MIPS Technology, Inc. F1Q08 (Qtr End 09/30/07) Earnings Call Transcript

MIPS Technologies, Inc. (MIPS)

F1Q08 (Qtr End 09/30/2007) Earnings Call

November 8, 2007, 16:45 p.m. ET

Executives

John Bourgoin - Chief Executive Officer and President

Merv Kato - Chief Financial Officer

Analysts

Tony Stoss - Craig-Hallum

Raj Seth - Cowen & Company

Rob Amam - RK Capital

Hasnin Kareem – Pacific Edge

Salomon Kamalodine - B. Riley & Co.

Presentation

Operator

Good afternoon and welcome to the MIPS Technology First Quarter and Fiscal Year 2008 Financial Results call.

I will now turn the call over to Mr. Merv Kato, Chief Financial Officer, sir you may begin.

Merv Kato

Thank you. Welcome to the MIPS Technology’s First Quarter Fiscal 2008 Earnings Conference Call. I am Merv Kato, Chief Financial Officer and with me today is John Bourgoin, Chief Executive Officer.

This conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The including projections of certain operating results for the second quarter of fiscal 2008. Listeners are cautioned not to place undue reliance on this forward-looking information. Many important factors could cause the actual results to differ materially from those contained in such projections or forward-looking statements. We refer you the risk factor section of documents that we file from time to time with the Securities and Exchange Commission or factors that could cause actual results to differ from our forward-looking statement.

The agenda for today, I will provide the financial update, John will talk to the business highlights for the quarter. We will then have a Q&A session. For those that are interested in the playback of this call, the number is 203-369-1303. The access code is MIPS, and will be available for seven days.

An audio replay will also be posted to the Investor Relations page of our website at mips.com.

You should have a copy of MIPS earnings release, if not a copy is available on our website. A reminder that our fiscal yearend is June 30.

As announced on August 27, 2007, we acquired Chipidea Microelectronica, S.A. in a $147 million all cash deal. Approximately $120 million was paid upfront to the selling stock holders and approximately $27 million was placed in two escrow funds. We have consolidated the financial results of Chipidea for the five-week period from the close of the transaction through September 30, 2007. Historical of Chipideas financials were prepared under IFRS or International Financial Reporting Standards, while its current results are consolidated under US GAAP.

In our financial discussions today, I will be referring to first quarter fiscal 2008 and non-GAAP results.

The non-GAAP results exclude SFAS 123R stock option expense and certain costs and expenses related to the Chipidea acquisition. Please refer to the earnings press release or to the Investor Relations page of our website for a reconciliation of GAAP to non-GAAP results. I will be referring to the original MIPS architecture and relate it in embedded cores as the processor business and the Chipidea analog in MIPS signal devices as the analog business.

Revenue. MIPS Technologies had total revenue of $22.3 million in the first quarter of Fiscal 2008. A decrease of 6% from the $23.7 million in the prior quarter and an increase of 14% from the $19.6 million reported in the same quarter a year ago. Total first quarter revenue from the processor business was $19.9 million and revenue from the analog business was $2.4 million for the five-week period from the date of acquisition.

Approximately $2 million in analog revenue which was adjusted out by a combination of purchase accounting adjustments and accounting for revenue recognition under US GAAP . We expect that approximately $1.5 million of this will be recognized in future periods.

Royalty revenue in the first quarter was $10.5 million, a decrease of 7% from the $11.3 million reported in the prior quarter and a decrease of 6% from the $11.2 million reported in the same quarter a year ago. Royalty revenue from the processor business was $10.5 million which was reduced by $528,000.00 for a prior period calculation error by one of our licensees. Our licensees report shipments of 92 million units, approximately 6% higher than the 86.9 million units shipped in the prior quarter and an increase of approximately 3% over the 89.6 million units shipped in the same quarter a year ago.

Contract revenue was $11.8 million, a decrease of 5% from the $12.4 million reported in the prior quarter and an increase of 42% from the $8.3 million reported in the same quarter a year ago.

Contract revenue from the processor business was $9.5 million. Six new license agreements were signed in the quarter, including an agreement with one new customer. There were three MIPS 24K Family Core agreements completed, one MIPS 34K Core agreement and two 4K Family Core agreements including cores bundled together in several combinations.

In addition, approximately $1.9 million was recognized from payment terms from existing contracts.

Contract revenue from the analog business was $2.3 million.

Moving on to expenses, total GAAP operating expenses in the first quarter of fiscal 2008 was $13.4 million including $2.4 million in SFAS 123R stock option expense and a $5.4 million charge for in-process R&D related to the Chipidea acquisition.

Intangible asset amortization charges related to the Chipidea acquisition was $970,000.00 plus $648,000.00 in compensation expense related to the amortization of a whole back escrow for the founders of Chipidea.

In addition, we had expenses of $1.2 million in post acquisition integration cost, primarily related to accounting fees or consulting services, tax, audit and IFRS to GAAP reconciliation of the Chipidea historical financials. This also included the legal fees associated with putting the short-term revolving loan facility of $35 million in place related to the acquisition.

