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Tessera Technologies, Inc. (NASDAQ:TSRA)

Q2 2009 Earnings Call Transcript

August 4, 2009 4:30 pm ET

Executives

Moriah Shilton – Senior Director, IR

Hank Nothhaft – President and CEO

Mike Anthofer – EVP and CFO

Barney Cassidy – SVP and General Counsel

Analysts

CJ Muse – Barclays Capital

Raj Seth – Cowen and Company

Kevin Vassily – Pacific Crest Securities

Paul Thomas – Bank of America

Daniel Gelbtuch – Roaring Brook Capital

Michael Cohen – MDC Financial Research

Greg Eisen – ICM Asset Management

Hans Mosesmann – Raymond James

Operator

Good afternoon. My name is Ellie and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Ms. Shilton, you may begin your conference.

Moriah Shilton

Thank you, Ellie, and good afternoon, everyone. Thank you for joining us for the Tessera Technologies second quarter 2009 earnings conference call. This call is being broadcast live over the Internet. A webcast replay will be available at tessera.com for 90 days after the call.

In addition, a telephone replay of this call will be made available for two business days 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 19462142.

I will now read a short Safe Harbor statement. During the course of this conference call management will make a number of forward-looking statements, which are statements regarding future events including the future financial performance of the company. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those projected. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this call. More information about factors and that may cause results to differ from the projections made in these forward-looking statements can be found in Tessera’s filings with the Securities and Exchange Commission including it’s annual report on Form 10-K for the year ended December 31st, 2008 and its quarterly report on Form 10-Q for the period ended March 31st, 2009, especially in the sections of these filings entitled Risk Factors. The company disclaims any obligations to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after this call.

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 related tax effects.

Management believes that non-GAAP amounts provide a more meaningful comparison measure of quarter-over-quarter and year-over-year financial performance. Please refer to the company’s second quarter 2009 earnings press release and to the company’s website for a 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.

And with that, I will turn the call over to Hank.

Hank Nothhaft

Thank you, Moriah. Greetings to all of you. Thank you for your interest in Tessera. Coincidentally, this is my one-year anniversary as CEO of Tessera. We will discuss our second quarter 2009 results, recent developments, and then open the call for your questions.

Total revenue for the second quarter of 2009 was $62.3 million, slightly above the raised guidance we gave on June 2nd. Combined and controlled spending during the quarter, we had favorable GAAP EPS and non-GAAP EPS results.

In our micro-electronics business, we generated $55.6 million of total revenue during the second quarter of 2009, 100% of which was royalties and license fees including a license fee and options fees from Motorola who became a licensee in the second quarter. Although the macroeconomic outlook remains uncertain, we did see some encouraging trends during the quarter in our served markets of computing and wireless mobile devices.

In the DRAM market, the decline in chip demand appeared to bottom out as both OEMs and the channel became comfortable with inventory levels. As a result, we believe DRAM vendors experienced an increase in orders towards the end of the second quarter. Demand in the overall mobile device market appears to have reached it nadir and will begin to improve in the second half. Because we recognize revenue one quarter in arrears, any positive impact we receive from increased orders in either DRAM or wireless would be felt starting in our third quarter.

Turning to the research and development side of our micro-electronics business, we continued to make progress on multiple fronts in the second quarter. Within the context of our controlled spending, we have reallocated resources and continue to invest in strategic micro-electronics programs including silent air cooling and micro-PILR.

In silent air cooling, we continue to address the remaining engineering challenges of dust and longevity in our program to productize and commercialize silent air cooling technology. We are initially targeting the notebook, All-in-One PC, and projector segments, which are high volume markets, similar to those we currently serve with our chip-scale packaging and imaging and optics technologies.

In micro-PILR, we completed the installation of a fine pitch, flip chip assembly line in our San Jose facility in the second quarter. We are using this line to build prototypes for customers to evaluate our micro-PILR technology, as well as to generate the performance and reliability data required for commercial adoption. We are currently working with a potential customer on a high-performance logic device with over 4,000 I/O on 180 micron pad pitch and expect to have results by the end of the year.

In our imaging and optics business in the second quarter of 2009, we generated $6.6 million in revenue. Our micro-optics business that serves the traditional semiconductor and communications market was negatively impacted by the softness in these markets and showed slight recovery toward the end of the quarter.

We had better news from our wafer-level optics group in the second quarter. Nemotek, our first wafer-level camera licensee, announced its wafer-level optics is fully qualified and available to customers. The new production facility for Qtek, the OptiML wafer-level optics licensee we announced last quarter, officially opened in the second quarter and is slated to be in production in early 2010.

