MIPS Technologies Inc. F3Q10 (Qtr End 03/31/10) Earnings Call Transcript

Apr.27.10 | About: MIPS Technologies, (MIPS)

MIPS Technologies Inc. (NASDAQ:MIPS)

F3Q10 (Qtr End 03/31/10) Earnings Call

April 27, 2010 4:45 pm ET

Executives

Jen Bernier - Public Relations Manager

Sandeep Vij - CEO

Maury Austin - CFO

Analysts

Gary Mobley - Benchmark

Anthony Stoss - Craig Hallum

Jeff Schreiner - Capstone Investments

Suji De Silva - Kaufman Brothers

Andrew Leonard

David Wu

Operator

Good afternoon and welcome to the MIPS Technologies third quarter fiscal 2010 financial results call. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I'll now turn the call over to Jen Bernier, MIPS' Public Relations Manager. Ma’am, you may begin.

Jen Bernier

Thank you, and welcome to the MIPS Technologies' third quarter 2009 Earnings Call. I'm Jen Bernier, MIPS' Public Relations Manager.

Leading the call today are Sandeep Vij, Chief Executive Officer and Maury Austin, Chief Financial Officer.

After they discuss the business highlights and detailed financial results, we'll open the call for Q&A. If you do not have a copy of the earnings release, it is available on our website at www.mips.com.

Before we begin, I would like to remind you that this conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including projections of certain operating results for the fourth quarter of 2010.

Listeners are cautioned not to place undue reliance on this forward-looking information. Many important factors could cause the results to differ materially from those contained in such projections or forward-looking statements. We refer you to the risk factors section of the documents that we file from time-to-time with the Securities and Exchange Commission for factors that may cause the results to differ materially from our forward-looking statements.

In our financial discussion today, we will be referring to the third quarter 2010 GAAP and non-GAAP results. MIPS' management believes that non-GAAP information is useful, because it can enhance the understanding of the company’s ongoing economic performance. MIPS Technologies uses non-GAAP measures in evaluating its financial results, as well as for internal planning and budgeting purposes.

The non-GAAP results exclude FAS 123R stock option expense, certain costs and expenses related to acquisitions, divestitures, impairments and restructuring costs incurred during the period. Please refer to the earnings press release or to the Investor Relations page of our website for a reconciliation of GAAP to non-GAAP.

As a reminder, the playback number for this conference call is 203-369-0063, and the access code is MIPS. The recorded call will be available for 30 days after the call. An audio replay will also be posted on the Investor Relations page of our website at www.mips.com.

With that said, I will now turn the call over to Sandeep Vij.

Sandeep Vij

Thank you all for joining us today. We had a good quarter coming in at the high end of the guidance and hitting several key milestones along the way.

Revenue grew to $17.5 million, an increase of 15% over the prior quarter. Quarterly royalty units grew to a record $135 million units, which was our highest quarterly unit volume ever.

In this quarter, we also released our new M14K core family to general availability. It is the first core to implement our new microMIPS architecture and it got two [lite sensor] in the first week it was available.

MIPS also secured a large and fast growing fabless semiconductor company in Asia Pacific as its flagship mobile handset customer. Through extensive evaluation, this supplier selected the MIPS solution over its incumbent ARM-based solution for its next generation mobile handset chips. This customer is targeting a range of 3G mobile phones, including Android smartphones, and is the anchor mobile handset customer we have been looking for.

We are pleased that we got this customer sooner rather than later. This is now our third licensee targeting mobile handsets with MIPS.

In Q3, we announced the China-based Mavrix will develop a mobile applications processor based on MIPS. And Altera Semiconductor is creating mobile WiMAX baseband chips based on MIPS. Now we have this new significant additional design wins.

Based on these wins, our licensees are on track to introduce the first MIPS-based handset chips in the first half of calendar 2011. At the same time, MIPS momentum continues in other areas of the mobile market.

