Tessera Technologies Inc. Q4 2008 Earnings Call Transcript

Feb. 2.09 | About: Tessera Technologies, (TSRA)

Tessera Technologies Inc. (NASDAQ:TSRA)

Q4 2008 Earnings Call

February 2, 2009; 4:30 pm ET

Executives

Hank Nothhaft - President & Chief Executive Officer

Mike Anthofer - Executive Vice President & Chief Financial Officer

Barney Cassidy - General Counsel

Moriah Shilton - Investor Relations

Analysts

Brett Hodess - Merrill Lynch

Raj Seth - Cowen & Company

Olga Levinson - Barclays

Mehdi Hosseini - FBR

Daniel Giltouch - Rowing Brook Capital

Kevin Vassily - Pacific Crest

Operator

Good afternoon. My name is Wesley and I’ll be your conference operator today. At this time I’d like to welcome everyone to Tessera’s fourth quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker’s prepared remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Moriah Shilton. Please go ahead ma’am.

Moriah Shilton

Thank you, Wesley and good afternoon everyone. This is Moriah Shilton, Director of Investor Relations for Tessera Technologies speaking. Thank you for joining us for the Tessera Technology’s fourth quarter 2008 results conference call. This call is being broadcast live over the internet. A webcast replay will be available at www.tessera.com for 90 days after the call.

In addition, a telephone replay of this call will be made available for 48 hours beginning approximately two hours after the completion of this call. To listen to the replay in the U.S., please dial 800-642-1687 and internationally dial 706-645-9291. The access code is 78822353.

Before we begin I would like to remind everyone the today’s call including the Q-and-A session will include projections and other forward-looking statements, regarding expected revenue and earnings per share, as well as future plans, opportunities and expectations of the company. These projections, estimates and other forward-looking statements involve known and unknown risks and uncertainties, that may cause actual results to differ materially from those expects or implied on the call and are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

You are cautioned not to place undue reliance on the forward-looking statements, which are made based on information known to the company as of today’s date. The company assumes no obligations to update the information contain in this call, which speaks only as of today’s date.

A detailed discussion of the material factors that may cause results to differ from the statements made can be found for example, in the Risk Factors section of Tessera’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2007 and its quarterly report on Form 10-Q for the quarter ended December 30, 2008.

On the call today from management are Hank Nothhaft, Tessera’s President and Chief Executive Officer; Mike Anthofer, Chief Financial Officer and Barney Cassidy, General Counsel.

During this call today, management will discuss certain non-GAAP financial measures for comparison purposes only and they will be using non-GAAP numbers in their prepared remarks. The non-GAAP amounts of cost of revenues; research and development; selling, general and administrative expenses; net income and earnings per share do not include the following Stock-based compensation, acquired intangibles, amortization charges, charges for acquired in-process research and development and non-cash tax expense.

Management believes the non-GAAP amounts provide a more meaningful comparison, a measure of quarter-over-quarter and year-over-year financial performance. Please refer to the company’s fourth quarter 2008 earnings press release and to the company’s website for reconciliation of non-GAAP measures to GAAP.

After management’s opening remarks we will open the call to your questions. So, that management is able to respond to as many of you as possible, please restrict yourself to an opening and a follow-on question. Please re-enter the queue if you have additional questions.

With that, I will now turn the call over to Hank.

Hank Nothhaft

Thank you, Moriah. Greetings to all of you and we appreciate your interest in Tessera. We’ve got to lot to cover this afternoon, so we’ll jump right into our presentation. Total revenue in 2008 was $248.3 million and royalties and license fees were $220.3 million up 27% and 37% respectively compared to 2007.

Before I discuss the fourth quarter 2008 in more detail and our recent accomplishments, I want to comment on our recent IP protection efforts, including the decision last Friday by the International Trade Commission to review the initial determination by the Administrative Law Judge, ALJ, in our wireless ITC action. The commission’s final determination is scheduled to be issued by April 3 and may accept or reject the initial determination in part or as a whole.

If the ITC determines that the expert’s methodology was appropriate, that will have a significant impact on the party’s expert discovery and trial presentation in our Subcon ITC Action, which is currently scheduled to begin April 27. Therefore today we filed a motion requesting that the ITC pause proceedings in this action.

Given prior acceptance of the same basic methodology by the ITC and the Amkor tribunal, we believe it makes sense to allow the ITC to issue its decision regarding infringement methodology, before moving forward in the Subcon ITC Action, so that the parties and their experts may proceed in view of the ITC’s rulings. We are seeking an expedited ruling from the ALJ in this matter and may receive a ruling by February 9. If Tessera’s motion is granted, the Subcon ITC Action would resume after April 3, which are rescheduled for later this year.

