LONDON Mentor Graphics Corp. was downgraded by RBC Capital Markets Inc. Friday (July 29) following a disappointing second quarter financial report in which the EDA giant posted a net loss of $6.8 million on revenue of $154.8 million for the second quarter of 2005.
Based on concerns about weak booking in the second quarter, RBC lowered Mentor's stock rating from "outperform" to "sector perform with an above average risk assessment." RBC reduced its price target for Mentor from $13 to $10 per share.
Mentor's quarterly loss was up from $4.4 million reported in the preceding quarter and the revenue was down from first quarter revenue of $164.3 million (see April 27 story). Sales were even further behind the $169.6 million posted in the second quarter of 2004.
"We had an expectation that Mentor would be able grow faster than the rest of the industry," said Garo Toomajanian, RBC's EDA analyst. "But now it looks like the company's growth will be more in line with the rest of the EDA."
In a report issued Friday, RBC said it believes Mentor still has a strong renewal pipeline in the second half of the year and that the size of the company's sales would likely grow. But, it said it was more cautious about the second half of the year for several reasons, including a reduction of backlog levels, increased back-end weighting, an inability to close deals ahead of expiration and a dependency on less predictable new products for growth.
RBC reduced its forecast for Mentor's 2006 earnings per share from 88 cents to 58 cents.
Mentor's second quarterly bookings decreased by 15 percent compared to the same period a year ago. Gregory Hinckley, Mentor president, said though many customers wanted to renew licenses early, they were unable to agree to terms. He expressed confidence that Mentor would close those deals prior to the end of the year.
"It's disappointing," Hinckley said of the drop in bookings. "But the good news is that Mentor lost no business, slipped no significant deals and saw multiple indications of strength, particularly with new products and new customers."
Mentor’s results were in contrast to those of smaller rival Magma Design Automation Inc., which posted a nominal net loss on record quarterly revenue of $38.8 million for its fiscal first quarter of 2006 on Thursday (July 28).
“Despite weaker bookings, there were many signs of an improved business climate in the quarter. New customer logo additions were up nearly 20 percent over the second quarter of 2004, up both worldwide, and in every region. Bookings from new customers doubled from the year ago quarter, as well,” said Wally Rhines, chief executive officer and chairman of Mentor (Wilsonville, Oregon), in a statement.
"During the quarter, we saw good bookings growth in most of our new and emerging products. Automotive electrical system design products more than doubled over the second quarter of 2004, and design data management, Catapult C Synthesis, embedded and FPGA tools all did well during the quarter,” he added.
Revenue by region was 45 percent Americas, 30 percent Europe, 15 percent Japan and 10 percent Pacific Rim. By product line, revenue was 30 percent scalable verification, 25 percent integrated system design, 25 percent design to silicon, and 20 percent new and emerging products.
Hinckley said weaker-than-expected second quarter bookings would not support the company's previously guided second half revenue targets.
Mentor said it expects third quarter revenue of approximately $160 million to $165 million. In the fourth quarter, the company expects the market to improve with revenue of $221 million and for Mentor to show a net profit. For the full year 2005, the company expects revenue of about $700 million to $705 million.
For 2006, Mentor said it expected revenue to be about $755 million, a growth of approximately 7 percent to 8 percent from 2005.