In Q3, we saw our first royalties from the femtocell market and we saw great momentum in WiMax and LTE 4G technologies that will drive the next generation mobile products. This is an area of opportunity and growth for MIPS.

WiMax shipments were up in the quarter and MIPS licensees in this market made numerous announcements during the quarter, including Beceem, who filed for an IPO and just this month announced multiple customer wins.

With our leading position in Wi-Fi and WiMax, we are in a perfect position to continue gaining share in 4G, since 4G is all about data traffic. In February during the Mobile World Congress, where MIPS exhibited for the first time, we saw a lot of traction in mobile applications. There were ports to MIPS from four separate LTE software vendors and two distinct end-to-end LTE solutions, including one from MIPS architecture licensee, Cavium Networks.

MIPS-based LTE solutions from our licensee, Altera Semiconductor, were demoed by companies including ZTE, Huawei, Anritsu, Aeroflex and Litepoint. Our licensee, Wintegra, also featured numerous announcements and demos around LTE on MIPS. And NetLogic announced that its MIPS-based processors are powering LTE trials worldwide and also powering ZTE’s next generation mobile infrastructure network products.

So why is MIPS gaining traction in mobile? There is a displacement on the market that it is happening because of Android and the move to 4G. Android removes our barriers to entry from a software perspective and we are in a strong position for 4G. The unique multithreading capabilities in our cores, is also an advantage for MIPS in mobile handsets since both performance and energy efficiency are critical. We are number one throughout the networking infrastructure and the digital phone and we are now bringing our advanced capabilities to the next generation of mobile handsets. And it should be obvious that nobody likes a monopoly.

Customers see an opportunity to differentiate in mobile with MIPS. In addition to mobile we saw good growth and momentum in Q3 in our traditionally strong digital home and networking markets. Compared to this time last year and to the previous quarter, royalty revenues and unit volume shipments were up in markets such as set-top boxes, digital televisions, residential gateways and wireless LAN. Networking is another area of growth for MIPS.

The core of the network is switching from power PC to MIPS, thanks to our architectural licensees, Cavium Networks and NetLogic for displacing free scale power PC based solutions across leading networking vendors. And in Q3 we had a significant design win from – with a major networking OEM that shows MIPS for its next generation multiprocessor design. So now, it's not just networking chipset vendors choosing MIPS but networking system OEMs that are choosing MIPS as well. We believe that any company that wants to succeed in networking should align with MIPS.

Another growth market for MIPS is storage, where analyst reports show MIPS' licensees gaining market share. This includes PMC-Sierra with its RAID-on-Chip products and Cavium Networks with its OCTEON secure storage processors. As I mentioned on last quarter's call, I took the opportunity in Q3 to fly around the world to visit many of our licensees and get to know them personally. I heard about their design challenges, their concerns and most importantly the importance of their partnership with MIPS.

By working closely with our licensees and ecosystem in what I think of as a team MIPS approach we are leveraging the power of a large group of influential companies to develop solutions around the MIPS architecture. We are also working with companies in the MIPS ecosystem to co-present solutions and to develop reference designs. Just yesterday we announced a strategic alliance with Imagination Technologies. Our joint solution is being demoed this week at the Embedded Systems Conference running on a new 3G3B chipset from Sigma Design.

At the Embedded Systems Conference, we are demonstrating many of our cores as well including our 1004K, the industry's only multithreaded multiprocessor IP core. MIPS today is the only microprocessor IT company that offers a combination of single and multithreaded cores and the only combination of 32-bit and 64-bit licensable architectures. The efficiency and simplicity of the MIPS architecture enables great scalability. MIPS actually spans the widest dynamic range of applications in the industry from 32-bit microcontrollers from the industry leader Microchip all the way through massively multi-core network processors from companies such as Cavium Networks and NetLogic to even super-computers.

We have a compelling road map moving forward. We are well under way in making a transition from a product focused to a solutions oriented company and from a pure engineering focus to an end market and customer focused. With that I'll pass the call on to Maury.

