Mentor: great results, takeover speculation

In the flurry of earnings releases last week came the following from Mentor Graphics: For the full year that ended on January 31, 2011 Mentor reported revenue of $915 million, up 14%, and for the fiscal fourth quarter, the company reported revenue of $307 million, up 30% from the fourth quarter of the prior year.

CEO Wally Rhines said that “40% year-over-year bookings growth in our core system design business [led] Mentor [to] set an all-time revenue record this past year. Mentor’s decade-long emphasis on investment in system design software has driven us to a near-50% market share in printed circuit board design (PCB) software and an operating margin percent for PCB software that is twice that of the overall company. We expect this momentum to continue in this fiscal year as we achieve over 9% growth in Mentor’s revenues and a much greater percentage growth in earnings.” This outlook takes Mentor;s fiscal first quarter to revenue of about $225 million and full year fiscal 2012 to revenue of approximately $1 billion.

Mentor had a busy time last week, as billionaire investor Carl Icahn (well, his hedge fund) offered to buy the company for $17 per share in cash. According to Dow Jones, Icahn Enterprises, L.P. made the offer “less than two weeks after saying the chip-design software company should put itself up for sale.” Of course, this leads to all sorts of turmoil, as one law firm is trying to round up shareholders to participate in an investigation to determine whether Mentor’s board of directors is “adequately shopping” the company to other potential buyers, since the Icahn offer may not be the best out there. This is normal — we last saw it with MSC Software, when that company was taken private — but can be very distracting for the company’s management.

Mentor didn’t specify how its CFD group (the Mechanical Analysis Division) performed, but here are a few other interesting snippets from the material that was released:

• Transportation industries now make up more than 1/3 of Mentor’s revenue, likely because it has been “an area of significant investment throughout the last decade, both in R&D and in the development of a whole new distribution channel.” Revenue from transportation customers was up 50% for the quarter and 60% for the year.

• Bookings for cabling and wire harness products grew 110% in Q4 and 95% for the total year.

• Mentor says it has a 45% share of EDA global revenue.

• For the fourth quarter,the revenue mix by geography was 50% from North America; 25% from Europe; 15% from Japan, and 10% from the rest of the PacRim.

• Mr. Rhimes noted that the company has seen a “dramatic increase in the average annual run rate on contract renewals, which was 30% this last quarter, but has averaged over 25% for the year. With numbers at 45% in the second quarter, suggests that people are just using a lot more software than they have in the past, and they’re willing to make commitments for it.”

I’m not sure how Mentor’s shareholders feel about it, but it does appear that the company’s current management is doing quite well — and I can’t help but wonder if these results make Icahn’s takeover bid more difficult.