With regard to our Arbitration with Amkor, in January, the International Chamber of Commerce’s, International Court of Arbitration issued the final award. The panel found our patents were valid and enforceable. As part of that ruling, the panel accepted our expert Dr. Qu’s testing methodology and calculations for proving that products were made under our patents. The panel granted us $64.1 million, which covers the time period March 2, 2002 through December 1, 2008 and pre-judgment interest. The full payment from Amkor is due by February 15, 2009.

Turning back to 2008, we exited the year with good momentum in our imaging and optics business, furthering our strategic development of this important business segment. In the fourth quarter, we signed two new licensees for our image sensor wafer-level packaging technology, AWLP and Qtech.

We also achieved smart optics and smart imaging design wins with existing and new customers. We expect the combination of these activities will lead to our technology being shipped in up to 100 million camera-enabled cell phones within the next 24 months. We cannot disclose some of these contracts publicly. We can share as we have done in the past, how the nature of the contracts and customer determines the timing of royalty related revenue.

For our image sensor packaging, wafer-level optics and wafer-level camera technologies, which we designate infrastructure IP, the average amount of time to get to production and revenue varies according to the nature of the licensee’s facility, their experience and the technologies being licensed.

If a licensee has an existing facility, it can take up to one and a half to two years after licensing for royalties to start. If the facility needs to be built from scratch, it takes longer, up to an additional six to nine months. For technologies like our smart optics or smart imaging or what we called design in IP, it can take one to one and a half years from licensing to royalties.

Royalties from our existing engagements for smart optics with Toshiba and Samsung will begin to ramp at the end of 2009 and will contribute significantly in 2010. Other important future imaging and optics milestones include; first, one of our first SHELLCASE, MVP licensees, Nemotek should begin sampling customers this quarter.

Second, our product launched services operation is up and running. We received our first customer order for production and expect to be engaged with one or more customers for production of our optimal single element VGA Lens in the first half of 2009.

Third, on the technology front, in the first quarter we expect to display first images from our 3-megapixel version of our OptiML Wafer-Level Camera Technology and demonstrate a new smart imaging technology exemplifying our position as an IP and innovation provider in this field.

Turning to our Micro-electronics business segment; I will now comment on our IP protection efforts in 2008. The current market drivers of our growth and the emerging technologies anticipated to help drive our long term growth. Due to our successful IP protection efforts, various license fees increased royalty payments in 2008. Companies, who make downstream products, increased their use of subcontractors, who are licensees of our technology.

As previously stated, the International Chamber of Commerce awarded us $64 million from Amkor for their past use of our technology. The majority of our customers pay us on a unit basis for their use of our technology. The continued strong unit growth in our served markets drove our 2008 revenue growth in this segment. Our served markets are computing our wireless mobile devices.

In computing, our technology is used for DRAM. In wireless, it is the brains of the products; memory, digital signal processors, baseband processors and application processors that use our technology. Hence, the mobile phone market drives our royalties.

I’d like to start the discussion of our technologies by spending a few minutes discussing the current DRAM memory market and its impact on Tessera. Rather then trying to forecast the market, I believe discussing some market drivers who help illustrate the potential impact of the production cuts announced by DRAM manufactures, which by the first quarter of 2009, have been estimated about 25% of the industries total capacity.

First, most announced production cuts are in the older 8-inch wafers with some cuts taking place in the newer 12-inch wafers. 12-inch wafers produced approximately two and a half times more shifts, so the reduction in units is not renewably proportionate and will not be as significant as that of the wafer reduction overall.

Second, it appears much of the production cuts are for the older DDR1 DRAM that does not use our technology and therefore we receive no royalties. Our technology is used in DDR2 and DDR3 for which we do receive royalties.

Finally, we are paid on shipment not on manufacture. Thus the impact of production cuts on Tessera is likely to be bumpered by the inventory burn off at the DRAM makers. In summary, while we are not immune to the headwinds in the semiconductor industry and there is a lot of uncertainty today about the current and coming quarters, there are industry dynamics in our favor that will partially mitigate the negative impact on Tessera.

Looking longer term, internal research and development is a key part of the history of innovation at Tessera and our long term growth in our Micro-electronics business. We currently have two major efforts underway: The first is electro hydrodynamic, EHD cooling. The EHD cooling story is another example of Tessera’s innovation engine that develops technologies that enable higher functionality and performance in smaller phone factors.

