Tessera Technologies' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 5.14 | About: Tessera Technologies, (TSRA)

Tessera Technologies, Inc. (NASDAQ:TSRA)

Q4 2013 Earnings Conference Call

February 5, 2014 8:00 AM ET

Executives

Moriah Shilton – Senior Director-Communications and Investor Relations

Thomas Lacey – Chief Executive Officer

Robert J. Andersen – Chief Financial Officer

Analysts

Krish Sankar – Merrill Lynch Global Securities

Mohit Khanna – Value Investment Principals Ltd.

Keith Curtis – Brant Point Investment Management LLC

Rich H. Hummel – Kirr, Marbach & Co. LLC

Operator

Good morning. My name is Kathy and I will be your conference operator. 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)

I will now turn the conference over to Moriah Shilton. Please go ahead.

Moriah Shilton

Thank you, Kathy 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 for 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 to reflect events or circumstances that occur after this call.

On the call today from 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 or loss, and earnings per share do not include the following: discontinued operations, stock-based compensation expense, acquired intangibles amortization charges, charges for acquired in-process research and development, impairment charges on long-lived 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.

I will now turn the call over to Tom.

Thomas Lacey

Thanks very much, Moriah. Good morning to all. Whether live or via the webcast recording, thank you for joining us on the call today. There is a great deal going on at the company given the substantial decisions and recent developments.

This morning, Robert and I look forward to providing much more insight into our IP business, so that shareholders and potential investors can better understand our company. As you will hear from us, we are very positive on the changes at the company and now are optimistic of the years ahead. Also in order to help provide clarity to this unique time in the company’s recent history, we have provided some slides that we’ll review later in the call.

Before I get into the details, the high level message I hope you take away from the call is that after years of challenges and underperformance, the company expects to be profitable in the 2014 on a non-GAAP basis and is well positioned to move forward.

Before I get to where we are and where we are going, let me provide a brief summary of what the company has looked like in the recent past. We have had declining annual revenues since 2010. On a cash basis, we invested approximately $475 million in our DigitalOptics business discontinued operations and approximately, $650 million on a GAAP basis.

The overall cultured executive team work company communication overall operations of the company needed improvement. On our IP business, we did not always consider potential license fees as customers and at times did not seek ways to be value-added partners to our customers.

Our relationship with our shareholders was tense at times. Our primary identified growth opportunity was our underperforming DOC business, our IP business was often of secondary importance. On the one hand, it’s kind of sobering to reflect on the past however. On the other hand, it’s quite exciting to see how much progress the team has made in moving the company forward.

We truly are excited about our future. So where are we today? In a nutshell, with the recent developments of ceasing manufacturing in our DOC business and the Samsung patent licensing agreements combined with our other assets including excellent people, we have a strong platform from which to move the company forward.

With the recent announcement of the agreement with the Samsung, combined with the existing recurring revenue streams, we anticipate being a profitable company on a non-GAAP basis in 2014, based on recurring revenue alone and we can achieve our near-term target 50% operating margin level depending upon the timing of some episodic revenue.

In addition to our recurring revenue base, we continue to believe that we have substantial episodic revenue opportunities as many of our cases are scheduled for trial during the year. As you may recall, we settled our pending disputes with Sony in October of 2013. Following the settlement, Sony made a payment to our Tessera, Inc. subsidiary in the fourth quarter. Sony will also be transferring some patents to one of our subsidiaries.

Now for a high-level summary of our litigation activities for which much more detail is available in our 10-Q, 10-K filings, as Moriah had mentioned. In 2014, we have three cases with trial dates as PTI, Renesas and the remaining parties in the AMD consolidated cases.

In the PTI case, there has been increased activity lately as we prepare for trial in April 2014. Also on January 15, 2014, the court issued an order in which it found that PTI had no right to terminate the agreement and ruled in our favor on virtually all of PTI’s claims, including a claim that we breached the agreement.

Additionally, the court has ordered – and companies to participate in a confidential mediation. We remain optimistic about successful outcome in this matter. In the Renesas case, there has also been increased activity lately in terms of expert deposition. the case is set for trail in May of this year.

In the AMD consolidated cases in northern district of California, six defendants have already settled, that’s AMD and ATI, Spansion, SPIL, STATS ChipPAC, Freescale and ChipMOS, and three defendants remained. That’s ASE, ST Micro and Qualcomm. This case is currently scheduled for trial in August of this year.

In the Amkor arbitration, we are looking forward to the ICC issuing a damages award after their partial award on July 5, 2012, ruling on validity and infringement and finding that Amkor owes significant royalties. The party is continuing to engage in further damages, they say and that process should end in the next few months.

