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Tessera’s Hiccups May be a Buying Opportunity

Posted on Tuesday, Apr 1st 2008

I have reviewed Tessera several times before. The stock has recently been going through a series of ups and downs. It has fallen more than 60% and touched its lowest in more than three years. Let’s look at what’s been going in this company, which I said in an earlier post is a beneficiary of the convergence device and electronics miniaturization trends.

On February 26, Tessera Technologies (NASDAQ: TSRA) plunged more than 38% to a low of $22.15, its lowest in more than three years. What triggered this plunge was an International Trade Commission (ITC) stay on its patent infringement case against Motorola, Freescale, Qualcomm and others, pending a reexamination of three of Tessera’s patents by the Patent and Trademark Office (PTO).

On March 4, TSRA shares sank further to $11.11 on news that the PTO had rejected its 6,133,627 patent. A press release from its rival Siliconware Precision (NASDAQ: SPIL) reading “Siliconware Wins Again In Its Patent Reexamination Fight Against Tessera” managed to worsen its situation by making it sound final. Siliconware had asked for a reevaluation of five of Tessera’s lucrative patents that together are worth more than $250 million licensing earnings. The stock picked up after a lot of reassurances that the patent is still in full effect until the reexamination process, including all appeals, is complete. The reexamination process takes 24 months, during which the patent is enforceable.

And on March 28, TSRA soared more than 32% to around $22 after the ITC overruled its earlier stay on its patent infringement case against Motorola, Qualcomm and others.

On the financial front, Tessera reported its Q4 and full fiscal year 2007 results on January 31. Q4 revenue was $53 million with royalty and license fees at $45.5 million, meeting its earlier estimates for Q4. GAAP net income was $13.0 million, or $0.27 per diluted share, which includes non-cash charges of $4.9 million for stock-based compensation and $1.9 million for deal amortization. Royalty growth was driven by DRAM and wireless unit growth as well as new consumer optics licenses with Toshiba and Nemotek. In the consumer optics business, it also acquired FotoNation, a leading provider of image enhancement technology for digital still cameras and mobile phones in February for up to $39 million. The Shellcase acquisition has also started producing monetization.

For the full fiscal year, total revenue was $195.7 million, within its full year guidance of $193 to $198 million but down from $208.7 million in 2006. Royalty and license fees were $158.9 million, above its estimate of $153 to $158 million. Product and service revenue was $34.6 million. GAAP net income was $45.1 million, or $0.93 per diluted share.

For Q1 2008, Tessera expects revenue between $55 and $57 million and royalty and license fees between $47 and $49 million. For Q2, revenue is expected between $53 and $55 million and royalty and license fees are estimated between $46 and $48 million. It is currently trading around $22 with a market cap of around $1 billion.

You could most certainly consider this a buying opportunity if you can stomach the uncertainty. All the electronics miniaturization trends are still blowing in Tessera’s favor. I think the more important question to ask about the company at this point is when do the miniaturization patents expire, and would the other newly acquired IP from Shellcase, etc. be sufficient to substitute the revenue stream when they do.

Chart for Tessera Technologies Inc. (TSRA)

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