Qtek first took a license for our SHELLCASE MVP technology in the fourth quarter of 2008. They will be manufacturing products using these technologies separately, as well as wafer-level cameras in the future. In our wafer-level packaging group, we made progress on the installation and qualification of the SHELLCASE MVP line we transferred from Israel to our Charlotte facility.

We expect to complete qualification this quarter. We remain on track for royalties from our existing engagements for optical image enhancement with Toshiba and Samsung to begin to ramp at the end of 2009. Royalties are expected to contribute appreciably in 2010.

We continue to work towards expanding our imaging and optics technology portfolio. Last week, we announced we are developing one of the industry's first 3 megapixel wafer-level optic solution that integrates extended depth of field. The innovative new technology will combine our OptiML wafer-level optics with our OptiML Focus image enhancement solution, enabling smaller, lower cost, higher quality camera modules. Sampling is expected to start in the fourth quarter of this year. We also plan to demonstrate new, embedded image enhancement technology in the fourth quarter.

We have entered into a new era of low cost, miniaturized, smart modules that will help drive our long-term growth. Smart modules are intelligent image capture solutions, which either generate and display images or use the image capture to generate an action or set actions without displaying the image.

Technology collaborations will be a key component to our long-term growth. In July, we announced a program with CEVA, a leading licensor of silicon intellectual property platform solutions and DSP cores, which demonstrates our FotoNation technology on their MM2000 multimedia platform. Our strategy is to secure similar partnerships with other industry leaders in the future.

We are beginning to work with industry leaders in a new market, which is gaming. Gesture-based technologies and platforms are beginning to build a presence in imaging and optics, especially in the gaming industry. Gaming is one of the many markets beyond cell phones we believe will require our technology.

Finally, we made a key addition to Tessera's management team during the second quarter. Robert Yung joined us from PMC Sierra where he was the company CTO after extensive stance with Sun and Intel. As our CTO, Robert is responsible for managing our technology vision and direction.

I will now turn the call over to Mike Anthofer for a discussion of our financial results and guidance. Mike?

Mike Anthofer

Thank you, Hank. We generated excellent results for the second quarter. Our total revenue was $62.3 million, up 11% year-over-year. Micro-electronics royalties and license fees were $55.6 million, up 13% year-over-year including license and option fees from Motorola.

As a reminder, we had a settlement from Amkor in the first quarter of $64.1 million, of which $60.6 million with micro-electronics revenue and $3.5 million with interest income. This distorts the quarter-over-quarter comparisons. However, excluding the Amkor settlement, we were up 21% over the prior quarter.

Second quarter of 2009 imaging and optics revenue was $6.6 million. Royalties and license fees were $4.2 million, up 209% year-over-year, however, down 20% quarter-over-quarter. One-time license fees currently make up a significant portion of our imaging and optics royalties and license fee line item and as such, can make the quarterly revenue lumpy.

Imaging and optics products and services revenue was $2.4 million, down 57% year-over-year and 11% quarter-over-quarter, largely due to the slowdown in the semiconductor equipment purchases, which negatively impacted our lithography business and weakness in the communications sector related to high-end routers that use our micro-optics high-end lenses.

Total GAAP operating expenses were $43.6 million and are broken out as follows. Cost of revenue, $3.9 million; R&D, $16.9 million; SG&A, $17.3 million; and litigation expense of $5.5 million. Our litigation expense was much lower than the prior quarter, largely due to our decision to terminate the Subcon ITC case in March, which the ITC subsequently dismissed on July 19th.

As a result of the reduced litigation expense, second quarter total GAAP expenses were 7% lower than the prior quarter and 19% below the second quarter of 2008. Excluding litigation expense, GAAP operating expenses were down sequentially just under one-half percent and up only 3% year-over-year. Stock-based compensation expense was $7.2 million and amortization of acquired intangibles was $2.9 million.

In the second quarter, our other income, net of expense, was $1.1 million. Our GAAP tax expense was $8 million. The tax provision represents a 40% estimated tax rate for the quarter. GAAP net income then for the quarter was $11.8 million or $0.24 per share on a fully diluted weighted average share count of 48.8 million shares.

I will now make a few comments regarding our non-GAAP results. We have included a detailed reconciliation between our GAAP and non-GAAP net income in both our earnings release and on our website for your convenience. Total non-GAAP operating expenses were $33.5 million. Excluding litigation, it totaled $27.9 million, which was below the anticipated expense levels guided previously.

