Mentor Graphics reported its 2Q13 results and showed that its earnings improved due mostly to a decrease in expenses. Revenues were $240.8 million, up 13% with gains in systems and software, and a very strong showing from the Design to Silicon division, the home of Calibre. This is to be expected, given the major effort from large companies to move to the 20 nm process node. Still the results show that Calibre continues to be the leader in its market segment. Percentage revenue growth for this division is greater than that of Mentor as a whole, showing its critical importance to the company.
The rate of growth of the Integrated System Design division, the PCB division, was quite good but it has slowed from previous periods, Jay Vleeschhouwer is estimating a revenue growth of 9%. This division in the recent past had grown significantly through acquisitions, and now it has to be a profitable business as it stands. Its contribution to revenue is practically equal to that of the Scalable Verification division.
Mentor has chosen to pursue legal action for patent infringement against EVE in its emulation business. This is not necessarily good news. The emulation sector has been plagued with patent litigation since about its inception. The cases drag on and on without a clear resolution and both parties are not able to enter into any meaningful discussion with the media on the matter of the case under the advice of their legal teams. Of course it is never about technology, it is always about money, meaning market share. I find it a bit curious that Mentor would spend money on a legal issue around a product line that has much lower profit margins than its software products.
I do understand that given the complexities of today's designs targeting leading edge processes, emulation and acceleration is a very desirable technology to system houses. But, Mentor lags Cadence in the market, profit margins are not exciting, after all it is like selling iron not software, and other verification products could be sold just a easily even without the Veloce product line. Those who have doubts can look at the revenue generated by Synopsys's verification products. To complicate matters, I understand that customers are demanding to acquire emulation product under a term license, effectively renting, not purchasing, the hardware equipment.
It is not like someone can suddenly invent a new fundamental way to do emulation: it is what it is, since the times of Integraph and Quickturn. of course one can build boxes that execute faster thanks to semiconductor technology advances, but this has nothing to do with intellectual property. And add to this the fact that patent law is still at the wagon wheel epoch and cannot deal properly with an algorithmic and software based environment.
In spite of what the ultimate outcome will be, the legal actions are principally nuisance activity meant to scare potential buyers of both products and technology. If it is true that Synopsys is interested in acquiring EVE, for example, Mentor hopes to get a piece of the action as a settlement in the process. On the other hand, given the prowess of Synopsys in dealing with legal matters, should the acquisition occur, Mentor might find itself with a much more expensive legal fight on its hands.
An Altered State of Mind
When Mentor moved the Catapult product to Calypto, a company it fully controls, I thought that Wally had found the solution to both the Icahn problem and the future growth of Mentor. So far I have been disappointed, but then, it is hard to be me.
Looking at Mentor's structure one can see a number of business units grouped under one corporate structure. Aside for administrative services, corporate organizations, like marketing and sales for example, have little impact on the business activity of the company. So why not created a collection of wholly owned subsidiaries that operate as independent businesses instead of burdening them to be part of a corporate structure that at times gets in the way instead of helping?
The Integrated System Division could once again become VeriBest, and the Scalable Verification Division could be reborn as Model Technology, a name that continues to linger inside the company. And of course the Design to Silicon division would be a star among small EDA companies. Standing alone it could be the target of extremely lucrative acquisition proposals both from system companies and semiconductors manufacturers.
The only change to the executive staff would be a title change. Instead of Executive Vice President and General Manager, Wally's direct reports would now be President of their business group, now an independent company with enough treasure stock to insure a healthy growth in the financial markets.
Even more importantly, having shed its profile of typical EDA enterprise, Mentor could be free to address new markets outside of EDA. After all, electronics is only a portion of a system. MEMS, mechanical design, biochemical systems are all areas that are related to electronics but do not properly belong in an EDA company.