Tessera Wins Cash, Ups Guidance - Analyst Blog

After the closing bell on Monday, Tessera Technologies Inc. (TSRA) announced that it had signed a six-year licensing agreement with United Test and Assembly Center Ltd.
 
While the exact value of the new licensing agreement was not disclosed, the company, however, mentioned that United Test and Assembly Center would pay $15 million upfront in lieu of past royalties to Tessera.
 
Shares jumped 4.44% yesterday, as the market digested the news.
 
Both companies have been in litigation for some time and this agreement settles all past disputes, brings in some immediate cash and also ensures a revenue stream over the next six years.
 
Tessera immediately raised its first-quarter guidance to $63-$64 million from the previous range of $58-$61 million.  Since the company provides expense guidance but does not forecast earnings, the rest of the guidance was not revised.
 
Estimate revisions have been minimal over the last 30 days as 1 out of the 9 analysts covering the stock lowered estimates for the quarter and fiscal year 2010. We expect positive revisions to estimates over the next few days.
 
That said, we reiterate our long-term Underperform rating on the stock as protection of intellectual property (IP) for a company this small is always a challenge. Tessera spends heavily on litigation expenses, which took off 17 cents, 11 cents, 12 cents and 12 cents per share from profits in the March, June, September and December quarters of 2009, respectively. Management has also stated that it expected litigation charges in the first quarter of 2010 to be significantly higher than in the fourth quarter of 2009.
 
Tessera also has volume pricing incentives in place for 2 of its largest DRAM customers. Therefore, revenue growth for Tessera will not be commensurate with the growth in units shipped. Moreover, competition is fierce in the packaging market, so there is an immediate preference for the lowest cost package that meets minimum performance requirements. Therefore, pricing pressure is part and parcel of the business and we do not expect it to alleviate any time in the near future.
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