We continue to expand our R&D resources, focused on high growth opportunities such as wafer-level camera and silent air cooling while continuing the benefit from its expense control in all other areas. Sequentially, our non-GAAP expenses, excluding litigation, were down 4% due to one-time expenses in the first quarter related to the Mobile World Congress trade show and move related expenses specific to our relocation of Jerusalem personnel and equipment to Charlotte, North Carolina.

Non-GAAP cost of revenue with $2.1 million, R&D $12.8 million, and SG&A $13.1 million with $5.5 million of litigation expense. Cost of revenue was lower than the prior quarter due to the aforementioned shortfall in product related revenue in our I&O segment.

R&D expense was down sequentially $0.5 million due to the aforementioned non-recurring charges in Jerusalem, which more than offset increased expense, attributable mainly to our wafer-level camera development and product launch services at our Charlotte facility.

SG&A expense was down sequentially due again to the trade show related expense for Mobile World Congress in the first quarter. Tax adjustments for non-GAAP items were $3.7 million, resulting in non-GAAP net income of $18.3 million or $0.37 per share on a fully diluted weighted average share count of 49.7 million shares.

We ended the quarter with $378.2 million in cash, cash equivalents, and investments and no debt. We have generated $80 million from cash from operations in the first half of 2009, approximately half of which came from operating activities and half from the settlements, net of tax, we received from Amkor.

Our overall cash position in the second quarter represents a $5.6 million decrease from the prior quarter, primarily due to approximately $22 million of estimated tax payments and approximately $9 million used for the purchase of intellectual property and technology, building on our strength as an intellectual property innovator and licensing company.

Before I discuss third quarter 2009 guidance, I wanted to briefly mention the one-time option exchange program that was approved by our shareholders at our Annual Meeting in May. The majority of our eligible employees participated in this program who will have no impact on our future stock-based compensation expenses due to the value-for-value structure, nor will there be any one-time stock-based expense resulting from any movement in the stock price downward during the offering period as our stock price did not decrease during this period, which ended July 1st.

Now, looking for the third quarter of 2009, we expect the following. Total revenue for the company will range between $60 million and $62 million. This compares to the third quarter of 2008 figure of $63.5 million, which included revenue from one-time self audits performed by certain customers.

Micro-electronics revenue will range between $54 million and $56 million and it's all royalty and license related. As you know, our royalty revenue is the one quarter in arrears, making us a lagging indicator. As such, the third quarter royalties will be impacted by the demand in the DRAM and wireless markets in the second quarter, which while for many was stronger than anticipated, was still down significantly year-over-year.

Products and services in this segment, the revenue will be zero. As a comparison, third quarter of 2008 micro-electronics royalties and license fees were $56 million and our products and services revenue was just over $0.5 million for a total of $56.5 million for the segment.

Third quarter of 2009 imaging and optics revenue in total is expected to be $6 million. Royalties and license revenue is expected to be $3 million and products and services also approximately $3 million. This compares to the imaging and optics royalty and license revenue of $1.5 million and products and services revenue of $5.4 million in the third quarter of 2008, which totaled $6.9 million for the segment.

We are providing non-GAAP operating expense guidance, which includes non-GAAP cost of revenue, non-GAAP R&D, and non-GAAP SG&A less litigation expense. Third quarter of 2009 non-GAAP operating expenses are expected to range between $30 million and $31 million.

Non-GAAP cost of revenue will be up approximately 10% from the prior quarter due to the increased products and services revenue and increased activity in our product launch services. Non-GAAP R&D should be up sequentially approximately 12% to 13%, primarily due to our continued development efforts in wafer-level camera and silent air cooling. Non-GAAP SG&A should be up slightly and less than 5%.

We expect our litigation expense to be higher in the third quarter. Whether the increase is moderate or more pronounced will depend in part on the actions of adverse parties. We expect our stock-based compensation to be approximately $7 million and amortization charges to be $3 million.

Thank you very much and I'll like to turn the call back to Hank.

Hank Nothhaft

Thanks, Mike. Before I open the call for questions and answers, I want to discuss our intellectual property protection efforts including the significant progress we made in the second quarter of 2009.

On May 20th, the U.S. International Trade Commission ruled in a final determination that our assorted patents in the Wireless ITC action are valid and infringed. The ITC issued a Limited Exclusion Order and Ceased and Desist Orders under which the Wireless ITC action respondents including Qualcomm, Freescale and Spansion are not permitted to import or sell infringing products in the United States.

