Chip Package Designer Unwraps Image Effort Tessera's Diversifying Sees growth opportunity in image chips for digital cameras and other uses

Chipmaker Tessera picked a tough time to try to find stability.

Just as the economy has tanked, the company forged ahead with plans to diversify into imaging chips -- with a new chief executive and new chief financial officer.

Previously, the San Jose, Calif.-based company's sole business was to license chip packaging designs to makers of memory chips, so moving into licensing imaging chip designs is a big change.

"We needed to diversify," said recently named Chief Executive Hank Nothhaft. "We decided we should find an adjacent market and take advantage of some of the skills we have."

Tessera chose imaging chips. Imaging chips create the images in digital cameras, camera cell phones and other devices.

Plays In Toy Market

Companies sell about 1.2 billion such chips a year, Nothhaft says. He expects that figure to rise 15% to 20% a year for the next several years. "We see them going into things like autos (dashboard GPS systems) and even toys (that, for example, will "recognize" things). Think of some of the fabulous toys that will come out of this."

Tessera could use a boost after a tough year. Last spring, a patent office ruling went against the company. Tessera had sued Patriot Memory and other memory makers, saying those firms were using Tessera's package designs but not paying royalties.

The patent office ruling sent its share price tumbling from a close of 43.54 on Feb. 1 to 14.07 on March 4. It now trades near 13.

Besides the new CEO, Michael Anthofer joined the company on Sept. 29 as chief financial officer.

Nothhaft, a former Marine and member of the company's board, replaced Bruce McWilliams on Aug. 6. McWilliams remains with the company as chief strategy officer. Nothhaft is the former CEO of wireless firm Danger Inc. and former Internet service provider Concentric Network.

Tessera made the change after sales last year fell 5% to $196 million and per-share profit fell to 93 cents from $1.27.

CFO Anthofer replaces Charles Webster. Webster resigned Sept. 19, the company said, to pursue other interests. Anthofer joins the company from Kodiak Networks, a maker of software applications for mobile devices, where he was CFO.

Raymond James analyst Hans Mosesmann isn't convinced it can make the leap into imaging chips.

"I'm skeptical," Mosesmann said. "They have been unable to quantify how much they will get in royalties (from imaging chip companies). We'll have to wait and see." He rates the stock market perform, or neutral.

Tessera is the No. 1 designer of memory chip packages -- the way chips attach to circuit boards. Customers include such chip giants as Intel, Samsung, Toshiba and Hynix. Some 20 billion memory chips have shipped in its packages over its 18-year history.

But when its revenue fell, the company jumped into the imaging chip design business.

The company's first imaging chip product, the OptiML WL-VGA-1 E, is the design for a camera lens. It will let chipmakers create camera chips smaller than the diameter of a pencil.

Tessera is contracting out the manufacture of the chips, which it's selling itself. It will quit selling and manufacturing them when its customers start shipping them next year.

"It will be one-eighth the size of a traditional camera being used in cell phones to this time," Nothhaft said. Tessera's chip designs will also help camera chipmakers lower costs, he says.

"In less than two years, we will drive down the cost of, say, a VGA- (Video Graphic Array standard) size camera module. We will reduce cost by an order of magnitude."

Today, chips for low-cost cameras cost as little as $2.50 each. Within the next year, he says, there will be $1 chip cameras, based on Tessera designs. There are one or two such chips in every digital camera.

Camera makers like Sony and Canon make their own imaging chips. But some others use chips from outside designers, and it's these firms Tessera is targeting.

Tessera has signed its first two imaging chip customers, Alps in Japan and a small company in Morocco, called Nemotek. Nemotek plans to start making tiny camera chips using Tessera designs in mid-2009. Alps hasn't given a timeline.