Be Careful With Tessera

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, Fresscale Semiconductor, Motorola, Qualcomm, Spansion and STMicroelectronics, 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.

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.