Tessera (TSRA) Surpasses Q2 Earnings & Revenue Estimates

Following the earnings release on Aug 2, Tessera Technologies Inc.’s (NASDAQ:TSRA) shares have slumped 2.4% to close Aug 4 at $31.32. The company reported better-than-expected results for the second quarter of 2016.

The leading chip packaging and interconnect solutions provider beat the Zacks Consensus Estimate on both the top and bottom lines.

Adjusted earnings of 55 cents per share surpassed the Zacks Consensus Estimate by 7.8% or 4 cents. Revenues of $67 million beat the consensus mark of $65 million by 3.1%.

Revenues

Tessera’s revenues came ahead of its own guidance range of $64–$66 million. Revenues were up 11.7% sequentially and 4.4% year over year. The strength versus a year ago was on account of the increase in recurring revenues, which went from $63.2 million to $66.7 million. Episodic revenues, however, were down from $1 million to $0.3 million.

Margins

Owing to the high percentage of licensing revenues, Tessera usually generates very strong gross margins. Accordingly, Tessera’s second quarter gross margin was 99.92%, up 7 basis points from 99.85% reported in the previous quarter.

Tessera’s quarterly operating expenses were $26.8 million, down 3.4% from $27.7 million last quarter and up 18.9% from the year-ago tally of $22.5 million. Operating expenses comprise year-over-year increase of $1.8 million in litigation expense, $1.4 million in amortization expense, and $2.4 million in research and development.

Litigation expenses of $5.3 million were up from $3.5 million in the second quarter of 2015 due to increased case activity.

Net Income

Net income was $27.5 million or earnings of 55 cents a share, compared with $22.1 million or earnings of 43 cents in the prior quarter and $29 million or earnings of 55 cents last year. Earnings increased 27.4% sequentially and 2% year over year. On a GAAP basis, net income was $23.5 million or earnings of 48 cents compared with $18.1 million or earnings of 36 cents in the prior quarter and $26.1 million or earnings of 49 cents in second quarter 2015.

Balance Sheet and Cash Flow

At quarter-end, current assets were worth $397.5 million, down $4.7 million sequentially. Cash, cash equivalents and short-term investments as of Jun 30, 2016 were $371.8 million, up $8.3 million from the Mar 31, 2016 level. The company had no debt.

Share Repurchase & Dividend

Tessera spent $9.8 million on cash dividends and $25.2 million to repurchase 0.8 million shares in the reported quarter. Further, management declared a cash dividend of 20 cents per share for the second quarter, payable on Sep 12, 2016 to stockholders on record as on Aug 22.

Guidance

For the third quarter, Tessera expects revenues in a range of $61 million–$63 million. GAAP earnings per share are expected between 39 cents and 41 cents, and non-GAAP earnings per share within 51-53 cents. Currently, the Zacks Consensus Estimate is pegged at 46 cents.

Our Take

Tessera posted better-than-expected second quarter results with both the top line and the bottom line outperforming the respective Zacks Consensus Estimates.

Tessera continues to witness improvement with FotoNation imaging group that recorded second highest ever quarterly revenues this quarter. The company stayed aggressive on the capital allocation front with a combination of dividends and share buybacks.

Tessera has intensified its Invensas, FotoNation and IP licensing efforts and is currently working with a number of semiconductor manufacturers and OSATs to enhance its portfolio of advanced packaging and interconnect technologies that encompass ZiBond, Direct Bond Interface (DBI) bonding technologies and BVA.

The company has also made good progress with its Greenfield licensing efforts and is in advanced stage of negotiations with two of its potential Greenfield customers.

Tessera’s premium imaging technology continues to see strong interest thereby indicating that the business will grow significantly in the mobile and adjacent markets.

The company is making good progress on the SOC front and its IPU architecture is creating interest among several Asia-based SOC providers, thereby opening up opportunities in China.

Tessera is also making good progress on the automotive front and continues to create advanced and intelligent automotive application solutions.

Overall, the company’s internal R&D efforts, Invensas, FotoNation and IP licensing initiatives and prospects in the automotive market remain bright spots and are expected to drive growth going forward.

Tessera shares carry a Zacks Rank #4 (Sell). Better-ranked stocks include Impax Laboratories (NASDAQ:IPXL) , Mylan, Inc. (NASDAQ:MYL) and MeetMe, Inc. (NASDAQ:MEET) each carryinga Zacks Rank #2 (Buy).