Be Careful With Tessera

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 |  Includes: AMD, FSL, GOOG, QCOM, SPSN, STM, TSRA
by: Sramana Mitra

Last month on February 2, Tessera Technologies Inc. (NASDAQ:TSRA), an IP licensing company and a leading miniaturization technology provider, reported fourth quarter results that beat Street estimates. Despite the economic downturn, Tessera continues to benefit from the convergence device and electronics miniaturization trends. For a better understanding of the company’s strategy, read my earlier post available here.

Q4 revenue increased 30% to $69.1 million with royalty and license fees growing 37%. GAAP net income was $7.7 million, or $0.16 per share compared to $13 million or $0.27 per share last year. Non-GAAP net income was $20.4 million or $0.41 per diluted share. Analysts expected earnings of $0.12 per share on revenue of $67.9 million.

Royalty and license fees were up 37% to $62.5 million, driven by stronger-than-expected royalty revenue from existing clients as well as option fees from Motorola. Product and service revenues were down 14% to $6.5 million due to Tessera’s planned exit at year-end from its government business. GAAP expenses were $57.1 million, including $17.7 million of litigation expenses. The company ended the quarter with $298.6 million in cash, cash equivalents and investments and no debt. Its overall cash position showed an improvement of $11.8 million over the last quarter.

For the full fiscal year 2008, total revenues were up 27% to $248.3 million. Royalty and license fees were up 37% to $220.3 million. Product and service revenues were $27.9 million. GAAP net income for 2008 was $4.6 million, or $0.10 per diluted share, down from $45 million last year. This decrease in net income can be attributed to the almost fourfold increase in litigation expenses to $84.3 million, from $22.3 million in 2007. Tessera had good momentum in its imaging and optics business with two new licensees for its image sensor wafer-level packaging technology, AWLP and Qtech.

On January 14, in a case of infringement against Amkor, a judgment was ruled in Tessera’s favor and the company will be awarded $64.1 million in damages. On December 1, in its case against Advanced Micro Devices (NYSE:AMD), Freescale Semiconductor (NYSE:FSL), Motorola (MOT), Qualcomm (NASDAQ:QCOM), Spansion (SPSN) and STMicroelectronics (NYSE:STM), the US International Trade Commission (ITC) had ruled that there was no infringement of Tessera’s patents, leading to a 50% slide in its shares and a 52-week low of $8.33 on December 5. It is currently trading around $11 with a market cap of about $520 million.

Chart for Tessera Technologies Inc. (<a href='http://seekingalpha.com/symbol/TSRA' title='Tessera Technologies, Inc.'>TSRA</a>)

For the first quarter of 2009, Tessera expects total revenue exclusive of the Amkor award between $54 and $58 million, a decline of about 9%. Analysts estimated revenue of $58.66 million. Microelectronics royalty and licensing fees are expected between $46 and $48 million. Imaging and optics revenue in total will range between $8 million and $10 million with royalty and license revenue between $5 and $6 million. Tessera expects litigation expenses to be slightly less than last quarter.

A key patent expires next year, which has caused me to sell my holding of Tessera’s stock.