Maury Austin

Thanks, Sandy. In summary our Q3 revenue of 17.5 million was in the range of guidance and slightly ahead of the consensus estimate of 17.4 million. This result was a sequential increase of 2.3 million or 15% and reflected both the record growth in licensee shipments as well as the expected improvement in our licensing revenues.

Our non-GAAP EPS of $0.08 a share was $0.01 better than the high end of our guidance which was $0.05 to $0.07. We ended Q3 with cash and investments of 51.2 million generating approximately 4 million in cash from operations during the quarter.

In addition, certainly after the end of the quarter we paid up all of our debt on April 7th. We are now completely debt free. Royalty revenue in the third quarter was 12.1 million a sequential increase of 700,000 or 6% and a year-over-year increase of 13% or 1.4 million.

Our licensees reported shipments of a 135 million units during the December quarter or 7% higher than the previous quarter and 26% higher than Q3 last year. This quarter's royalty unit represents an all time record amount of products being sold into the market place containing this technology. At our current run rate, we would expect to exceed 500 million licensees in this fiscal year. We now have 51 companies contributing to royalties in Q3.

Our Q3 license revenue was $5.4 million, a 43% improvement over the $3.8 million reported in the prior quarter and 23% lower than the $7 million reported in the same quarter a year ago.

We signed nine new license deals this quarter and we continue to [take action] in the Android related license revenue as three of our nine license deals were directly associated with Android related end applications. Of course, the big news this quarter was the signing of a new license deal with a large mobile handset chip supplier.

Though we cannot disclose who this customer is, as Sandy mentioned, this license win represents the flagship customer MIPS have been looking for in the mobile handset space to validate our investments in the mobile technology.

Our Q3 GAAP operating expenses were $13.5 million, an increase of $500,000 over Q2. This increase was largely due to the previously discussed investments in Android software and tools. We did a good job internally of managing spending to achieve the spending level that was significantly lower than what we have guided to at the last earning's call.

There was approximately $800,000 in stock compensation expense and $375,000 in depreciation and amortization included in our third quarter OpEx.

The Q3 tax provision was $700,000 consisting mainly of states and foreign taxes and was in line with our forecast. Our Q3 GAAP net income for the quarter was $3.1 million or $0.07 a share, effectively flat with the prior quarter and the year ago quarter.

On a non-GAAP basis, net income for the third quarter was $3.9 million or $0.08 per share compared to the non-GAAP net income of $4.1 million or $0.09 a share in the prior quarter and $4.4 million or $0.10 a share in the third quarter a year ago.

Recall that our Q2 non-GAAP earnings contained a $0.02 positive impact, resulting from a tax credit. Excluding that tax impact, non-GAAP earnings grew from adjusted $0.07 to $0.08 in Q3. Our Q3 non-GAAP operating margin percent climbed 27% from 23% in the prior two quarters as they continue to drive towards our long-term corporate goal of 30% plus operating margins.

Non-GAAP net income is now $0.23 on the year-to-date basis for two or three quarters.

Looking forward to our fiscal Q4, we continue to estimate sequential royalty unit growth though at a decelerating rate. Q4 is generally the seasonally low point in our royalty stream as it is the quarter after the Christmas unit build up.

Additionally, we have two top 10 royalty paying customers who are enjoying great success in the market place and are reaching volume based royalty reduction. Based on those dynamics, we currently estimate for royalty revenues to be essentially the same as Q3.

On a year-to-date basis, this Q4 estimated unit volume would be increasing approximately 70% over the year ago period, while the associated revenue would be up approximately 57% on a year-to-year basis.

On the license revenue front, we continue to build our Android related [patent] and are increasingly optimistic that some of our selling (inaudible) showing signs of recovery.

