Can Tessera pack an IPO punch?
As cell phones and other devices get smaller but more powerful, chip packaging is taking on increased importance. And Tessera Technologies holds some important patents.
The San Jose, Calif.-based company--which is expected to hold its initial public offering in about two weeks--specializes in designing semiconductor packaging, the sleeves that wrap around processors or memory chips and connect the chips to the motherboard.
What's new:
Tessera Technologies, a maker of semiconductor packaging, is getting set to hold its IPO.
Bottom line:
Packaging is taking on increased importance as cell phones and other devices get smaller but more powerful. Tessera holds some important packaging patents, with Intel and others as licensees.
"The importance of packaging has grown over the last 10 years because as chips have gotten faster, issues on how to get signals out of the chip have grown," said Nathan Brookwood, an analyst at Insight 64. "It is a nontrivial problem. You've got materials issues, thermal issues, manufacturing issues."
Tessera holds some of the more valuable recipes in the packaging cookbook. Intel, for instance, licensed the company's multichip packaging technology for, among other products, an upcoming flash memory module that will let phone makers stack up to four chips vertically in the same space where one chip fits now.
Drawing on statistics from Tessera, market research company Gartner says the market for chip scale packaging, the basic package Tessera invented, should grow from 4.4 billion units last year to 18.9 billion units in 2006, representing a compound annual growth rate of 44 percent. In total, 2.5 billion semiconductors with the packaging have already been made. While other companies will manufacture packages, Tessera may be able to receive royalties on all the units shipped.
Texas Instruments, Sharp and others have also paid millions to settle legal disputes with Tessera, according to filings with the Securities and Exchange Commission.
A year from now, the company will square off against Samsung Electronics in an intellectual-property lawsuit in the U.S. District Court for the Northern District of California.
Tessera alleges that Samsung has infringed its patents. Samsung, which has been a Tessera licensee, denies the allegation and adds that Tessera fraudulently obtained its patents by failing to disclose its intellectual property while a member of the Joint Electron Device Engineering Council.
If that name sounds familiar, it's because Micron, Infineon and others alleged that Rambus, another company specializing in semiconductor intellectual property, improperly manipulated JEDEC procedures. An appeals court rejected the fraud claim, and Rambus will soon go to trial on the infringement case.
The company's IPO filing with the Securities and Exchange Commission also broadly hints more legal actions will come, an issue that will likely be raised in the stock offering, which is expected to take place on Nov. 13, according to IPOhome.com. Approximately 7.5 million shares will be offered, at between $9 and $11 per share, under the symbol TRSA. Although Tessera only has 84 employees, it's hardly a start-up: The company was founded in 1990 and almost went public in 2001. Because it is in a quiet period, the company declined to comment for this story.
Topsy-turvy
The company's technology in some ways can be thought of as the packaging world's equivalent of the Fosbury Flop, the backward high-jump technique pioneered by Dick Fosbury in the 1960s, which changed the sport.
In the early days of the semiconductor market, a chip package might contain two or four electrical leads (for connecting the chip to the board), but now some packages can contain several hundred in a ball grid array, that series of bumps on the bottom of today's chips, said Morry Marshall, vice president of strategic technology at researcher Semico. Funneling electrical signals through an ever-shrinking package wreaks havoc with the laws of physics.
"We're at the point where those ball grid array packages aren't adequate anymore," Marshall said.
|  |  | |
| | ||
To tackle these problems, packaging experts constructed large, fairly rigid packages that could reduce localized flexing and accommodate numerous leads. This, however, created other problems. Large packages mean longer electrical leads, which mean greater delays in getting signals to and from the chip. Large packages are also, by definition, large, which chafes against manufacturers' desires to shrink their products.
Tessera went the opposite way with what it called chip scale packaging. In chip scale packaging, a semiconductor rests on a flexible substrate and the bundle is then wrapped in polyimide tape, Tobak said. Aluminum traces inside the substrate connect the chip to metallic balls on the outside surface of the tape. (Chip scale package refers to the general concept--the actual packages are sold under names like the micro Ball Grid Array, or BGA, package.)