Many investors ask us all the time when we expect to receive decision from the tribunal? We can’t give a specific date at this point, but for comparison purposes, our experience is that it can take two to three years to receive an award and we are currently in the third year of the current phase for the larger of the two remaining Amkor matters.

While there’s no mandatory timeline for an award to be given based on what has occurred in the past and we may receive an award in 2014. But again, there’s no certain guarantee on the timing, although we do remain confident in receiving a significant award. We’ve recently demonstrated with Sony and ChipMOS. we’re continuing our efforts to engage in settlement discussions in the event we can reach fair deal for our shareholders, we will strive to reach settlements versus litigation.

Please understand for legal and commercial reasons, Robert and I are unable to provide additional details on these cases beyond the summary. With the baseline of recurring revenues and episodic opportunities along with the significant focus on cost optimization, we’re investing to obtain sustainable growth. Let me provide some insight into our price, very identified growth opportunities, although we invested a great deal in DOC without producing the desired results.

We emerged with a clear view that we have valuable assets in what we maintain namely our DOC Intellectual Property and our embedded imaging enhancement business unit, which we are today renaming to our FotoNation business unit. FotoNation is the name of the business when it was originally acquired by Tessera and a brand that still has value with our customers.

Our FotoNation team is comprised of world-class image scientists and advanced mathematicians who specialize in important product and system level imaging technologies including computational imaging, face detection, voice detection, smile detection, face beautification, red eye reduction, video stabilization, panoramic photography, 3D content generation, fast focus, auto focus and other important image editing capabilities.

The DOC Patent Portfolio is comprised of more than 1,100 patent assets that addressed image processing mems and camera modules. We are addressing the large and growing smartphone, tablet and laptop markets. In addition to our current software licensing of FotoNation products, our additional monetization opportunities may include a sale of the patent portfolio, patent licensing, additional software and technology feature licensing where some combination thereof.

As I have mentioned previously, we continue to be involved in the process to explore the best monetization approach, and thus far remain encouraged by both the level of interest and our own internal analysis of the assets. We would expect to complete this assessment on which path to take during the first half of this year.

The other identified growth opportunity resides in our Invensas portfolio. Recall, we recently licensed Samsung [indiscernible] Invensas portfolio that has 1,200 patents.

We’ve done extensive work not only in architecting the portfolio, but also in examining which additional markets are applicable and that determines a significant number of our Invensas and Tessera portfolio patents are applicable to the mobile industry.

The remaining focus area we’ve talked about before is also an Invensas portfolio. We focus on our historical expertise in DRAM packaging. As the market continues to move from single-chip packaging to multi-chip packaging, our SSD technology addresses this segment. In the future, as DRAM moves to 3D, we are well positioned with our 3D-IC patents and technologies.

I will now turn the call over to Robert who has had quite an interesting first two weeks on the job. Robert will address our financials and Q1 guidance. Robert?

Robert J. Andersen

Thanks, Tom. Before I begin, I will note that it has certainly been an eventful first month. When I joined the Tessera at the beginning of January, I expected there would be a great deal of work to do in getting the company on the solid footing. This has certainly proven to be true, however, on the positive side; I have also found management team and employees who care very much about the company. I believe the company is heading in the right direction and feel positive about our ability to bring value to the customers and licensees going forward. It’s good to be here and good to be working with you again, Tom. Thanks.

I will now for your listening pleasure cover our financial results from the fourth quarter 2013 and for the full fiscal year. Total revenue from continuing operations for the fourth quarter of 2013 was $54.6 million. Intellectual Property total revenue was $49.1 million and then included $30.8 million in episodic revenue in the fourth quarter of 2013. Compared to the third quarter of 2013, Intellectual Property revenue was up $16.8 million, primarily due to increased episodic revenue offset by the following two items.

First, certain of our licensees have pricing structures in their contract that results in quarter-to-quarter fluctuations in our revenues that can negatively impact one quarter as compared to the next. These pricing structures negatively impacted us in the fourth quarter of 2013 and will also impact us in the fourth quarter of 2014.

Second, we have a licensee who claim they are no longer subject to license payments beginning in the fourth quarter. We disagree with their position and are currently in discussions with the customer. We did not report any revenue in the fourth quarter for this customer and will not forecast revenue from them until the matter is resolved.

In comparison to the prior year, Intellectual Property revenue was up $6.1 million, primarily due to increased episodic revenue in this year’s quarter, compared to last year’s quarter and greater recurring revenue from Hynix in the year’s quarter as compared to the fourth quarter of 2012.

DigitalOptics total revenue from continuing operations for the fourth quarter of 2013 was $7.2 million, compared to $4.9 million in the third quarter of 2013. The increase was due primarily to the one-time license fee related to a legacy DOC license agreement.

