Intermolecular, Inc. (IMI) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Intermolecular, Inc. (IMI)

Intermolecular, Inc. (NASDAQ:IMI)

Q2 2013 Earnings Conference Call

July 25, 2013 4:30 pm ET

Executives

Gary Hsueh – Senior Director of Corporate Development and Investor Relations

David Lazovsky – Founder, President and Chief Executive Officer

Reed Birnbaum – Vice President of Finance and Corporate Controller

Analysts

Harlan Sur – J.P. Morgan & Co.

Edwin Mok – Needham & Company

Operator

Good day, ladies and gentlemen and thank you for standing by. And welcome to the Intermolecular Second Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. Please note that this call is being recorded. My name is [Huerie]. And I’ll be your operator for today.

I’ll now like to turn the conference over to your host for today, Mr. Gary Hsueh, Senior Director of Corporate Development and Investor Relations. Please proceed sir.

Gary Hsueh

Thank you, Huerie. Good afternoon and welcome to Intermolecular’s Second Quarter 2013, earnings conference call. We announced results after the close today and you’ll find a copy of the press release on our website at www.intermolecular.com. On the call with us today are David Lazovsky, President and Chief Executive Officer and Reed Birnbaum, Vice President of Finance and Corporate Controller.

Today's conference call contains forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events including any statements that relates to our expectation that Micron will consummated acquisition of Elpida, as well as any statement regarding financial projections and future market conditions is a forward-looking statement.

Actual results may differ materially from those expressed in these forward-looking statements. Intermolecular assumes no obligation to update these forward-looking statements, which speak only as of today. For more information about factors that may cause actual results to differ materially from forward-looking statements. Please refer to the press release we issued today as well as the risks described in our Form 10-K for the fiscal 2012 year and our subsequent quarterly reports on Form 10-Q as filed with the SEC, particularly in the sections titled Risk Factors.

Before we begin, please note that during this call we will be discussing non-GAAP financial measures as defined by the SEC and Regulation G. We believe non-GAAP financial measures provide useful supplemental information to both management and investors, but note that these measurements are not a substitute for GAAP and should only be used to evaluate the Company’s results of operations in conjunction with corresponding GAAP measures. All non-GAAP measures are reconciled to the most directly comparable GAAP financial measures in our press release issued today.

And with that, I’ll hand the call now over to Dave.

David Lazovsky

Thanks, Gary. Good afternoon everyone and thank you for joining us on today’s call and webcast. Our Q2 results were led by $16.6 million in revenue reflecting new collaborative development programs initiated in the quarter. Principally with Micron and DRAM and non-volatile memory, Epistar and LED as well as an early stage CdTe with a top-tier display manufacturer.

In the quarter, we continue to make investments to grow and diversify our business into large markets with Tier-1 customers. Even with this level of investment non-GAAP net income was $620,000 hit it by a 12% sequential reduction in internal R&D spend as expenses associated with our LED and display programs moved and the cost of good sold related to the initiation of this new customer CdTe.

Additionally, in Q2 we finalized the realignment of our CdTe activities with global properties. And find and amend agreement expected July 1, that is consistent with the reduction in CdTe scope discussed last quarter. The amendment extends our CdTe to December 2014 and preserves the original IP licensing and volume-based royalty terms.

We also addressed the upcoming maturity of our original 4% node with Symyx that was given November of this year. And structure of refinancing the Silicon Valley Bank at a more favorable interest rate. We have security availability of converting our new revolving credit line into a three-year term loan at a fixed rate of 3.25%. Strategically, the availability of long-term low-cost debt reinforces the current strength of our balance sheet.

Now I would like to provide broader visibility on the status of our business and where it’s at. Intermolecular’s mission is to accelerate development of critical top technologies collaboratively with Tier-1 customers in large markets leveraging our HPC Innovation platform. This is done through our collaborative development programs or CDPs. Each CDP has the potential to drive high margin, recurring licensing and royalty revenue streams, then our customers’ implements, our developed technology and IP in volume production.

