Tessera Technologies' CEO Presents at Ceasing All Remaining MEMS|CAM Manufacturing Operations Conference (Transcript)

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 |  About: Tessera Technologies, Inc. (TSRA)
by: SA Transcripts

Operator

Good morning. My name is Adrianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera Technologies 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. I would now like to turn the call over to Moriah Shilton. Please go ahead.

Moriah Shilton

Thank you, Adrianne and good morning everyone. Thank you for joining us for the call today. This call is also being broadcast live over the internet. 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 speaks only as of the date of this call.

More information about factors 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 its annual report on Form 10-K the year-ended December 31, 2012 and its quarterly report on Form 10-Q for the quarter ended September 30, 2013, especially in the sections entitled Risk Factors. The company disclaims any obligation to publicly update or revise any forward-looking statements which reflect events or circumstances that occur after this call.

On the call today for management are Tom Lacey, Chief Executive Officer and Robert Andersen, Chief Financial Officer.

During this call today, management may discuss certain non-GAAP financial measures for comparison purposes only. 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: discontinued operations, stock-based compensation expense, acquired intangible machination charges, charges for acquired in-process features and development, impairment charges along with assets and goodwill, restructuring and other related exit costs, and related tax effects.

After management’s opening remarks, we’ll open the call to your questions. And with that, I’ll turn the call over to Tom.

Thomas Lacey

Thanks Moriah and good morning to all. Whether you’re joining us live or via webcast reporting, thanks for joining us on the call today. Despite the short notice here in the press release just went out, we wanted to hold this call this morning to continue to provide transparency to the company. Joining me on the call today is Robert Andersen, recently hired Executive Vice President and Chief Financial Officer. I’m excited that Robert is a member of the Executive team and look forward to working with him again.

Also, as I’ve done within the company, I want to thank John Allen for stepping into the interim role, I’m pleased to report he returned to his previous role within the financial organization. As noted in the press release sent out earlier today, we’ve decided to make substantive changes to the structure of the company.

Before I get into the details, let me provide a high-level summary. After reconstituting the Board and senior management team, laying out specific milestones against an identified budget, working with an experienced advisors on exploring strategic alternatives for the DOC business, accomplishing mems/cam proof of concept volumes but not high-volume production, and learning about the strength of our related intellectual property, I determine we will cease our remaining DOC manufacturing operations.

This decision allows us to substantially lower our operating costs and focus on our core strength of our IP business, while we continue to operate our successful DOC image enhancement business. The contributions of some very talented employees who were able to get the MEMS product to perform at preproduction volumes, we have learned a great deal about the technology and we believe our MEMS technology is not only unique and may be valuable in the future.

We intend to maintain a team of engineers to assist in the maintenance, promotion and development of the MEMS technology that for a bit more details. As previously forwarded in the second half of 2013, we methodically made substantial progress against almost all key milestones including assessing our DOC intellectual property portfolio, reaching out to a large number of companies as part of our strategic process, signing up an outsourced camera module manufacturing partner, receiving multiple mems/cam purchase orders with the remaining major milestones achieving high volume mems/cam shipments during the fourth quarter at positive cash contribution market. Although we have not achieved – although we have achieved proof of concept preproduction volumes, we did not accomplish the high-volume shipment goal.

Given the additional capital and the risk required to achieve this significant milestone, together with the fact that our expensive strategic process ultimately did not lead to the sale of the mems/cam business, and the other options we see in front of us to realize the value from our extensive DOC intellectual property portfolio, including a sale, licensing or other means [indiscernible] to restructure the company, which will provide us with a laser focus on our core intellectual property, innovation and licensing business.

With that, what I would like to do again is welcome Robert to the Company and turn the call over to him. And he will provide some additional information around the impact of our financials and results of these changes.

Robert Andersen

Thank you, Tom. It is great to be working with you again as well.

Thomas Lacey

Thanks.

Robert Andersen

Good morning and thank you for being on this call. Let me walk through our estimates on the financial impact of today's announcements, keep in mind these are initial estimates, we will provide updates during the earnings announcement for the company’s fourth quarter results.

