Not a quick study

In the last year MOSAID Technologies Inc. (TSX: MSD) has developed an incredibly lucrative business model.  Its success and long term financial forecasting in the tech sector are unheard of. The only reason shares aren’t climbing? Analysts say not enough investors have taken the time to understand the complex patent firm.

MOSAID Technologies Inc. is an intellectual property and patent licensing company in Ottawa,  one that focuses on the licensing and development of semiconductor memory technology.

With no long-term debt obligations and a stable stock price this year, the media have been positive about the company’s share price.

In its early days, MOSAID was in the business of inventing advanced memory chips, most notably a circuit technology that is used by Dynamic Random Access Memory products (or DRAM). The technology is now found in most computers.

Today, MOSAID has a portfolio that includes about 2500 patents across a number of technology sub-sectors. While DRAM and other memory chip patents are still  its primary focus, MOSAID also has patents for flash memory, wireless technologies, Wi-Fi and a new product called “Power Over Ethernet”.

Lead by a seven-member board of directors and a new CEO, John Lindgren, the company has posted large revenue increases over the last two quarters (15 per cent in each quarter) and is on track to meet targets for 2011.

MOSAID’s net income was also up in their latest quarterly financial report as well to $6.5 million from $5.0 million in the same quarter last year.

Positive coverage

MOSAID’s stock closed at a healthy $26.55 a share on December 2, 2010 and the company continues to pay dividends of about 25 cents a share quarterly.

With no long-term debt obligations and a stable stock price this year, the media have been positive about the company’s share price.

Michael Salter, the senior director of investor relations and corporate communications explained the company’s main revenue source comes from a large number of existing licensing agreements with Japanese multinationals for their DRAM patents.

“You kind of think of that as providing a revenue floor, or replacing dollar for dollar,” Salter says.

Usually it’s a much more volatile boom to bust environment that a company has to thrive in. Once MOSAID signs these deals, they just sort of sit back.

Todd Coupland, an analyst specializing in the high-tech sector with CIBC World Markets, says that revenue stream is leading to exemplary results for the company. “Their licensing program is very robust and successful. Over the last 10 years they’ve signed up 100 per cent of the market. The company is in terrific shape.”

Coupland and Salter don’t see any signs of slowing in the future. MOSAID’s long-term licensing agreements typically last five to six years. This gives the company a good ability to forecast its financials up to a year in advance, eliminating a lot of the risk typically associated with high-tech companies.

When yearly financial forecasting is done, a large percentage of revenue is accounted for by fixed payment patent licenses they already have in hand. “When we start a fiscal year, 65 per cent of our estimated revenues are already booked,” Salter said.

Coupland said this is almost unheard of in the tech sector, “Usually it’s a much more volatile boom to bust environment that a company has to thrive in. Once MOSAID signs these deals, they just sort of sit back.”

MOSAID is now looking to their wireless licensing programs to drive growth higher and so far, it’s working.

In October 2010 MOSAID negotiated a new patent licensing agreement with Texas Instruments Inc. for a wireless technology that will be used in all of its Wi-Fi devices. This represents a shift in MOSAID’s corporate strategy from licensing to semiconductor vendors rather than system companies.

The shift has proved profitable though. “On the revenue side, the new Texas Instrument deal was instrumental in the 15 per cent increase in revenues [in Q2 2011],” Salter said.

More negotiations on the horizon

Salter also confirmed  MOSAID is in the process of negotiating with a number of other chip vendors.

At the same time, the company is in litigation with one of the world’s biggest technology corporations, CISCO Systems Inc. CISCO filed a complaint against MOSAID in anticipation of a suit  over Power Over Ethernet patents that CISCO hopes to use. CISCO hopes to establish that its technologies that utilize Power Over Ethernet patents don’t infringe on MOSAID’s patent portfolio.

Power over Ethernet offers power and internet over one cable, and could be a massive source of income for MOSAID in the future.

The majority of their revenue is coming from memory and wireless. The Power over Ethernet is quite an early market for them.

Salter said the litigation shouldn’t dissuade potential investors, “We actually budget $5 to 10 million dollars per year for litigation costs, so we see litigation as a normal occurrence.”

He added MOSAID has settled (reached an agreement out of court) 100 per cent of its cases, and allocates a large amount of money to legal costs each year.

Coupland explained that while MOSAID has a lot to gain,  it doesn’t have much to lose, and the result likely won’t have a large financial impact on the company. “MOSAID isn’t making any products that infringe on Cisco patents. The question is, is Cisco making products that infringe on MOSAID’s products?”

Either way, Coupland, like Salter, is not concerned, “I don’t think it matters that much. The majority of their revenue is coming from memory and wireless. The Power over Ethernet is quite an early market for them.”

“Investors have not built in expectations for that into the stock price, and I haven’t either.”

Diversification calms investors

Regardless of the litigation, the company represents a fairly stable investment.

More stable than three years ago, when Lindgren took over from 13-year CEO George Cwynar. Cynwar was ousted as part of a deal with shareholders who thought the company was underperforming. At the time MOSAID’s business was very concentrated, with a few very large licenses. The uncertainty of renegotiating large licensing agreements with companies like Samsung was a risk for investors.

But Coupland said since Lindgren has taken over, MOSAID has diversified and is “a stronger investment today than it would have been three years ago.” It has also been successful in renegotiating long-standing license agreements.

The only problem, Coupland said, is that the investment may be difficult for investors to understand because of the complex nature of what MOSAID does. Not only that, but investors will have difficulty comparing MOSAID to other companies. “You can compare RIM with Apple and the iPhone, but with a patent licensing company, you either have it or you do not.”

But he added that it may be worth investor’s while to take a closer look at what the company does. “They met or exceed expectations for three years. If investors are willing to take the time to understand it, it is a very lucrative business model,” he added.

Over all, with no long term debt obligations, a healthy dividend and revenue increases expected to continue, MOSAID is a good investment opportunity for individuals looking to the tech sector.