In this post, I take a look at the impact the recession is having on three major semiconductor intellectual property (IP) players: ARM, InterDigital and Tessera (earlier coverage is available here and here). It seems as though royalty revenues are growing just fine, presumably on the wings of ballooning handset sales across the world, from which all 3 players benefit handsomely.
On October 28, ARM Holdings plc [(LSE: ARM); (NASDAQ: ARMH)], the world’s leading semiconductor IP supplier, reported a strong third quarter. Dollar revenue grew 7% to $134.4 million while normalized EPS grew 23%, benefiting from the strengthening of the dollar against the pound sterling. US GAAP EPS grew 46% to 92 pence. Gross margin was 89.9% versus 89.8% last year. Cash generation was strong with £22.5million cash generated in the quarter and net cash of £66 million at the end of the quarter. ARM bought back shares worth £8.6 million in Q3.
By segment, Processor Division (PD) dollar revenue grew 7% to $90.7 million with record shipment of 1 billion units. Physical IP Division (PIPD) dollar revenue grew 4% to $21.4 million. Development Systems grew 18% to $14.6 million while Services revenue grew 1% to $7.7 million.
Total dollar license revenue declined 17% to $45.9 million, accounting for 34% of total revenue. Total dollar royalty revenue grew 31% to $66.2 million, or 49% of total revenue.
At the end of Q3, backlog was about 30% higher than last year but lower sequentially. ARM signed important deals with companies such as STMicroelectronics, Chartered, IBM and Samsung. Based on the order backlog and underlying momentum in royalties, ARM expects revenue to at least meet its expectations. It is currently trading around $5 after hitting a 52-week low of $3.35 on October 27.
On October 30, InterDigital, Inc. (NASDAQ: IDCC) reported a mixed third quarter. Net income grew 6% to $9.2 million or $0.20 per share. Revenue declined about 3% y-o-y and 2% q-o-q to $55.1 million, affected by softness in sales of licensees in Japan.
Recurring patent licensing royalties in third quarter 2008 were $51.6 million versus $55.7 million a year ago. Technology solutions revenue increased to $2.2 million from $0.8 million last year, driven by the success of the SlimChip IP.
With litigation and arbitration expenses coming down to $5.8 million from $10.7 million last year, operating expenses also declined to $44.7 million versus $46.0 million in Q307 and $50.8 million in Q208. Costs came down primarily due to resolution of InterDigital’s UK mandate with Nokia as well a reduction in costs associated with its ITC proceedings with Samsung and Nokia.
InterDigital has a mix of fixed and per unit agreements, which should provide stability in the current economic scenario. The booming 3G market adds to the company’s confidence in its ability to meet targets. The stock is currently trading around $22, well up from its 52-week low of $16.50 on October 10.
On October 30, Tessera Technologies, Inc. (TSRA) reported its third quarter results.
Q3 revenue was $63.5 million, up 29% y-o-y and 13% q-o-q. GAAP net loss was $5.4 million or $0.11 per share and non-GAAP income was $387,000 or $0.01 per share.
Royalty and license fees were $57.6 million, up 38% y-o-y and 15% q-o-q, driven by the increasing demand for DRAM, increased sales of 3G handsets and stronger demand in wireless international markets. GAAP expenses were $67.1 million, including $29.2 million of litigation expenses. Operating cash flow was $14.3 million and Tessera ended the quarter with $286.8 million in cash, cash equivalents and investments, with no debt.
For the fourth quarter, Tessera expects total revenues to range between $60 and $62 million. Royalty and license fees are expected to be between $53 and $55 million. The company recently won its arbitration against Amkor, but the guidance does not include any contribution from Amkor. Another recent development is its licensing agreement with Motorola for its chip scale packaging technology. The stock is currently trading around $19 after hitting a 52-week low of $12 on October 24.