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Tessera Technologies (TSRA - Analyst Report) reported third-quarter 2013 net loss of 91 cents per share, significantly wider than the Zacks Consensus Estimate of a loss of 18 cents.

Revenues

Tessera reported revenues of $37.3 million, down 20.0% sequentially and 38.3% year over year.

Intellectual property total revenue was $32.3 million, down $10.5 million sequentially and $25.5 million on a year over year basis. The sequential decline was mainly due to lower episodic revenues while the year-over-year decline was attributable to the absence of royalty revenues in the quarter from Micron Technology (MU - Snapshot Report) and PTI.

DigitalOptics total revenue from continuing operations for the third quarter of 2013 was $4.9 million compared with $3.7 million in the prior quarter. The sequential increase was primarily due to higher revenues from image enhancement technologies including a one- time fee recognized in the quarter.

In comparison to the year-ago quarter, third quarter 2013 DOC revenues from continuing operations were up $2.4 million, with the increase being driven by higher revenues from image enhancement technologies.

DigitalOptics revenues from discontinued operations were $1.2 million in the third quarter of 2013 – related to the products and services sold from the Charlotte facility.

Margins

Because of the high percentage of licensing revenues, Tessera usually generates very strong gross margins. Accordingly, in the last quarter, its pro forma gross margin was 95.5%, 157 bps higher than the 93.9% reported in the year-ago quarter.

Its pro forma operating loss was $9.4 million, or 25.3% of revenue compared to a profit of $9.9 million 16.5% of revenue in the year-ago quarter. The decline was because of significantly lower revenues.    

Net Loss

Tessera’s pro forma net loss was $49.5 million compared to net income of $11.5 million in the year ago quarter. Our pro forma calculations are adjusted for restructuring, amortization and acquisition-related charges on a tax-adjusted basis. Our calculations may not match management presentation, because of the addition/deletion of some items that were not considered by management.

Net loss on a GAAP basis was $59.0 million compared to net loss of $24.0 million in the last quarter and profit of $4.2 million in the year ago quarter.

Balance Sheet

Tessera exited the third quarter with current assets worth $410.2 million, down $7.8 million during the quarter. Cash, cash equivalents and short-term investments totaled $376.8 million, down from $380.5  in the prior quarter. Tessera has no debt.

Further, management declared a cash dividend of 10 cents per share for the third quarter, payable on Dec 12, 2013 to stockholders of record at the close of business on Nov 21, 2013.

Guidance

For the fourth quarter of 2013, Tessera expects revenues in the range of $56 million–$60 million. Intellectual Property revenues are expected in the range $48–$50 million whereas Digital Optics revenues are expected to be in the range $8-$10 million. GAAP operating expense is expected to be between $59– $63 million.

Our Recommendation

Tessera remains a company with good intellectual property, which it has protected with great difficulty. However, management is keen on shifting to a lower-margin but safer product-oriented model involving camera modules for mobile devices.

We believe the company is on the right track as this could reduce if not eliminate the significant litigation expenses it has been incurring. The fact that the target market is fast-growing is an added bonus.

Tessera is steadily progressing towards achieving its milestone of conducting an in-depth analysis of its DOC intellectual property portfolio. Tessera’s DOC portfolio leads the semiconductor manufacturing technology category, ahead of companies such as Samsung, SanDisk, Foxconn and Intel (INTC - Analyst Report).  We are encouraged by the fact that Tessera has secured a high volume purchase order for MEMS/cam modules from OPPO, a growing Chinese smartphone maker.

Tessera shares currently carry a Zacks Rank #3 (Hold). Another semiconductor stock worth considering is Microchip Technology Inc. (MCHP - Analyst Report), which has a Zacks Rank #2 (Buy).
 

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