Tessera Technologies: The Money Keeps Rolling In

| About: Tessera Technologies, (TSRA)

Chances are, you have not followed this company, nor heard of it. But unsung, Tessera Technologies (NASDAQ:TSRA) has accumulated an annual revenue of $208.7 million in 2006, with a current market cap of close to $2 Billion.

Shares of Tessera, which have traded between $24.58 and $42.40 over the last year, surged to a fresh 52-week high of $42.79 recently.

Wondering why?

The company has been around for a long, long time. Its investors had to be very patient for many years of painful grinding when literally nothing happened. Meanwhile, Tessera’s technology innovations managed to get patented. At the time, no one paid attention to esoteric chip packaging techniques like chip-scale and multi-chip.

And then the miniaturization wave hit the electronics industry. Every cell phone was suddenly infringing on Tessera’s patents, and had to pay them royalty fees. An important patent infringement suit won against Samsung in late 2004 shot the stock up $20. And since then, money has kept rolling in.

Today, Tessera runs a fat gross margin business that ranges between 80%-95%. Their primary business is licensing of technology for chip-scale and multi-chip packaging for miniaturization in electronic products. Most semiconductor chips that are utilized in various electronics products, including digital audio players, digital cameras, personal computers, personal digital assistants, video game consoles, and mobile phones have something to do with Tessera’s patents. In terms of royalties, Tessera receives an estimated 6 cents to 14 cents on each cell phone handset, between 5 cents and 15 cents on each video camera, and 30 cents or more on each computer.

In the last two years, Tessera has made several acquisitions: Shellcase, Digital Optics, and Eyesquad.

Shellcase is the world’s leading provider of commercially available wafer level image sensor packaging technology. Shellcase’s broad technology portfolio includes wafer-level packaging for image sensors and other devices. The world’s largest cellular phone manufacturers utilize image sensors packaged in Shellcase technology for cellular phones that integrate highly reliable, miniaturized digital cameras. Packaging for Image Sensors and MEMS Devices is forecasted to become a 7.3 Billion Unit Market by 2009. Tessera bought Shellcase for $33 Million.

Tessera acquired Digital Optics last July for $59.5 million. Digital Optics develops and designs micro-optical technologies. Micro-optics is the use of microscopic structures to shape and influence light. The Digital Optics team and key technology will be components in Tessera’s development of low-cost, miniaturized imaging solutions for high-volume consumer optics applications, such as camera phones, next-generation DVD players and automotive applications. According to the most recent forecast from market research firm Techno Systems Research [TSR], the market for camera phones will increase to approximately 825 million units in 2009, representing a 21 percent compounded annual growth rate from 2005.

Recently, Tessera also bought Eyesquad, a Tel Aviv, Israel company that designs digital auto-focus and optical zoom products for cameras in camera phones and other products. The purchase price was $18 million in cash, and it strengthens Tessera’s position in the camera phone market.

To summarize Tessera’s strategy, it has been systematically rolling-up important technology modules that are essential in the growing hyper-integration and miniaturization trends around consumer electronics.

Their primary business model of technology licensing is a highly profitable model, and if they can continue to roll-up more of the components of electronics miniaturization (e.g. audio, memory, imaging, even computing), there is no reason for the company to not continue growing systematically.

TSRA 1-yr chart