I want to stress that the ITC orders affect only unlicensed companies that are trying to maintain an unfair competitive advantage against their licensed competitors. We have spent hundreds of millions of dollars in research and development to bring our innovative technologies to market. Most of the world's largest semiconductor companies have licensed and incorporated our technologies to the benefit of their customers and shareholders.

The list of Tessera licensees now includes Motorola who signed a license with us in June. The other respondents in the Wireless ITC action have followed a different approach and in July, filed appeals with the Court of Appeals for the Federal Circuit. We and the ITC have submitted our position to a stay during the appeal and now await the Federal Circuit's ruling.

In the interim, the respondents are not permitted to import or sell infringing products into the U.S. even under bond. Hardly one of these respondents appears at times to value innovation and intellectual property as we do and in fact participates in the alliance Tessera co-founded to fight for innovators' rights. Different playing fields can apparently drive different public positions on these important questions.

With regard to our other enforcement efforts, the date of the initial determination in our ITC DRAM action has been extended until August 28th. As we mentioned earlier, our ITC Subcon action has been dismissed as we requested.

I now want to address an issue relating to Amkor. Last year, we prevailed in arbitration proceedings against Amkor with the International Chamber of Commerce's Arbitration Panel, ruling that Amkor had breached its agreement with Tessera by using Tessera's technology while withholding payments owed to Tessera. Amkor subsequently paid us $64.1 million in the first quarter of 2009.

We hope that the Arbitration Panel's ruling will lead Amkor to comply with its license agreement. But once again, it appears that Amkor is not compliant. Based on the information we have obtained, Amkor is no longer a licensee in good standing.

Although I cannot go into detail regarding this ongoing matter, one principal issue has to do with how Amkor is accounting for – or from our perspective, not accounting for royalties on products found by the ITC to infringe Tessera's technology. We have initiated an audit regarding Amkor's royalty reporting and payments and hope to obtain more information regarding Amkor's conduct through that process.

I will now discuss one other area that is important not only for Tessera's intellectual property protection efforts, but the protection of American intellectual property as a whole. I am referring to patent reform, specifically the United States Patent and Trademark Office.

We believe improving the performance of the U.S. Patent Office is a far greater priority in improving our patent system and our nation's economy and continuing to battle over pending legislation that divides our nation's community of innovators.

In these challenging economic times, the nation needs a patent office that helps for innovation, not impeded. Today, there is a backlog of more than three-quarters of a million patents. It takes an average of nearly three years from the day a patent is filed until a ruling is issued. The goal should be 18 months.

Congress can help the prospective head of the U.S. Patent Office, Mr. Kappos, in reshaping the office to address these issues. Among our recommendations, improved funding by preventing any diversion of fees, adopt more of a market-driven model by changing how fees are assessed, improve the patent office technology infrastructure, continue evaluating submission guidelines to improve the quality of patent applications, set up regional offices so patent examiners can work directly with innovators to improve patent quality. Lastly, do a better job of attracting and retaining a high quality workforce, offer financial incentives for government service.

It's time to retune the patent engine that has historically driven our nation to discovery and prosperity to once again perform as magnificently as before in these challenging and exciting times.

I will now open the call for questions. Thank you very much.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from CJ Muse of Barclays Capital.

CJ Muse – Barclays Capital

Thank you for taking my question, Hank and Mike. I guess first question, you talked about Toshiba's stance on starting to ramp in late 2009 and I guess a – two-part question to this. One, can you give some sort of context to what kind of magnitude we could see versus the current run rate? And then I guess second part of the question there is, are you close to signing up additional customers for that product as well?

Hank Nothhaft

CJ, this is Hank and thank you for your question. So the imaging and optics division had a very good quarter and we are very satisfied and optimistic about the potential and certainly we are very enthusiastic about hitting our $100 million goal in 2011, but it is very much like doing a startup in a – within a public company. And because the division is rather small and as Mike said in his comments, we are going to experience lumpy results based on contract wins, one-time license fees as we build the royalty stream.

So we have won a number of important engagements with the potential manufacturers that I mentioned in the script and we do expect those royalties to ramp as handsets that include that technology start to ship, but I really don't and can't put a context of magnitude on it. It is a very active market and we are engaged in bidding on and pursuing a number of new projects at this time. So we feel we are right on schedule and very confident about the future of the division.

CJ Muse – Barclays Capital

Sounds good. And if I could, I guess, make my follow-up question, considering the advantage I guess Amkor has relative to some of the other non-licensee (inaudible), can you talk about whether or not you've had conversations there, whether you think despite the ITC Subcon case being dismissed that they could actually come back and become licensees?

