Tessera Technologies Inc. (TSRA) reported second-quarter 2014 earnings from continuing operations of 14 cents per share, down 80.8% from the previous quarter, surpassing the Zacks Consensus Estimate by 13 cents.
Shares were up nearly 4% in after-hours trading due to the strong results and positive guidance indicating enhanced growth prospects in all the segments.
Revenues
Tessera reported revenues of $37.2 million, down 57.9% sequentially and 20.1% year over year. However, revenues were above the Zacks Consensus Estimate of 31.0 million. The year-over-year decrease was primarily due to relatively higher episodic revenues in the year-ago quarter. The extended relationship with Samsung helped recurring revenue growth.
The broadening of its existing relationship with Micron with new licensing agreements should help revenues in the future.
The company’s FotoNation technology contributed record revenues in the quarter as technologies and team continue to gain important reception from leaders in the wireless handset market. These positive developments and its premium imaging technology reflect that the business will grow significantly going forward in the mobile and adjacent markets.
Margins
Owing to the high percentage of licensing revenues, Tessera usually generates very strong gross margins. Accordingly, in the reported quarter, Tessera’s pro forma gross margin was 99.7%, 25 basis points lower than 100.0% reported in the previous quarter.
Tessera’s quarterly operating expenses were $31.1 million, up 15.6% from $26.9 million reported in the previous quarter but down 29.1% from $43.9 million in the year-ago quarter. The sequential increase was primarily due to increased expenses on lawsuits with Amkor, UTAC and AMD and increased patent managing cost for new assets, mainly those received in its arrangement with Renesas.
Its pro forma operating profit was $6.0 million, or 16.2% of revenues, which was lower than $61.4 million or 69.5% of revenue recorded in the previous quarter but above the $2.7 million or 5.7% of revenues in the year-ago quarter.
Net Income
Tessera’s pro forma net income was $7.6 million compared with $39.1 million in the previous quarter and $3.9 million in the year-ago quarter. Our pro forma calculations are adjusted for restructuring, impairment and amortization related charges. Our calculations may not match management presentation because of the addition/deletion of some items that were not considered by management.
Net income on a GAAP basis from continuing operations was $2.5 million compared with $33.4 million in the prior quarter and a net loss of $2.5 million in the year-ago quarter.
Balance Sheet
Tessera exited the second quarter with current assets worth $363.0 million, down $51.1 million from the previous quarter’s 414.1 million. Cash, cash equivalents and short-term investments totaled $329.2 million, down from $379.0 million in the prior quarter. Tessera has no debt.
Share Repurchase & Dividend
Tessera spent $32.4 million on cash dividends and $31.1 million on the repurchase of 1.4 million shares in the reported quarter.
Further, management declared a cash dividend of 10 cents per share for the third quarter, payable on Sep 23, 2014 to stockholders of record as of Sep 2, 2014.
Guidance
For the third quarter of 2014, Tessera expects revenues in the range of $92–$94 million. The Zacks Consensus Estimate is pegged at $80.0 million for revenues. GAAP operating expenses are expected to be between $32 and $33 million. Management expects amortization of intangibles of approximately $4.7 million, stock-based compensation expense of around $3.2 million and expenditure associated with discontinued operations of $1 million.
For the full-year 2014, management expects total recurring revenue to be around $140 million.
Our Recommendation
Tessera posted encouraging results with both the top and bottom lines exceeding the Zacks Consensus Estimate.
We believe that the company is on the right track following its exit from DOC industrial operations. It has lowered its operating expenses, redirected investment to areas with growth potential and secured several patent licensing agreements. A number of patent litigations have also been settled in its favor. Moreover, new licensing deals on the anvil will further increase its revenue and improve its profitability.
Tessera shares currently carry a Zacks Rank #3 (Hold).
MKS Instruments, Inc. (MKSI), which sports a Zacks Rank #1 (Strong Buy), and Siliconware Precision Industries Co. Ltd. (SPIL) and Brooks Automation, Inc. (BRKS), carrying a Zacks Rank #2 (Buy) are better-ranked semiconductor stocks and thus worth considering.
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