As computer manufactures are designing smaller, thinner notebooks, thermal management has become an increasingly significant problem. Thin, small fans are inefficient, limit system performance and are noisy. Tessera’s EHD cooling technology is a compelling alternative that provides more designed flexibility, offers better cooling performance, a smaller and is silent as there are no moving parts associated with the solution.

Over the past six months, we have expanded and strengthened our EHD IP portfolio through both internal development efforts, as well as through patent acquisition. We are currently focused on addressing the remaining engineering challenges to productize and commercialize this technology.

Similar to what we have successfully done with our chip scale packaging technology, we planned to provide initial prototypes and low volume production of EHD cooling systems to see the market, establish the required manufacturing infrastructure and promote mainstream adoption.

The second is our development of our MicroPILR Interconnect platform, which we envision will be the next generation semiconductor packaging and interconnect technology. Today, we are optimizing this technology as an alternative to conventional flip chip and are targeting certain segments of the overall flip chip packaging markets that are best suited for our technology. These segments are competing telecom and wireless.

Prismark estimates 2 billion flip chip units will be shipped in these segments in 2011, up from 1.5 billion units in 2008. The flip chip packaging technology used today for high pin count application such as microprocessors, high end logic chips and some smart phone applications processors, suffers from substrate and package yield issues as the distance between the contact pads, more commonly referred to as PAD pitch, on the chip continuous to be reduced.

We believe our MicroPILR technology addresses this challenge, while leveraging existing flip chip processes, materials, equipment and know-how. As a result, the MicroPILR platform has a potential to reduce the total cost of flip chip packages and gain share in this growing market.

I would now like to turn the call over to Mike Anthofer, for a more detailed discussion of our financial results and guidance. Mike.

Mike Anthofer

Thank you, Hank. Now to review 2008; first a few comments on revenues. Fourth quarter 2008 total revenue is $69.1 million, up 30% year-over-year and 9% quarter-over-quarter. Royalty and license fees are $62.5 million up 37% year-over-year and 8% quarter-over-quarter. These results are driven by stronger than expected royalty revenue from certain existing customers and option fees from Motorola.

Products and services are $6.5 million which is up 9% from the prior quarter, but down 14% year-over-year. The decrease year-over-year is due to our planned exit at year end from our government business. The revenue in this segment is slightly below our guidance due to the less than anticipated demand from our lithography customers due to the continued market softness.

Total GAAP expenses are $57.1 million and are broken out as follows; cost of revenue is $3.9 million, research and development $16.7 million and SG&A $36.5 million, which included litigation expense of $17.7 million. Our litigation expense during the quarter was driven by discovery and trial preparation for the ITC Subcon case originally slated for April of ’09, completion of the ITC de-ramp case in October and it’s related post trial briefings and briefings related to the initial determination issued in the ITC wireless case.

Stock based compensation expense is $7.3 million for the quarter, which is higher than guidance given due principally to additional stock options granted to employees in November. Amortization of acquired intangibles is $2.9 million.

In the fourth quarter, we’ve recorded impairment charges of $2.5 million, one component of which is recorded in SG&A and the other components are recorded in our other income and expense. The amount recorded in SG&A is an impairment charge of approximately $1 million on the lease agreement from our previous corporate headquarters in San Jose.

Recorded in other income and expense; our impairment charges of approximately $1.5 million on the fixed assets and leasehold improvements related to the old headquarters, other than temporary write-downs of mortgage-back investments and a minority equity investment in an emerging technology company.

Our GAAP tax expense is $4.1 million. This amount is below our guidance due to a reduction in non-U.S. un-benefitted loses and secondly the benefit of a Federal R&D credit that occurred in the fourth quarter. GAAP net income for the fourth quarter is $7.7 million or $0.16 per share on fully diluted weighted average share count of 48.2 million shares.

As a reminder, Tessera’s non-GAAP results exclude stock-based compensation charges for the amortization of acquired intangibles, acquired in-process R&D and non-cash tax expenses. We have included the detailed reconciliation between our GAAP and non-GAAP net income in both our earnings release and on our website for your convenient reference.

Total non-GAAP operating expenses are $46.9 million; excluding litigation, the total is $29.2 million. Non-GAAP cost of revenue is $3 million, R&D is $12.1 million and SG&A is $31.8 million, which includes the litigation expense of $17.7 million as I mentioned earlier. Non-GAAP cash taxes are $1.6 million, which was lower than anticipated due to lower foreign withholding taxes. Non-GAAP net income is $20.4 million or $0.41 per share on a fully diluted weighted-average share count of $49.1 million shares.

