Tessera Technologies Inc (TSRA): Great News Lost in the Fray

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Nov 30, 2011
The markets have been brutal for the last few weeks, with a never-ending supply of negative news from Europe overshadowing positive economic news out of the US and a strong earnings season. This kind of climate can present great opportunities for investors to find companies that are doing well but are being pummeled in the markets due to largely unrelated issues. Consider the case of Tessera Technologies, Inc (TSRA, Financial), which I have written about on this site before. The company has made three announcements over the last two weeks that show a dramatically improved outlook.


First, the company announced it had renewed its license agreement with Samsung Electronics Co:
SAN JOSE, Calif. – Nov. 16, 2011 – Tessera Technologies, Inc. (NASDAQ: TSRA) (the “Company”) announced today that Samsung Electronics Co., Ltd. exercised the renewal option in its Jan. 1, 2005 license agreement with Tessera, Inc. to extend the term of that license to May 17, 2017.


“We are delighted to have Samsung, a worldwide leader in memory technology, elect to renew its license agreement with Tessera, Inc.,” said Richard Chernicoff, president of the Intellectual Property and Micro-electronics Division of Tessera, Inc. “Samsung’s intellectual property team is among the most sophisticated in the world, and we greatly value their decision to renew our license.”


“We are very pleased that Samsung elected to renew its Tessera, Inc. license agreement, extending the long-term commercial relationship between our two companies,” stated Robert A. Young, chief executive officer of Tessera Technologies, Inc. “We look forward to expanding our business relationships with them.”
This extends licensing revenue from Samsung through 2017. As one of TSRA’s largest licensing clients, this is a positive development and goes to partially de-risk future revenues (note that, if Samsung’s revenues on products that use TSRA’s licenses decline, TSRA will earn lower licensing fees. So future revenues are not completely stable, but this is a far better development than the situation where Samsung decides not to renew its license and instead move forward with a different technology).


Then the company announced it had reached another important renewal, this time with Hynix Semiconductor:
SAN JOSE, Calif. – Nov. 23, 2011 – Tessera Technologies, Inc. (NASDAQ: TSRA) (the “Company”) announced today that Hynix Semiconductor Inc. exercised the renewal option in its March 31, 2005 license agreement with Tessera, Inc. to extend the term of that license to May 22, 2017.


“We are pleased to have Hynix, a leading provider of memory solutions, elect to renew its license agreement with Tessera, Inc.,” stated Richard Chernicoff, president of the Intellectual Property and Micro-electronics Division of Tessera, Inc. “With this renewal, Tessera, Inc. has secured 5-year license agreements with two of the top memory manufacturers in the world, further validating the value of its portfolio of semiconductor packaging related intellectual property (IP).”


“The Hynix renewal further secures our future IP & Micro-electronics business,” said Robert A. Young, chief executive officer of Tessera Technologies, Inc. “We greatly value our relationship with Hynix and look forward to continuing it.”
Hynix is also a large client of TSRA’s, and so this is a positive announcement that will also work to de-risk future revenues through 2017. Beyond securing future licensing revenue, the effect of these renewals also (as noted in the press releases) validates TSRA’s intellectual property and signals to other parties that licensing is appropriate. We have seen this elsewhere recently in Microsoft’s (NASDAQ: MSFT) wins on licensing agreements from various Android tablet and smartphone manufacturers. After a few high profile wins, MSFT was able to exert pressure on others to also license its IP.


Finally, just yesterday the company announced that the Supreme Court of the United States had declined to hear an appeal by TSRA’s counterparties in a lawsuit over its intellectual property rights. This solidifies TSRA’s earlier victory in a lower court.
SAN JOSE, Calif. — Nov. 29, 2011 — Tessera Technologies, Inc. (NASDAQ: TSRA) (the ‘‘Company’’) today announced that on Nov. 28, 2011, the United States Supreme Court rejected petitions for certiorari seeking review of the judgment of the U.S. International Trade Commission (ITC) in Investigation No. 337-TA-605 (Wireless ITC action) in favor of Tessera, Inc., leaving intact a finding that the patents asserted by Tessera, Inc. were valid and infringed by certain wireless semiconductor manufacturers.


“We are heartened to see that despite Respondents’ efforts to delay, the highest court in the United States has now upheld our patent rights,” said Robert A. Young, chairman and chief executive officer, Tessera Technologies, Inc. “The Supreme Court’s ruling removes the last procedural hurdle to getting the stayed cases in the federal district courts moving forward. Tessera, Inc. prefers to settle disputes like these through broad portfolio license agreements that reflect the value of its patents, but intends, in the absence of a licensing agreement, to pursue damages for each Respondent’s infringements in these district court cases.”


The Wireless ITC action was brought against Respondents Qualcomm, Freescale, ST Microelectronics, ATI, Spansion and Motorola. Tessera, Inc. asserted infringement of two patents, U.S. Patent Nos. 6,433,419 and 5,852,326. Motorola settled with Tessera, Inc. before the decision of the ITC became final. The ITC found the Tessera, Inc. patents valid and infringed, and issued a Limited Exclusion Order and Cease and Desist Orders against the remaining Respondents. On Sept. 24, 2010, the patents at issue in the case expired. On Dec. 21, 2010, the U.S. Court of Appeals for the Federal Circuit affirmed the rulings of the ITC.


Related district court actions against the Respondents are pending but currently stayed in the Eastern District of Texas and the Northern District of California. A Case Management Conference is scheduled for Jan. 4, 2012 in the Northern District of California regarding certain of these stayed cases.
This is a big win for TSRA, affirming once and for all that TSRA’s patents in this case were indeed valid and infringed upon. Now several related cases will continue, but with the defendants in a much worse position. For example, in Tessera, Inc. v. Advanced Micro Devices, Inc. et al., Civil Action No. 05-04063 (N.D. Cal.) (see the company’s notes in its 10-Q here), the defendants claimed that the patents at issue were invalid, unenforceable and not infringed, and/or that TSRA is not the owner of the patents. This victory does away with that defense. Some defendants (e.g. Motorola, Inc) have settled in the past, but this win should cause the remainder to settle, and likely for a higher amount given their weakened bargaining position.


TSRA has had some big wins over the last two weeks, but after an initial 19% jump following first press release, the company’s shares fell back quite a bit and then the market completely ignored the subsequent two press releases. It could be the European mess or getting lost in the holiday shuffle, but I think the market is missing something big here. Recall also that TSRA has 64% of its market cap in cash and investments, no debt and has an ex-cash free cash flow yield of a whopping 29%!


What do you think of TSRA?


Author Disclosure: Long TSRA