The estimated restructuring charge related to the closure of our mems/cam business and the closure of the related facilities in Taiwan, Japan, Arcadia, California and Rochester, New York is $50 million to $55 million. Approximately three quarter of this charge is expected to be recorded in the fourth quarter of 2013 primarily related to the impairment of assets, the remainder which is comprised of severance and related personnel costs, lease and facilities cost and other miscellaneous cost will be recorded in the first half of 2014.

In terms of cash payments, the company expects to incur approximately $16 million to $19 million as a result of the business closure. As the result of the mems/cam business closure and certain corporate overhead reductions, our cash burn will decrease by approximately $12 million for the quarter, the company will not realize the full benefit of the reduced cash burn until it completes all business closure activities and building lease obligations.

The impact should be more pronounced from a cash standpoint in the second quarter of 2014 after substantially all staff departures and business closure activities are completed. I will now update the company’s Q4 2013 financial outlook in relation to the guidance previously provided of $56 million to $60 million in total revenue and $59 million to $63 million in GAAP operating expenses. The company’s total revenue outlook is at the lower end of the guidance in part due to no commercial shipments of our mems/cam product during the quarter as Tom mentioned.

GAAP operating expenses prior to the restructuring charge are also at the lower end of our previous guidance. The restructuring charge was not contemplated in our original Q4 guidance and will negatively impact this quarter. I will now return the call to Tom for his closing remarks prior to opening the line for your questions.

Thomas Lacey

Thanks. Again, welcome. As Robert and I explained, the charges that [indiscernible] will enable us to return our focus to our core IP business and obviously substantially reduce our operating costs with a path to significantly improve financial performance and profitability. With that, what I would like to do is turn the call over to Adrianne for some Q&A with Robert and I. Adrian?

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mohit Khanna.

Mohit Khanna – Value Investment Principals

Good morning guys. This, I think, is a positive step towards better managed Company in a single direction. So can you provide any more details on the upcoming contractor renewals in the IP business?

Thomas Lacey

First of all thank you and I agree with you with respect to what’s going on in the IP business, what we will do is we will handle those calls, those questions if you will during the earnings call which is going to be coming up here shortly, what we’re trying to do today is focus specifically on the DOC closure activities. Let me give a little bit more color on that, I guess sufficed to say discussions continue and positive progress on those fronts.

Mohit Khanna – Value Investment Principals

Okay. For these sales, how are you planning to monetize these sales probably? Are you seeing for upfront sale of all these assets? Or probably you are more inclined towards licensing them out?

Thomas Lacey

Yes. Great questions. As we’ve mentioned before, we’re going through that process now and all those options are on the table right sufficed to say, there is strong interest in the assets, both from licensing perspective or potentially as we mentioned even in outright sale. But we are going to complete that process and we will provide additional details as information comes available.

Mohit Khanna – Value Investment Principals

All right. All right and any ballpark book value of these assets that we have already on the books? And are probably the market value of these assets and back rates appreciate or something like that?

Robert Andersen

This is Robert, I think you are referring to the fixed assets that we have that relates to the mems/cam business. Is it that or are you talking about the DOC IP?

Mohit Khanna – Value Investment Principals

DOC.

Robert Andersen

The IP portion or the fixed asset portion?

Mohit Khanna – Value Investment Principals

The fixed asset related to the DOC business. That is a business we are not going to do going forward.

Robert Andersen

Got it. We do have a significant amount of fixed assets and we will be endeavoring to sell those as part of the closure process and we are fortunate to have some of the management teams that is to involve in the business, help us close that business profitably and do the sale of the assets. So we will get us much as we can, obviously we will, some of the equipment is custom-made specifically for this business, so it will be challenging on some level. But we do have some assumptions built in to our preliminary forecast that we described today and which is one of the reasons for the ranges. Also that gives you a little bit of feel for it. On things like assets like leases, we will endeavor to sublet buildings and mitigate those expenses well.

Mohit Khanna – Value Investment Principals

Okay. That's cool. So are we talking about any amount of episodic revenues or will we be talking about that in the next call?

Robert Andersen

I didn’t understand your question?

Mohit Khanna – Value Investment Principals

Well in the first quarter call, we did talk about episodic revenues. Some revenues that we are not sure that we will get. And these are not the recurring revenues, these are non-recurring episodic revenues. So are you open for the discussion on the episodic revenue right now?