Our gross strategy is based on execution with CDPs with existing customer to build increasing licensing and royalty streams, as well as diversifying our business with new Tier-1 customers and semi-clean energy and display. As we state last quarter, we expect our licensing and royalty mix to be approximately 20% of total revenue in 2013. The primary contributors to that 20% mix of this year are result to successful CDPs with Elpida and DRAM and ATMI in advanced material. This includes Elpida’s 25 nanometer DRAM technology, which initiated production in the first half of 2013.

Looking ahead to 2014, we believe the next wave of CDPs will driver licensing and royalty growth will include Micron and Elpida’s next-generation DRAM products, GlobalFoundries advanced logic, ATMI’s and advanced semiconductor materials and Guardian’s low emissivity.

Beyond this wave, wise licensing and royalty revenue growth from the balance of our currency CDP customers. In many cases, success with these CDPs customers features on future development technology in IP. And I want to remind you that there are no guarantees where get these customers will implements Intermolecular CDP technology and IP in volume production.

In addition to the aforementioned customers, this Group includes SanDisk, Toshiba, First Solar, Epistar, and our new Tier-1 customer in Display

Our objective is to work as closely and as collaboratively as possible with our customers. To ensure our CDPs remain on their critical path are successfully executed and then our CDP technology is implemented in volume production.

Now, I’ll provide you with more detail on our progress in the first half of 2013 with our CDP growth and diversification strategy. Entering 2013, we had fulfilled CDPs employers with seven customers, all of which have IP licensing and our royalty agreements.

In the first half of 2013, we added three new CDP and IP licensing agreements, including Micron and DRAM in non-volatile memory Epistar and LED and a Tier-1 display manufacturer. This brings the current number of CDP customers to nine. We counted Micron and Elpida as one anticipating the completion of Micron’s acquisition of Elpida, even though the Micron deal significantly expands our licensing pipeline in non-volatile memory.

As I mentioned earlier, at this stage we are generating licensing and royalty revenue, resulting from volume production implementation of CDP technologies from two of these nine customers. We have multiple additional customers in earlier stages in our business development and CDP conversion pipeline.

We will provide updates as we transition early staged customer engagements and micro CDPs to fulfill CDPs and IP licensing agreements.

We believe that one of the biggest potential sources of our future licensing and royalty revenue is our developed technology and IP in next generation non-volatile memory. As many of you’re aware, one of our development partners in non-volatile memory SanDisk held an Analyst Day in May. The upshot is that SanDisk disclosed is a 3D resistive RAM timeline for volume production is beyond 2016 which represents a delay versus its time line last year, which calls for volume production in 2015 and beyond.

SanDisk reiterated 3D resistive RAM as the ultimate successor of NAND and has stated it has the ability to scale below 10 nanometer to drive long-term cost per bit reduction. Additionally, SanDisk presented successfully operating 32 gigabit [test chips] at 24 nanometer, the highest memory density demonstrated to-date for any NexGen nonvolatile memory technology. So it’s clear that SanDisk and Toshiba are making steady progress developing 3D resistive RAM and readying the technology for volume production implementation.

We are gratifying to be working with each technology and market leaders in non-volatile memory and we look forward to transitioning with our partners SanDisk and Toshiba to implementation phase of 3D Re-RAM.

As I touched on earlier, we amended our CDP agreement with the GlobalFoundries in Q2, which is refocused our resources inline with our highest priority critical path products, such as 14XM. This realignment process has helped strengthen the strategic relationship between GlobalFoundries and Intermolecular. In addition, the amendment maintained all aspects of the volume-based royalty at the licensing commissions.

In terms of the effect on financials, we do have accounting for the anticipated reduction in CDP resources and services in the first of half of 2013. But the realignment activities are concentrated in Q3. And as a result we expect our revenue run rate with GlobalFoundries in Q3 will be reduced by approximately $1.6 million, compared to the Q2 level. This has been challenging, but we believe that refocusing our resources on critical path products like 14nm-XM helps to ensure global norm with success. When they deploy three in test and thus improves visibility on meaningful volume based royalties over the next one to two years.

Now switching over to clean energy, I would like to spend some time on progress in two areas, one was an existing customer and the other is our entry into the display market.

