Digging into Tessera Technologies: Smaller, Faster, Smarter

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Tessera Technologies Inc. (TSRA) licenses a portfolio of patented semiconductor packaging technologies; these designs enable semiconductor makers to produce high-performance packages for use in mobile phones, personal digital assistants, PCs, and other electronic products. Licensees include big chip makers such as Hitachi (HIT), Intel (NASDAQ:INTC) and Toshiba (OTCPK:TOSBF), as well as semiconductor assemblers such as ASE (ASTSF) and Amkor (NASDAQ:AMKR). Tessera has taken on the likes of Micron Technology (NASDAQ:MU) (15% of sales), Qimonda (QI) (21%), Sharp (OTCPK:SHCAY) and Texas Instruments (NYSE:TXN) in lawsuits defending its patents and won settlements from them. Tessera also offers prototype design, assembly line consulting, and related services.

Tessera is all about making semiconductor packaging technology that allows its customers to produce semiconductors that are smaller, faster and smarter than competitors' chips. It generates revenues from license fees and royalties based on intellectual property it develops.

What is of special interest is two groups of shareholders: Morgan Stanley has a little more than 10% of the stock and Goldman Sachs owns a bit more than 14% (as of April of 2006). Officers and directors have 5%. When two large and respected Wall Street firms take a position of this magnitude in a publicly traded stock, it usually means the stock is worth spending time with and maybe money as well.

Here are some impressive numbers for TSRA. Net Profit Margin for 2004 was 81%, then it was 33%, followed by 29%. Look for 23% this year and 28.5% next year. Return on equity for the trailing twelve months was almost 25%. There is no debt on the books. Analysts expect sales to grow, on average, 26.5% per year over the next 5 years while earnings are forecast to increase by 19% per year, on average, in the same time frame.

Tessera receives licensing revenues from almost 80% of the DRAM (dynamic random access memory) manufacturers. It has developed something called CSP technology which is incorporated into DDR2 memory. Over the last year, demand for the chip has grown by double digits. The new DDR3 market is just emerging which will most likely carry the CSP technology. Furthermore, the new Vista operating system will increase demand for more DRAM.

Tessera generates a lot of cash. It's using some of it to buy other companies. Earlier this year, it acquired Eyesquad. The company is a leader in digital focus and optic zoom soutions for electronic products using cameras, in particular cellphones. Analysts estimate that volumes in the digital imaging market are likely to grow beyond 1 billion units by 2010.

Lawsuits have been a big part of Tessera's past and this year. That should decrease next year and going forward. Most of these suits deal with collecting royalty fees. One in particular against Amkor will last through 2007 and another involving several other parties looks like it won't be done until next year. The legal fees are high, but the royalties being sought will not only cover those fees but warn others not paying for the intellectual property they're using.

Tessera has a bright future. Its CSP technology is in high demand which will keep license revenues strong. The balance sheet is clean with no debt and $220 million in cash. Current liabilities are only $15.4 million.

Spend some time digging into TSRA if you're looking for a tech stock. This one holds some good nuggets and has a great story. Of course all the positive news hasn't been kept from investors. They've bid up the stock so it's carrying a rather high P/E of 33.

TSRA 1-yr chart


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