Thomas Lacey

Yeah, so we’ll handle episodic revenue discussions as we have in the past, so no discussion on this at this point. And we’ll definitely cover that during our quarterly earnings announcement.

Unidentified Analyst

All right. I think that is all for me. Thank you, guys.

Thomas Lacey

Okay thanks a lot, thanks for joining us.

Unidentified Analyst

Best of luck with the process going forward.

Thomas Lacey

Thanks.

Robert Andersen

Thanks.

Operator

(Operator Instructions) The next question comes from the line of Nicholas Ragelli.

Unidentified Analyst

Good morning. Thanks for taking my question. Just a quick one, I was wondering if you could comment on Judge Wilkins’ summary judgment decision that came out yesterday afternoon in the Powertech litigation. Thanks.

Thomas Lacey

Nicholas thanks, sure. We’re generally quite happy with the ruling. Our current reading of the ruling is that it limits many of PTI’s claims against us while preserving virtually all of our claims against them. As you maybe aware, we talked about in the past you know we expect this to go to – it’s currently scheduled to go to trial in the first half of 2014. So we were pleased with what happened yesterday.

Unidentified Analyst

Okay. Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Rich Hummel.

Unidentified Analyst

Good morning. Listen, I had a question. In your last press release you talked about an agreement with Lite-On Technology as well as the Guangdong Oppo Mobile. What does this announcement mean for those two agreements?

Thomas Lacey

So, Rich thanks. So Lite-On, if you recall, they were the outsourced manufacturing partner. And Oppo was the initial identified customer, what we’re doing is we’re ceasing manufacturing of that. So what it means specifically to those deals, is we – obviously we are ceasing manufacturing operations, we don’t need outsource manufacturing partner. And similarly, we’re not going to produce the product, Oppo isn't going to be taking these products and putting them into their cell phones at this point in time.

Unidentified Analyst

And what did you determine was the main problem? Is it a technology problem? Is it a manufacturing problem? I mean kind of what led you to this or maybe it’s just not enough customers other than this agreement.

Thomas Lacey

No it’s how closely you’ve and how long you’ve followed the company, but we laid out some specific milestones, call it internally June of this year, probably publically July or August of this year. And there is a series of milestones which we have been reporting against. The final milestone or major milestone was what we called our high-volume manufacturing milestone, and that was to ship multiple hundred thousand units during the calendar fourth quarter at acceptable yield and positive cash contribution. And that’s the milestone we did not achieve. And as a result of that, it pushed the program out some period of time, caused us to reassess things, especially in light of the fact that in parallel we had been working on having our DOC intellectual property portfolio assessed. And we very much like what we have seen there, so when you look at the financial risk and technical risk of achieving this next hurdle compared to the other alternatives in front of us, we took the – I took the decision to restructure the business as announced today.

The team made substantial progress, you know when I say getting it to work in preproduction volumes, that’s more than the company has ever done, but again we didn’t achieve that final hurdle at this point.

Unidentified Analyst

And then does this business then just kind of get rolled in to the IP business whatever is left, the technology portion of it?

Thomas Lacey

Yeah so, kind of exactly, we talked about maintaining, in my prepared statements, maintaining a small team of MEMS, engineers, those folks will actually be part of our Invensas organization. And we look at it that way as we do with some of our other technology where we work to get that – like xFD to 3D-IC or BVA, we work with, call it the industry and customers to get that product into production and then in exchange for licensing if it’s our IP licensing model. View the MEMS technology in much the same way, We’ll take the – what we’ve learned in attempt to get that MEMS technology into production with somebody else putting the stuff ultimately into volume production, in which case we would participate in some kind of licensing stream, royalty stream as a result of the IP we own and it’s developed.

Unidentified Analyst

Okay. Thank you.

Thomas Lacey

Thanks.

Robert Andersen

Thanks Rich.

Operator

And now we’ll turn the call back over to Tom for any closing remarks.

Thomas Lacey

Hey thanks again for joining us. Continue to appreciate the interest in the company, although clearly this is a difficult decision for the company, I agree with Shankar [ph] as he said I think this is a very positive step for the company. Look it’s – the Board, the management team and I am confident this is in the companies and the shareholders best interest and look forward to providing further updates and insight in our upcoming fourth quarter earnings call. Thanks again for joining us.

Operator

This concludes today’s conference call. Your may now disconnect.

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