In comparison to the prior year, fourth quarter 2013 DigitalOptics revenue from continuing operations was up $2.7 million due to the aforementioned legacy DOC license agreement. Total GAAP operating expenses from continuing operations in the fourth quarter of 2013 were $1.5 million as follows: cost of revenue $837,000; R&D $22.1 million; SG&A $16.1 million; litigation expense $16.2 million and restructuring impairment of long-lived assets and other charges of $45.3 million with about $5.8 million of this expense line representing cash expenditures.

These charges related to both shutdown of our mems/cam manufacturing and closure of our Charlotte manufacturing facility and reflects current estimates for actual expenditures and on asset recovery values. Our GAAP operating expenses in the fourth quarter include amortization of acquired intangibles of $5.2 million and stock-based compensation expense of $3.4 million.

fourth quarter total GAAP operating expenses from continuing operations were higher by $47.7 million quarter-over-quarter, primarily due to the aforementioned impairment and other charges, higher litigation expense, $15.2 million compared to $12.7 million in the prior quarter and higher R&D expense of $22.1 million compared to $20.9 million in the prior quarter.

Litigation expense was higher due to the settling of subsequent matter in the fourth quarter and increased offset in part by lower spending on other matter. R&D expense increase was driven by increased investment in the mems/cam manufacturing, SG&A expense was sequentially lower quarter-over-quarter, $16.1 million compared to $17.4 million in the prior quarter, due to reduced personnel expense and reverse executive bonus.

On other income for the quarter, net of expense was $540,000. GAAP tax provision from the continuing operations was $2.5 million for the fourth quarter of 2013. GAAP net loss from the continuing operations for the fourth quarter of 2013 was $46.3 million or $0.86 per basic share.

Now turning to discontinued operations, for the fourth quarter of 2013, discontinued operations included revenue of $109,000. GAAP net loss from discontinued operations for the fourth quarter of 2013 was $1.7 million or $0.03 net loss per basic share. This results in total GAAP net loss for the fourth quarter of 2013 of $47.9 million or $0.89 per basic share.

I will now cover non-GAAP results, total non-GAAP operating expenses from continuing operations in the fourth quarter of 2013 were $46.7 million as follows; cost of revenues, $10,000; R&D, $19.6 million; SG&A, $10.8 million and litigation expense, $16.2 million.

Fourth quarter total non-GAAP operating expense was higher by $2.7 million compared to the previous quarter, primarily due to an increase in litigation expenses of $3.5 million offset by lower SG&A of $1.7 million due to lower personnel costs as noted earlier.

Non-GAAP results exclude discontinued operations, restructuring and other exit costs, stock-based compensation, charges for acquired in-process research and development, acquired intangible amortization, impairment charges on long-lived assets and goodwill and related tax effects.

We’ve included a detailed reconciliation between our GAAP and non-GAAP net income or loss in both our earnings release and on our website for your convenient reference. There were no tax adjustments in the fourth quarter of 2013 for non-GAAP items. Non-GAAP net income from continuing operations for the fourth quarter of 2013 was $7.7 million or $0.14 per diluted share.

Turning to the full year results, total revenue from continuing operations was $168.9 million for the full year ended December 31, 2013. The company’s Intellectual Property revenue for the full year was $115 million and the company’s stock revenue from continuing operations for the full year was $18.9 million. GAAP net loss from continuing operations for the year was $151 million or $2.84 per basic share. Non-GAAP net loss from continuing operations for the year was $63.8 million, or $1.20 per basic share.

Now, I’ll move into the discussion of our balance sheet. During the fourth quarter of 2013, $359.6 million in cash, cash equivalents and investments, a decrease of $17.2 million in the prior quarter. We generated $12 million of cash from operations in the fourth quarter, which was offset by $23.8 million of stock repurchases pursuant to our stock repurchase program, $5.4 million of dividend payments, and $1 million of patent purchases.

I’ll now provide an update on our capital allocation activities including dividends and share repurchases. On December 12, 2013, $5.4 million was paid to stockholders of record as of November 21, 2013, for the quarterly $0.10 per share of common stock cash dividend.

During the fourth quarter of 2013, we repurchased 1.24 million shares pursuant to our stock repurchase program for an aggregate amount of $23.8 million. For the full year, we repurchased 1.5 million shares under our stock repurchase program for an aggregate amount of $28.8 million. Our Board has authorized a total of $150 million under the plan, including the $50 million increase approved by the Board in November 2013.

For the first quarter 2014 guidance, we expect the following: total revenues expected to range from $33 million to $36 million. First quarter 2014, GAAP operating expense from continuing operations is expected to range between $51 million and $53 million, which includes expected litigation expense to be lower compared to the prior quarter, approximately $12 million of impairment and restructuring charges and other exit-related costs, amortization of intangibles were approximately $4.7 million and stock-based compensation expense of approximately $4 million.