Our CDP with Guardian has progressed steadily to the point where we will be participating in manufacturing qualification on low emissivity, our Low-E glass products. The manufacturing qualification process has faced an contingent on passing certain milestones. For example many glass products acquire third-party certification from agencies such as the National Glass Association or NGA.

We are pleased with the progress we've made so far with Guardian. And we believe Guardian will be among the next wave of customers to implement our developed IP in volume production. The other opportunity I would like to discuss is new for us. And we catalyzed this by the recent conversion of our internal R&D investments to a paid early stage CDP in the display sector.

Our internal R&D has been a period of four months and leveraged our HPC innovation platform to produce a next generation thin-film transistor or TFT. The results that we achieved we have taken one to 2 years to develop using our conventional R&D method. The outcome of this internal R&D investment and display was similar to the outcome of, of our R&D investment in thin-film solar which capitalized our CDP and IP licensing agreement with First Solar. We signed a CDP and IP licensing agreement with the Tier-1 display manufacturer in May of this year.

At this point, we are unable to disclose the identity of this customer. This is an early stage CDP and has we developed, the developments successfully passes milestones, we hope to be provided additional information on this program in the future.

With this talk to your customer and CDP engagement, we are addressing to display market head on. In 2012, the total display market was roughly $80 billion. This includes the $34 billion small and mid-sized panel market that is pushing for innovation at TFT back line to enable lower power consumptions, higher pixel densities, faster pixel response times and lower cost.

It also includes the balance of the display market. The $46 billion large sized panel display market for TVs. Like the small mid-size market, the TV market is driving innovation in the TFT back line to achieve 4K or higher resolution and a support and OLED frontline, all at reasonable cost.

Given the product offerings of the CDP customer and the scale of their manufacturing capacity, we believed we are positioned to benefit from potential licensing and royalty streams across both small and mid-size and the large size TV display markets.

Overall, that we’re pleased with the progress made in the first half of 2013, with both technical execution of existing customer collaborative development programs as well as diversification of our business with a new customers.

Our customer CDPs continue to make steady progress moving developed technology in IP towards volumes production implementation. And our CDP growth and diversification strategy has tracked to plan in 2013, with the addition of Micron and DRAM and non-volatile memory and our new Tier-1 customers in LED and Display.

Now before we turn to financials, I’d like to take a moment on behalf of the Board of Directors, the management team and our employees to recognize and thank Peter Eidelman for his contributions Intermolecular and financial leadership over the last seven years. Peter has got a world-class team, implemented systems and established business processes that have prepared the Company for growth in the years ahead.

We have initiated an active research and in the interm to ensure that the transition process is smooth. Reed Birnbaum, the Company’s VP of Finance and Corporate Controller will assume interm responsibility at the Principal Financial and Accounting Officer.

With that, I’d like to welcome Reed to the call to provide more details on the financial results for Q2. Reed?

Reed Birnbaum

Thanks, Dave. Now I’ll briefly summarize select financial results for the second quarter. Revenue for the second quarter of 2013 were $16.6 million, which was down 5% sequentially compared to the first quarter, and slightly up year-over-year versus the second quarter of 2012.

CDP revenue represented 77% of total revenue in the second quarter and licensing and royalty revenue 23%. To remind, there were no product sales during the second quarter of 2013, thus impacting the quarter-over-quarter comparison. We have three customers, which are each greater than 10% of total revenue during the second quarter. Together, these three customers represent 50% of total revenue in the second quarter.

Net loss in the second quarter of 2013, on a GAAP basis was $7, 44,000 or a loss of $0.2 per basis share. This compares to a net loss of $1.5 million or a loss of $0.3 per basic share in the previous quarter. In the same period of year ago, we’ve recorded a net loss of $960,000 or a loss of $0.2 per basic share.

Please review today’s earnings press release for both GAAP and non-GAAP measures in reconciliation between our GAPP and non-GAAP results. The key item in our reconciliation from GAAP to non-GAAP measures is the exclusion of stock-based compensation expense.

We delivered positive non-GAAP net income for the second quarter of 2013 and the amount of $620,000, or $0.01 per diluted share. This compares to a slight non-GAAP net loss of $86,000, or $0.00 per basic share for the first quarter and a slight non-GAAP net loss of $33,000 or $0.00 per basic share in the year ago period.