We ended the quarter with $298.6 million in cash, cash equivalents and investments and no debt. Our overall cash position thus represented an $11.8 million increase over the prior quarter. For the full year of 2008, our total revenue is $248 million, the 27% increase over the prior year and again as Hank mentioned, our royalties and license fees of $220.3 million are up 37% over the prior year.

GAAP net income for 2008 is $4.6 million or $0.10 per share and non-GAAP net income is $45.9 million or $0.93 per share. This compares to GAAP net income in 2007 of $45.1 million or $0.93 per share and non-GAAP net income of $96.5 million or $1.95 per share. In 2008, we incurred litigation expenses totaling $84.3 million, which was up from the $22.3 million spent in 2007. This increase in litigation year-over-year is principle reason for the lower 2008 GAAP and non-GAAP net income measures.

Before we discuss our first quarter 2009 guidance, I would like to explain the change we have made to our segment reporting. Commencing in January of 2009, we will have the following two reporting segments, microelectronics and imaging and optics. Within each we will have two revenue categories, royalties and license fees and then products and services, although, the products and services category in the microelectronic segment will be near zero for the year due to our previously stated decision to exit our government business.

We will begin to report historical financial results in this new segment reporting starting with our 10-Q for the period ending March 31, 2009 which will due by May 5. Looking to the first quarter 2009, we expect the followings: Total revenue for the company will range between $54 million and $58 million, exclusive of the Amkor award. This compares to the first quarter 2008 figure of $59.4 million.

Micro electronics revenue will range between $46 million and $48 million and is royalty and license related. As we have discussed previously, this revenue will be impacted by the volume based pricing adjustments that we have with two of our major customers, who will also be impacted by weaker fourth quarter demand for our de-ramp and wireless license fees, which reflects the macro economic conditions in our customer served markets. Again our products and services revenue in this segment will be zero.

As a comparison, first quarter of 2008 micro electronics royalties and license fees were $46.2 million and products and services revenue was $2.5 million for a total of $48.7 million in this segment. First quarter 2009 imaging and optics revenue in total will range between $8 million and $10 million.

Royalties and license revenue will range between $5 million and $6 million and the products and services revenue will range between $3 million and $4 million. This compares to imaging and optics royalty and license revenue of $4 million and products and services revenue of $6.6 million in the first quarter of 2008, which totaled $10.6 million for this segment. The products and services revenue is anticipated to be down year-over-year primarily due to the lower litho demand.

Finally with respect to revenue, in January the panel in our arbitration with Amkor issued us an award of $64.1 million for Amkor’s material breach of its license agreement. Payment from Amkor as I mentioned it’s due by February 15. From a segment reporting standpoint, such amount will be reflected in microelectronics royalty and license fees.

I should add that there is a possibility that the parties may agree to a different structure of compensation to Tessera, which Tessera would only accept if it added a significant benefit above and beyond the award. As such the first quarter 2009 guidance currently does not include the Amkor award.

We are providing non-GAAP operating expense guidance, which includes non-GAAP cost of revenue, R&D and SG&A less litigation. The first quarter 2009 non-GAAP operating expenses in aggregate are expected to be between $32 million and $33 million. Non-GAAP cost of revenue will be up slightly due to the initial production from our product launch services in the first quarter.

Non-GAAP R&D should be up approximately 15% sequentially, primarily due to headcount additions related to the micro-electronics development reference discussed previously by Hank. Non-GAAP SG&A should be up approximately 10%, due primarily to the trade show activity occurring this quarter, primarily the big one is Mobile World Congress.

We expect our litigation expenses to be slightly less than last quarter. We expect stock based compensation to be approximately $6.7 million and our amortization charges to be $2.9 million. Our cash taxes should be approximately $3.4 million.

That concludes my comments, thank you very much for interest in Tessera and I’ll now turn the call back to Hank.

Hank Nothhaft

Thank you, Mike. Before I open the call to question, I want to discuss one of the America’s greatest renewable economic resources innovations. The protection and therefore the motivator behind America’s innovation engine is patent. IP protected by patents, enables new products that create jobs for Americans in the U.S., improve domestic living standards and in fact saves lives. As an intellectual propriety provider and innovator, we are adding onto this resource everyday.

We spent $61 million in 2008 in R&D expenses and filled for 175 patents worldwide. We added to our patent portfolio with our acquisitions of FotoNation, a leading provider of embedded imaging solutions for digital still camera and mobile phone applications. We also acquired patents covering micro-cooling applications, PHP from Kronos, a developer of ionic based products and technologies.

