) 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
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
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
), as offset by lower royalties from
) 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).
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
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
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.
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%
Inventories were up 17.9% during the quarter, with turns going
from 5.2X to 18.3X. DSOs jumped from 8 to 18.
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
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).
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