As a result, chip scale packages are small--about the same size as the chip--and they bend to accommodate the different flexing characteristics of the board and the chip.
Additionally, Tessera put the chip face down. This reduces the length of electrical connections between the chip's transistors (located on the upper surface of the chip) and the motherboard, thereby improving performance. In traditional "face up" packages, wires sprout from the top of the chip and coil down.
The size and the nature of these packages allowed for another possibility: multichip packaging. Chips get tested after packaging. Multichip packages, therefore, have historically been risky because one bad part can spoil the whole bundle.
"The holy grail in packaging has been to come up with multichip modules. Everyone has tried it and failed," Tobak said.
With chip scale packaging, each chip can be tested individually and then tiled together in a multichip package.
The company began filing its patents in 1990 and first started licensing its intellectual property in the mid-'90s. Although Intel and TI, among others, licensed the technology, it didn't spread rapidly. The tape packages were expensive, said Brookwood.
Instead, the industry gravitated toward FBGA (Fine Ball Grid Array) packaging, a then-emerging standard. FBGA shares similar flexible characteristics but allowed the chip to float face up. Although the face-up position creates longer electrical leads, it was a lot cheaper and could be made on existing equipment, noted Brookwood. It got adopted by manufacturers, such as Toshiba, that do their own packages as well as contract testing and packaging companies such as Amkor Technologies.
FBGA "was a big deal because the leads didn't bend. It was robust," said G. Dan Hutcheson, CEO of VLSI Research, who added that in general, "the industry has never been wild about paying licenses to individual intellectual-property providers."
Letter of the law
FBGA, though, proved to be Tessera's best friend. TI filed suit in federal court in California in 2000 seeking relief from royalties. A few months later, Tessera filed an action in district court and with the International Trade Commission against Sharp for copyright infringement.
In November 2001, an administrative judge with the ITC ruled in favor of Tessera.
On Dec. 31, 2001, TI paid the company $13.3 million in a settlement, according to Tessera's IPO filing, while Sharp followed shortly after with a $4 million settlement. Settlement fees from Seiko Epson, Shinko, Mitsubishi and Intel came to $2.1 million in 2003.
"The Tessera technology includes a patent on a flexible interface between the chip and the package that is very broad," said Brookwood.
The settlements had a huge impact on the company's bottom line. In 2000, Tessera reported revenue of $11.5 million and a net loss of $34 million. Last year, revenue came to $28.3 million, and the company had a net income of $6.5 million. In the first nine months of this year, revenue hit $26.6 million, and net income came to $6.3 million. (Still, because of the amount of stock issued to employees and backers over the past 13 years, the company has been typically reporting net losses on a per share basis.)
The lawsuit with Samsung revolves around similar issues. Samsung asserts that it isn't required to pay royalties on its independent packages. The Korean giant has also alleged fraud, a contention Tessera rebuts.
While the outcome or ultimate effect of the Samsung suit is uncertain, it seems fairly clear that Tessera will file more legal actions. The company currently has 44 licensees. In its IPO filing it states: "We believe that more than 100 companies across the semiconductor supply chain have invested in the materials, equipment and assembly infrastructure...that incorporate our technology."
Revenue growth outside of lawsuits will likely occur as well. DDR 2, a faster version of DDR DRAM, the most common form of memory in PCs today, will start to hit the market next year, and both Marshall and Brookwood said chip scale packaging of some sort will be needed to facilitate high-speed signaling. To help its popularity, Tessera also long ago defused the face-up, face-down distinction by making a version of the chip scale package that can use wire bonding.
Despite the potential, success could still prove elusive. Other competing technologies exist on the market, said Hutcheson. Tessera also doesn't charge huge royalties--the cost is a fraction of a cent per pin on a package, said Brookwood.
Demand for multichip packages will also increase. Intel has come out with multichip packages for housing memory chips in phones. In the future, these packages will be used to bind communications chips closer together, or to put extra buffer memory close to the graphics processor, said Marshall. While popular in consumer electronics, network equipment makers are also looking at new packaging.
"If you have a dollar part that doesn't work, and you have to throw out a $300 part because of it, that's not a good situation," said Marshall.