We also incurred $360,000.00 of expenses early in the quarter associated with the completion of the restatement work from the options investigation.

Net of these extraordinary expenses and charges non-GAAP expenses were $19.3 million in the first quarter of which $16.1 million was for the processor business and $3.2 million for the analog business.

For the processor business, non-GAAP R&D expenses in the first quarter were $7.4 million, sales and marketing expense of $ 4.4 million and G&A expenses of $4.4 million.

Other incumbent expense, due to the utilization of our cash balance for the Chipidea acquisition, our interest income declined to approximately $1 million. In the first quarter, we recognized $337,000.00 in loan fees related to obtaining the revolver loan mentioned earlier. Net loss on a GAAP basis for the first quarter of fiscal 2008 was $7.2 million or $0.16 per diluted shares compare with net income of $2.3 million or $0.05 per share in the prior quarter and $2.3 million or $0.05 per share in the same quarter a year ago.

We recorded an income tax benefit for the quarter of $413,000.00 on a GAAP basis. Excluding the cost and charges noted earlier, net income on a non-GAAP basis for the first quarter of fiscal 2008 was $3.8 million compared to a net income of $4 million in the prior quarter and net income of $4.4 million in the same quarter a year ago.

The fully diluted net income per share on a non-GAAP basis for the first quarter of fiscal 2008 was $0.08 compared with net income per share of $0.09 cents in the prior quarter and net income per share of $0.10 in the same quarter a year ago.

On the balance sheet, cash and short term investments were approximately $17.6 million at the end of Q1, a decrease of approximately $127.3 million over the prior quarter due to the all cash acquisition of Chipidea and including the draw down of $20 million from the revolver alone.

Accounts receivable increased by approximately $16.6 million compared with the last quarter primarily due to the addition of the Chipidea accounts receivable balance. The DSO for the processor business was 25 days compared to 24 days last quarter.

Guidance for Q2 Fiscal Year ’08. We believe that both the processor business and the analog business will grow during the December quarter. With the processor business growing about 5% in a soft licensing market and the analog business which seem relatively robust real growth in excess of 15%.

However, the complexities of the transition to GAAP compatible recording make it difficult to estimate with precision at this point the amount of revenue we will be able to recognize in the December quarter.

We expect to gain a much more extensive understanding during the quarter and return to our normal guidance practice at the end of our next conference call.

For the processor business, we expect the Q2 spending will be flat with respect to Q1 on a non-GAAP basis. We have recently initiated a new project to optimize our tax rate going forward following the acquisition of Chipidea. We will be able to provide more information in the coming months.

A final note, our 10-Q filing for the quarter ended September 30, 2007 is due tomorrow, November 9. In light of the additional processes involved with our initial inclusion of the Chipidea results, we intend to utilize the five-day filing extension allowed of these filings and expect to file by Wednesday, November 14.

After we hear from John Bourgoin about the business highlights for Q1, we would be glad to answer your questions.

John Bourgoin

Thank you, Merv. Well, without a doubt, the most exciting milestone for MIPS in many years was the acquisition of Chipidea in August. Developers of system on chips solutions are faced with increasing complexity and development cost and they need to benefit from the shared cost of R&D model, property providers for IP that they need to be beyond their own differentiating design work. And that means they must find reliable suppliers who can provide these wide range of products in a cost effective manner and that IP must work well. Debugging the IP and the term analysis developed is difficult to impossible, so quality is essential. Furthermore to the technology progression as described in Moore’s law means that a matching progression of a range of IP is essential of companies that are to rely on IP suppliers for their needs as they migrate to new technologies, indeed, analog IP is proven to be the limiting factor in technology migrations for many companies including the large sophisticated ones.

In difficult product areas like microprocessors and analog products, it takes many years to build an expertise, if in fact one can build such an expertise at all. With the Chipidea acquisition, MIPS now offers a wide range of IP in two of the most technically challenging areas for SoC developers. No other IP company offers this combination. Strategically, we believe this move will prove to be instrumental and growing our overall business. Chipidea is the overwhelming leader in analog IP and as such, is able to provide the critical mass necessary for reducing porting costs for analog. This is crucial for the expansion of the analog business. This critical mass has been achieved by the assimilation of a large body of analog design talent, a rare commodity and locations around the world where universities support such programs. No one else has this.

Chipideas’s revenue growth since inception ten years ago has clear evidence that this kind of IP is valuable, is in-demand that there is a strong market and that the Chipidea team itself is exceptional that is why we are excited about the acquisition.

Today we are announcing our first combined revenue numbers including the period since August 27 for the analog business crew. Our teams have been working closely to identify and reconcile the differences between the practices used by Chipidea in their accounting and GAAP accounting used at MIPS. The effect of the shift will be a deferral of a material percentage of their revenue to later quarters, but that deferral should diminish over the next few quarters, and we believe the overall revenue picture remains the same as we have projected it in our public presentations to date.

