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Tessera Technologies (TSRA - Analyst Report) reported first-quarter 2013 net loss of 41 cents, which was greater than the Zacks Consensus Estimate of a loss of 27 cents.

Revenues

Tessera’s reported revenues of $31.1 million, down 41.5% sequentially and 33.3% year over year, in line with the Zacks Consensus Estimate.

In the first quarter, Intellectual Property continued to generate the bulk of Tessera’s revenues (82%) compared to just 18% for Digital Optics. Intellectual Property revenues were down 40.4% sequentially and 34.3% year over year.

The broadening of its relationship with Hynix (an 8-year contract) should help revenues in the future. Tessera has had problems with its largest licensees: Micron Technology (MU - Snapshot Report), Powertech and SK Hynix that have impacted its revenues over the past year.

Tessera has come out winner in some cases, for instance, the $1.5 million it recovered in past production payments in the last quarter. Notably, the company recovered $24.7 million in past production payments in the Dec quarter, which was the main reason for the sequential decline. Excluding these amounts in both periods, core revenue was up 3.8% sequentially.

Tessera is also developing other licensable technology beyond the traditional packaging area that should translate to additional revenues going forward.

The Digital Optics line declined 46.3% sequentially and 28.2% from last year. The sequential decline was due to reduced focus on fixed camera module sales as management shifts focus to core MEMS products.

Margins

The GAAP gross margin was 74.5%, down 249 basis points (bps) sequentially and 1,318 bps from a year ago. A high gross margin is typical for a technology company that is largely dependent on the licensing model.

Tessera’s quarterly operating expenses were $87.7 million, up 30.7% from $67.1 million reported in the previous quarter and 70.1% from $51.5 million in the year-ago quarter. The operating margin shrank 18,450 bps to -207.3%, impacted by much higher research and development (R&D) and selling, general and administrative (SG&A) expenses (as a percentage of sales). Litigation charges have also jumped up and were more than 4X the amount in the year-ago quarter.

Net Loss

Tessera’s pro forma net loss was $21.4 million or 68.9% of revenues compared to loss of $15.4 million or 28.9% of revenues in the Dec 2012 quarter and loss of $3.3 million or 7.0% of revenues in the Mar quarter of 2012. Our pro forma calculation excludes restructuring charges and 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 $44.6 million ($0.85 per share) compared to net loss of $19.6 million ($0.38 per share) in the Mar 2012 and $8.1 million ($0.16 per share) in the Dec quarter of 2012.

Balance Sheet

Tessera’s balance sheet remains strong, despite the $39.9 million reduction in cash and short-term investments to $402.7 million. It has no debt.

Inventories were down 32.8% during the quarter, with turns going from 32.5X to 31.4X. DSOs went from 20 to around 15. Capital expenditure in the quarter was $68.1 million, down from the fourth quarter capex of $72.5 million

Management declared a cash dividend of 10 cents per share for the second quarter payable on Jun 13, 2013 to stockholders of record at the close of business on May 23, 2013.

Guidance

For the second quarter of 2013, Tessera expects revenues in the range of $42 million–$50 million. Intellectual Property revenues are expected in the range $38–$45 million whereas Digital Optics revenues are expected in the range of $4–$5 million. GAAP operating expense is expected between $77– $81 million. GAAP loss per share is forecasted to be in the range of 40-45% with tax rate of 30%.

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. We are encouraged by the fact that Samsung is licensing Tessera’s unique software technology for face recognition. Tessera will be the global supplier for Samsung’s latest flagship model, S4.

Tessera shares currently carry a Zacks Rank #2 (Buy). Other technology stocks performing well at the moment include Maxim Integrated Products Inc. (MXIM - Analyst Report) and Lam Research Corp. (LRCX - Snapshot Report), both with a Zacks Rank #2 (Buy).

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