Gross margin in the quarter was 57%, compared to 55% in the prior quarter and 54.7% in the second quarter of 2012. We expect some delay in the timing of the reduction of cost related to our amended GDP with GlobalFoundries, which will introduce gross margin pressure in Q3, relative to Q2 and is reflected in our Q3 adjusted earnings guidance.

Total operating expense in the second quarter was $10.1 million, compared to $10.8 million in the first quarter and $9.8 million in the same period a year ago. The 7% sequential reduction in total operating expenses for the second quarter was primarily related to the conversion of the internal research and development costs into paid GDP programs.

Other net expenses during the quarter $144,000, primarily reflects our quarterly net interest expense related to our 4% note with Symyx. The reduced level of net interest expense reflects the early repayment of the note with Symyx and the entry into the new credit facility with Silicon Valley Bank.

As previously mentioned, on May 31, the company entered into a financing agreement with the Silicon Valley Bank that provided near-term availability of a credit facility currently at 2.75% with an option to roll into a three year term loan with a fixed rate of 3.25%, due on the earlier of three years following conversion for November 2016.

Well we would refer you to the 8-K we filed on June 3 for a copy of the agreement and a more comprehensive summary of its terms. There are couple of specific details contained in the 8-K that we believe merit mentioning in the context of these financial terms.

First, at the end of May we paid down remaining principal outstanding on our 4% Note to Symyx which totaled $26.3 million. We did so by driving down $25 million on our credit facility currently at 2.75% and using $1.3 million of cash from the balance sheet.

Second, Silicon Valley Bank has provided the company with the option of converting any portion of or all of the amounts drawn on the credit facility into a three year term loan at a fixed rate of 3.25%

And as of June 30, 2013, our balance sheet included cash, cash equivalents and marketable securities of $80.8 million, which was consistent with the first quarter ending balance of $81 million. This was a net result of $6.2 million of positive cash flow from operations, offset by $1.3 million used to repay a portion of the Note to Symyx and $5 million in CapEx associated with new CDP and R&D programs.

At the end of June, backlog attributable to remainder of 2013 revenue was $27.8 million and included the benefit of new deals such as Micron, Epistar, and early stage CDP in Display.

Now for the financial outlook for the third quarter of 2013, I would like to remind everyone that the following statements are based on current expectations as of today and include forward-looking statements. Actual results may differ materially. Our guidance for the third-quarter of 2013 is as follows: we project revenue in the range of $15 million to $16 million. This revenue projection includes $14.2 million from our reported backlog at the end of June 2013.

Non-GAAP net loss excluding stock-based compensation expense is projected between a non-GAAP net loss of $2 million and $1 million or between a negative $0.04 per basic share to negative $0.02 per basic share and approximately 45 million basic shares outstanding.

Now I’ll turn the call back to Gary.

Gary Hsueh

Thanks, Pete. Now, we’d be happy to take your questions. Huerie would you provide everyone with instructions for Q&A.

Question-and-Answer Session

Operator

Sure, thanks. (Operator Instructions) All right and our first question will come from Harlan Sur with J.P. Morgan. Please go ahead. Your line is now open.

Harlan Sur – J.P. Morgan & Co.

Thanks guys for taking my question. So with the refocusing and realignment of the partnership with GlobalFoundries. I understand to stepdown in Q3 is that hit in terms of stepdown or should we expect a little bit more fall off in Q4 as well?

David Lazovsky

Harlan this is Dave. No we don't expect any further reductions from GlobalFoundries this is a one-time adjustment based on the scope of work to be conducted and we expect the run rate to be consistent going forward this year.

Harlan Sur – J.P. Morgan & Co.

Great and then on the flip side of that does the Q3 guidance include any one-time HPC or Informatics product revenues or is this just your core recurring CDP and licensing and royalty revenues that are encompassed within the guidance and then obviously including that GlobalFoundries’ step down.

David Lazovsky

Yeah Harlan, this does not include any HPC workflow sales included in our guidance. And so that’s just a core recurring business included in Q3 guidance.