We estimate Q4 license revenue closure rate to be incrementally better than it was in Q3. Given the lumpiness of our license revenue and the previously mentioned dynamics of the royalty stream, we expect Q4 '10 to be in the range of $17 million to $18.5 million compared to the $17.5 recorded in Q3.

On the spending side, we continue to modulate our spending to balance the mobile and Android investments with expected revenue. We expect our Q4 spending to be up approximately $500,000 over Q3 reflecting our continued moderate investments in Android and mobile technologies and ecosystem.

Of course, we may adjust our spending as we get further clarity in the Q4 revenue level.

And finally on the tax side, excluding discrete items we estimate our effective tax rate to be in the 23% to 25% range as on the year-to-date basis its approximately 23%.

Given the above assumptions, we expect Q4 non-GAAP EPS to be in the $0.06 to $0.08 per share range.

Now with what, I would like to open up the call for any questions investors may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Gary Mobley. Your line is open.

Gary Mobley - Benchmark

Congratulations to the quarter. This licensee on the mobile handset side, is this for a baseband or an applications processor.

Sandeep Vij

They are investing in our core.

Gary Mobley - Benchmark

And what kind of market share does this licensee have in the cellular base then?

Sandeep Vij

So we cannot disclose the name of the supplier. All I can tell you is it is a significant player in the market.

Gary Mobley - Benchmark

Got you. And more, why did you guys under-spend during the quarter and as well it seems though you are under-spending what you had implied just three months ago?

Maury Austin

Well, one of the things that we always do every quarter is manage the top line and the bottom line and as we went through the quarter we were able to cutback on some of the spending and push some of that out, so that we'd maintain the EPS guidance that we have provided.

Gary Mobley - Benchmark

Okay.

Maury Austin

It was a conscious effort.

Gary Mobley - Benchmark

In essence of 16, that some process architecture, did you sign any license agreements for that or have you signed an ISA agreement for that yet?

Sandeep Vij

Yes, Gary as I mentioned in my remarks, we actually sold two licenses in the first week it was available.

Gary Mobley - Benchmark

So those were ISA agreements right?

Sandeep Vij

They were license to utilize our specific core, the M14K.

Operator

Our next question comes from Anthony Stoss. Your line is open.

Anthony Stoss - Craig Hallum

Two quick questions for you guys, what percentage of your revenues was [brought back] in the quarter, Maury?

Maury Austin

We report that about little bit over 10%.

Anthony Stoss - Craig Hallum

Also you mentioned, Sandeep, the large Asian mobile customer and network system company, were took our licenses in the quarter. Was that specifically included in your 5.4 million in license revenue in the quarter?

Sandeep Vij

Yes, it was.

Anthony Stoss - Craig Hallum

Okay. Same thing in the network systems company?

Sandeep Vij

March revenue.

Anthony Stoss - Craig Hallum

Sandeep, I loved to hear you talking about, so you got the first anchor customer on the mobile side, how good is that going to be as on non-trading you thinking to other customers? Also love to hear your thoughts on lot of the speculation on RMB up for grabs, how that would enhance your ability also sell into the mobile side?

Sandeep Vij

I think getting our first flagship or anchor customer is very significant because naturally when you have a significant player in the market that is driving an option and of course hoping with bringing all of the ecosystem up in the mobile area. So I can’t stress how important it is. For me it is absolutely critical, number one.

Number two, with regard to the number of the rumors out there regarding ARM and Apple's potential acquisition of ARM, and actually we don’t comment on the rumors. Of course, we’ve heard them. We’ve heard quite of few of them. I think the only thing I can say there is that customers are always planning what if scenarios, and I think listening to the most recent rumors, I think customers plan that within their what if scenarios and if customers are looking for an alternative to putting all their eggs in the mobile space in the ARM basket amidst is the logical choice to implement their mobile designs.