We have done extensive additional research and development based on these patents, resulting in additional patent filings, as well as productization of this technology. Our patent and application portfolio now totals over 1,500. We announced seven new imaging and optics products; signed seven new imaging and optics agreements, secured key design wins with existing and new customers and furthered our development work in emerging technologies that will help build long-term growth.

It is an IP provider’s duty to also protect its patents, as innovation would not exist without strong patent protection. Innovation, without compensation is philanthropy. We were successful in 2008 in our IP protection efforts, reducing the illegal use of our technology, which in turn generated additional royalty revenue for Tessera and its takeovers.

Admittedly looking at 2009, we too are facing the headwinds currently brewing in our served markets. We entered this turbulent time, encouraged by our 2008 accomplishments and supported by our solid balance sheet of almost $300 million in cash with no debt. We remain confident about our long-term growth potential and the opportunities that lie ahead.

I would now like to open the call to questions. Operator, you want to open the lines?

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Brett Hodess - Merrill Lynch.

Brett Hodess - Merrill Lynch

Two questions; first, Hank on the emerging and optic side of the business, you laid out how you thought the revenues would ramp up overtime and I was curious if you could go into a little bit more detail on the timing, particularly for what you call this into sort of the designed in part, the software. Is that because the software is designed into these products before they are fully developed and so the end products have to be designed and produced and what not? If you could go into that a little bit more for us, it will be great.

Hank Nothhaft

So, the question as I understand is why the lead time is so long for software related or software derived IP in the emerging optics business? Okay, so the development cycle for wireless device is fairly lengthy. The OEM’s manage to bring out all these models that look like they’re rapidly producing these products by overlapping design cycles.

The average development cycle for a cell phone is 18 to 24 months and so as part of that, we have to compete in the supply chain to win a contract, get design into a design cycle that takes up to two years to get the market and then of course they start selling the phones and then royalties are paid retrospectively after the product is actually shipped and they take audits on how many units are sold. So, it doesn’t take much imagination to string that after three years easily. That answers your question?

Brett Hodess – Merrill Lynch

It does and the follow on to that is, so once your design to a phone, either with the software or with the hardware, with the SHELLCASE and with the optics. Do you have the same length of time for the next one; in other words we rollover to the next version of that model that come out? Do you find that out fairly early in the process?

Hank Nothhaft

Yes, it’s a very interesting and fairly complicated question, because on the SHELLCASE side and the hardware side of sort of an infrastructure IP and then what I was answering in the first question was software related non-infrastructure IP design in IP. So, let me address the design in IP first and then maybe I can comment on the infrastructure IP.

So, the way it’s been working so far is that the various OEMs have designed programs for specific models or groups of models within a family or phone and they’ve been going off and bidding contracts on the design in IP side of the business for these families of phones, and generally we know by pricing and indication from the manufacturers, what the volume is going to be for that family devices.

So, once we win one of these contracts and its starts rolling through when we start getting paid royalties, in parallel with that there could be several other programs where we have won, which may kick-in three months later, six months later, just because of the contracting cycle, not due to any inter mixing of technology.

So, it’s just that, let’s say we went out successfully won five contracts over the course of the year and those occurred at different times during the year. All those programs would eventually be rolling into the market at different times, might have different lengths of lifecycles and certainly would have different volumes associated with them. I don’t know if that helps to answer your question. Brett?

Brett Hodess – Merrill Lynch

The product launch services and you noted that the SG&A would be up this quarter. I think that actually cost of goods sold might be up this quarter as that starts to kick into with that?

Hank Nothhaft

I’m sorry, first of all I was not sure I answered the previous question and then your question was cut-off, so we only heard the end of the question. So, could you please restate your question? We can’t hear anything right now.

Brett Hodess – Merrill Lynch

Can you hear me now?

Hank Nothhaft

Yes.

Brett Hodess – Merrill Lynch

Okay, sorry. So the question was, on the product launch services, you did answer my question, Hank and I was asking Mike if on the product launch services if he could talk again about the cost impact as that starts to ramp-up now?

Mike Anthofer

Yes Brett. Well, most of it’s in the form of depreciation based on the capital investment, so it’s fairly minimal probably 10%-15% maximum parse increased product sequentially quarter-to-quarter, most of it being depreciation?

Hank Nothhaft

And that’s mostly in COGS, not in the OpEx.

Mike Anthofer

No, it’s in the cost of revenue line. When we got cut off I heard you mention SG&A and the increased there is principally related to the major trade show, Mobile World Congress in Barcelona coming up this month, which spikes up the SG&A. Otherwise we’d be fairly flat in the quarter.

