Tessera's Q4 Earnings In Line

Zacks

Tessera Technologies (TSRA) reported fourth-quarter 2013 earnings of 8 cents per share, in line with the Zacks Consensus Estimate.

Revenues

Tessera reported revenues of $56.4 million, up 51.2% sequentially and 18.5% year over year.

Intellectual property total revenue was $49.1 million, up 52.0% sequentially and 14.2% on a year over year basis. The year-over-year increase was primarily due to increased royalty revenues from SK Hynix, Inc. and greater episodic revenues in the reported quarter.

DigitalOptics total revenue from continuing operations for the fourth quarter of 2013 was $7.2 million compared with $4.9 million in the prior quarter and $4.6 million in the year-ago quarter. The year-over-year increase was due to a one-time license fee related to a legacy DOC license agreement.

Margins

Owing to the high percentage of licensing revenues, Tessera usually generates very strong gross margins. Accordingly, in the last quarter, its pro forma gross margin was 97.05%, 407 bps higher than 92.98% reported in the year-ago quarter.

Its pro forma operating loss was $44.2 million, or 78.3% of revenue, compared with a loss of $18.6 million or 39.2% of revenue in the year-ago quarter.

Net Loss

Tessera’s pro forma net income was $4.3 million compared to net loss of $17.7 million in the year-ago quarter. Our pro forma calculations are adjusted for restructuring, amortization and acquisition-related charges on a tax-adjusted basis. Our calculations may not match management presentation, because of the addition/deletion of some items that were not considered by management.

Net loss on a GAAP basis was $47.9 million compared with net loss of $23.6 million in the year-ago quarter.

Balance Sheet

Tessera exited the fourth quarter with current assets worth $393.3 million, down $16.8 million during the quarter. Cash, cash equivalents and short-term investments totaled $359.6 million, down from $376.8 in the prior quarter. Tessera has no debt.

Guidance

For the first quarter of 2014, Tessera expects revenues in the range of $33 million–$36 million. The revenue guidance happens to be much below the midpoint of the revenue guidance of the prior quarter. GAAP operating expenses are expected to be between $51– $53 million. Management expects approximately $12.0 million of restructuring charges and other related exit costs, amortization of intangibles of approximately $4.7 million and stock based compensation expense of approximately $4.0 million.

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.

Tessera is steadily progressing toward achieving its milestone of conducting an in-depth analysis of its DOC intellectual property portfolio. Tessera’s DOC portfolio leads the semiconductor manufacturing technology category, ahead of companies such as Samsung, SanDisk (SNDK), Foxconn and Intel (INTC).  

Tessera shares currently carry a Zacks Rank #5 (Strong Sell).

Microchip Technology Inc. (MCHP) is a better-ranked semiconductor stock with a Zacks Rank #2 (Buy).
 

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