Tessera: IP Assets Seem Ready For A Re-Rating

| About: Xperi Corporation (XPER)


Acquisition of DTS should act as a major catalyst for the re-rating of the business as well as the sector.

After a successful transition over the past few years, diversification from the acquisition and ramp of FotoNation and other offerings should help the business attract a well-deserved premium.

Synergies from the combined operation and Greenfield licensing deals can offer upside to the current expectations.

A few days ago, Tessera Technologies (TSRA) announced the acquisition of DTS (NASDAQ:DTSI), not an announcement that attracted much attention, even in the broader tech sector news flow, not surprising given the broader IP (intellectual property) vendor space is barely followed and lacks the scale to attract major Street coverage or investor interest. But the development holds importance on many counts, whether it is the growing attractiveness of the IP assets, decent balance sheets of the players in the space, potential to generate more value out of the existing IP deals, cross-selling opportunities or the long-term growth opportunity on offer.

Besides the changing sentiment towards the broader space, the acquisition should help Tessera as well. The company was already enjoying good momentum, as reflected in the recent results, and decent visibility, with recurring revenues expected to hit an all-time high by next quarter, expected ramp of new deals, new IP licensing initiatives that were undertaken and a steady generation as well as the use of cash. Now that progress on bonding and packaging technologies and products like FotoNation is starting to make an impact on the results, the DTS acquisition should help define a better long-term picture for the business, whether it is related to the diversified growth opportunities (significant for a business that has long been shrugged off as a 'patent-troll' earning royalties from some old computer technologies) or removing complaints about the use of large cash on the books. Relatively, the stock should continue to attract a well-deserved premium over other IP businesses like InterDigital (IDCC), Rambus (NASDAQ:RMBS) and Dolby (NYSE:DLB), as Street estimates start reflecting the earnings potential of the combined business.

No doubt, the stock may have to continue to fight off the negative image that is associated with what some call a 'patent trolling' model, especially when expectations of a jump in episodic revenues in the near-term remain muted. Typical of the business model, there is a perennial risk of negative news flow related to some patent litigation or other.

Thanks to Starboard's involvement, the business has transitioned well over the past few years, away from manufacturing and delivering a decent double-digit topline growth as an IP business, while creating consistent value for the shareholders, including a steady dividend, handsome cash balance and a consistent buyback, which is expected to be almost 5% of the shares outstanding this year.

But there is plenty more to come over the coming quarters. Addition of DTS and its strong market position in audio technology for mobile devices, home theater systems, cars, etc., should sit well with Tessera's presence in semiconductor packaging and imaging products for mobile and other vision systems to help diversify the company's end-market exposure, ranging from end-markets like consumer electronics, mobile, automotive and semiconductors. In terms of balance sheet, the deal will add close to $600 million of debt, but given the decent free cash of the two businesses and expected annualized cost synergies of close to $15 million (significant for a business with just 48-49 million shares) investors may end up liking a bit of leverage on the books.

Besides the deal, the business should benefit from FotoNation's strong position in the imaging market, Invensas' efforts to commercialize packaging and interconnect technologies, including ZiBond, Direct Bond Interface bonding technologies that are already being shipped by Sony (NYSE:SNE) and BVA for high pitch interconnect, which is getting qualified at Jabil (NYSE:JBL). The company has just started legal proceedings against Broadcom (NASDAQ:AVGO) and other companies as part of 'Greenfield licensing' efforts and any positive outcome may be a cherry on the cake.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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