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Tessera Technologies, Inc. (NASDAQ:TSRA)

Settlement Announcement Conference Call

February 27, 2014 5:30 pm ET

Executives

Brandi Larsen - SVP, The Piacente Group

Tom Lacey - CEO

Robert Andersen - CFO

Analysts

David Rosen

Jeff Karansky - DePrince, Race & Zollo, Inc.

Keith Curtis - Brant Point Capital Management

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Tessera Business Update 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 Brandi, Piacente, Investor Relations. You may begin.

Brandi Larsen

Thank you operator, and good afternoon everyone. Thank you for joining us for the call today. This call is also being broadcast live over the Internet. During the course of this conference call, management will provide 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 the 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 section entitled Risk Factors. The company disclaims any obligations to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after this call.

On the call today for management are Tom Lacey, Chief Executive Officer; and Robert Andersen Chief financial Officer. After management's opening remarks, we will open the call to your question.

I'll now turn the call over to Tom.

Tom Lacey

Hey, Brandi. Thanks a lot. This is Tom. (Inaudible) and the webcast recording, thanks for joining us on the call today. Before I get into the some of the details on the PTI settlement, I want to reiterate as I have in recent conference calls that the team and I remained very positive on the changes at the company and optimistic about our future. And bid on -- more on the PTI announcement that we announced today.

First of all, on giving the timing of PTI's public disclosure, we felt it was appropriate to issue our press release during market hour, so this kind of timing isn't our preference. Nonetheless, we wanted to get the information out to you just as it seems good. Given the significance of the PTI settlement and although many of the details of the settlement remained confidential, we wanted to hold this brief conference call to provide additional insight and answer as many questions as we could regarding the settlement.

As noted in our press release this morning, the payments from PTI to Tessera will total $196 million, payable by two payment this year and then recurring payments from 2015 through 2018. If we receive the majority of the payments due by March 31, 2015, and certain other conditions are met, we would agree to dismiss the PTI cases. The cases are currently stayed, but if the conditions in the settlement are not met we may choose to reinstate the cases, including all of our existing claims.

I would like to turn the call over to Robert, who will provide an update on our guidance and a few other financial matters.

Robert Andersen

Thanks, Tom. As mentioned in the release, we are increasing our current quarter revenue guidance from $33 million to $36 million, to $83 million to $86 million.

In our relation to the PTI settlement, I would like to reiterate our previously communicated capital allocation policy, whereby the board is previously elected to pay a portion of episodic revenue, net after expenses, the shareholders in the form of share buyback, quarterly dividend, and one-time annual dividends based on previous 12 months net episodic revenue.

Even when we are talking with investors today, I would like to provide one additional financial update on fiscal year 2013. I previously reported financial results for the fourth quarter and year-ended December 31, 2013 have been revised to include $6.3 million of additional charges related to the DOC restructuring announced on January 16, of this year. The additional charges are related to an additional $2.6 million on fixed asset impairment charges, $3.5 million for commitments on the purchase of equipments and materials, and $0.2 million in other miscellaneous charges. The additional charges result in a GAAP net loss in the fourth quarter of 2013 in the amount of $54.1 million or $1.01 per basic share. For the entire year ended December 31, 2013, GAAP net loss was $185.6 million or $3.48 per basic share.

Let me turn the call back to Tom.

Tom Lacey

Thanks, Robert. Before taking Q&A, let me just make a few more comments if I could. First of all, stating the obvious. We're delighted with this outcome in the PTI cases. We are also pleased about the recent $3 million settlement with ASE and a commitment by the Tessera and ASE to work together on technical collaboration.

Back on the PTI for a second. For those who are not familiar with the PTI cases, we were sued by PTI on multiple occasions. We did not initiate these actions. PTI made multi $100 million claims against us, which the court rejected in January. Following the court's January ruling, we ended up reaching the settlement that we announced today.

Now, when faced with taking the case all the way through trial, we consider a number of factors, including the company's ability to pay, the company's corporate structure, the company's cash practices, a company's location and the risk faced in jury trials amongst other things. Once all factors are considered, we can make a decision on whether or not to proceed to trial versus reaching a settlement. In this particular case, again we are very pleased with the outcome for our company and our shareholders.