Operator

Your next question comes from Raj Seth - Cowen & Company.

Raj Seth – Cowen & Company

Thanks very much. Hank on Amkor is it fair to assume a recurring contribution after the payment you received in February; and could you remind me if in fact it does when that license terminates and whether or not sort of $10 million to $12 million a year annually might be a fair way to think about that revenue stream?

Hank Nothhaft

Okay, so the question is relative to our relations with Amkor. So the current license that’s in effect expires in 2011 and based on our current understanding, assuming they make their payment in the current contract, remains in effect with no authorizations. We expect that it would be about $2 million to $3 million a quarter.

Raj Seth – Cowen & Company

And if its $2 million to $3 million a quarter, also fair that the period of December which was not covered by the cash up that you’d received, I don’t know, $1 million in Q1 and are you assuming that or not assuming that in your guidance or are you stripping everything from your quarter out of that guidance?

Mike Anthofer

Raj it’s not included in the guidance.

Raj Seth – Cowen & Company

Okay and then can you just quickly tell us how to think about going forward pro forma taxes here? Where is tax right now?

Mike Anthofer

This is Mike. So, Raj there is so many dependencies they are based on our structure. I mean long term we would certainly be under 40. For this year from a guidance standpoint I would say roughly in the mid 40’s probably a fair number to use at this point for 2009.

Raj Seth – Cowen & Company

Mid 40’s for a cash tax?

Mike Anthofer

No, I’m sorry both tax. Cash tax, probably around 5% to 6% of revenue would be a good guide for all of the analysts.

Raj Seth – Cowen & Company

Okay, that for the full year and last question for me. Hank, do you guys have any statistics now that might be useful. I know it various by situation on reviews on the ITC. I think last quarter you talked about, you threw out a 25% reversal percentage and I don’t remember if that was inclusive of the decision to either accept or not accept a review and then a reversal. Do you have any statistics that might help eliminated how unusual or common it is for the ITC to do what they’ve just did, that might also suggest probabilities and general for our reversal?

Hank Nothhaft

Thank you for the question. I’m going to let Barney answer it.

Barney Cassidy

Hi Raj, this is Barney to answer it. I’m the new General Counsel. We are not going to give any probabilistic suggestions about the outcomes of any of our litigation going forward. We’re part of the team on the field as it where and we’re going to leave the handicapping to the people in Las Vegas.

So, the experience of the ITC is that when they see a significant issue, they will reach out and reserve an administrative law judge that is what’s happened here. They are reviewing it to determine whether they agree or not and since we’re deeply involved in this effort, it’s somewhat indecorous for us to comment on our chances of success. You wouldn’t ask players in the super bowl, what their chances of success are who are very busy at trying to win the game.

Operator

Your next question comes from Olga Levinson - Barclays.

Olga Levinson - Barclays

Just first question just for our comparison purposes; can you provide us with the December quarter in micro electronics and imaging & optics revenues?

Hank Nothhaft

I do understand. No, we’re not providing that at this point. So when you do the historical restatement in the queue that will be available. We’re not providing that today.

Olga Levinson - Barclays

Okay and then can you talk about within the Imaging & Optics portion, why that products and services proportion of that was so high? Is that a result of the Litho segment or is that actually an indication we’ve been designed into handset OEMs and now we’ve eventually turned into royalties?

Hank Nothhaft

The reason for that is that historically when we purchase these companies they were either mature product oriented companies like digital optics or they were very nascent sort of start up companies that hadn’t started producing licensable technology yet; and so what will happen overtime is the percentage of revenue in the Imaging & Optics business that is product derived will decline and the royalties and licenses segment will grow overtime.

So, I would imagine without giving guidance or forecasts for several years out that number or flip-flop and it will be more or like 60% to 70% royalty and licenses and products then will be under 30% to 35% category end of two years; that’s certainly our plan.

Olga Levinson - Barclays

Okay, and then one final question, does your guidance or margin includes any sort of option fee related to Motorola’s expansion?

Hank Nothhaft

Yes.

Mike Anthofer

Yes, it does.

Olga Levinson - Barclays

Okay, and anyway to quantify it? Is that lower than your December level or roughly equal?

Mike Anthofer

No, cannot comment on that; it’s confidential Olga.

Operator

(Operator Instructions) Your next question comes from Mehdi Hosseini - FBR.

Mehdi Hosseini - FBR

A couple of things; first Hank, I’m sort of a little bit confused. It will be great if you could help us understand who exactly in the imaging and optics is paying you? Is it just one single party or multiple parties and whether they sit in the food-chain?

