Tessera Technologies, Inc. Q2 2010 Earnings Call Transcript

Aug. 1.10 | About: Tessera Technologies, (TSRA)

Tessera Technologies, Inc. (NASDAQ:TSRA)

Q2 2010 Earnings Call Transcript

July 29, 2010 5:00 pm ET

Executives

Moriah Shilton – IR

Hank Nothhaft – President, CEO & Chairman

Mike Anthofer – EVP & CFO

Brian Marcucci – SVP, Business Development & Licensing, Micro-Electronics

Barney Cassidy – EVP& General Counsel

Analysts

Paul Thomas – BoA/Merrill Lynch

Simran Brar [ph] – Cowen

Olga Levinzon – Barclays Capital

Michael Cohen – MDC Financial Services

Kevin Vassily – Pacific Crest Securities

Operator

Hello, my name is Dawn and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions) Thank you. I would now turn the call over to your host, Moriah Shilton. Please go ahead.

Moriah Shilton

Thank you, Dawn, and good afternoon, everyone. Thank you for joining us for the Tessera Technologies Second Quarter 2010 Results Conference Call. This call is being broadcast live over the internet. A webcast replay will be available at tessera.com for 90 days after the call.

In addition a telephone replay of this call will be made available for two business days beginning approximately two hours after the completion of this call. To listen to the replay in the U.S., please dial 800-642-1687 and internationally dial 706-645-9291. The access code is 87257605.

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’re cautioned not to place undue reliance on the forward-looking statements, which speak 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, 2009, and its quarterly report on Form 10-Q for the period ended March 31, 2010, especially in the sections of these filings and titled “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 Hank Nothhaft, Tessera’s Chairman and Chief Executive Officer; Mike Anthofer, Chief Financial Officer; Barney Cassidy, General Counsel, Mike Bereziuk, Executive Vice President, Imaging and Optics and Brian Marcucci, Senior Vice President, Business Development and Licensing Micro-electronics.

During this call today, management will discuss certain non-GAAP financial measures for comparison purposes only. The non-GAAP amounts of cost of revenues, research and development, selling, general and administrative expenses, net income and earnings per share do not include the following, stock-based compensations, acquired intangibles’ amortization charges, acquired in-process research and development and related tax effects.

Management believes the non-GAAP amounts provide a more meaningful comparison of quarter-over-quarter and year-over-year financial performance. Please refer to the company’s second quarter 2010 earnings press release and to the company’s Website for a reconciliation of non-GAAP measures to GAAP.

After management’s brief opening remarks, we will open the call to your questions.

And now, I’ll turn the call over to Hank.

Hank Nothhaft

Thank you, Moriah. Good afternoon. And welcome to Tessera’s quarterly earnings call. Starting today, we are following a different approach for our earnings call posting prepared remarks ahead of the call to provide our investment committee with additional time to analyze our results prior to the actual conference call. I will offer very brief remarks and then open the call for your questions.

We had an excellent quarter. In fact, it was the best quarter of revenue excluding settlements in our history. Today, total revenue for the second quarter of 2010 was $74.6 million, up 20% from the second quarter of 2009. We took steps in the second quarter of 2010 to further our growth with our acquisition of Siimpel, the developer and manufacturer of Micro Electro Mechanical Systems or MEMS based camera solutions or mobile imaging application. As a result of this acquisition we now address a wider spectrum of the camera module market.

Long-term based upon the strength of our technologies and the expanded market opportunities we see before us we believe Tessera will play an important role in the anticipated multibillion unit Imaging & Optics market.

Our Micro-electronics business continues to grow reflecting the strength of our served DRAM and mobile wireless markets. Given our active licensing program, we are devoting both manpower and dollars to support it and overall are confident in the opportunities that will provide. We are excited about our future in our long-term growth and I look forward to reporting on our successes in the future.

I now would like to turn the call over for questions so I will turn it back to the operator. Don?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Krish Sankar with BoA/Merrill Lynch.

Paul Thomas – BoA/Merrill Lynch

Good afternoon. Thanks for taking my questions. This is Paul Thomas for Krish Sankar. Hank, I guess under the new format I have a question sort of along those lines. I think before you talked about your revenue forecasting that you get updates 30 days and 60 days after the quarter. And then your Q2 pre-announcement came, sort of seems like more than 60 days after the quarter. So is this a more normal process we should expect now that maybe we might get some update at the midpoint of the quarter on how the quarter is shaping up, or has anything else changed about how you guys put together your guidance?