As I mentioned numerous times, we do litigation as a tool, not a strategy. Our preference is to reach settlements whenever possible but if the shareholders are not receiving fair value we will use litigation as a tool. What I like to do now is, turn the call over to Victoria for some Q&A before making a few closing comments. Victoria?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David (inaudible).

David Rosen

Just a quick question on the implications on this settlement vis-à-vis your negotiations with Micron. Thanks.

Tom Lacey

David thanks for the question. It's really not something we can comment on this time. The way I think about this is, each time we're able to reach a settlement and a fair settlement for our shareholders that should have a positive impact on future discussions. But there obviously is any discussions between us and Micron, remain confidential as you would expect.

David Rosen

My thought around this is, PTI was providing a product, if I understand correctly, to Elpida, which is now a subsidiary of Micron. So just kind of bridging the three of those entities together -- if there was an implication. But maybe not.

Tom Lacey

Yes. It turns out probably not. Let me give you a little bit more detail on this. So under the terms of the settlements, right, PTI is licensed, if you will, from our Tessera Inc. and our TCC portfolios through 12/31/12. And subject to some additional conditions, which are confidential, assuming all of those things are met then anybody who is getting products from them at that particular time from those portfolios again as long as certain conditions are being met then in fact they would have a license.

Operator

There are currently no further questions. We will go ahead and turn it back to Tom for closing remarks.

Tom Lacey

So again I --

Operator

I'm sorry. We have a couple other questions come in the queue.

Tom Lacey

I'm sorry. Victoria, you did say there are more questions or are not more questions?

Operator

Yes. They just came into queue, yes.

Tom Lacey

All right. Okay.

Operator

And your next question --

Tom Lacey

Just under the deadline.

Operator

Your next question is from Jeff Karansky.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Good. Just a quick question on the comments you made regarding the episodic revenues, could you clarify on what your thoughts are on potential dividend, special dividend, increases in dividend, how this all works out here going forward?

Tom Lacey

Yes. A good one for Robert.

Robert Andersen

Yes. So our policy is in relation to episodic revenues, we would consider a portion of that episodic revenue after expenses to be paid in special dividend, which I think is what you're referring to. And I would expect that the portion we receive during Q1 would be considered episodic revenue.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Okay.

Robert Andersen

So it's up to the court to actually to make the final determination on a dividend payment for us. And I did mention what our past practice has been; it's my expectation that court will continue with that practice.

Tom Lacey

That actual way to think about it, it's previous -- its one year, you take the episodic revenues and if you want to reach your previous 12 months look at that net episodic revenue, right. And then, a portion of that, as the board has previously done, is elected to do that in a one-time dividend each year. So decision hasn't been made to do it again but as Robert mentioned, that would be something that was in front of the board after this quarter is over.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Okay. And then, in terms of how you should model these payments, and there's $50 million this year, or for this quarter -- is it safe to say another $50 million in the fourth quarter, or is it up in the air?

Tom Lacey

Yes. So the way, again this is where it gets tied with what we can and can't say in terms of the settlement agreement but we did increase our guidance by $50 million on this conference call, right. So earlier a payment is reflected there. We haven't said the exact amount but there is a payment reflected there. We also said that there will be a second upfront payment in the second half of this year.

And then, for the next 2015, '16, '17 and '18, so four years will be a balance of that, will be paid in what we call recurring revenue, each of those calendar years, provided the terms of the settlement agreement are met through which I outlined a little bit through March 31, 2015, which case the cases would be dismissed.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Okay. And on this previous --

Tom Lacey

One additional clarification if I could. One additional clarification is what we said in there trying to give the investors much clarity as we can and while honoring the terms of the confidentiality is we set the majority of money. So to me that means more than 50% of the money, the -- committed to the company by March 31, 2008.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Okay.

Tom Lacey

That helps.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Yes, that helps. And then on this $30 million settlement that's broken out how over the next four years?

Tom Lacey

Yes, so that we set out in a separate press release and you're referring to the ASE settlement, and that begins, there's an upfront payment in the first quarter, but we talked about a few thousand in '15 and then recurring annual payments for the next four years.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Okay. So, just equal payments over the next 4 years? Is that a good way of looking at it?

Tom Lacey

Yes.

Jeff Karansky - DePrince, Race & Zollo, Inc.

Okay. And just for me, in terms of what else -- what do you have else out there, in terms of potential settlements, or deals, or judgments or whatever, that you guys are working on?