Anthony Stoss - Craig Hallum

Two follow-ups, I think first for you Sandy. You mentioned some of your largest customers having volume discounts still continuing which will impact royalty revenue for June, when does that flat liner stop? What are the up in terms of contracts? And then more if you won't mind jumping and after that talking about the $500,000 additional OpEx for the June quarter, is that kind of catch-up for the (inaudible) spend in March or is that strictly the new mobile spend.

Maury Austin

Let me get the first one as well. It turns out that both of the royalty tier impacts that will have this quarter is the last year for both of those customers. So at least on a specific basis that’s the end of that, at least that’s all it's contractually obligated?

On the spending increase, it's a little bit of each. I mean, part of what we had said at the last call was as we continue to gain traction and continue to sort of validate our investments with actual revenue we build lot more money and that's effectively what we are doing.

As we get deeper into the mobile space, there are software specs that we created, things like that. They are not a lot of money, but it's what some of our customers expect. So it's a little bit of each I would say from last quarter.

Anthony Stoss - Craig Hallum

Just also, a little bit of specifically, Broadcom was 17% of revenues last quarter [and now] little bit over 10.

Maury Austin

It's 15 plus or minus the 3% of the actual number.

Anthony Stoss - Craig Hallum

So, clearly it was a pretty large sliding scale when it comes to that volume discount on units.

Maury Austin

Short answer would be yes. That is pretty meaningful volume [to]?

Sandeep Vij

I would expect if we get the same kind of results over the next couple of quarters as we did in the last few quarters, within a quarter or so the volume will make up the shortfall in revenue.

Anthony Stoss - Craig Hallum

That's why I asked before.

Sandeep Vij

I expected to be a relatively short time. It's just exacerbated by the seasonally low point plus we happen to have to customers in our top five actually that it volunteers.

Anthony Stoss - Craig Hallum

Was there more than one 10% cuts made in the quarter?

Sandeep Vij

No.

Operator

(Operator Instructions). We'll take our next question from [David Wu]. Your line is open.

David Wu

I was curious about if I do the math correctly, then license revenue in your upcoming quarter will be in excess of the level of the first quarter, right despite the fact that you would have asked them that flagship mobile handset license fee that that I have heard you correctly?

Maury Austin

Well, we give a range without specifically guiding royalty versus license, but it generally through that we expect license revenue to be higher in Q4 than Q3 notwithstanding the fact that we have the mobile customer in Q3.

David Wu

The other thing was, it wasn't very clear to me that the mobile customer, I guess was the ARM licensee currently and you will get part of that 4G mobile handset when it comes out, which is next year, right. So, basically that customer essentially would be licensee of both MIPS and ARM.

Sandeep Vij

Okay, David. Let me just clarify that. Basically what I’m doing is I am repeating the comments that I made earlier. This is a large and fast growing fabless semiconductor company in Asia. They are targeting with our core 3G mobile phones. They currently have been using ARM in their previous implementations and they will use MIPS for their next implementation.

David Wu

Oh I see. So, essentially it’s a replacement not an addition.

Sandeep Vij

That is correct.

David Wu

I assume that is that a brand name ODM or is that a brand OEM/ODM and (inaudible) of these companies have new business models.

Sandeep Vij

We cannot announce the name of the customer because we definitely would require their permission to do so. So I really can't go beyond what I have already specified.

David Wu

Okay. Last question I have is can you talk about what is…

Sandeep Vij

Sorry David, we lost you there.

Maury Austin

Operator, can you go to the next question and then he can get back in line?

Operator

Our next question comes from Jeff Schreiner.

Jeff Schreiner - Capstone Investments

Just wondering, Maury, when you talk about the customer breakpoint and we are thinking about the two other customers maybe hitting final part of that. Given that it is kind of the down quarter and we're hitting the final part of that, should we see may be royalty ASP to a sequential decline in the June quarter on an average basis?

Maury Austin

It was about $0.09 during the quarter, it could go down to $0.088 or $0.089, so you are expecting a bit of nasty decline?