Let me now turn the call back over to Tom.

Thomas Lacey

Thanks, Robert. Again, welcome to the company. Before I turn the call over to the operator for Q&A, let me provide our views on the patent legislation activities in Washington, D.C. and Robert and I will walk through the slides that were solicited this morning or sent out this morning.

First, the patent legislation. After the rapid passage in the House last quarter, somewhat more deliberate Senate process is underway. A mark-up in the Judiciary Committee is expected later this quarter and the bill may reach the Senate floor for a vote in the second quarter. This approach is expected to produce a Senate product more acceptable to the patent owners.

To briefly summarize the two bills, the Innovation Act in the House emphasizes the discovery, reform transparency, customer stay, reshipping and small business education. It was passed by the House on December 5, 2013, less than 50 days after its introduction.

The Patent Transparency and Improvements Act in the Senate emphasizes bad-faith demand letters, customers stay transparency and small business education. The bill was introduced on November 18 in the first and currently only hearing before the Judiciary Committee was held on December 17. Both the House and the Senate bills reflect our basic principle that reforms your focus on views of litigation behavior, not specific business models.

However, certainly overbroad provision such as proposed mandatory customer stay are likely to have unintended consequences. We are actively engaged on this issue and are working constructively with other stakeholders and the Senate to help achieve consensus. We also hope to help persuade the Senate to hold an additional open hearing to learn more about the potential impact of the proposed legislation on companies both big and small.

Next, Robert and I will quickly walk through the slides as we have covered much of the material in prepared scripts. The slides were prepared given the recent subsequent changes of the company and we want to provide insight into our business. If you bring those slides up the first slide is Safe Harbor, and as Moriah said, subject to that. The next slide is entitled Recurring and Episodic Revenue. The dark blue is the recurring revenue. The light blue is the episodic revenue. You can see that we are not providing a forecast for episodic revenue in 2014, but consistent with past practices we intended to continue to provide updates on the developments in this area on subsequent earnings conference calls.

2013 recurring revenue includes $11.5 million that is not part of 2014 recurring revenue. It’s comprised of $6.5 million royalty catch-up that was paid in 2013 for prior periods and $5 million of a license that expired in 2013.

Note that since FotoNation revenue is generally recurring in nature is included in recurring revenue amounts. The way we look at this on a comparative basis, 2013 recurring revenue has grown from approximately $91 million to approximately $120 million in 2014. Stating obviously, we will continue to work on increasing the recurring revenue in 2014 as we work with other customers.

Next, the slide entitled recurring revenue PTI and Micron Impact. Message here is quite simple, hopefully the graphic helps to provide further context regarding the impact of micron not renewing their license and PTI seizing to make payments under their license.

The next slide entitled SK Hynix and Samsung recurring revenue. The intent of this slide is to show the combined impact of successfully reaching agreements with these two important customers. Recurring revenue from these two customers increased by more than 125% once both entered into new agreements, and as I mentioned earlier, contributed to the Company to be profitable on a non-GAAP basis on recurring revenue alone.

The next couple of slides Robert will cover.

Robert J. Andersen

The next slide is litigation spend, which gives a good visual on the varying nature of the company’s litigation spend. The blue bars show the amount of litigation spend by year as measured in dollars on the left side Y axis. The green lines spots litigation spend as percentage of revenue with the values measured on the right side Y axis. The horizontal red line indicates the litigation spend of the company’s near-term target operating model, all together to the right side Y axis.

As you can see the litigation spend as a percent of revenue has been both above and below the target, by this nature with litigation spend is difficult to forecast, it will be uncertainty of the future business negotiations and the phases through which a case you can perceive prior to settling or go into judgment.

On the next slide, the near-term operating model is intended to give directional guidance on where the company is heading from an expense standpoint. The model contemplates non-GAAP operating expenses at an annual revenue rate of $180 million to $200 million. As just noted the litigation expense is difficult to forecast, so this model should serve only as a reasonable estimate.

The title Near-Term means that the company could meet the model’s guidelines as it exits the fiscal fourth quarter, provided the revenue assumption is met. We plan to update the model as the business outlook changes.

The remaining slides address some of our growth opportunities. The slide entitled “Mobile” is Driving Unit Volume/Licensing Opportunities, there is really three simple messages here. Our primary growth area is target the growing tablet, laptop, and smartphone markets. The laptop and tablet markets are totaled in the hundreds of millions in units in the smartphone market is certainly in excess of the billion units, big markets.

Next slide, Imaging is a Central Smartphone Feature. Our FotoNation business unit and DOC portfolio are well positioned in the important imaging market in the areas that matter to users.

