Tessera Technologies Inc. (TSRA) reported third quarter earnings that beat the Zacks Consensus estimate by 9 cents, or 26.5% on revenues that beat by 1.4%.
Revenue
Tessera’s reported revenue of $82.1 million was up 10.1% sequentially and 24.2% year over year, just over the high-end of management’s expectations of $79−$82 million (up 6%−10% sequentially). However, results were actually much better than management’s expectations, since guidance included $6 million to be received from UTAC for breach of contract, which was not actually received during the quarter.
Royalty and License Fees continued to generate the bulk of Tessera’s revenue (93% in the last quarter). Revenue increased 11.2% sequentially and 21.2% year over year. Around 95% of this revenue came from the Micro-electronics solutions, which saw sequential and year-over-year increases of 10.7% and 22.0%, respectively. Royalty and License fees from the Imaging & Optics line (the remaining 5% of segment revenue) also did well, increasing 22.3% sequentially and 8.3% year over year.
Product & Service comprised the remaining 7% of total revenue, a sequential decrease of 2.4% and a year-over-year increase of 79.6%. All of the product and service revenues were from Imaging & Optics.
Pro forma gross margin excluding amortization of intangibles was 95.4%, up 86 bps sequentially. The very strong 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 some revenues from products, which have much lower gross margins.
Tessera’s quarterly operating expenses were $42.6 million, up 4.2% from the $40.9 million reported in the previous quarter. However, the operating margin expanded 43.5%, up 384 bps sequentially due to higher volumes. While R&D edged up despite the volume increase, SG&A declined substantially as a percentage of sales and the increase in gross margin was a bonus.
Net Income
Tessera’s pro forma net income was $21.8 million, or 26.5% of revenue compared to $17.7 million, or 23.7% of revenue in the June 2010 quarter and $14.3 million, or 21.6% in the September quarter of 2009. Our pro forma net income estimate excludes intangibles amortization charges on a tax-adjusted basis but includes stock-based compensation in the last quarter. 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 income on a GAAP basis was $19.0 million (38 cents per share) compared to net income of $15.0 million (30 cents per share) in the previous quarter and $12.1 million (24 cents per share) in the September quarter of 2009.
Balance Sheet
Tessera has a strong balance sheet, with $473.7 million in cash and short-term investments and no debt. However, deferred revenue dropped to $3.8 million at quarter-end.
Additionally, inventories increased 2.9% during the quarter, with turns going down from 8.7x to 7.9x. DSOs increased from 11 to around 12.
Guidance
For the third quarter of 2010, Tessera expects revenue of $76−$79 million (down 4%−7% sequentially, up 35−40% from the December 2009 quarter). Micro-electronics revenue, all of which will be royalty and license-related, is expected to come in at $65−$68 million (including $6 million to be received from UTAC for breach of contract).
Imaging and Optics revenue is expected to come in at around $11 million, of which $5 million will be related to royalty and license fees.
Non-GAAP operating expenses, excluding litigation charges are expected to come in at $36−$37 million. Tessera expects to write off $3−$4 million off its long-lived assets due to the decision to cease the development of wafer level optics.
Our Take
We currently have a Neutral recommendation on Tessera shares. While we believe the company has some solid technology, protection of its IP has always been a significant challenge, especially considering its size. OEMs continue to infringe its technology and even ship products using it after the expiration of their license agreements.
As a result, Tessera has always spent considerable amounts on litigation, which have negatively impacted earnings and not resulted in significant revenue thereafter. Some of the ongoing lawsuits are against big names, such as Sony Corp. (SNE), Qualcomm Corp. (QCOM), Freescale Semiconductor, Renesas and UTAC (Korea).
Further, as a result of the lack of near-term catalysts, Tessera shares also have a short term Hold recommendation (Zacks #3 Rank).
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