Tessera Technologies
(
TSRA
) reported a second quarter income of 8 cents that missed the Zacks
Consensus Estimate by a penny.
Revenue
Tessera's reported revenue of $61.4 million was up 31.6%
sequentially and down 13.2% year over year.
Revenue continues to be hurt by the non-renewal of major
licenses. Tessera has taken the matter to court and received
favorable rulings. However, licensees could appeal, so the negative
impact is likely to continue in the near term.
Tessera renamed its two segments. Accordingly, the
Micro-electronics segment is now being referred to as Intellectual
Property, while the Imaging & Optics segment is being referred
to as Digital Optics.
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.
Since the camera module business is yet to take off (Tessera
expects volume shipments in the December quarter), management
decided not to provide guidance for the next few quarters.
In the last quarter however, Intellectual Property continued to
generate the bulk of Tessera's revenue (86%) compared to just 14%
for Digital Optics. Intellectual Property revenue was up 35.7%
sequentially and down 12.4% year over year. The sequential increase
was helped by a one-time licensing fee of $1 million. The Digital
Optics line was up 10.5% sequentially and down 17.5% from last
year.
Tessera continued its discussions with potential DRAM customers
for long-term contracts. While these could take some time to
develop, they are likely to lead to some stability in revenue.
The company also announced that its wholly-owned subsidiary
Invensas introduced two new packaging technologies that were
currently in the process of commercialization. The company 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 first internally developed MEMS
autofocus camera module will start shipping from a tier-1 mobile
phone makers in the fourth quarter.
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 as a
product).
Margins
The pro forma gross margin excluding amortization of intangibles
was 94.2%, up 219 bps sequentially. The high gross margin is
typical for a technology company that is largely dependent on the
licensing model and quarterly fluctuations are therefore usually
mix-related, as Tessera also generates a growing percentage of
revenue from products, which have much lower gross margins. Volumes
also helped the company in the last quarter.
Tessera's quarterly operating expenses were $98.7 million, up
47.8% from the $66.8 million reported in the previous quarter.
However, given the higher volumes, the operating margin expanded to
10.0%, up 1,913 bps sequentially, and as a result, both R&D and
SG&A expenses dropped significantly as a percentage of sales.
Litigation expenses continued to increase however.
Net Income
Tessera's pro forma net income was $4.3 million, or 7.0% of
revenue compared to $3.3 million, or -7.0% of revenue in the March
2012 quarter and $14.7 million, or 20.8% in the June quarter of
2011. Our pro forma net income calculation excludes intangibles
amortization charges on a tax-adjusted basis but includes stock
based compensation.
Our 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 $409 million ($0.01 per share)
compared to net loss of $8.1 million ($0.16 per share) in the
previous quarter and income of $11.6 million ($0.23 per share) in
the June quarter of 2012.
Balance Sheet
Tessera's balance sheet remains strong, despite the $15.6
million reduction in cash and short-term investments to $474.8
million. It also has no debt. Deferred revenue declined 38.5%
sequentially.
Inventories were up 69.1% during the quarter, with turns going
from 9.2X to 5.2X. DSOs dropped from 15 to 8.
Our Recommendation
We think the company has good potential based on its recent
decision to focus on the Digital Optics segment. While generating
lower gross margins, this will help protect its IP, so Tessera may
not have to go to litigation so often. This could ultimately lower
overall expenses and generate higher profits for the company.
Management is optimistic about volume production by the end of
the year, so all this is good news. Of course, the fact that the
company will not be providing guidance seems to indicate quite a
bit of uncertainty. However, we like the strategy.
Tessera will maintain its Intellectual Property segment, which
continues to generate high margins. While it has proved to be a
double-edged sword for Tessera, the company has seen favorable
outcomes so far. It is also in talks for long-term DRAM contracts,
which could take a while to materialize. Therefore, for the time
being, the company will continue to be impacted by pricing
pressures in the DRAM market.
TESSERA TEC INC (TSRA): Free Stock Analysis
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