Hank Nothhaft

CJ, I'm not sure I – I understood kind of what you said, but I’m not sure what your specific question was.

CJ Muse – Barclays Capital

Well, the question – I mean, Amkor is a licensee, ASE still or not, do you see a situation where they could come in given the competitive advantage that Amkor enjoys?

Hank Nothhaft

I think I better refer that question to Barney Cassidy, our General Counsel.

Barney Cassidy

Hi, CJ. We are obviously interested in more licensees. We are in discussions with Amkor, we don't agree with their current position. I think Hank was pretty clear about that in the call. And it's very hard to predict what future licensees we may obtain.

CJ Muse – Barclays Capital

All right. Thank you.

Operator

Your next question comes from Raj Seth of Cowen and Company.

Raj Seth – Cowen and Company

Hi, thanks. A couple of quick ones. Mike, am I correct in assuming that in your guidance for the following quarter that you have included the Motorola or anticipated recurring contribution from Motorola because I thought there was some uncertainty around whether or not you'd have the necessary audit reports?

Mike Anthofer

We have an estimate and it is included in the guidance.

Raj Seth – Cowen and Company

Okay. Hank, you talked about the optics business and referenced why it's a little bit difficult at this stage to predict revenues perhaps next year. I'm curious when do you expect your wafer-level camera to be hitting the market? When will we start seeing that in phones? Obviously, some of the smart optics stuff probably comes sooner from Samsung and from Toshiba. When will the wafer-level stacks hit, do you think?

Hank Nothhaft

Raj, thank you for the question. So as you know, we have both design-in IP and infrastructure IP. So as far as a design-in IP goes, we've won a number of programs in those areas and that technology is in units that are moving to market as we speak. In terms of the wafer-level camera and wafer-level optics, which fits into the IP infrastructure bucket, we expect to see that in the beginning of the year.

Raj Seth – Cowen and Company

Okay, good. One last one if I might. You mentioned a $9 million purchase of some IP during in the quarter. Could you comment on what it is you are buying and then maybe comment on uses of cash, cash balance keeps growing here, how are you thinking about deployment of cash?

Hank Nothhaft

Okay, Raj. I'm going to ask Mike to handle that question.

Mike Anthofer

Yes. So Raj, the acquisitions we made in the quarter were primarily around patents, additional patents. We have the Dblur Asset acquisition in addition to acquiring some patents and we had the balance of an earn-out on a previous acquisition. So in total, on aggregate, that was approximately $9 million.

Raj Seth – Cowen and Company

And with regard to sort of uses of cash going forward, you used to have a buyback in place. I'm sure you are looking for more acquisitions. How should we think about – to date, you've only done very small acquisitions, again on the cash balances getting close to $400 million. How are you thinking about what to do there?

Hank Nothhaft

Raj, thanks for the question on the use of cash. So as you said, it is clear that we got intent at this point in time to initiate a major stock buyback. We are very active in surveying the market and looking for acquisitions of companies and/or intellectual property that fits into our strategic purpose and business model.

And so, that would be my intended use of the cash. We certainly would be willing to do a larger transaction if we found something that made sense. Clearly, to date we have not found such a transaction.

Raj Seth – Cowen and Company

Thank you.

Operator

Your next question comes from the line of Kevin Vassily of Pacific Crest Securities.

Kevin Vassily – Pacific Crest Securities

Yes, hi. A couple of questions. First, I think on your last earnings call you mentioned that Nokia was shipping one or two handsets that incorporated enhanced depth of field technology. Do you have an update on that number right now? Is that going up from what you guys can tell?

Hank Nothhaft

Yes, it has. It's our – keeping score at our end, we believe seven handsets at the moment including the two that I mentioned on the previous call.

Kevin Vassily – Pacific Crest Securities

Okay. As you kind of look out in the second half of the year as you obviously get into a period of the year where there are a number of product releases. Do you guys expect that number to go up? Do you have any visibility to that?

Hank Nothhaft

Well, I don’t have a precise visibility, but I know it's a very desired feature and it's being incorporated in a lot of additional handset programs and we do anticipate more handsets in the market by the end of the year. And then in addition to that, we are bidding on a lot of the additional opportunities. And then extended depth of field, itself turns out that it does provide that feature. We are trying to come up with a better name than extended depth of field because it has so many other capabilities besides just providing a focusing capability.

