Tessera Technologies Inc. TSRA reported second-quarter 2015 earnings of 55 cents per share, down 24.4% from the previous quarter but up a massive 285.5% from the year-ago period. It also surpassed the Zacks Consensus Estimate by 10 cents.
Revenues
Tessera reported revenues of $64.2 million, down 19.6% sequentially but up 72.5% year over year. Also, revenues surpassed the Zacks Consensus Estimate of $63.0 million but matched the mid-point of the guidance range.
Episodic revenues were down 30% to $1.0 million from $1.4 million in the year-ago quarter. Recurring revenues surged 76.6% from $35.8 million a year ago to $63.2 million, mainly led by new customer license agreements and recurring settlements made over the past year and a half.
The increase in recurring revenues is particularly encouraging since it reflects the company’s successful settlement of the long-standing disputes and its focus on alliances with customers. The company is now generating license revenues from Micron Technology, Inc., and witnessing continued growth from FotoNation.
Margins
Owing to the high percentage of licensing revenues, Tessera usually generates very strong gross margins.
Accordingly, in the reported quarter, Tessera’s gross margin was 99.7%, down 8 basis points from 99.8% reported in the previous quarter.
Tessera’s quarterly operating expenses were $22.5 million, down 1.6% from $22.9 million last quarter and 27.6% from $31.0 million in the year-ago quarter. This decline resulted from lower spending on litigation, lower legal spend with an R&D and the absence of restructuring and impairment charges in last year’s numbers.
Litigation expenses were $3.5 million, down $6.7 million from second-quarter 2014. The company has successfully settled almost all litigations outstanding for more than two years. Currently, the company has only two active litigation matters, both related to breach of contract.
Net Income
Net income was $29.0 million (55 cents a share) compared with $38.7 million (72 cents a share) in the prior quarter and $7.6 million (14 cents a share) in the year-ago quarter.
On a GAAP basis, net income was $26.1 million (49 cents a share) compared with $35.6 million (66 cents a share) and $2.5 million (5 cents a share) in the year-ago quarter.
Balance Sheet and Cash Flow
Tessera exited the second quarter with current assets worth $479.7 million, up $9.9 million from the previous quarter’s $469.8 million.
Cash, cash equivalents and short-term investments as of Jun 30, 2015 were $431.9 million, down $2.5 million from the Dec 31, 2014 level. The company has no debt.
Share Repurchase & Dividend
Tessera spent $10.5 million on cash dividends and $25.0 million to repurchase 645.0 million shares in the reported quarter.
Further, management declared a cash dividend of 20 cents per share for the third quarter, payable on Sep 18, 2015 to stockholders on record as of Aug 28.
Guidance
For the third quarter, Tessera expects revenues in the range of $64–$66 million. GAAP earnings per share are expected to be between 46 cents and 48 cents, while non-GAAP earnings per share are likely to be within the 55–57 cents range.
Our Recommendation
Tessera posted encouraging results with both the top line and the bottom line exceeding the Zacks Consensus Estimate.
We believe that the company is on the right track. It has lowered operating expenses, increased technical collaboration, channelized investment toward areas with growth potential and secured several patent licensing agreements and design wins. Cost savings from these restructuring efforts is a positive for the company. A number of patent litigations have also been settled in its favor.
Also, Tessera continues to witness growth with its BBA initiative and Greenfield activities, which are driving growth.
The company continues to witness improvement in the FotoNation imaging group on the back of recent product additions. FotoNation remains well poised to achieve $100 million in annual revenues over the next several years.
The recently acquired Iris biometric authentication technology is likely to boost growth for FotoNation.
These positive developments and its premium imaging technology reflect that the business will grow significantly in the mobile and adjacent markets.
Also, Tessera’s leadership with FacePower continues and is now at a more general purpose object detection stage with the human body being the primary object of interest for the computer vision used cases.
The company’s ability to create a number of market leading solutions for video stabilization has also gained traction.
Tessera shares carry a Zacks Rank #3 (Hold).
Some better-ranked stocks in the technology sector are PetMed Express Inc. PETS, Amazon.com Inc. AMZN and Expedia Inc EXPE. While PetMed and Amazon sport a Zacks Rank #1 (Strong Buy), Expedia has a Zacks Rank #2 (Buy).
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