Harlan Sur – J.P. Morgan & Co.

Okay great and then so Dave is it fair to assume that post Q3 that the CDP, and licensing and royalty’s sort of recurring rate is roughly about $15.5 million to $16 million per quarter kind of give or take?

David Lazovsky

You know the Q3 run rate is at that level given the – that’s a mid-time – the midpoint excuse me of the range that we have provided, that’s correct.

Harlan Sur – J.P. Morgan & Co.

Okay great. And then obviously in your prepared remarks and you’ve talked about this at the several of the Investor Conferences, but you’ve obviously been engaged with several of the top tier flat panel display customers. You mention in your opening remarks an early engagement CDP with one particular Tier-1 flat panel display manufacturer. So can you give us any more color round the scope of the development i.e. what problems are you trying to help this particular is customer solve. And then is it a full blown CDP, and if not, when do you expect you can convert this partnership to a full blown CDP engagement?

David Lazovsky

So Harlan the details around that program at this stage we’re not going to be able to get into a lot of them unfortunately. What I can tell you that it is a one of the larger players in the display market, we hope to be able to talk more about the specifics of that customer as we make progress with the technology in the Collaborative Development Program. The results – that program is really the result of some internal work that we did around establishing an HPC workflow for TFT optimization in the fourth quarter last year, I mentioned we did about four month worth of work and we made huge amount of progress and those results are what catalyze that opportunity with that customer.

So far that program is on track that the team is executing extremely well and I believe the customers are impressed with the results that we’ve seen, so it’s more than a Micro CDP, it’s a full scale initial stage CDP it does have some licensing terms associated with it but we will be able to talk more about it as we make progress and past certain milestones in the coming quarter.

Harlan Sur – J.P. Morgan & Co.

Great. And then just my last question and I will jump into the queue, but looking at the pipeline line this year. What is the team’s confidence about closing another one or two more full blown CDP program with new customers here in 2013.and maybe some view on what end markets those could be from?

David Lazovsky

So we obviously had a solid year from the standpoint of execution of our growth in diversification strategy in the first half of the year. We got a lot of prospects in the second half multiple customers that were currently engaged with which include a Tier-1 in the semiconductor industry as well as some very exciting opportunities that we’re pursuing in, in non-semi applications in clean energy.

So I will be talking more about those as we make progress but the growth prospects to continue to grow the business in term of diversification of the business with Tier-1 companies in large markets continue to look extremely promising.

Harlan Sur – J.P. Morgan & Co.

Okay thank you, I’ll get back into the queue. Thanks.

Operator

Thank you sir (Operator Instructions) Our next question will come from the line of Edwin Mok with Needham & Company. Please go ahead. Your line is open.

Edwin Mok – Needham & Company

Hi, thanks for taking my questions. So first question just I think on the prepared remarks you guys talk about in the third quarter we might see a little bit margin pressure as it result of the GlO-FOUN CDP. Just wondering if that something that is just common near-term effect or is that something that you expect to state beyond for quarter?

Reed Birnbaum

Yeah, Edwin, this is Reed. So we don’t provide guidance beyond the current quarter and in particular we don’t provide margin guidance. The GlobalFoundries realignment is included in our Q3 adjusted earnings guidance, and as a result of this realignment, we do expect near-term pressure that were likely result in our CDP gross margins being below our target range of 40% to 45% in Q3 of 2013. Our CDP margin targets do remain unchanged that 40% to 45% and we’re confident in our past, back to that level. Our overall long-term margin targets also remained unchanged that the 65% to 70% range.

Edwin Mok – Needham & Company

I see, okay. That’s fair. And then on this display customer, I think you had mentioned that you were doing some development internally and you signed as customer. I’m trying to understand that the timing of that and also on the P&L. Is this fair to say that you had choice to receive revenue from those customers in the second quarter or is it all incremental in the third quarter? That’s a first part of that question.

And second thing is as you start working with this customer, did that help? Would that help reduce your R&D expense, you guys now to some of your R&D expenses being allocated into display customer? Am I correct with that?