So for example, in manufacturing it increases the yield of the sensors in a manufacturing application. It's the basis of an ultrafast lens for low lighting situations, provides a lower F-stop and the like. Just as we decided to incorporate it as a feature or a capability and the wafer-level 3 megapixel program that we are – we announced or talked about in today's script. So it's a pretty exciting capability and it's being well received by the market. And in summary, yes, we do expect many additional handset models to be in the market using that technology by year-end.

Kevin Vassily – Pacific Crest Securities

Okay. A question on Amkor. Just want to make sure, you are not applying because they – I think you've characterized them as not being a licensee, if I heard that in the prepared remarks.

Hank Nothhaft

I said not a licensee in good standing.

Kevin Vassily – Pacific Crest Securities

Good standing? Okay. You are not implying that they are not paying at all. You are just implying that the – their audit does not true up to kind of what you think incorporates your technology. Is that the right way to think about it?

Hank Nothhaft

Yes, that's exactly the way to think about it.

Kevin Vassily – Pacific Crest Securities

Okay. So just one kind of last follow-up around that. One of the respondents in the ITC Wireless case – I think you actually referenced Amkor and this issue around being not in good standing saying that there is no liability on their part, this is an issue between Tessera and Amkor. As it pertains to the kind of legal ramifications of the ITC decision, do you think that's a correct statement on that respondent's part? I mean, how do you guys view they are not compliant relative to a respondent who would have using them as a sub-contract packager?

Hank Nothhaft

Kevin, thank you for the question. I will refer this to Barney Cassidy, our General Counsel.

Barney Cassidy

Kevin, we don't agree with that characterization. We believe that the ITC order, which is an order of the federal government is broad and includes all products being imported on behalf of the respondents that infringe our technology and that a partial payment by a licensee on components does not satisfy that order and we anticipate that there maybe a public dispute about this in the near term that will adjudicated in one of a variety of forums.

Kevin Vassily – Pacific Crest Securities

When you say a variety of forums, can you go there in more detail? Is this part of the appeal process that they are undergoing right now or –?

Barney Cassidy

I don’t think it would be part of the appeal process. I think it would be either in arbitration or in direct litigation against one or two parties.

Kevin Vassily – Pacific Crest Securities

All right, okay. Any – when you say near term, do you have any time frame around that?

Barney Cassidy

I do not.

Kevin Vassily – Pacific Crest Securities

Okay. All right, thank you.

Hank Nothhaft

You are welcome.

Operator

Your next question comes from Krish Sankar of Bank of America.

Paul Thomas – Bank of America

Good afternoon, this is Paul Thomas for Krish Sankar. Thanks for taking my question. Just looking at the micro-electronics revenues in Q2, if we take out roughly $12 million or so in one-time payments, mostly from Motorola, that’s roughly the amount you raised guidance by in June. It looks like the underlying business was down maybe mid-single digits. Is that the right way to think about it?

Hank Nothhaft

I'll refer your call, Paul, to Mike.

Mike Anthofer

Yes. No, I'm not sure where you get those numbers, Paul. I wouldn’t agree with that. I think the underlying business is actually going to be up slightly.

Paul Thomas – Bank of America

No, I’m talking about – in Q2, the $12.5 million was kind of the midpoint that you raised the guidance from in June. So was that – that's obviously not all one-time payments. I'm just looking for any sense of the breakout between what was the underlying units based business versus what was the one-time payment.

Mike Anthofer

Yes, in the second quarter?

Paul Thomas – Bank of America

Yes, in the second quarter.

Mike Anthofer

Well, in the second quarter there was not – they were not ongoing, if you will, or royalty payments under the license. Those commence with this third quarter. So in the second quarter, there were – there was a continued payment for an option fee and then a license fee. So they are one-time charges.

Hank Nothhaft

Paul, this is Hank. They weren’t – you shouldn’t conclude that all the increase in our guidance was from Motorola because it was not.

Paul Thomas – Bank of America

Okay. That's what I'm trying to figure out. So how should we think about that growth mix? Is it just – is it, I mean a little bit Motorola, is it the majority for Motorola?

Hank Nothhaft

I don't think we are going to answer that question.

Paul Thomas – Bank of America

Okay, thank you.

Hank Nothhaft

It's all right.

Operator

Your next question is from CJ Muse of Barclays Capital.

CJ Muse – Barclays Capital

Yes, hi, a quick follow-up to Kevin's question, I guess, regarding Amkor. What are your alternatives that you have there with the licensee that you feel is not in good standing? Is that something that would automatically go to arbitration or as you pointed out, direct litigation is also an alternative?