Jeff Schreiner - Capstone Investments

Gross margin dollars were flat year-over-year in March, the first time in five quarters, that we didn’t' see a decline. Should we expect gross margin dollars on a year-over-year basis likely to maybe win a new growth rate moving forward?

Maury Austin

So, yeah just for those who aren't as familiar we have a basically 100% gross margin business and we are expecting gross margin and revenue to increase from this point forward. So yeah, you should see both revenue and margins increase in the coming quarters. As evidenced by the last couple of quarter, we were 23% pro forma operating margin, we did 27% last quarter. And corporate goal is 30% and greater and we keep making progress towards that via combination of increased revenues, some increase spending, but a net increase in profit.

Jeff Schreiner - Capstone Investments

How much licensing revenues pushed into March from December?

Maury Austin

Less than 2 million.

Jeff Schreiner - Capstone Investments

Just wondering the typical timeframe, you signed a license suite, you go to the process of developing the products through the three years down the road and then ship the product and then you are receiving royalty. Why has that change now it seems when you are talking about now having a mobile chip revenues in the first half of '11? Is that going to be from this new large Asian customer or is that you are classifying may be additional WiMax or other revenue there?

Maury Austin

In the digital home design cycle, you signed a license deal by the same process that it's took designed than incorporated in the product, product hit the market and ramps through material volume and sort of in the four years plus or minus year range. On the mobile handset based on the design cycles and longevities of probably half of that, so it's likely that the times are first royalty for the mobile space is perhaps half of what it is in our normal business. So that’s why we could expect to see some royalty volume when we’ve announced already in the next year or so.

Sandeep Vij

So then by that answer and may be if Sandy wants to correct me here, but by that answer then this agreement that we signed in the quarter with the unannounced licensee, probably they are may be two years away from [record] in terms of royalties?

Sandy Creighton

In terms of royalties I completely agree with Maury, the lifecycle in terms of getting a chip out. The market is shorter in mobile than even for the digital home. I think two years is probably pretty good guess. I would assume the speed with which the Cavium customer is going, they may (inaudible) sooner than that.

Operator

Our next question comes from Suji De Silva.

Suji De Silva - Kaufman Brothers

On the large handset customer, is there a multi-quarter component with license revenue or is it one quarter, and are there chances for follow-up licensees in this one customer [need]?

Maury Austin

The initial win when other revenue was recorded last quarter, but they are certainly follow-up similar design wins. This won't be on that mobile handset win.

Suji De Silva - Kaufman Brothers

Then just one more broadly, Sandeep, I think you reviewed the license pipeline here. Give a sense of the stability of that and hold into that kind of license environment generally and whether we should expect average deal size to be smaller than they have in the past, which they have in the last few quarters whether they may track back up?

Sandeep Vij

This is actually from my quite a bit of attention to through the quarter? To give a qualitative sense, I saw the pipeline of activity grow through the quarter, so I think we're pleased that the pipeline has continued to growth, so that is very encouraging. If you look at the macroeconomics if you will within the semi industry, it's fair to say and we've seen our customer base that, this year there will be more investment in R&D, more investment in OpEx among our customers and I believe there will be a more chip starts than the world last year, so that does provide a more positive environment than last year.

Suji De Silva - Kaufman Brothers

Certainly more positive trend. Lastly, you're in no debt position at this point. Any early thoughts on plans for the cash or something you just want to hold on to get the company going from here, Sandy?

Sandeep Vij

No, right now we are going to keep the cash derivates.

Operator

(Operations instructions) We will take our next question from Gary Mobley.

Gary Mobley - Benchmark

Hi guys, I have a couple of follow-up questions. Maury I wanted to put pressure little bit on your Q4 guidance, punching all the parameters that you gave, its hard not to come out with at least $0.08 in non-GAAP earnings per share. Am I missing something now?