Hank Nothhaft

It’s clearly multiple parties dependent on product lines and so there is a lot that takes to look at quite a matured company; they had 2 million lines of product businesses that had a group of customers that they’ve been servicing for a number of years. Of the newer companies that we bought, SHELLCASE was pretty nascent, and in the case of Eyesquad, as usual, they had actually not booked any contracts at all when we had acquired them.

In the case of the SHELLCASE technology, we announced on a regular basis as we did in this script today, new license fees for that technology. So we have five or more companies that have licensed showcase technology and some are paying us significant royalties and that we’ve spoken on a number of occasions. We have 40% plus market share in cavity center encapsulation in the market.

Then FotoNation was a company that had a significant penetration of digital still camera market and certainly had 15 to 20 customers and the reason we had acquired them was to take that technology and migrate it into wireless handsets as the camera quality generally improved and increased and so we’ve been able to sustain if not strengthen our position with the digital still camera market and certainly we’ve made great strides in starting to move their technology into our wireless handsets.

Then Eyesquad, which I didn’t mentioned has won a number of contracts. That’s designed in IP. Certainly I would expect that technology to be in tens or millions if not more firms within the next 24 months, but today it has not produced one penny in royalties.

Mehdi Hosseini - FBR

So, would it be fair to say that the SHELLCASE right now accounts for well over 50% of imaging and optics, but at what point would the impact of SHELLCASE be less or the percentage go down significantly?

Hank Nothhaft

Well, you’re wrong; it doesn’t even approach 50% and we have developed a SOHO Technology which has quite a bit of interest in the market. We’ve been able to license some new licensees in the process of outfitting their factory, so we would see royalties coming from that source.

Then in this vision we had to create the wafer-level camera. The SHELLCASE technology is a key part of that and so you may recall we closed our Jerusalem operation which was SHELLCASE. We are in the process of moving the engineering team to North Carolina, so they can be in the same location as our team in North Carolina from visual optics.

So, we’re taking the wafer-level optics expertise and capabilities from that team in North Carolina. We’ve now brought the people over from Israel to work with them and that’s where our wafer-level camera’s activity and development is taking place. So that will have a long lifecycle as part of the wafer-level camera.

So, we have four major components in imaging and optics; it’s the wafer-level optics, smart imaging, smart optics and our wafer-level packaging and in that, there is really a broad distribution of revenue. There is not a dominance by any category and we’re forecasting in our own internal plans growth in all those areas.

Mehdi Hosseini - FBR

I’m glad that I was wrong on that mix of revenue, because at the end of the day, it seems like with incremental revenue from non-semi area, your overall royalty revenue would be more stable and to that extent for the purpose of modeling, should we assume that imaging and optics would be more than 20% of the mix or less or can you just help me with that?

Hank Nothhaft

For the whole company, I don’t think we’re providing that guidance today, but I can tell you that we’re very optimistic about the imaging and optics business. I won’t read too much into the first quarter guidance and we have had a lot of wins during the 2008 which will start kicking in as revenue as we move through 2009 and then even in a greater extent into 2010.

So for a emerging sort of market with a lot of new products and a lot of new customers, I’d say disproportion in the amount of this years plan booked already, as we look ahead in a very weak economy and a terrible market. We actually have the makings of a real success story in that area.

Mehdi Hosseini - FBR

One more follow-up question, how should I think about pricing in this area? Is that fixed over the length of the contract or does it changes?

Hank Nothhaft

Well, it depends on the product actually. Typically though there are some form of an up front license fees, some cases NRE and then an ongoing royalty based on unit shipments.

Operator

Your next question comes form [Daniel Giltouch – Rowing Brook Capital]

Daniel Giltouch – Rowing Brook Capital

I just wanted to get a little color on the trend of legal expenses over the course of the year, I’m not sure you’ve covered that yet?

Hank Nothhaft

We haven’t, but this is Hank. I’ll refer to Barney Cassidy our new General Counsel or Mike Anthofer.

Mike Anthofer

This is Mike. I just want to make one comment. I did say specifically for the first quarter that our litigation expense would be slightly below last quarter and beyond that we’re not prepared to give any specific guidance to litigation, but I’ll let Barney comment further if he chooses.

Barney Cassidy

I completely agree with Mike.

Daniel Giltouch – Rowing Brook Capital

The qualitative type of guidance put together just to get an idea, what’s remaining in terms of, or what’s your timeline in terms of a cases etc.

