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I have been a technology investor for over twenty years. My investing style includes a combination of Fundamental Analysis with Technical Analysis used for entry and exit points. I follow several stocks involved in patent litigations including Rambus, TIVO and Tessera. I follow the actual... More
  • The Tessera Gold Rush 2 comments
    May 20, 2009 10:54 PM | about stocks: TSRA

     

     

    About a week ago I wrote a post about finding a golden nugget in a conference call.    Now, we are about to see a full fledged "gold rush" as investors and analysts start to appreciate what the US ITC ruling does for Tessera.

    The US International Trade Commission issued a ruling after hours on 5/20/09 that was a tremendous win for Tessera.   As I predicted in the recent Seeking Alpha article, this final determination confirmed that Tessera’s ‘326 patent and ‘416 were valid. The Commission chose to overturn their own ALJ’s initial determination that Tessera had not proven infringement.   Now Tessera’s patents have been judged valid and infringed and this ruling has far reaching implications.   The Commission chose to agree with their in house counsel in the Office of Unfair Import Investigations. They issued a strongly worded Limited Exclusion Order (LEO), and they also issued a cease and desist order and incorporated a 3.5% bond requirement during the presidential review period.  The terminology used in the LEO forces the issue with all the accused parties.
     
     
    From the order (bold is mine)…. 
     
    The Commission has determined that the appropriate form of relief is (1) a limited exclusion order under 19 U.S.C. § 1337(d)(1) prohibiting the unlicensed entry of semiconductor chips with minimized chip package size and products incorporating these chips that infringe one or more of claims 1, 2, 6, 12, 16-19, 21, 24-26, and 29 of the ‘326 patent and claims 1-11, 14, 15, 19, and 22-24 of the ‘419 patent, and are manufactured abroad by or on behalf of, or imported by or on behalf of, Spansion, Qualcomm, ATI, Motorola, ST-NV, and Freescale; and (2) cease and desist orders directed to Motorola, Qualcomm, Freescale, and Spansion.

    The Commission has further determined that the public interest factors enumerated in     Section 337(d) and (f) (19 U.S.C. § 1337(d), (f)) do not preclude issuance of the limited exclusion order and the cease and desist orders. The Commission has determined that the bond for temporary importation during the period of Presidential review (19 U.S.C. § 1337(j)) shall be in the amount of 3.5% of the value of the imported articles that are subject to the order. The Commission’s order was delivered to the President and the United States Trade Representative on the day of its issuance.
     
    The terminology used by the ITC in this LEO is about as good as it gets.   Look at the words......
     
    are manufactured abroad by or on behalf of, or imported by or on behalf of, Spansion, Qualcomm, ATI, Motorola, ST-NV, and Freescale;
      
    The wording "manufactured abroad or on behalf of" or "imported on or on behalf of" means that these companies won't be able to try an end run around the exclusion order.  So, IMHO, these companies will have to license soon.
     
    Just last quarter, Amkor settled with tessera and paid 64 Million in past production when they signed the license.  &a... Freescale, Qualcomm, Motorola, ATI, ST Micro and Spansion owe significant back payments for past production of infringing products, but this is a negotiating issue between Tessera and these companies.   Tessera now has significant negotiating leverage over these defendants.   The infringing companies must now negotiate in good faith (which includes past production payments for all the years they infringed), or else they face losing an appeal and being in much worse position than they are in now. Unfortunately for the infringers, the combination of a "cease and desist order" and a 3.5% bond (which they lose if they lose the appeal) is a disastrous scenario for them to fight. All these companies have no choice but to sign a license with Tessera.

    Tessera may choose to allow some companies to pay minimal past production royalties in exchange for higher on-going royalties.   But make no mistake, Tessera is now in the driver's seat in these negotiations.   We should see several licenses signed in the next few weeks. In these types of negotiations, sometimes the early bird gets the worm. For example, Tessera could place their settlement offer on the table and tell the infringers….&am... is the offer, it is good for 1 week, and after that, the royalty rate goes up”. The smart companies would take whatever reasonable deal they can get.      The 3.5% bond these companies have to put up will also play a significant factor in forcing settlements.
     
    Tessera's management is too classy and too conservative to start gloating and talking about the impact on revenues....but with past production payments, it would be easy for Tessera to have 2009 non GAAP net income of $7-9/share. I could easily see 2010 having $6-9/share in earnings (even with no past production payments).   Their ongoing litigation expenses should drop into the 15 Million dollar per year range going forward. Last year they spent 84 Million in litigation, so this is a savings of about 70 Million dollars going forward. With Tessera's business model, this drops straight to the bottom line and adds an additional 1.50/share in earnings. Also, remember, Tessera has 383 Million dollars in the bank (about $8/share) and no debt.
     
    IMHO, we will see TSRA in the high 30's or low 40's in the very near future...and in the 50's or 60’s later this year.
     
    Disclosure: Long Tessera
    Stocks: TSRA
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This post has 2 comments:

  •  
    Hello Nuke,

    thanks again for this brilliant article and sharing your insight with us.

    Since your last post I added to my position because you reassured my initial decission.

    I am keen to see the movement in pps over the next days.

    Kind regards,

    Markus
    2009 May 21 01:34 AM Reply
  •  
    As usual, Nuke has done a thorough analysis of the complexities of the legal landscape.

    TSRA is well positioned to prosper in a difficult macro-economic environment. With significant cash reserves and no debt, TSRA can pursue payment for past infringement and new licensing agreements without being unduly pressured to settle on less than satisfactory economic terms.

    QCOM has already said it will source from Amkor to ensure supply.

    In addition, TSRA has other new technologies that will help drive growth. This does not appear to be a one trick pony.

    Disclosure: long TSRA (and RMBS)
    carpediem0496
    2009 May 21 10:07 AM Reply
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