Mike Anthofer

Paul, this is Mike. Thanks for your question. I would not expect that we would do in our updated guides. We would only do that if conditions necessitated it based on how our forecast looked or our guidance looked in comparison to actual royalty reports that we received during the quarter, which you are exactly right, some of them are received roughly one month into the quarter, others 60 days or roughly two months into the quarter. So, I don’t want you to think that this is going to be standard operating procedure for us; we would only do it when we feel necessary to update.

Paul Thomas – BoA/Merrill Lynch

Okay. And then I was looking through the prepared comments that you guys sent out. So Micro-electronics revenue year-over-year in Q2 was up like 17%. I think that’s the underlying growth. And if I do Q3 to what looks like your Q3 now sort of taking out the one-time things I get about 18%.

And if total semi units are probably going to be up 20% plus, something like that, year-over-year from '09 to '10, so the underlying unit business, we’re watching it accelerate here from 17% to 18%, and I don't know, maybe up to 20%? Obviously, you have your DRAM price breaks and all, but just the underlying unit trends, are we seeing it move along with what we see with the larger semi unit trends, or do you still think there is enough difference in mix that we shouldn't expect that?

Hank Nothhaft

Okay, Paul, thank you very much. I’m going to ask Brian Marcucci to take your question.

Brian Marcucci

Yes. Paul, I think, in general, the unit trends that we’re seeing in our business in line with the market. But we do have the price breaks in the DRAM as you talk about, we do have a mix of products that are out there. If you’re looking at the entire semiconductor industry, there’s a lot of product that are out there, they’re in packages that aren’t using our technology. So there’s a lot of discrete products and of the same there’s just another market. So if you look at the segments we’re involved in like DRAM, I think as we said in our remarks the analysts are expecting 25% growth in that market. We follow that type of a trend.

Paul Thomas – BoA/Merrill Lynch

Okay. And of course you will have the price breaks, but the units, you don't expect to see anything different than that?

Brian Marcucci

That’s what the analysts are projecting.

Paul Thomas – BoA/Merrill Lynch

Okay, then maybe on the optics side, I’d just ask about the legacy business, that looks like it is getting back to the roughly $20 million run rate next quarter?

Hank Nothhaft

Is that a question, Paul?

Paul Thomas – BoA/Merrill Lynch

That is a question, yes.

Hank Nothhaft

So to the Micro-Optics business we have recovered nicely this year. We have done almost revenue equal to the entire year in the first six months of this year as a result of the snapback. It is a fairly short lead time of business. And so, we’re able to turn orders fairly quickly. We do go into each quarter though with part of the quarter and backlog and then needing a requiring to book additional orders, as the quarter goes along. So, we feel very comfortable that we are going to meet our plan for the year, which did anticipate a nice snapback in that segment when we started out the year.

Paul Thomas – BoA/Merrill Lynch

Okay, that's all for me. Thanks guys.

Operator

Your next question comes from the line of Raj Seth with Cowen.

Simran Brar – Cowen

Thank you. This is Simran Brar [ph] calling in for Raj Seth. I had a question on the CSP side of the business. We know that two of your licenses that are coming up for renewal later this year. I’m not sure what you able to share with us at this point, but I just wanted to understand your level of confidence as far as renewing those are concerned, any color you can give us on that would be appreciated?

Hank Nothhaft

Thank you for the question. So actually, we have four smaller licensees coming up for renewal this year. And I really can’t comment on specific negotiations but I would like to say this. We’re very comfortable with our broader licensing program. We think it’s going very strong. We’re devoting both manpower and dollars to support it. And overall, we’re confident in the opportunities that will provide us over the long-term.

Simran Brar – Cowen

Okay, thank you. And then on the legal side, you got a nice benefit from sort of lower than expected legal expenses this quarter. Would it be fair to assume sort of the same $4 million to $5 million run rate going forward, would that be a fair assumption over the next couple of quarters or so?

Mike Anthofer

Simran, this is Mike speaking. Again, thanks for your question. We’re guiding up slightly from the second quarter to third quarter in our guidance due to increased activity related to the Hynix antitrust action, Amkor arbitration and legal activity related to the various appeals on the ITC.

With respect to guiding further than that it would be impossible for us to do that just given the unknowns out there and the actions of their respondents and what not so. All we can really do this in the quarter at a time and guide directionally where we see it based on the information we have on hand, so I don’t want to indicate that you could be looking at a $5 million sort of run rate for litigation and to the out quarters.

Simran Brar – Cowen

Okay, great. Thank you.

Mike Anthofer

You’re welcome.

Hank Nothhaft

Thank you.

Operator

Your next question comes from the line of C.J. Muse with Barclays Capital.