David Lazovsky

Yeah, yeah that’s absolutely correct. And so we did start to see some initial revenue from that program in the second quarter and we did reallocate resources from the R&D line from internal R&D to cost of goods sold that has reflected in the improvements and overall expense which I mentioned. So we had basically effectively a 12% sequential reduction in R&D spend quarter-over-quarter associated with the reallocation of those resources as well as reallocation resources related to LED.

Edwin Mok – Needham & Company

Since the customer just started would that is it fair to say about you guys totally have high revenue from this customer in the September quarter and therefore more R&D resource reallocate to this customer?

David Lazovsky

Not necessarily more R&D resource allocated to the customer potentially more CDP resources allocated to the customer which would impacts cost of sales not necessarily high R&D. So how we typically operate is investing in establishing capabilities for diversification of the business in high R&D as we had with photovoltaics which resulted in First Solar as we had with LED which resulted in our engagement with Epistar and as we did in the fourth quarter of last year in display that resulted in this new Tier-1 customer engagement and display.

We do anticipate continuing that strategy which is proving to be extremely effective and making modest forward investments in high R&D that generally much more significant leverage in catalyzing new CDP and growth opportunities with new customers.

Edwin Mok – Needham & Company

Great. That was fair actually very helpful. One question I have I think Dave you mentioned in your prepared remarks that right now you guys now has grown the customer CDP paying customer to 9% and of which to them is being royalties on IP that you guys are developed. Do you kind of give us some rough idea where do you think those are the seven customer or in terms of switching to royalty point that you can (inaudible) in some call. If you can kind of quantify that or if you could give us some color on that that will be helpful.

David Lazovsky

Sure. So we – just when we were thinking about the ways of CDP technology and intellectual properly about IP implementation volume production and effectively 3D from waves, the current licensing and royalties which are the result of successfully commercialized technology that’s in volume production today, primarily with Elpida, which is 30 nanometer DRAM technology and the 25 nanometer technology that went into – initiated volume production in Q1 of this year and then ATMI which is primarily around materials that are ramping now at 20 nanometer and below.

The next wave that we anticipate will likely come from four primary programs; this includes Micron and Elpida 20 nanometer in DRAM. GlobalFoundries is for Advanced Logic and this is primarily around 20 nanometer and 14 nanometer technology, incremental materials ramping in volume production of the ATMI. And as I mentioned earlier in my prepared comments, Guardian glass has the low emissivity coated glass products are in the process of being qualified for high-volume manufacturing with Guardian.

So that’s the next wave and we do expect to see some levels of initial volume manufacturing for those applications beginning next year. Now way behind that is the balance of our existing customers and new customers. So those existing customers include First Solar with our work in thin-film photovoltaic around Cad Tel, it includes Epistar, it includes obviously SanDisk and Toshiba for three-dimensional RE-RAM and includes this new display partner that we have with a focus on their more advanced display applications. And then also we expected to include Micron for non-volatile memory applications in addition to any new customers that we had to the pipeline. So the pipeline is robust and increasing steadily.

Edwin Mok – Needham & Company

Great, that was actually very helpful color. One last question I have and I’ll go away. So this year, you guys have added some customer visiting time there are some customers that like GlobalFoundries and I guess last year, (inaudible) actually scaled back to CDP or at least realigned CDP to focus on different part, right. How do you guys think about of CDP business, do you see any additional risk sort of nine customers that you have in your pipeline that might realign or change their scope which effectively effect CDP revenue, help me try and think about that?

David Lazovsky

Yeah, I mean that’s a very good question. And from our respect to that one we really don’t see any additional risk from the existing CDP customers. The GF situation was pretty unique and those really driven by the original scope of GlobalFoundries’ collaboration, which that the one CDP that we have that included an extremely diverse set of technology development applications that were running in parallel.

I believe I mentioned in our Q4 earnings call last year that we have 16 applications running in parallel within one GlobalFoundries program. So this refocusing exercise that we’re in a process of going through right now as the transition really from Q2 to Q3. This unique GlobalFoundries and we don’t see significant amount of risk and recurrence of that.

So all of our other customer programs were focused on their critical path applications from the onset and we have seen that focus really deliver results across to all of our CDPs

Edwin Mok – Needham & Company

Great good bye all. Thank you.

