Tessera's Q2 Loss Wider Than Expected


Tessera Technologies (TSRA) reported second-quarter 2013 net loss of 30 cents per share, wider than the Zacks Consensus Estimate of a loss of 27 cents.


Tessera’s reported revenues of $46.6 million, up 49.8% sequentially but down 46.6% year over year, in line with the Zacks Consensus Estimate.

In the second quarter, Intellectual Property continued to generate the bulk of Tessera’s revenues (92%) compared to just 8% for Digital Optics. Intellectual Property revenues were up 67.6 % sequentially but down 19.1% year over year.

The Digital Optics line declined 32.7% sequentially and 56.0% from last year. The sequential decline was due to reduced focus on fixed camera module sales as management shifted focus to core MEMS products.

The broadening of its relationship with SK Hynix with new licensing agreements should help revenues in the future. Tessera exited the lens manufacturing business and its internal high-volume camera module assembly in Zhuhai.

Tessera entered into a contract with Liteon, one of the leading camera module integrators globally. Liteon ships roughly 20 million camera modules per month to leading phone OEMs. Tessera also received multiple 100,000 unit camera module purchase orders.


The GAAP gross margin was 97.8%, up 2334 basis points (bps) sequentially and 145 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 $68.2 million, down 22.3% from $87.7 million reported in the previous quarter but up 32.2% from $51.5 million in the year-ago quarter. The operating margin improved 15888 bps sequentially to -48.4%, impacted by much lower research and development (R&D) and selling, general and administrative (SG&A) expenses (as a percentage of sales) in the quarter.

Net Loss

Tessera’s pro forma net loss was $15.9 million or 34.1% of revenues compared to loss of $21.4 million or 68.9% of revenues in the Mar 2013 quarter and a profit of $3.3 million or 10.2% of revenues in the Jun 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 $24.0 million (45 cents per share) compared to net loss of $44.6 million (85 cents per share) in the Mar 2013 and profit of $1.2 million (10 cents per share) in the Jun quarter of 2012.

Balance Sheet

Tessera’s balance sheet remains strong, despite the $22.2 million reduction in cash and short-term investments to $380.5 million. It has no debt. Capital expenditure in the quarter was $55.9 million, down from the first quarter capex of $68.1 million.

Management also paid a special dividend of 30 cents per share during the quarter.

Further, management declared a cash dividend of 10 cents per share for the third quarter, payable on Sep 19, 2013 to stockholders of record at the close of business on Aug 29, 2013.


For the third quarter of 2013, Tessera expects revenues in the range of $35 million–$38 million. Intellectual Property revenues are expected in the range $30–$33 million whereas Digital Optics revenues are expected to be $5 million. GAAP operating expense is expected between $59– $63 million with a 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 and SK Hynix have entered into new licensing agreements with Tessera.

Tessera shares currently carry a Zacks Rank #3 (Hold). Semiconductor stocks that are worth considering include Advanced Micro Devices (AMD), Microchip Technology Inc. (MCHP) and Intersil Corp. (ISIL), all carrying a Zacks Rank #2 (Buy).

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