Tessera Technologies (TSRA, Financial) is a technology innovation company that develops, licenses and delivers semiconductor packaging and interconnects solutions in the areas of mobile computing and communications, memory and data storage and 3-D integrated circuit to original equipment manufacturers, original design manufacturers, and integrated device manufactures.
The company posted estimate-beating first-quarter fiscal 2015 results, beating consensus estimates both on top- and bottom-line and delivered 5th consecutive profitable quarter on both GAAP and non-GAAP basis.
First-quarter preview
For the first-quarter fiscal 2015, Tessera reported consoliated revenue of $79.9 million, representing growth of 33.3% sequentially but down 9.6% versus the year-ago quarter. However, this was sufficient to beat the analysts’ estimates on top line.
The year-over-year decline in revenue was due to episodic revenues declining 56.9% year-over-year to $28.0 million. However, episodic revenues decline was partly offset by 122.0% year-over-year jump in recurring revenues.
Part of the jump in recurring revenues is on the back of a dispute settlement with Amkor Technology Inc. (AMKR, Financial) and Powertech Technology Inc. According to Tessera, Amkor agreed to pay the company $155 million in equal quarterly amounts over the next four years. Last year, Powertech had agreed to pay $196 million to Tessera to end patent disputes. However, as part of settlement, Powertech terminated its licensing deal with Tessera.
On the back of estimate-beating top-line growth, earnings came in at $0.74 per share, again ahead of expectations. The company has a very good history of earnings beat as shown below:
| Earnings History | Jun 14 | Sep 14 | Dec 14 | Mar 15 |
| EPS Est | 0.01 | 0.80 | 0.34 | 0.67 |
| EPS Actual | 0.19 | 0.87 | 0.62 | 0.74 |
| Difference | 0.18 | 0.07 | 0.28 | 0.07 |
| Surprise % | 1,800.00% | 8.70% | 82.40% | 10.40% |
During the quarter, the company spent $10.5 million on cash dividends and $29.0 million on the repurchase of 722.0 million shares in the reported quarter, returning value to shareholders.
Development pipeline is strong
Tessera has a strong development pipeline. For example:
- During the quarter, the company conducted a product launch road show of its new Image Processing Unit, or IPU, architecture. Besides face detection, this offers image stabilization, object detection, body detection and biometric features including face recognition and authentication with lower power consumption. Based on positive customer feedback, the company expects this to be a long-term growth driver going forward.
- On the automotive front, the company’s efforts are gaining momentum, with strong interest in core imaging technology, including driver monitoring systems. Sometime during the summer, the company will be participating in multiple product demonstrations with automotive ecosystem partners.
- In the xFD development, the company expects to build functional test units by the middle of this year. This is slated to be an important step towards the ultimate goal of achieving volume products shipments.
Patent portfolio is strong
Tessera has a strong patent portfolio of over 3,700 patents issued and pending. Such a strong portfolio creates a high barrier for new entrant in the same market and also allows the company to strike licensing deals with new customers.
During the quarter, the company continued having meaningful technology IP licensing and business development discussions with a number of new prospects. Licensing deals add to recurring revenue growth.
Shopping for growth
Another area of growth is though meaningful merger & acquisitions, or M&A, and the management is always open to this route for growth. Tom Lacey, CEO, said during earnings call:
An additional growth focus area of our company is M&A, as I mentioned during the FotoNation summary, we have now integrated smart sensor team we continue to be active in looking at opportunities against our overall strategic vision for the company. We’ve a very discerning approach to acquisitions, we're very thorough and the vast majority of opportunities we look at don't pass our criteria. This is an area where patience is a virtue.”
Wrapping up
Tessera has zero debt on balance sheet. Also, since licensing revenues form a large part of sales, the company generates strong gross margins of ~100% and ~58-68% operating margin. The company has a strong portfolio of patents and also development pipeline is strong.
For the next five years, analysts expect compound annual growth of 20%. It has huge market potential in non-DRAM and DRAM chips and imaging sensor market.
Hence, this is a good stock to buy.
