The beauty of intellectual property (IP) businesses is that they do not have to wrangle over component prices: A single innovation and they collect royalties for years. ARM Holdings (NASDAQ:ARMH), InterDigital (NASDAQ:IDCC), and Tessera (NASDAQ:TSRA) are examples of such IP businesses in the smartphone sector. And all three have benefited from the market coming their way in recent years. Let’s take a closer look.
Following ARM’s foray into netbooks and reports of its moving in on Intel’s territory, it was perceived to be vulnerable to a takeover. Guest author Nalini Kumar Muppala did an in-depth analysis of the Intel–ARM rivalry and concluded that Intel was not likely to buy ARM, but the ecosystem of companies that depends on ARM’s architecture could buy a stake in ARM to protect their interests.
ARM recently entered into a venture called Linaro with IBM, Samsung, Texas Instruments, Freescale Semiconductor, and ST-Ericsson to develop key parts of operating systems, programming tools, and other software, initially targeting chips based on ARM designs. Don Clark at the Wall Street Journal says backers of ARM’s chip designs are eager to counter recent moves by Intel to move its franchise into other markets.
Recently Apple, whose iPhone and iPad use ARM’s IP, was rumored to be interested in buying ARM. However, Ian King at Businessweek reports that ARM’s CEO Warren East says the deal doesn’t make economic sense. Dale Ford at iSuppli agrees with this view and adds, “The acquisition would not give Apple’s products a competitive edge/differentiating value . . . the majority of the impact would be felt by companies like Broadcom, Samsung, and Texas Instruments, which are not exactly Apple’s biggest rivals.” I agree with these perspectives: Apple’s buying ARM would be an unnecessary distraction for a company that is intensely focused. I just don’t see this kind of a haphazard move coming out of Steve Jobs. If there is one CEO in the technology business who has absolute clarity, it’s Jobs. He won’t make such a convoluted move. Ever.
ARM in April reported first quarter revenue of £92.3 million or $143.3 million, up 16%, and EPS of 2.04 pence, up 49%. It signed four IP licenses for mobile phones and thirteen licenses for other applications. In 2009, ARM signed 87 new semiconductor IP licenses, bringing its total licenses to 662. ARM estimates that every semiconductor company would need to spend between $50 million and $150 million annually to reproduce what it does. ARM’s annual revenue in 2009 was £305 million or $489.5 million. The stock is currently trading around $12.86 with a market cap of $5.64 billion after hitting an eight-year high of $13.17. Surely, ARM is having its day in the sun amid the growth in smartphones and tablets.
InterDigital, which has a 55% share in the 3G handset license market and annual revenue of $297.4 million, reported first quarter revenue of $116.2 million, up 65%, driven by the recognition of $35.7 million of royalties from past sales resulting from the recently signed Casio agreement. Net income was $48.8 million or $1.09 per share, three times the pro forma net income of $15.4 million or $0.34 per share last year.
Licensees that accounted for 10% or more of the $116.2 million of total revenue were Casio (25%), Samsung (22%), and LG (12%). InterDigital secured a design win for its multimode SlimChip modem core with Beceem Communications, a leading supplier of WiMax semiconductor solutions, for integration into its multimode 4G chips. For the second quarter of 2010, InterDigital expects revenue of $81 million to $83 million. The stock is trading around $25.82 with market cap of about $1.14 billion. It hit a 52-week low of $18.41 on October 28 of last year.
Tessera, which licenses its miniaturization technology to various mobile device vendors and has annual revenue of $299.4 million, recently announced plans to acquire 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. In April, Tessera reported first quarter revenue of $64.3 million, down 44%. Net income was $9.8 million, or $0.20 per share compared with $39.5 million, or $0.82 per share last year. It signed an updated license agreement with UTAC and also added a new licensee, Nanium, S.A., formerly the assembly and test operations of Qimonda.
For the second quarter, Tessera expects revenue of $74 million to $75 million. Its stock has fallen about 28% this year on concerns over expiring patents. It is trading around $18.09 with market cap of about $908 million and hit a 52-week high of $32.17 on October 12 of last year. I sold the stock a while back on the same concern and am waiting to see how the company manages to replace the revenue stream from this critical patent.