Hank Nothhaft

CJ, I'll refer this call – your question, follow-up question to Barney Cassidy.

Barney Cassidy

Hi, CJ. This is a topic that I have to be very careful about because it obviously involves potential litigation. We have a variety of alternatives. The preferable one would be a negotiated resolution, but we do have besides that alternative several public forums in which this dispute could be adjudicated and I think I want to stop there.

CJ Muse – Barclays Capital

Okay. And then I guess another on the 3 megapixel wafer-level camera that you talked about announcing last week. So can you provide a little more color there in terms of your anticipated cost advantage, the roadmap, as to how you expect to get designed in with customers and what could the opportunity look like when the opportunity unfolds?

Hank Nothhaft

So – just to make sure I understand your question, CJ, it's what is our cost advantage compared to traditional camera module?

CJ Muse – Barclays Capital

Yes.

Hank Nothhaft

And then, what do we see the opportunity like as it unfolds? Okay. So I would say we would estimate that the cost advantage would be around 30% relative to the camera modules. We will be sampling the product in the fourth quarter. That would imply availability to license and have licensees in production in the first half of next year. And as you well know and maybe some of the audience are not as familiar that the – we believe that the VGA market will sustain itself for quite sometime at high volumes due to the requirement for two cameras on phones, one for video and one for digital still camera.

We believe that the 3 megapixel is somewhat the sweet spot of the high volume market for digital still cameras on wireless devices at this time. And so, we think that a large percentage of the market will likely migrate to wafer-level technology not only for the cost advantages, but due to size and reliability and other benefits.

CJ Muse – Barclays Capital

Very helpful. And I guess one last question for Mike. Tax rate came in at 40%. I think you guided the book rate in – for Q1 around 46% I think for the full year. What should we be thinking about the second half of ’09 –?

Mike Anthofer

I think the full year rate should be around 45%-ish. We have the benefit of an R&D tax credit in the second quarter and a few other discrete items. But for the year, we are looking at about 45% for the full year and so, you can make your estimates for third and fourth quarter accordingly, based on first half actuals.

Hank Nothhaft

And CJ, Hank again. One other thing I wanted to mention is I think you and I have talked about, this is the VGA, it's reflow compatible to one step manufacturing process. Of course, 3 megapixel brings that as well. So I didn’t want to miss that. It saves so much money in a one-pass manufacturing process.

And as we have said, the VGA is probably a 300 million to 450 million unit market during the next few years. Certainly 3 megapixel is looking to be a 200 million to 300 million unit market in the foreseeable future.

CJ Muse – Barclays Capital

Perfect. Thank you.

Hank Nothhaft

You are welcome.

Operator

(Operator instructions) Your next question is from Daniel Gelbtuch of Roaring Brook Capital.

Daniel Gelbtuch – Roaring Brook Capital

Thank you and congratulations.

Hank Nothhaft

Thank you, Dan.

Daniel Gelbtuch – Roaring Brook Capital

With regard to the wireless litigation, is there any way to timetable what you are up to as far as how long you think appeals process is going to last before you can get – how long do you think it's going to take to shake it all out?

Hank Nothhaft

Yes, I'll let Barney answer that.

Barney Cassidy

Daniel, the Federal Circuit does not have the same statutory framework underlying it as the ITC does. So they don't – they are not driven by strict deadlines. So it's really hard to say. I think an average is six to 18 months to hear a – and resolve an appellate question. And our case may move more quickly than that or less quickly than that.

Daniel Gelbtuch – Roaring Brook Capital

And then just switching gears to the wafer-level camera, is there any other solution that's out there in the market you find yourself competing against just module guys that are entrenched and just trying to drive down price or is it – do you see anyone else near on the market – in the marketplace that's trying to develop this?

Hank Nothhaft

Yes, that's a really good question. And Dan, I don’t – I really haven’t seen anything directly competitive as you said. The camera module guys will try to remain competitive by dropping prices, but as far as an alternative technology, we haven't seen anything yet.

Daniel Gelbtuch – Roaring Brook Capital

And you are basically marketing this more to the sensor manufacturer or is it – or was this in your marketing OEM, handset OEM or is it all flows [ph] into the module guys?

Hank Nothhaft

Good question, Dan. Thank you for the question. So we market the wafer level sensor packaging technology and the wafer-level optics technology, which can be combined to create a wafer-level camera.

Generally, the people who you would characterize as sensor packaging people, those are the people that have licensed to date. It's not to say that a sensor manufacturer would decide to bring it in house and what have you, but to date that's been more of a – I would call them sensor packaging service bureaus for lack of a better team have been the people who have been signing up for these technologies.