Maury Austin

No. I think there is more upside in the forecast than downside. So, if you take the sort of the high-end of the revenue and the low-end of the spending, you would exceed the guidance, but we are trying to be somewhat conservative given the lumpiness of the license revenue. The margin for error on royalty is plus or minus a couple of percent in terms of forecast accuracy. License projections are harder to get that close.

Gary Mobley - Benchmark

For the past two quarters you guys have closed a high number of license agreements compared to your history. In the past two quarters, you closed 9 deals each of the quarters and the average deal size has been between 400,000 and 600,000 well below your historical norm. And specific to this quarter some counterintuitive to think that it was as low as it was given that you signed some new architecture agreements and then as well it seem you land as a prepaid mobile handset chip customer. Could you give us some further explanation and why we are seeing the big drop in average deal size?

Maury Austin

If you back I would say two or three years ago, when everybody was feeling happy and everybody was guiding up. You saw a fair amount of $1 million to $2 million family license deals where customers would license multiple cores, for multiple users for multiple years. That drove us the deal ASP. Then when people start to cutting back an R&D spending, basically they only bought exactly what they would need for a pretty short window, so something used to be $500, 000 for five-year use with three quarters turned into one core two year, one news deal.

So it’s a little bit like just people are cutting back to only what they need for the sort of near-term development process. I think as people start increasing their R&D budgets, you will probably see the average deal size positively impacted because of that. So the dynamics in my mind are as businesses recover, the average deal size is going to go up. There are different region become a larger percent of the deals like Asia-Pac and typically a customers that will pay a little bit less than maybe Europe or North America, but dynamics are as people have more R&D dollars, the average deal size will probably going to be less because of that, so that's what I’d expect over the next two, three quarters. You should be in a trough in terms of sort of the short-term one core deal, I hope we could hit bottom.

Gary Mobley - Benchmark

Final question for Sandeep, you have been at the company now for almost four months, what have you done in order to motivate the R&D teams and then as well the sales teams, anything notable?

Sandeep Vij

Let met start with sales and then I'll move on to R&D. So what was very important to me was to get out and be on the road with the sales people, see their first hand, see their interaction with the customers and also to meet the customers directly. It's been a little over three months I have been here. I see the lot more enthusiasm on the part of the sales people and the customers and I’ve been actually pleased with that.

I think that’s trying to show up in the increasing licensing revenue and by more importantly in the pipeline, we see going forward. So that was primary to really getting out with the sales people at the customer locations. That was one. Number two would be R&D organizations. We did announce last quarter that I did bring on a VP of research and development, somebody who is quite well-known, well-respected within the processor space has a strong crack history of success and actually bringing a new leader into the R&D part of the organization has a motivating effects on the engineers.

Gary Mobley - Benchmark

One more final question, is the cellular chip licensee, there are three maybe four cellular baseband chip companies located in Asia. Is this license a tier 1 baseband chip company more than 10% share or is it somebody with single-digit market share?

Sandeep Vij

Again I can’t announce the company. All I can tell you is that it’s a very significant player; it is one of the companies I would have on my very short list of the ideal flagship company to have.

Operator

Our next question comes from Andrew [Leonard].

Andrew Leonard

I was hoping that you could have maybe elaborate a little bit on the networking OEM design win. I know you referred to the success that our licensees Cavium and NetLogic have had in the space, but are there any specific technical requirements that drove this design win and more generally if you could talk about the opportunity to displace a PowerPC and Freescale, and maybe specifically talk about the what percentage of the volume is done captively by network OEMs versus the emerging chip vendors?

Sandeep Vij

You've got a number of questions there. Let me go ahead and try to take some in kind of pieces. The first thing that I'll talk about is, why this network OEM would select MIPS. It's actually trend that I'm quite excited about and that is that from across the core of the network in just about every one of the top networking companies that I know about from at least my experience.

They are adopting the multi-core processors from Cavium Networks and NetLogic, and that's mainly being done as replacements or it will be a PowerPC based Freescale processors, and then PowerPC has been kind of a strong incumbent in the networking area for quite sometime.