Next slide, DOC Patent Portfolio Targets Mobile Market. Portfolio contains more than 1140 patent assets in the segment in imaging, camera, camera module, MEMS and other areas. Our total nation organization currently licensed specific features to some smartphone makers. Additionally, possible monetization opportunities include the scale of patents, patent licensing, additional royalties for licensing more features, driving higher royalty ASP or a combination thereof.

Next slide, What’s Valuable in Mobile Hardware? There are several points to make on this slide. First of all, this is a build materials for an Apple iPhone but is indicative of virtually any smartphone. The packaging type column shows that there are several advanced packaged types including multi-chip modules and stack die.

Stack die and Package-on-Package is the most valuable part of the build materials. Fortunately, our innovation areas in the patterning has been targeted in these areas. As you can see the relative ASP of these mobile package components are substantially higher in DRAM ASP. For example, typically DRAM sells for around $2 with packaging about a tenth of that or $0.20. You can see the mobile equivalents are approximately in order of magnitude higher in both areas enabling the possibilities of higher royalties.

Next slide, Mobile Portfolio Segmentation. We have large number of patent assets focusing on high-value advanced multi-chip and stacked package devices that address the mobile market. Packaging is part of our history and as you’d expect, it’s an area we have a high degree of confidence and know quite well.

And final slide is entitled Addressable Markets versus Innovation Roadmap. The top part of the slide is the memory DRAM packaging. We have the expertise, IPO roadmap addressing today’s single chip package to multi-chip packaging, addressed by our xFD inventions to the future of 3D-IC, where we have strong inventions in IP.

The bottom part of the slide addresses our solutions in mobile packaging ranging from today is simpler, PoP or Package-on-Package technology to advanced PoP addressed by our BVA solutions, in the future, Wide IO and 3D-IC, where again we have strong inventions in IP. Finally, the right hand side of the slide shows that we are focusing with our roadmap in IP on enormous growing markets.

We hope you find these slides actually helpful and more informative and give you a better insight and these were fairly lengthy prepared statements by Robert and I , but the intent is given, where we are with the company right now, we won’t provide as much transparency if we possibly could.

Right now, I’d like to turn the call over to Kathy for some Q&A. Kathy?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Krish Sankar.

Krish Sankar – Merrill Lynch Global Securities

It’s Krish. Can you hear me?

Thomas Lacey

Yes.

Robert J. Andersen

Hi Krish. Good morning.

Krish Sankar – Merrill Lynch Global Securities

Hey good morning guys. Couple of quick questions; first and foremost on the guidance of revenue, $32 million to $36 million, I’m just trying to get a sense of what is embedded in that in terms of DigitalOptics and IP and are you assuming any episodic revenue in the guidance?

Robert J. Andersen

Yes, so the guidance that we are providing we’re not breaking out the specific type of guidance. We do expect some small amount of DigitalOptics contemplated in that number. The bulk of it is the IP business.

Krish Sankar – Merrill Lynch Global Securities

And I’m guessing there is some episodic revenue embedded in that IP revenue guidance?

Robert J. Andersen

We’re not going to break out that detail in the forecast, because it’s difficult for us to forecast the episodic revenue with accuracy, but…

Thomas Lacey

We’ll provide insight into as we just did with the previous quarter and next quarter.

Robert J. Andersen

Yes, next quarter, but in terms of guidance I’m not going to breakout the episodic and the recurring.

Krish Sankar – Merrill Lynch Global Securities

All right. That’s fair enough. And then you guys mentioned that you’re going to be like on a non-GAAP basis, profitable on the recurring revenue basis. So two questions on that. (NYSE:A), number one, does your non-GAAP assumption include litigation cost? If so, what are your assuming for that? And number two, at what recurring revenue level would you be breakeven?

Robert J. Andersen

The non-GAAP expense include litigation cost that’s intrinsic in our model, so as we discussed on the target operating model, we do make an assumption around litigation expense at 14% of revenue and keep in mind that that – the breakeven numbers that we’re talking about are forecasted at a particular revenue level. So we’re looking at the overall target operating model. That’s between $180 million to $200 million on a non-GAAP basis. But if you also look at the level of recurring revenue, we’ve got that alone will get us there on a non-GAAP basis for the year.

Krish Sankar – Merrill Lynch Global Securities

Okay. So the breakeven is, obviously has to be much lower than $180 million to $200 million recurring, right?

Robert J. Andersen

Yes, that’s correct.

Krish Sankar – Merrill Lynch Global Securities

Okay, got it. And then one final question from my end. On the PTI case, it seems like, the favorable like ruling in your end seems to be the good news for you guys, but I think I read somewhere that there was a – you have been asking for $300 million or something like that. (A), number one, is it true? And, (NYSE:B), number two, kind of what is the assumption band getting into that figure?