Olga Levinzon – Barclays Capital

Hi, Olga Levinzon calling for C.J. Thanks for taking the question. My first question, I am looking through your prepared comments right now, so regarding your outlook for the $100 million for Imaging & Optics, excluding whether or not you get to that run rate in 2011, but just in general, as the market develops, what do you think the size of the market could be? And as part of that, what sort of data points should we be watching out for in order to gauge that the market is developing according to plan and you're capturing those opportunities?

Hank Nothhaft

Okay, Olga, thank you very much. This is Hank. On your first question, when you say how big is the market do you mean the general Imaging and Optics market that we serve or more specific…..

Olga Levinzon – Barclays Capital

Yes, exactly.

Hank Nothhaft

So, I guess I’d like to say this. We think that the market for that we’re addressing today in the wireless space is represented by about a 1.3 billion units to 1.5 billion units in the year that we’re in. And looking forward a couple of years we believe because of the functionality, price performance camera and camera module technology that the market will expand quite dramatically. And so, looking out of few years, we anticipate in other market analysts that are anticipating that the market size is going to be 3 billion units to 5 million units market over the next three years to five years. And so that’s the size of opportunity that we’re looking at.

We do believe that we’ll be able to do very well in the wireless space which we have quite a bit attraction, but we’re seeing our first sort of nibbles in some of the other spaces and we have received short of a pilot sized orders for technology in both the gesture control and in some ergonomic applications as it applies to display. So we actually have orders in hand, small quantities but very encouraging pilot quantities in those areas. I’m sorry I forgot the second question. Could you repeat it for me please?

Olga Levinzon – Barclays Capital

I guess what sort of data points will be on our side, should we be watching out for to confirm that sort of development above and beyond the $100 million you are shooting for?

Hank Nothhaft

Sure, that’s a good question. I wanted to make it clear just because we’re looking for more product revenue in our mix and there are some very exciting opportunities that we’re seeing there. We have by no means abandoned our licensing program in Imaging and Optics and we feel that we have very good traction in some of those areas; we’ve talked about multiple wins over the past in these calls. And so, one thing I’d be looking for as a barometer as an outside investor would be the growing our royalty and license stream from such products as EDOF.

We think we’ve got a real winner there, we think their strong adoption is taking place in the industry, has started out with tier one handset manufacturer with Nokia, it’s now branching out another handset manufacturers or adopting the technology. So we believe for example that market next year could be in the range of 80 million units to 90 million units even though there’s market research out there that we’ve seen that is 50 million units. So we’re seeing such dynamism in the market and momentum that we’re actually looking at figure, for example, that are somewhat higher than the published market research.

So I think the leading indicator would be growth of the royalty stream and hence then you will see some product revenues growth. Micro-Optics is now back this year, sort of back to traditional levels as earlier in Paul‘s call, but then the other thing I’d be looking for are some breakout revenues occurring in other product areas that didn’t exist before. So you’ll be seeing strong growth revenues in product.

Olga Levinzon – Barclays Capital

Got it. And then in terms of your guidance for a Micro-electronic royalties in the next quarter, does the sort of flattish sequential guide, if I exclude the $6 million from UTAC, is that a function of volume break discounts coming in a little earlier this year?

Mike Anthofer

Hi, Olga, this is Mike. Yes. There will be an impact based on the increased DRAM market that will impact our third quarter relative to our second quarter sequentially as opposed to last year when essentially the effect hit us more generally in looking at third quarter and fourth quarter sequentially. And it stood a higher volume that are underlying our royalty. So yes, there will be some impact in the third quarter relative to the second quarter in terms of explain sequential variances.

Olga Levinzon – Barclays Capital

Got it. And then just one final question. In the prepared remarks you talk about partnering up with some of the, I guess, OSAB [ph] in Asia for the production of the Siimpel product. When do you expect those shipments to commence? Will you be breaking that out, and any sort of trajectory there?

Hank Nothhaft

I think it would be realistically to expect something in the second half of 2011.

Olga Levinzon – Barclays Capital

Okay, thank you.

Operator

(Operator instructions) Your next question comes from the line of Michael Cohen with MDC Financial Services.

Michael Cohen – MDC Financial Services

Great, thank you for taking my question. I’m wondering if you could please provide some comments on the early development of your silent air or ionic cooling business.

Hank Nothhaft

Hi, Michael, this is Hank. May I ask you what do you mean by early development?

Michael Cohen – MDC Financial Services

I’m specifically looking for do you still think you are on track for some product announcements perhaps in the last quarter of this year

Hank Nothhaft

Okay, thank you. Just wanted to make sure I understood your question properly. So, our side on air cooling applications are developing pretty much as planned. The one thing that we’ve really learned very clearly this year that besides the benefit of silence the fact that we can design ultra thin cooling systems with our technology turns out to be a very, very important factor in the adaptability or attractiveness of this technology. We do think that laptop computers are the first application for us. We are entirely focused on getting a design win and bringing it to market. We think we’re on track for design win to make that happen and certainly in the second half of this year. And so, we’re very encouraged by that.