With that transition, what the networking companies are just finding that there is a lot more MIPS in their boxes in the networking area and that of course means more ecosystem around MIPS, more momentum around MIPS, more knowledge, more experience, more software development expertise and particularly development expertise as it pertains to multi-core.

I would also argue that the longest base of experience in the industry on multi-core that is on MIPS, so again primarily, who those two architecture licensees Cavium Networks and NetLogic, so now when we networking OEMs develop their own processors and chips and they do that only if it's going to be for quite high volume applications, MIPS is very natural selection for them.

It’s a natural selection, simply because of the incumbency, the ramping incumbency of MIPS, and then also I think the architectural fit to the networking applications and in this case the OEM saw very significant advantages to the MIPS architecture, particularly in their case the multi-threading nature of the architecture, which is a unique capability that we have, and its intrinsically better enablement to be implemented in the multi-core implementation, and we actually get some enhancements to the core for that and those are enhancements we believe that will be useful to a number of other networking OEMs. Does that help answer the first part of your question?

Andrew Leonard

Yes.

Sandeep Vij

You have to remind me what the second part of the question is.

Andrew Leonard

Well, the second part I was just trying to get a sense of what the opportunity is from a unit volume perspective as to what portion of that market is served by captive vendors, there was a network OEMs with their captive chip development efforts?

Sandeep Vij

At the top of my head I don’t know the specific numbers, I could follow up with you later on and kind of share with you the best information that we have, but I just don't have those numbers of the top of my head.

Andrew Leonard

Then sort of as a follow-up, when you talk about improving pipeline, I know a lot of it's been around Android mobile and some of those opportunities are there? If you refer to some networking OEMs that we think we could help, are they in the pipeline now and how should we think about when some of these designs could ramp any more traditional three to four-year or when the timeframes be compressed as well?

Sandeep Vij

In the networking area, I think the timeframes will be pretty similar to what you see for other networking chips, so they would not be the compressed cycles that we see in mobile. In terms of other deals, those are all in development activities right now, and we were developing the customer.

Operator

(Operator Instructions). We'll take our next question from [David Wu]

David Wu

I was just trying to ask Android has been very well received in the mobile space, I was wondering in the digital home has Android caught on?

Sandeep Vij

The answer I would give David, is that it is cut on like wildfire in the mobile space, and what we are seeing is that is are catching on rapidly within the digital home and naturally we're the largest processor play in the digital home, so we get pretty good visibility into the applications on the SoC developments, and I would say the option rate is very strong in that area.

David Wu

What are the incumbent OS in that space?

Sandeep Vij

I think it will be a mix. Many people would use some either a form of Linux, and then port their own kind of application structure middleware on top of that. Some people may use a Windows CE-based system, some would either use one of their own RTOS word RTOS that was a real time operating system that was commercially available.

David Wu

What is the advantage if I would OEM, do a set-top box to use an Android versus other versions of Unix and Linux rather?

Sandeep Vij

I think the biggest one, David, is that what Google has done is, they have hardest the power of Linux and to use that really is underlying operating system for Android, but that may have codified and structured the release of the Linux implementation with additional enhancements and stacks on top of it, so it is a much more standardized Linux-based implementation, and of course it's available for free.

David Wu

As appose to all this different versions of Linux?

Sandeep Vij

No. That would be as opposed to some of the other RTOS or other operating system.

Operator

I am showing no questions at this time.

Sandeep Vij

Okay, excellent. Thank you again for joining us today. Q3 was, for me personally, a pretty energizing quarter. We added a number of licensees, including those in three growth areas, especially our flagship mobile customer.

Now, well into Q4, we are seeing a strong pipeline of opportunities and a higher level of optimism among MIPS employees, partners and customers and we look forward to talking to all again at next quarter's conference call.

Thank you again. Bye-bye.

Operator

Thank you. That concludes today's call. You may disconnect at this time.

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