Thomas Lacey

Hey, Krish, this is Tom. So, yes, I would agree with the first part of you wholeheartedly. We did view that Judge Wilkins ruling quite favorably and it certainly is, again, we think it’s good news for the company. I think you’re right. In one of those fillings it had ranges of – the company’s view, I guess, on potential settlements and PTI’s view would be substantively lower.

It’s not uncommon on these kinds of matters for kind of both parties to exaggerate their positions albeit but I don’t mean exaggerating. It’s well founded and there is thing that you would expect to settle somewhere likely in the middle unless it goes to jury trial and then there may be damages or they may not be. That’s a bit of a wild card.

So we certainly aren’t going to on this call suggest what we think that range is because as I mentioned there’s been mediation and the thing is scheduled to go to trial in early April. But again, I would confirm we think it’s very – we’re in a favorable situation, feeling pretty excited about it.

Krish Sankar – Merrill Lynch Global Securities

Great, all right. And then, just one last question from my end. You guys mentioned in the prepared comments about a pricing structure unfavorably impacting your 4Q and 1Q. Does the pricing structure – is that pricing structure also part of Invensas or is it some of the legacy deals that you guys find?

Thomas Lacey

That’s part of the legacy deals that we have. So it’s an IP contract.

Krish Sankar – Merrill Lynch Global Securities

Okay. This state here that you don’t have such pricing structure volume discounts with the Invensas portfolio?

Thomas Lacey

We consider the Invensas portfolio really part of the overall IP structure. So I think the contract itself doesn’t really distinguish. I would consider it to be part of our legacy business, but the way that we structure the contracts for IT business would include Invensas type arrangements or would – it includes Invensas.

Krish Sankar – Merrill Lynch Global Securities

Got it. All right. Thank you, guys. Thank you very much.

Robert J. Andersen

Krish, thanks a lot.

Thomas Lacey

Thanks, Krish.

Operator

Your next question comes from the line of Mohit Khanna.

Mohit Khanna – Value Investment Principals Ltd.

Hello, good morning guys. I just have a couple of questions regarding the ongoing discussions with the current customer. So first of all, on the IP side, are you seeing some kind of traction coming in from the mobile technology?

Thomas Lacey

Are we seeing some? Yes, we are. That was, yes.

Mohit Khanna – Value Investment Principals Ltd.

And would it be fair to assume that there could be some kind of success in getting some mobile manufacturers, getting the revenues from kind of mobile manufacturers on the memory side?

Thomas Lacey

Your question is, do we expect to have some successes in targeting the mobile sector for some of our mobile technology in the Invensas. In Tessera portfolios, the answer is yes. We do.

Mohit Khanna – Value Investment Principals Ltd.

Okay. and how do you see – do you see business patent portfolio, would you be inclined towards selling it off entirely or you would be inclined towards licensing these FotoNation technologies? Thank you.

Thomas Lacey

Are you talking about the IP or the FotoNation business unit or both?

Mohit Khanna – Value Investment Principals Ltd.

The FotoNation business unit now. Would you be inclined to sell off all the patents, or would you be inclined to license that going forward?

Thomas Lacey

Okay. So you’re talking about the patents within the FotoNation business unit. As we said, we’re running – I mentioned in previous calls, we’re running a process where on the DOC intellectual property where we’re seeing if there is interest in potentially people buying those patents and depending upon what kind of market feedback we get on that we’ll then weigh that against running a licensing campaign or continuing to operate what we call a software licensing, a royalty base model with our FotoNation business unit. and as I mentioned, we may be able to use the patents more so to help us potentially grow unit ASPs. There’s a number of different options even a combination thereof, that would expect to kind of complete this go forward path, as I mentioned, in the next couple of quarters.

Mohit Khanna – Value Investment Principals Ltd.

Great, okay.

Thomas Lacey

We’re excited about what we’ve seen there, right. It’s – suffice it to say we like what we see given our internal analysis on that asset.

Mohit Khanna – Value Investment Principals Ltd.

Thank you so much. That was helpful.

Thomas Lacey

Thank you.

Operator

(Operator Instructions) Your next question comes from Sandy Maheta [ph].

Unidentified Analyst

Good morning. On your Slide number 7, where you talked about your near-term operating model, when do you – can you give us some sense of when you expect to achieve this level of profitability, just a sense on timing on this?

Thomas Lacey

The way that we’re looking at this is, if we can get to a revenue level that touch the $180 million to $200 million mark, you would be exiting the year, so fourth quarter of this year under our model like the one that’s current here on the slide.

Unidentified Analyst

Okay. So just to be clear. So hopefully you are at this run rate of profitability as well as revenue around the fourth quarter of this year.

