Will Tessera's 'smart module' gamble pay off?

New forecasts
''Tessera's chip-scale packaging (CSP) technology remains the key driver of Tessera's royalty stream, with DRAM likely the major contributor,'' said C.J. Muse, an analyst with Barclays Capital, in a report. The ''longer term focus (is) on emerging growth opportunities in Imaging and Optics. That said, outside of some upfront licensing fees, Tessera has not seen much Imaging and Optics royalty streams to speak of.''

Some licensees will begin to ramp in 1Q 2010 and beyond, he said. But it remains to be seen if Tessera can replicate its glory in the arena. In 1990, the company was founded as a manufacturer of IC-packaging, but it eventually moved towards an IP model. It devised the so-called Tessera Compliant Chip (TCC) technology, a newfangled CSP scheme.

Today, the company boasts the who's who in terms of licensees. It is pushing its CSP IP into wireless and NAND, but its claim to fame is DRAM. ''On this front, management indicated that their CSP technology is scalable to (greater than) 2.5-GHz DDR3; and with DDR3 likely remaining mainstream well beyond 2013, this will continue to be a solid contributor to Tessera's top/bottom-line for many years,'' Muse said. ''Management also indicated that they are working on solutions for DDR4 as well, though this has yet to enter production.''

Here's the big question: How long will Tessera's revenue steam last in DRAM? ''As for questions regarding the existing DRAM licensing contracts, where patents begin to expire in the next couple of years, Tessera still holds additional patents, trade secrets and 'know how' for DRAM CSP that extend well beyond 2012, including the '106 patent used in the ITC DRAM case, which expires in 2014,'' Muse said.

In 2007, Tessera filed a complaint with the ITC, charging that various DRAM makers and others infringed upon its patents. In a blow to the company, the ITC recently issued an initial determination, finding Tessera's asserted patents are valid, but not infringed by the respondents. The ITC can affirm, modify or reverse the decision, which is due Dec. 29. The respondents in the DRAM ITC action include Acer, Centon, Elpida, Kingston, Nanya, Powerchip, ProMOS, Ramaxel, Smart Modular and TwinMOS.

Tessera gained a more favorable ruling in another high-profile case. In May, the ITC ruled that the ATI division of Advanced Micro Devices, Freescale, Spansion, STMicroelectronics and Qualcomm infringe two patents of Tessera. The ITC issued a limited exclusion order banning the companies from importing into the U.S. chips that use fine-pitch BGA packages described in the patents.

The ban on imports into the U.S. of a broad range of chips using fine-pitch BGA packages potentially has far reaching impact. But it is still difficult to gauge the impact of the ruling or even find out exactly which chips it covers. The case highlights the difficulties electronics companies face dealing with a rising tide of patent enforcement issues.

Amid its legal battles, Tessera is still seeing a decent growth despite the downturn. Revenues for the three months ended June 30, were $62.3 million as compared to $56.3 million for the three months ended June 29, an increase of 11 percent.

CSP---or micro-electronics--revenues for the three months were $55.6 million as compared to $49.3 million for the three months ended June 29, 2008. For the unit, operating income for the three months ended June 30, 2009 and June 29, 2008, was $40.0 million and $21.8 million, respectively, which represented an increase of 84 percent.

Imaging and optics revenues for the three months ended June 30, were $6.6 million as compared to $7.0 million for the three months ended June 29, 2008, a decrease of 5 percent. Imaging and optics revenues for the six months ended June 30, 2009 were $14.7 million as compared to $17.6 million for the six months ended June 29, 2008, a decrease of $3.0 million, or 17 percent.

In that unit, operating loss for the three months ended June 30, 2009 and June 29, 2008 was $11.4 million and $9.7 million, respectively, which represented an increased loss of $1.7 million, or 17 percent. Operating loss for the six months ended June 30, 2009 and June 29, 2008 was $22.0 million and $14.9 million, respectively, which represented an increased loss of $7.1 million, or 47 percent.

Last month, Tessera raised its third quarter 2009 revenue guidance to range between $65.0-to-$66.0 million. Third quarter 2009 micro-electronics (CSP) revenue, all of which will be royalty and license related, is now expected to range between $58.0-to-$59.0 million. Prior guidance, announced on Aug. 4, was for third quarter to range between $60.0-to-$62.0 million and micro-electronics revenue to range between $54.0-to-$56.0 million.

It is raised its imaging and optics revenue to be approximately $7.0 million, of which approximately $4 million will be royalties and license fees. Prior guidance, given on Aug. 4, was imaging and optics revenue of $6.0 million, of which approximately $3.0 million was royalties and license fees.