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Tessera Technologies (TSRA - Analyst Report) announced its plans to restructure its DigitalOptics Corporation (DOC) business in a bid to cut costs and enhance shareholder value by improving profitability.

In accordance with these plans, DOC will not make camera modules going forward, but will instead focus on the development of intellectual property and in particular Micro Electro Mechanical System (MEMS)-based technologies.

Simply put, MEMS technologies enable the development of smaller and lighter devices, which therefore use less power than the VCM motors that power most modern smartphone cameras.

The company said that it will terminate its current lens manufacturing program and instead partner with third-party manufacturers to produce other components of the full camera module. These steps are expected to reduce DOC’s capital spending to $5–$7 million versus $10–$15 million expected previously.

In addition, the restructuring plan includes the closure of operations at its leased facility in Zhuhai, China where the devices are produced. The company expects total restructuring, asset impairment and other related exit charges to be in the range of $17 million to $23 million, the majority of which is to be incurred in the first quarter of 2013.

In the last few months, Tessera has taken quite a few steps to reduce costs. In Feb 2013, the company stated that it would reduce its corporate, general and administrative spending by 17% to 21% by year end. Last November, it unveiled plans to lay off about 180 employees, cease operations in Israel and pursue the possible sale of its facility in North Carolina to refocus its efforts on the mobile phone market and save costs.

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. The company also reported disappointing 2012 financials with an operating loss of $88.5 million on revenues of only $41.1 million.

Given the current situation, management announced its decision to shift the focus of the DOC business toward MEMS camera modules, which target the smartphone market. We are positive about this strategy, as it could reduce if not eliminate the significant litigation expenses Tessera has been incurring.

According to a recent report from Strategy Analytics, the number of smartphones used around the globe topped 1 billion for the first time ever in the third quarter of 2012 and is projected to double by 2015. The growing demand for smartphones has provided ample growth opportunities for companies within the technology sector, which will be an added bonus for Tessera.

Tessera shares currently carry a Zacks Rank #5 (Strong Sell). Technology companies that have been performing well and are worth considering include UltratechInc (UTEK - Snapshot Report), Brooks Automation Inc. (BRKS - Snapshot Report), and Mattson Technology Inc. (MTSN - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

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