Yes, there’s some potential in other markets besides PCs could be that we’re not pursuing them at this time and so far we think that perhaps ultra thin LED televisions might be an attractive sort of secondary market due to the silent operation and the ability to cool the LEDs and therefore perhaps save on the number of LEDs that would be required in a set of that type. But we’re entirely focused at this time on the PC market, the thin design market, we’re encouraged by what’s going on there, we believe we’re on track.

Michael Cohen – MDC Financial Services

Thank you for that color. And my last question is about the Amkor arbitration. You gave some remarks in the prepared remarks on line, and you reminded us that the last Amkor arbitration took roughly three years. Do you think that the way of tracking that it’s going to be roughly three years again, or do you think it’s going to be maybe more or less, or is it hard to predict at this time?

Hank Nothhaft

Okay. Thanks for that question, Michael. I’m going to introduce Barney Cassidy, our General Counsel and he would address that question for you.

Barney Cassidy

Hi, Michael, this is Barney Cassidy. It is hard to predict it will probably be three years or more, this is a more complex arbitration and the last one. On the other hand it’s the same panel as last time, the same players, the same litigation team, so, you would hope for some efficiency to begin there, but generally I would assume three years or more.

Michael Cohen – MDC Financial Services

Okay, great. And congratulations on the results.

Hank Nothhaft

Thank you very much.

Operator

Your next question comes from the line of Kevin Vassily with Pacific Crest Securities.

Kevin Vassily – Pacific Crest Securities

Hi, yes, thank you for taking questions. First one on the legal theme, any update with regard to the Hynix antitrust arbitration, as well as any update in terms of timeline on the appeal process post the ITC rulings?

Barney Cassidy

Hi, this is Barney Cassidy again. Thanks for the question. The Hynix case is not actually in our arbitration, it’s litigation in the California State Court System. We do not have a trial date set. We have virtually everything done that is necessary to go to trial however. The four hearings that we identified in the preconference call statement that will occur in August and September. We’ll cover virtually everything we need to cover in order to get a trial started. So, the judge has required that we go forward that all the motions and (inaudible). It’s the technical motions that occurred just before trial. So we’re prepared to go as soon as we get a date. Unfortunately, we haven’t gotten that date yet and we look forward to getting one as soon as possible. We’ve been litigating this case for three years now and are fully prepared to go.

Hank Nothhaft

Kevin, does that answer your question?

Kevin Vassily – Pacific Crest Securities

Yes, on Hynix, and then an update on where the appeal process stands right now with…

Barney Cassidy

Right. So there are two appeals, one from the six cases or five cases been fully submitted to the Court of Appeals for the Federal Circuit, the Appellate Court that hears appeals from the ITC. They can issue their ruling at any time. I have no guidance easy one on that. So we’re waiting, we check every day to see if the ruling has been issued. The other case is still in the appeals process. We’re filing our reply brief on August 6. We expect that our argument will be set sometime after that.

My guess is that we’ll have an oral argument in the late third quarter or early fourth quarter, but there is no requirement that will be held at that time and again; there is no requirement that the court issue its ruling at any specific time after that oral argument. So, in terms of very rough estimates, I would say that we’ll probably have oral argument this year and a ruling at the end of this year or the beginning of next year.

Kevin Vassily – Pacific Crest Securities

Okay. Maybe a follow-up question on the comments you made, Barney, on the Amkor arbitration. Is there anything that you can help us with to get our arms around why this arbitration has become a tad bit more complex, and hence the longer timeframe than the prior one?

Barney Cassidy

There’s a simple answer that we have asserted additional patents that we believe Amkor is not paying us for. Under the license they need to pay us for a wide variety of patents. Some of these were not arbitrated in the early arbitration. Both parties have a piece about what has happened since the previous arbitration has concluded. We don’t think we’re being fully paid, they object to our statements about that, and that’s the first phase of the arbitration that, originally, it was going to be heard in August of this year then it got move to September and now it's then move to December. So the December hearing will be based upon issues that arise from the earlier arbitration. When that’s done, we’ll move on to the new patents that we believe are being used without being properly compensated for.

Kevin Vassily – Pacific Crest Securities

Got it, okay. Okay, that’s helpful, thank you.

Barney Cassidy

You’re welcome.

Operator

(Operator instructions) There are no further questions in queue.

Hank Nothhaft

Okay. Well, thank you very much for your interest in the company. We look forward to talking to you again in about three months’ time.

Operator

This does conclude the conference call. We thank you for your participation. You may now disconnect your lines.

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