Thomas Lacey

I would be very happy if that’s the case.

Unidentified Analyst

Do you expect that or is that – that’s your aim is?

Thomas Lacey

That’s certainly is the poll.

Unidentified Analyst

Okay, okay.

Thomas Lacey

Yes, absolutely.

Unidentified Analyst

And when I look at your guidance for the first quarter, is there some – and I think you alluded to this a little bit in your comments. Is there some seasonality to the business where and I saw that I think in your results last year also the first quarter was seasonally the lowest. So can you just explain to us why you have that seasonality or you – the recent seasonality you expect the next three quarters of the year to be slightly higher in revenue?

Thomas Lacey

Yes, I would say that this has to deal with the way that the contracts are structured, which creates a seasonality to the returns on those particular engagements with our customers.

Unidentified Analyst

Okay. So is it – I’m sorry. Go ahead.

Thomas Lacey

I was going to say, so most of that impact that I highlighted because we felt some impact during Q4 and we expect some impact during Q1 and then during – beginning in Q2 that revenue comes back online.

Unidentified Analyst

So is it fair to say that the Q1 will be the low point of the year in terms of revenue?

Thomas Lacey

We haven’t given guidance for quarters going out for the remainder of the year. I just wanted to highlight – the reason I said that in the remarks is because I wanted to highlight that there is because of the structural arrangement of the contracts, we do experience a degree of seasonality that impacts the guidance specifically for Q1.

Unidentified Analyst

Okay. And then this – coming back to your slide number 7, the $180 million to $200 million revenue, does that – how much of episodic revenue is included in that or does that not include any episodic revenue?

Robert Andersen

What we’re seeing now and what we’ve guided is that we have visibility to recurring revenue of $120 million. So it can be some combination between episodic and recurring. It would be great if it was all recurring, but I would suspect that there would be some degree of episodic revenue to hit the levels that we’re discussing on the target operating model.

Unidentified Analyst

And on your slide number 4 and again referring to the $120 million for 2014 guidance on that page, but that – there is other – this is not your – is this the total recurring revenue, are there some other parts that I’m missing here?

Thomas Lacey

Well, it’s – what we’re telling you today is this is what – there is a couple of messages here, one it’s the recurring that we’ve identified today. And clearly, as Robert had said, we’re going to continue to try to add to that as we march through the year. And second front on a non-GAAP basis that the company is profitable on this revenue, recurring revenue.

Unidentified Analyst

Okay. All right. Thank you so much. Thank you.

Robert Andersen

Sandy thanks.

Thomas Lacey

Thanks.

Operator

Your next question comes from the line of Roger Chuchen [ph].

Unidentified Analyst

Hi, great execution on getting the Samsung deal. Just curious if you can maybe bridge the gap for us in terms of the recurring revenues of $91 million in 2013 going to $120 million, how much of that is coming from signing new license versus organic growth in kind of your existing customer base. And just help us understand how to build the bridge there? Thank you.

Thomas Lacey

Roger thanks. So I think you’re referring to slide number 3.

Unidentified Analyst

Yes.

Thomas Lacey

Thanks on the Samsung; I would agree with you it’s a pretty substantial event to the company. In terms of kind of recurring revenue detail, which you’re asking to do, I think is to – you rightfully said, it says a $102 million on the slide you take out the $11.5 million you get to call it, $90.5 million, $91 million and that’s the recurring revenue growth from go forward recurring revenue growth from 2013 to 2014 that we’ve identified today. I can’t split that up and tell you that how much comes from which customer for obvious reasons, both non-disclosure and for competitive reasons.

But we’ve super important to us that we were able to convey to the market to our existing shareholders and potential shareholders, kind of the significance of getting these two major guys re-licensed and the fact again, that we could be on a non-GAAP basis profitable based on this non-recurring – or excuse me, on this recurring revenue stream, we should be able to provide you with the exact details on each, but we really can’t.

Unidentified Analyst

Okay.

Robert J. Andersen

Let me state it another way. Clearly as you in your opening comments, re-licensing Samsung is the substantial impact to this – to the number here.

Unidentified Analyst

Great. And then just one follow-up question. You mentioned earlier with respect to the PTI claim you’re claiming $300 million. What’s – could you remind us what PTI is claiming in terms of the damage that you – they owe to you?

Thomas Lacey

Well, they were claiming the opposite, right, they claimed that them on right. So they’re quite claiming zero, I guess is the way to think about it.

Unidentified Analyst

Okay, right, right, right.

Thomas Lacey

And the judge dismissed their claims.

Unidentified Analyst

Okay, all right. Thank you.

Robert J. Andersen

Thank you.

Thomas Lacey

Hey thanks, Roger.

Operator

(Operator Instructions) Your next question comes from the line of Keith Curtis.