Mike Anthofer

Right well, the main takeaway is that we are going to continue to protect our intellectual property. We’re deeply involved in the three ITC matters that are ongoing. We did receive a favorable ruling on Friday and the lead case, the 605 case and the ITC were ruled on or before April 3, on key issues in that case, which were actually key issues in the other cases and hence we asked for a stay by filing a motion today, so that when we go forward in the Subcon case, the 649 case, we’ll know what the rules of the game are.

We don’t know exactly what they are because the ITC has reached out and expressed an interest in reviewing the initial determination made on December 1, by the Administrative Law Judge. So, the Administrative Law Judge isn’t sure what the rules are going to be; neither are we, neither are the respondents. So we’ve asked for a stay until this eight week period passes during which the ITC will give us their views of the matter, at which time we expect we’ll go back into the full scale effort.

So, in terms of guidance for the year, we don’t obviously provide guidance for the year, but the company is committed to the protection of its IP. We had a various statutory effects from our enforcement efforts last year and we’re going to continue them in 2009.

Daniel Giltouch – Rowing Brook Capital

You feel that there is a pretty decent chance that we should see a reduction at least in the second half of this year or is this level certainly possible over the course of the year?

Mike Anthofer

Well, it certainly depends in part on our licensees and our other players who should be licensing our technology. So, again we are not going to give guidance for the year. We have given some guidance for Q1, which is the best we can do and we are prepared to go forward in continuing to enforce our IP protection efforts. I don’t know what else I can tell you frankly.

Daniel Giltouch – Rowing Brook Capital

As far as the micro electronics business itself, obviously we’ve heard some pretty significant statements from research; last week about DRAM market being down significantly this year. Do you have any guess or you have any type of guide for us where we should be looking for volumes, on the DRAM side or maybe on the wireless side.

Hank Nothhaft

Yes, this is Hank. So, we are not a good forward indicator because we get paid in arrears. So, we don’t have any particular inside information on what’s happening. Looking forward, we do have a lot of information looking in arrears.

Having said that, we do subscribe to a lot of external market research and try to follow the market as carefully as possible and keep in mind my comments and my statements that when you talk about the DRAM industry being down, you have to take into account, what part of it is DDR1, DDR2, DDR3. When you’re talking about revenue, are you talking about overall bips? Are you taking about unit shift etc?

So having said that, we get paid on units, in some cases pins and we also have some volume pricing incentive contracts in place that affect our revenue as well, but our current view base in all the market research that we’ve subscribed to and discussed shows that the forecast have been coming down very rapidly, like a weekly basis, but currently we’re looking at about a 2% to 3% unit growth for the overall market at this moment in time, but that view has been changing and has gone down.

Now this is not an unprecedented situation in the DRAM market and it is not the biggest price drop or crash of the market that ever occurred. Actually if you go back and take a look at the various cycles of the DRAM market, it was actually the post dot com bubble part of the market, in a much deeper price declines in a worse situation then we find ourselves in now.

So, it looks like the DRAM manufacturers have restrained their supply, their utilization rates have dropped, they’re taking capacity out of the system and prices have responded here in January and they are up. So, it’s in their best interest frankly to try to keep utilization low. It’s sort of like the airlines and how many seats are they going to fly at any given point in time.

So, the industry certainly has the ability to self destruct if they want to go and raise all the utilization rates backup to some significant level, they could get themselves in an over supply situation very quickly, but that is not the case right now.

Daniel Giltouch – Rowing Brook Capital

Just as far as the mix between DRAM and wireless or the other logic out there is it mostly DRAM at this point?

Hank Nothhaft

We don’t give that guidance, I’m sorry.

Operator

(Operator Instructions) Your next question comes from Kevin Vassily - Pacific Crest.

Kevin Vassily - Pacific Crest

My question is specific to DDR2 and DDR3. There seems to be some activity picking up in terms of DRAM companies moving from I think what you would call risk production to maybe some early volumes there. You get any different royalty rates for DDR III versus DDR II on average, relative to the kind of speed requirements of getting data on off-chip for DDR III.

Hank Nothhaft

No, we’re strictly unit based and in some cases IO based.

Kevin Vassily - Pacific Crest

There’s know real different pin count then for DDR III versus DDR II?

Hank Nothhaft

Slightly

Kevin Vassily - Pacific Crest

Slightly; okay, is it slightly negative or slightly positive for you guys?

Hank Nothhaft

Slightly positive

Operator

So, they are no further question at this time.

Hank Nothhaft

Okay, thank you very much in your interest. We look forward to talking to you next quarter. We are going to be at an investment banking conference next week in Florida, Deutsche Bank. Thank you very much.

Operator

And that concludes Tessera’s fourth quarter 2008 earnings call. You may now disconnect.

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