Tessera Reports In Line
Tessera Technologies’ (:TSRA) first quarter loss of 6 cents was in line with the Zacks Consensus Estimate. Results continued to be impacted by lower volumes, as the company is yet to make up the loss of licensing revenue on account of customers failing to renew contracts. It is also entangled in various lawsuits that are a constant drain on its resources, while not ensuring positive outcomes.
Revenue
Tessera’s reported revenue of $46.7 million was down 17.7% sequentially and 31.1% year over year.
Additionally, revenue continues to be hurt by the non-renewal of major licenses. Tessera has taken the matter to court, which has ruled in its favor. However, licensees could appeal, so the negative impact is likely to continue in the near term. On account of the continued uncertainties, the company is not providing guidance until the second month of the quarter.
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.
Intellectual Property continued to generate the bulk of Tessera’s revenue (84% in the last quarter). Revenue was down 20.4% sequentially and 27.2% year over year. The Digital Optics line (the remaining 16%) was down 0.7% sequentially and 46.0% from last year.
Tessera stated that it has obtained 4 new licenses in the last quarter, two of which were by important Japanese licenses. However, the names were not disclosed. Management also mentioned discussions with potential DRAM customers for long-term contracts, but stated that they could take at least 18 months to close. The company also mentioned that other licensable technology beyond the traditional packaging area were being developed 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 sampling at multiple tier-1 mobile phone makers in the current quarter. The product is expected to ship by the fourth quarter. The segment has now transitioned from an imaging and optics focus to an ODM of camera modules for the mobile phone market.
Margins
The pro forma gross margin excluding amortization of intangibles was 92.0%, up 136 bps sequentially. The high gross margin is typical for a technology company that is largely dependent on the licensing model and quarterly fluctuations are largely mix-related, as Tessera also generates a growing percentage of revenue from products, which have much lower gross margins.
Tessera’s quarterly operating expenses were $47.2 million, up 5.8% from the $44.6 million reported in the previous quarter. However, the operating margin shrunk to -9.1%, down 2,525 bps sequentially due to lower volumes, with both R&D and SG&A expenses increasing as a percentage of sales.
Net Income
Tessera’s pro forma net income was $3.3 million, or -7.0% of revenue compared to $6.0 million, or 10.5% of revenue in the December 2011 quarter and $16.2 million, or 23.9% in the March quarter of 2011.
Our pro forma net income estimate 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 $8.1 million ($0.16 per share) compared to net income of $2.6 million ($0.05 per share) in the previous quarter and income of $11.2 million ($0.22 per share) in the March quarter of 2011.
Balance Sheet
Tessera’s balance sheet remains strong, despite the $2.0 million reduction in cash and short-term investments to $492.4 million. It also has no debt. Deferred revenue declined 54% through 2011, but was up nicely in the last quarter.
Inventories were up 3.9% during the quarter, with turns going from 13.5X to 9.2X. DSOs went from 14 to around 15.
Our Recommendation
We think the company has good potential based on its intellectual property portfolio and the licensing model that supports attractive margins. However, this has proved to be a double-edged sword for Tessera, with the cost of intellectual property (:IP) protection running very high.
Additionally, while Tessera is in talks for long-term DRAM contracts, this will take time to materialize. Therefore, for the time being, the company will continue to be impacted by pricing pressures in the DRAM market.
The Zacks Rank on Tessera shares is #3, implying a Hold recommendation over the next 1-3 months.
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