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Tessera’s Growth Should Continue

Posted on Thursday, Nov 15th 2007

Tessera Technologies, Inc. (TSRA) was last reviewed here in February 2007, where I covered the basic strategy of the company in rolling up important technology modules essential in the miniaturization trends in consumer electronics.

On November 1, 2007, Tessera announced earnings for Q3 ending September 30, 2007. Versus previous Q2 guidance of total revenue approximately $48 million, Tessara posted $49.2 million in Q3 revenue. Tessera earned $41.4 million from royalty and license fees, above the Q2 $40 million target projected. The main driver of royalty growth continues to be strong DRAM unit growth, which is expected to make up 45 and 50 percent of royalty revenue for 2007. Overall, royalty and license fees made up $113.4 million of the total 2007 revenue of $142.6 million so far.

The remaining Product and Service Q3 revenue totaled $7.4 million, under expectations of $10 million. Total product revenue posted at $27.1 million for 2007.

Net income (GAAP) totaled $11.2 million or $0.23 per diluted share (Non GAAP posted at $25.1 million). This included non-cash charges of $4.4 million for stock-based compensation and $1.9 million for deal amortization.

Based on the above, full year 2007 guidance will total $193 to $198 million for 2007 annual revenue, with approximately $153 to $158 million in royalties and license fees versus 2006’s $99.6 million. For Q4 2007, Tessera indicated gross revenue would be approximately $53 million, with Q4 royalty and license fees to be approximately $45 million. Non-GAAP operating expenses are projected to be approximately $28 million, including $7.5 million for litigation expenses. The litigation is standard and for good reason: almost 80% of DRAM manufacturers license technology from Tessera.

Tessera was already being watched by analysts who wrote in mid-October that TSRA was undervalued and ripe for growth. So it was no surprise that based on the Q3 earnings report, Tessera stock jumped from $37.53 to $42/share. But as I mentioned before, there is more than trading to Tessera’s stock value. The convergence device and electronics miniaturization trend is marching ahead boldly, and Tessera is a happy beneficiary of this momentum.

Tessera’s company strategy is based on advanced packaging technologies that enable miniaturization. It’s acquisitions have brought additional image sensor and other such technologies into the fold. Long-term outlook places bets on memory demand, both in computing and consumer electronics, climbing. So far, so good. Everybody continues to want a PC in a smaller package with more speed, memory and functionality. With the above, combined with the strong interest in Tessera’s full range of consumer optics technologies, the company is confident in the long-term scalability of its business. With the release of Microsoft’s Vista, a DRAM hog, and a new DDR3 market emerging, prospects look consistent with Tessera’s direction.

Unlike it’s past run at acquisitions (Digital Optics, Eyesquad, and Shellcase), Tessera announced in August it had decided on pursuing a stock buyback as a better use of its cash on hand. The company announced a $100 million share buyback, intending to pursue acquisitions later.

In summary, Tessera continues to maintain a clean balance sheet with no debt and $220 million in cash, a super high gross margin business model, and aligns with strong market demand. It is one of the stocks I own, and a company for which I have consulted in the past.

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