to the niche performance demands of consumer products (smart phones, tablets, automotive, etc.) and may make inroads against giant Intel in the cloud computing server market.

MIPS (MIPS) – While they have failed to take significant market share in the highest volume consumer markets, MIPS’ processor designs are utilized by Broadcom, Cavium Networks, Cisco, Entropic, Juniper, Netlogic Microsystems, Renesas Electronics, Sony, and Toshiba in set top boxes (cable and satellite), video games and network communications. They lost focus on the microprocessor business with their 2007 acquisition of analog IP vendor Chipidea that was divested in 2009. MIPS will likely exist as a runner-up to ARM until a customer or competitor acquires them.

Tessera (TSRA) – Licenses their portfolio of semiconductor packaging and imaging technology patents. Their continued revenue growth requires them to acquire and author new patents to replace portfolio patents that expire or are determined to be invalid by the courts or government patent offices. Companies like Tessera, Rambus and Patriot Scientific are not so affectionately referred to as patent trolls in the industry. They don’t have much in the way of a sales force, but they are expert intimidators and litigators.

Synopsys (SNPS), Cadence (CDNS) and Mentor Graphics (MENT) all supply software design tools to the semiconductor industry and added IP design and licensing to their portfolio of products.

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