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Tessera And InterDigital Bring In Some Cheer

Posted on Wednesday, Dec 29th 2010
Tessera (NASDAQ:TSRA), which licenses its miniaturization technology to various mobile device vendors and has annual revenue of $299.4 million, last week achieved a major victory in its chip patent dispute with Qualcomm, Spansion, ATI, and STMicroelectronics. Another IP licensing company, InterDigital (NASDAQ:IDCC) recently announced the approval of its initial dividend policy. Let’s take a closer look.

Tessera’s Victory
The court of appeals for the federal circuit last weak upheld the upheld the final determination of the U.S. International Trade Commission (ITC) in the Investigation No. 337-TA-605 (Wireless ITC action) that Tessera’s patent was valid and infringed. Last year, ITC ruled that Patent No. 6,433,419 related to semiconductor packaging technologies was infringed by Qualcomm, Motorola, Spansion, ATI, and STMicroelectronics and banned the import of their products. Motorola subsequently signed a deal with Tessera.

Diana Barz on Reuters reports that Qualcomm and Spansion have said that since the patent expired in September of this year, the import ban would no longer be enforced. Tessera would however continue to pursue its right to recover royalties. Tessera is trading around $22 with market cap of about $1 billion. The ruling helped its stock gain some ground after it hit a 52-week low of $14.96 on August 27.

Chart forTessera Technologies Inc. (TSRA)

Tessera’s Financials
Third quarter revenue was $82.1 million, up 10.1% q-o-q and 24.2% y-o-y, beating the upper limit of its guidance of $79-$82 million. Net income was $19 million, or $0.38 per share compared with $12.1 million, or $0.24 per share last year. Microelectronics revenue was $72 million, and Imaging & Optics revenue increased 43% to $10.1 million including $4 million in royalties and license fees. It ended the quarter with $474 million in cash and cash equivalents. Last quarter, Tessera acquired Siimpel Corporation for $15 million. Siimpel is a developer and manufacturer of MEMS-based camera solutions for mobile imaging applications and complements Tessera’s focus on the growing market for camera-based handsets.

For the fourth quarter, Tessera expects revenue of $76 million to $79 million, up 35% to 40%. The company expects microelectronics revenue to be between $65 million and $68 million and Imaging & Optics to be approximately $11 million including $5 million in royalties and license fees.

Tessera’s Strategy
A key area focus for of Tessera’s R&D resources is expanding its semiconductor packaging IP portfolio in the areas of flip chip, Through Silicon Via (TSV) and 3D packaging, for DRAM and mobile wireless device markets. Thermal management and the development of its silent air cooling technology is another area of focus. Tessera says OEMs in the ultra thin elite laptop market are working on devices that are thinner than many smartphones available to consumers today, and this is its first target market due to the need for new forms of cooling for these very thin designs.

A major expense for Tessera is its litigation expenses. Tessera expects litigation expense in the fourth quarter of 2010 to be up slightly in comparison to the third quarter of 2010 due to the Hynix antitrust action, the Amkor arbitration, the UTAC (Taiwan) breach of contract case, the Sony and Renesas Electronics Corporation patent infringement case, and legal activity related to the appeals of the International Trade Commission (ITC) 605 and 630 cases.

Mathew Rafat on Seeking Alpha in his notes of Tessera’s shareholder meeting, writes

“Tessera’s problem is protecting its IP. As more products are made in Asia, the legal framework and culture isn’t necessarily conducive to an American company collecting royalties through patent litigation. CEO Nothhaft talked about Tessera’s “carrot licensing program,” where the company offers incentives to work with Tessera and to pay royalties. Overall, however, Tessera wants to become part of the supply chain in Asia so it can get paid at the time someone uses or buys its products.

CEO Henry R. Nothhaft says he wants Tessera to ‘compete in the domestic Chinese market’ for consumer electronics. To that end, Tessera has hired CTO Robert Yung. It has also signed up three new licensees in the China for its imaging/optics products. China currently represents about 20% of the consumer electronics market, which is expected to continue growing.”

To control its patents better in the Asian market, Tessera has recently opened an office in Seoul, South Korea. But it is indeed an uphill task to protect its patents across the world.

InterDigital’s Financials
Another IP licensing company with annual revenue of $297.4 million, InterDigital reported third quarter revenue of $91.9 million, up 22%. Net income was $35.5 million or $0.79 per share, up 16% from last year. The company ended the quarter with cash and short-term investments of $563.6 million.

Samsung accounted for 28% of total revenue, LG Electronics 16%, and Sharp 11%. Patent licensing royalties of $86.1 million increased 18%. The fixed fee portion of royalty revenue totaled $49.6 million, up 11% driven by new customer agreements. Per-unit royalties of $35.8 million increased 29% driven by increasing sales of customers’ mobile devices and new customer agreements. Technology solutions revenue was $5.8 million more than double from last year driven by the addition of new customers for its SlimChip modem core.

Based on the continued strong performance in sales of smartphones and the expansion of its licensee base, InterDigital last month said it expects fourth quarter 2010 revenue to be in the range of approximately $92 million to $94 million. This range includes about $4.3 million in technology solutions revenue related with a modem core customer whose agreement with IDCC is expected to terminate due to its acquisition. InterDigital this month announced that it will pay a regular cash dividend of $0.10 per share on its common stock. This news sent its stock to a 52-week high of $42.76 on December 20, and it is currently trading around $42.53 with a market cap of about $2 billion.

Chart forInterDigital, Inc. (IDCC)

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