David Lazovsky

Yeah, thanks a lot.

Operator

Thank you, sir. (Operator Instructions) All right and our next question is a follow up question from Harlan Sur. Please go ahead. Your line is open.

Harlan Sur – J.P. Morgan & Co.

Hey guys thanks for taking my follow up. So I thought it was kind of interesting at this year's SEMICON West just a few weeks ago. It was clear that pervasive theme revolved around the opportunities a new materials and device architecture development something obviously that Intermolecular has been focused on since the inception of the company.

And so to that end all of the top Tier semiconductor manufacturer is focused on these challenges, on these new materials, on these areas. What are the opportunities for Intermolecular to secure partnerships with the other Tier-1s in the market that you don't currently have today i.e. Intel, Samsung, TSMC are you already engaged with some of these guys and what’s the potential to bring them on board looking out over the next one to three years?

David Lazovsky

So, Harlan, again this is Dave here. Very good question I agree completely with your comments regarding our position and a kind of value that we have the opportunity to add to the semiconductor industry. So although the clean energy side of the business has been significant growth driver for us in terms of adding new opportunities outside of the Micron deal that we did in the first quarter of the year. We are seeing increasing momentum in semi as well. So we are now at various stages with all of the Tier-1 customers in the semiconductor industry we are clearly much further along with TSMC we've been building some significant with a momentum with TSMC as a result of good progress in technology developments initial programs, which are haven’t focussed primarily around clearly their advanced logic technology development application. So we’re pleased with progress with the TSMC and we’ll keep you posted as we continue to make progress with that.

Harlan Sur – J.P. Morgan & Co.

Great. And then we done some estimates on your royalty and licensing opportunity and we think that over the next four to six years that opportunity is somewhere close to around $40 billion. And so with this type of opportunity and list of realization from the semiconductor capital equipment suppliers that we do need to be more focused on material development and the wise architecture. Do you think the level of competition is going to increase other potential competitors out there that are trying to offer the same type of services and value-added Intermolecular brings to the table?

David Lazovsky

We don’t see any direct competitors at this stage. But we’re obviously always currently with that competition. Our technology and platform continue to be extremely unique and our platform hence offering also have the ability to add value of cost entire value chain as you just pointed out, not just the device manufactures in semiconductors and clean energy, but the supply chain. The material companies as we shown through our engagement with ATMI and with the equipment companies where we’ve had some very strong partnerships with equipment suppliers and we’re building increasing momentum there.

Just putting our growth strategy in perceptive, the objective for us in 2013 is to really lay the foundation for sustainable profitable growth. And in 2013, our priorities are execution with existing customers and on the existing customer CDPs as a priority and I just mentioned earlier, where we stand with respect to the three ways of execution there. In addition to that the next priority is new strategic customers in Semi, Clean Energy, and Display. And the way we think about these new customers is really having the right customers that are well positioned in large markets focused on the right applications which are on their critical path for their businesses, but also ensuring that we’re putting the right deal structure in place and putting the right agreement structure in place that facilitates open collaboration and aligns our incentives with theirs.

So, if you look at the 10 companies that we’re currently engaged with that we have CDP and IP licensing agreements are nine if you count Micron and Elpida as one. These 10 companies today will sell approximately $100 billion worth of products this year. And our collaborative development programs with these 10 customers are focused on developing technology that are applicable to the vast majority of these products.

So, we feel very confident that we’ve got the right strategy and we’re executing against that strategy.

Harlan Sur – J.P. Morgan & Co.

Great, thanks, Dave.

Operator

Thank you. And there appears to be no additional questioners in the phone queue. I would like to turn the program back over to Gary Hsueh for any additional or closing remarks.

Gary Hsueh

All right. Well thanks Huerie. I would like to thank everyone for joining us on the call and the webcast. Replay of today’s call will be available on our website at www.ir.intermolecular.com. Thank you.

Operator

Thank you gentlemen and thank you ladies and gentlemen, this does concludes today’s call. Thank you for your participation and have a wonderful day. Attendees you may disconnect at this time.

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