Tom Lacey

Yes, it's all. I cover this typically in each conference call, so you're able to go back if you'd like and look at previous scripts. We'll give you just a quick high level summary on these. So if there was (inaudible) 10 defendants if you will in the AMD case. Now with the ASE settlement there are two remaining? One is Qualcomm, one is ST Micro. These are scheduled to go to trial in August of 2014. There is outstanding issue with Amkor which is what's called the tribunal and we haven't been able to give a specific date on when we expect to receive word on that, could be this year, could be next year. We're dealing offshore.

If you look back historically, these things take two to three years and we're in that window now. So if it happened this year, it wouldn't be terribly surprising to us. And I think I'm just trying go through my brain if there is any others yet and then there is one additional one is renaissance as well that we talked about publicly.

Jeff Karansky - DePrince, Race & Zollo, Inc.

And then currently you're negotiations with Micron, right, as well.

Tom Lacey

Micron is not a litigation matter. Micron if you recall, they're license expired. So it would be fair to assume that we might be in licensing discussions with Micron, yes.

Operator

(Operator Instructions) Your next question is from Keith Curtis.

Keith Curtis - Brant Point Capital Management

I just had a question on the length of the licenses, I think today's announcement was three years and the ASE was four years. Do these patents expire at some point or I guess why we aren't looking at three or four year terms?

Tom Lacey

We're going to; I may come back to you just for clarity. But so first of all, the license today actually is through 12/31/2012. So it's not discussing a license going forward. So this is to settle the cases brought against us. So at this point it would be safe to assume that there is not a license in place going forward.

Okay. And what was on ASE, we talked about that there that was also a settlement of a case. It has nothing to do with the term of a license. It was settled, a case and did not talk about specifically go-forward a license in place.

Keith Curtis - Brant Point Capital Management

And is there an opportunity to get licenses in place at these customers for going forward or how do we think about that issue?

Tom Lacey

Certainly, yes we would be open to those discussions.

Keith Curtis - Brant Point Capital Management

And is there any color on what the recurring payments starting next year could be related to PTI?

Tom Lacey

You would do is impact the exact amounts. I'm not able to disclose. I could tell you what we hold today is $196 million. Majority of that is going to be paid over 50%, right by Q1 of '15 and the remaining portion over the next three tiers that's, yes four years.

Keith Curtis - Brant Point Capital Management

And last question, any comment on the Q, on the last earnings call you gave a model with 14% litigation built in, in your kind of near-term operating model. And I'm just curious what the two recent deals in place, what does that do to that litigation target?

Robert Anderson

Hi, this is Robert. The model that we communicated during the earnings call is still relevant. I think this is just an indication that we're settling a large base. But the underlying structure of the business I think is well represented in the model that we've communicated and that's really a model I'm looking to see us meet in Q4 from a cost structure perspective.

Tom Lacey

It's Keith right?

Keith Curtis - Brant Point Capital Management

Yes.

Tom Lacey

Keith, its Tom. One way to think about -- I think about this anyway is additionally is when we reach a settlement, it often means that the total litigation expense playing on that particular case is probably less than what's forecasted. Because if you're going to take something all the way through trial, you incur regular expense towards especially as you're in trial. So if you avoid that by definition, you'd expect that your litigation cost would be less on that particular case. It's not always but that's kind of rule of thumbs.

Operator

I'd now like to turn the call back over to Tom for any completing remarks.

Tom Lacey

Hey, thanks to you Victoria and thanks Brandi. Thanks again everybody for dialing in and given this very short notice. This was an exciting day for the company. We're obviously delighted with the outcome. I hope you share our belief that we come a long way over the recent past. And the management team and I are, really believe that a call with this recurring revenue stream that was referred to on the calls. These episodic opportunities like we outlined today. Robert's continued focus on optimizing the spending. We're profitable company now. This partnerships-style approach to customers, strong overall team, we're working better together internally and we're constantly trying to improve our transparency on what our business can be to our investors and the growth opportunities ahead of us including our FotoNation business, our DOC intellectual properties, some of our mobile assets with our existing portfolios that we're quite optimistic about our -- about our future.

(Inaudible) thank you guys for your interest in the company and for joining us on the call today, thanks.

Operator

Again, thank you for your participation. This concludes today's call. You may now disconnect.

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