Back to top

Analyst Blog

This page is temporarily not available.  Please check later as it should be available shortly. If you have any questions, please email customer support at support@zacks.com or call 800-767-3771 ext.  9339.

Tessera Technologies (TSRA - Analyst Report) reported third quarter net income of 5 cents that beat the Zacks Consensus Estimate by 3 cents.  Results included a one-time net gain of $79 million in lieu of past production payments. Excluding intangibles amortization on a tax-adjusted basis and including stock based compensation, earnings were 7 cents.

Revenue

Tessera’s reported revenue of $72.7 million was up 18.3% sequentially and 22.5% year over year.

Tessera expects the Intellectual Property business to gradually become a smaller part of its revenue, while Digital Optics (its camera module business for smartphones) becomes a larger segment. Management is not providing guidance during the transition period due to the uncertainties involved (converting and equipping the facility, training, and building initial production capability).

In the last quarter, Intellectual Property continued to generate the bulk of Tessera’s revenue (80%) compared to just 20% for Digital Optics. Intellectual Property revenue was up 9.1% sequentially and 14.9% year over year compared to sequential and year-over-year increases of 75.4% and 64.7%, respectively for the Digital Optics line.

The year-over-year increase in Intellectual Property revenue was on account of the interim award from Amkor Technology (AMKR), as offset by lower royalties from Micron Technology (MU - Snapshot Report) and Powertech. Tessera stated that two DRAM customers renewed their contracts and its new XFD packaging technology saw its first OEM adoption during the quarter. Tessera is also developing other licensable technology beyond the traditional packaging area that would translate to additional revenue going forward.

On the digital optics side, Tessera is seeing some success with its new MEMS lens subassembly. The last quarter’s results benefited from the shipment of the company’s first camera modules from the recently-acquired facility in Zhuhai, China.

The segment has now transitioned from its imaging and optics focus to an ODM of camera modules for the mobile phone market. Tessera expects to make this the primary segment, which should simplify the protection of its intellectual property (since in this case its technology is not being licensed, but sold within an internally developed product). 

Margins

The pro forma gross margin excluding amortization of intangibles was 79.5%, down 1,465 bps sequentially. A high gross margin is typical for a technology company that is largely dependent on the licensing model. However, the decline is related to the mix of business, because the product side (Digital Optics) grew very strongly in the last quarter.

Tessera’s quarterly operating expenses were $54.0 million, up 4.4% from the $51.7 million reported in the previous quarter. The operating margin shrunk 474 bps to 5.3%, impacted by the weaker gross margin, as both R&D and SG&A expenses dropped as a percentage of sales. Litigation expenses continued to increase however.

Net Income

Tessera’s pro forma net income was $3.5 million, or 4.8% of revenue compared to $4.3 million, or 7.0% of revenue in the June 2012 quarter and $8.6 million, or 14.5% in the September quarter of 2011. This pro forma net income calculation excludes intangibles amortization charges on a tax-adjusted basis but includes stock based compensation. The pro forma estimates may not match management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

Net loss on a GAAP basis was $1.1 billion ($0.02 per share) compared to net loss of $409 million ($0.01 per share) in the previous quarter and loss of $44.7 million ($0.87 per share) in the September quarter of 2012.

Balance Sheet

Tessera’s balance sheet remains strong, despite the $8.9 million reduction in cash and short term investments to $465.9 million. It also has no debt. Deferred revenue declined 33.4% sequentially.

Inventories were up 17.9% during the quarter, with turns going from 5.2X to 18.3X. DSOs jumped from 8 to 18.

Our Recommendation

Tessera remains a company with good intellectual property, which it has protected with great difficulty. Over the past year, the company has spent more than half its earnings for this purpose and we had our doubts about whether this was worthwhile. However, management has been discussing a refocusing of the business toward a lower-margin, but safer product-oriented model involving camera modules for mobile devices.

We think that this is the way to go, as it could reduce if not eliminate the significant litigation expenses it has been occurring. The fact that the target market is fast-growing is an added bonus.

Tessera’s performance in the last quarter is indicative of the possible success that awaits it and we are encouraged by its plans to transition the Chinese facility for volume production by the middle of 2013. The news is likely to translate into positive movement in share prices, which is the main reason that the Zacks Rank on Tessera shares recently moved up to #1 (Strong Buy).

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

Learn more

Start for as little as $4.50 per trade.

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
BITAUTO HOLD BITA 35.33 +14.82%
ANI PHARMACE ANIP 24.79 +14.66%
E HOUSECHINA EJ 10.99 +9.24%
CANADIAN SOL CSIQ 26.97 +7.15%
INTERNATIONA ICAGY 33.30 +5.38%