Tessera Eyes Camera Module Biz

Zacks Equity Research
March 6, 2012

Chip technology developer,Tessera Technologies Inc. (TSRA) recently announced that its wholly owned subsidiary, DigitalOptics Corporation has signed an agreement with Singapore based Flextronics International Ltd. (FLEX) to buy certain assets of its Vista Point Technologies, a tier one qualified camera module manufacturing business.

Under the terms of the agreement, Flextronics’ divested assets will include existing customer contracts, intellectual property and the lease of a factory based in Zhuhai, China. The assets will cost approximately $23.0 million plus an undetermined amount for transaction expenses, taxes and inventory. The deal is expected to be completed by the third quarter of 2012.

We see management‘s decision to transform DigitalOptics from an optical and image enhancement software and components business to a more profitable camera module supply business for mobile phones, as strategically sound.

On the digital optics side, Tessera is already seeing some success with its new MEMS lens subassembly.  During the fourth quarter earnings release, the company stated that MEMS lens will initially be integrated into camera modules and that a design team is in place to create the entire camera module some time in the near future. We believe that the acquisition of the Zhuhai camera module business will allow DigitalOptics to introduce next-generation technology in a manner that will complement its existing collaborations with camera module makers. Tessera expects to make about 50 million camera module units annually, which in turn, is expected to help growth in the Digital Optics segment going forward.

We believe that Tessera remains focused on providing technology that enables miniaturization of electronic goods and is adopting a number of aggressive measures, including acquisitions to boost its profitability over the long term.

Additionally, Tessera has projected its first-quarter revenue in the range of $46.5 million to $47.5 million, below analysts’ estimate of $59.0 million, according to Thomson Reuters. The company has not posted any revenue growth in the past three quarters. Tessera’s fourth quarter revenue was down both sequentially as well as year over year, hurt by the non-renewal of major licenses.For the upcoming first quarter, Tessera again expects its revenue to be down 31% year over year.

However, Tessera has a strong balance sheet, with $492.4 million in cash and short-term investments and no debt. Very recently, Tessera announced that it will start paying a quarterly cash dividend of 10 cents per share, with the first payment falling due on June 14 to shareholders of record on May 24. The initiation of a quarterly dividend reflects that the company has sufficient capital resources for the near term and is confident about its long-term growth prospects.

Tessera Technologiesshares currently carry a Zacks Rank of #2, implying a Buy recommendation for the short term (1–3 months).

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