Bank of America/Merrill Lynch Downgrades TSRA
courtesy of RMBSrider....
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Downgrading to Underperform from Neutral
Tessera has two business segments: (1) IP (Intellectual Property) generates revenues from royalties in semiconductor packaging technology, and (2) the DigitalOptics (DOC) unit is in the process of transitioning into a vertically integrated camera module manufacturer. We downgrade Tessera from Neutral to Underperform for the following reasons:
- We believe that the IP segment will continue to underperform the semi industry's unit growth (IP revenue was -14% Y/Y in 2011 vs. total IC and DRAM units, the major contributor to IP segment revenues, +4% over the same period). Aside from slower DRAM growth and ongoing issues with customers who are not paying or have not renewed contracts, we expect some licensees could be renewing at lower rates, leading to slower growth down the road.
- Transition to a high-volume product manufacturing business in the DigitalOptics unit has execution risks that in our view could leave the cost structure inflated in the intermediate-term (in spite of the longer term revenue opportunity). Based on our analysis, this segment will account for 53% of the company's overall expenses in 2012, while generating only 17% of the year's total revenue.
- Lack of guidance (from FY13) due to the addition of camera module product sales could make it even more difficult to forecast the revenue and earnings potential, making them vulnerable to further estimate cuts, in our view.
Lowering estimates and PO to $13.50 (from $14.50)
We adjust our model to account for camera module revenues in DigitalOptics for CY12/13. Our new CY12/13 rev/pf EPS estimates are $227M/$0.03 (from $229M/$0.01) and $393/$0.15 (from $259M/$0.46). While peers are trading at 11-14x CY13E EPS, we apply a discount due to the litigation risks and execution challenges. Our new PO of $13.50 is based on 10x our CY13E EPS plus excess cash (~$12/share). We assume ~$150M from Amkor in our cash calculation. Our PO is ~2x CY13 sales, which is in-line with IP and DOC comparable averages.