Daniel Gelbtuch – Roaring Brook Capital

All right. Thank you very much.

Hank Nothhaft

You are welcome.

Operator

Your next question is from Michael Cohen of MDC Financial Research.

Michael Cohen – MDC Financial Research

This question would either be for Hank or Barney. If the respondents in the ITC Wireless investigation evade the Limited Exclusion Order by having only their customers ship product into the United States, could you seek an enforcement proceeding with the commission and could a General Exclusion Order possibly issue from such a proceeding?

Hank Nothhaft

Michael, I'm going to defer that question to Barney.

Barney Cassidy

Michael, it's hard to say what we would do. Certainly, going back to the ITC for an additional enforcement proceeding is an option. I'm not at all sure we would pursue that, it depends on the circumstances and how things evolve. It's very difficult to go into litigation tactics on a call like this.

Michael Cohen – MDC Financial Research

Okay.

Barney Cassidy

We don't have any current plans do that if that's of help.

Michael Cohen – MDC Financial Research

Are you aware of any precedent where an enforcement proceeding has kind upped the limited or a LEO to a GEO?

Barney Cassidy

None of the (inaudible) I have. No.

Michael Cohen – MDC Financial Research

Okay.

Hank Nothhaft

The only other thing I would say – and this is Hank, that we did ask for a GEO in the DRAM case. So I remind everyone of that. And the date on that, I think I said in my script, was August 28th for the initial determination.

Michael Cohen – MDC Financial Research

Okay. And my follow-up question is now that the 649 investigation against the subcontractors has been withdrawn, could you talk about your strategy to still get licensing revenues from those former respondents.

Hank Nothhaft

Michael, we can’t comment on that. Thank you.

Michael Cohen – MDC Financial Research

Okay. Well, thank you very much.

Operator

Your next question is from Greg Eisen of ICM Asset Management.

Greg Eisen – ICM Asset Management

Thanks, good afternoon. I wanted to follow-up on your revenue recognition regarding your license fee – your royalties from Amkor. Specifically, they made that one-time payment to you and then they went into non-compliance. Could you first tell us – post making the one-time payment to you, that $64 million payment, how long was it before they started to show evidence of being in non-compliance with the intent of your license agreement?

Hank Nothhaft

Go ahead, Barney.

Barney Cassidy

So -- hi, this is Barney. So the way the license agreement works is they give us a royalty report and then later follow-up with royalties over the period and it was in comparing the royalty report and the actual payments and our further reflection on what the meaning of the royalty report was that we came to the conclusion they were not in full compliance and we engaged in dialog with them. So payments have occurred, I want to be clear about that, but we do not believe the payments are full payments and we do not believe they are in compliance with the license at this time.

Greg Eisen – ICM Asset Management

Okay. Let me ask the question in another way. Since they give you a royalty report, do you believe that they did not report sufficient royalties based upon their level of business activity or do – or was it that you accept the royalty report, but then the payment doesn’t meet the definition that the royalty report would imply what they should be paying?

Barney Cassidy

Yes, I think these are details that we are not going to discuss on a public conference call.

Greg Eisen – ICM Asset Management

Okay. I'll ask one more question then. Just simply in terms of your revenue recognition, are you recognizing as revenue just what they are sending you as payment and nothing more or are you accruing for revenues that they have not agreed to pay you?

Mike Anthofer

Okay. Greg, thanks for the question, this is Mike. Now our revenue recognition policy is very tight. We only recognize revenue based on royalty report and the matching cash receipt. So we are only taking revenue on what is being reported and paid by them. I want to be very clear on that regard.

Greg Eisen – ICM Asset Management

Great. That answers my question. Thank you very much.

Hank Nothhaft

You are welcome.

Operator

(Operator instructions) And you have a question from the line of Hans Mosesmann of Raymond James.

Hans Mosesmann – Raymond James

Thanks. Just a clarification. Is the timing of the Amkor situation and not becoming a guy [ph] in good favor or good standing, is that the timing coincident with the Qualcomm situation in terms of the litigation that they have with you?

Hank Nothhaft

I don't think we are going to answer that question.

Hans Mosesmann – Raymond James

Okay, thank you.

Hank Nothhaft

You are welcome.

Operator

I'm showing no further questions at this time, sir. Do you have any further comments?

Hank Nothhaft

So, thank you very much and I appreciate your interest in the company and look forward to our next call in about three months from now.

Operator

That does conclude today's conference. You may now disconnect.

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