Keith Curtis – Brant Point Investment Management LLC

Question, just on operating expenses, if I’m doing my math correctly, I think on a non-GAAP basis on the fourth quarter you’re run rating around $188 million. And then on your target model plus the $190 million that would imply approximately $95 million. So can you just reconcile how we’re getting from kind of where we are now on the OpEx to what the guidance implies on the target model?

Robert J. Andersen

I think the only logical way to get there is that we’re going to have to reconcile our expenses over the course of the year to the target operating model. And that's obviously something is getting a lot of focus since I’ve arrived this last month. So, there is obviously there is a closure of the DOC business, which is going to have a substantial impact on our spending. and then we will also be looking at ways to optimize the business as we go forward over the course of the year.

Keith Curtis – Brant Point Investment Management LLC

Okay. Got it. And then just following up on the Q1 guidance, as it relates to also this – is the $120 million actually got – is that your guidance the recurring guidance for 2014?

Robert J. Andersen

No, it’s where we stand today, right. As both Robert and I mentioned we hope to do better than what. What we have kind of under contract today and have line of sight what I have said to you right now.

Keith Curtis – Brant Point Investment Management LLC

Okay. And then just lastly could you just update us on your, I saw you bought back some stock in the fourth quarter and how you feel about buyback and return of capital use of the balance sheet going forward? Thank you.

Thomas Lacey

I’ll take a whack at that and then Robert can jump in. As we mentioned on previous calls, there is broad capital allocation policy and the Board in the fourth quarter at our recommendation increased the buyback. What you can see now is a profitable – non-GAAP profitable operating company, right, generate cash and returning some of that cash to shareholders in the form of dividends, episodic dividends and stock buyback is a key part of our – if you will, our investment thesis. So, we also bought back more in the fourth quarter than the company has in its history. So, we feel pretty good about that. Robert, if you want to add anything.

Robert J. Andersen

I would agree with those comments. And we do believe it’s important to return capital to shareholders. So, that’s something I expect the Board to continue to do.

Keith Curtis – Brant Point Investment Management LLC

Thank you.

Operator

Your next question comes from the line of Rich Hummel.

Rich H. Hummel – Kirr, Marbach & Co. LLC

Good morning.

Thomas Lacey

Good morning.

Rich H. Hummel – Kirr, Marbach & Co. LLC

Hey thanks for the presentation, guys. Pretty helpful. Listen, I was going through the file on Amkor, trying to find what your expectations are on that particular settlement. In looking at my notes, I had something in the neighborhood of $130 million. Is that still reasonable? Am I looking at that correctly?

Thomas Lacey

Yes. What the company issued, they said at one point that was expected in the neighborhood of $150 million, $20 million of which is paid. So, that’s why you get to $130 million. Your math is correct.

Rich H. Hummel – Kirr, Marbach & Co. LLC

Okay. Does that still stand?

Thomas Lacey

Nothing has changed. Definitely nothing is changed until you have it, you don’t have it, right. There’s certainly risk in it, but yes, our position hasn’t changed. And one thing we talked about in the last conference call, we found interesting is Amkor’s own guidance in this matter, they increased reserve a little bit in this area.

So, as I mentioned, this tribunal – that’s one of the reasons, put more clarity in the script on when can we expect an answer, because the real answer is we don’t know, but based on history, all right, we would expect something this year, but again, there is no specific date or timeline. It’s much different than a case when we have a trial date, you got to a trial and when you’re going to trial this, we’re not sure. And again, as I mentioned, we feel good about our chances on this one too.

Rich H. Hummel – Kirr, Marbach & Co. LLC

Well, thanks a lot. And for one shareholder I appreciate all the additional color you provided in the call.

Thomas Lacey

Well, Rich, thank you. We’ve heard that enough. And Robert and I really share that views, trying to provide as much transparency as we can. This is a big time in the company’s history, isn’t it right? It really is and inflection point and being able to provide more color and clarity around our underlying IP business helps the shareholders and potential investors understand the opportunities as we see them. So, I’m glad to have worked for you at least. Thank you.

Operator

At this time, there are no further questions. I will now turn it over to management for closing remark.

Thomas Lacey

Thanks, Kathy, and thanks everybody for joining. Again, I hope you found the format and the information provided useful to better understand the company. We’ve come a long, long way over the recent past. The management team and I believe that with the recurring revenue stream, episodic opportunities, optimized spending, profitable structure, partnership style approach to our customers, strong employee team improved, internal communication, improved transparency on our business with investors and the growth opportunities including FotoNation and our DOC IP, mobile focused licensing amongst others that hopefully you can tell from Robert and I, we’re quite optimistic about the future. So, thanks again.

Operator

This concludes today’s conference. You may now disconnect.

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