Our product organizations including product development, product marketing and other areas of improvement to the product will remain as separate product groups and manage much as they have been in the past. This makes sense from a variety of perspectives including the simplification of the integration task.

For the sale organization and traditional, general and administrative functions, we have an aggressive integration program underway. Both business groups are focused on existing customers as well as new opportunities that extend and integrate our businesses which we believe will create powerful synergies for our licensees and an even broader integrated IP portfolio to offer customers for their next generation associate designs.

Revenue numbers for the MIPS processor business were slightly down from our guidance at the last conference call, but we are still our best September quarter in seven years and very close to our all time high.

It is my view that the license market for microprocessors is a little softer right now than it has been in prior quarters and we are being conservative with this portion of our guidance for this December quarter. We believe royalty should rebound significantly during the quarter though. Although the spending picture is complicated in the September quarter by several issues including the acquisition cost and some residual cost associated with the restatement work which finished in the first week in July, microprocessor spending exclusive of these issues is under control and is in fact better than our plans.

We remain committed to our operating margin targets and our overall goals for the margin during the fiscal year.

We are also optimistic about the strength of the analog business as it shows no signs of abatement. This will manifest itself in the revenue recognized using GAAP standards as we move through the year until the reconciliation adjustments play out.

Moving on to products, last week in Tokyo, we unveiled a new strategic initiative for MIPS as we enter the 32-bit microcontroller market. And confirming speculation ramp for the first year this week, Microchip, the acknowledged leader in 8 and 16-bit microcontrollers announced that it has standardized its new 32-bit pic 32 family around the MIPS architecture.

This is highly significant for three reasons: One, the microcontroller units market is huge. It is without doubt the largest unit opportunity in the embedded market universe. Microchip as the leader is perhaps the single most powerful channel for tapping into it. Two, the attractiveness of the MIPS architecture to third party suppliers of related products commonly called the ecosystem is driven by the number of potential customers those third parties see.

Microchip has 60,000 customers today. MIPS by comparison has well under 150, even a small percentage of penetration should have a huge effect on the potential customer base seen by suppliers to our ecosystem. Large ecosystems with a plethora of supporting software and tools are a powerful attractive force for new customers and for MIPS in the future. And three, a substantial new base of MIPS users initiated by Microchip should provide the seed for a number of those customers to migrate their products to MIPS licenses for cores in the future, if those customers seek to enhance the features or the performance of their products. That is why I believe that this is one of the most exciting wins MIPS has ever announced. The M4K that is the MIPS microcontroller product has been used in a growing number of applications that demand good code density, rapid interrupt response and small core size. Many of our customers are already using it as a second core in their systems and others are using it as a stand-alone microcontroller.

We think it is excellent technically, and with the support of Microchip and its tools base, should have an outstanding growth rate.

The M4K is a strong bookend to our product line at the low end. The 74K is our performance leader at the high end. We have seen tremendous interest globally in this product since its announcement in May especially with key customers in the digital-entry markets running heavyweight operating systems like Windows CE and thriving broadcasting, broadband and networking markets.

In July, we announced that Infinian became the second major semi-conductor company to license the 74K. Earlier, we had announced that Broadcom had licensed the product.

As MIPS Technology continues to maintain its prominence in the digital living room in the connected home, our Asia Pacific momentum continues strong with a consistent growing customer base, for example, China’s power layer of Microsystems licensed the 24K-EC processor core to advance the development of its next generation digital television products.

Hong Kong’s Applied Science And Technology Research Institute Company known as ASTRI licensed the M4K core for the development of advanced H.264 video processing applications. ASTRI’s IC design team is focused on the next generation mobile technology, multimedia and performance computing solutions for media processors, portable media players, smart phones, set-top boxes and DTV markets where MIPS hold a significant leadership position.

Genesis Microchip, a leading provider of image and video processing systems enabling superior picture quality and flat-panel TVs and a variety of consumer and PC display products licensed a range of 32-bit MIPS cores to drive the development of its next generation consumer display products. The company will have access to a variety of cores ranging from the entry level MIPS 324KE pro to the popular 24K pro cores.

Networking news. Ikanos Communications introduced its MIPS based Fusiv Vx180, VDSL2 Gateway processor. It delivers 2.7 gigahertz of processing power, VoIP, multi mode DSL and security. Targeted applications include customer premises equipment, home networking, SO-HO and SME network, all explosive sectors within the thriving broadband arena where MIPS holds the commanding position.

Customer premises equipment is of course where the volumes are. Industry analysts firm in phonetics research predicts the annual broadband CPE revenue of over $6.2 billion by 2010 as service providers continue to bundle voice, data, video and wireless services in triple and quadruple play offerings to attract new customers and reduce charge on the existing customers.

Earlier this week, MIPS announced that Sigma Designs licensed the 24K Family of cores for its next generation home entertainment SoCs. Since 2003, Sigma has licensed a number of other MIPS cores from the entry level 4KE series of processors to the high performing 24K. Looking at Chipidea, some of the additional highlights included their USB high-speed physical layer IP which was the first to be verified on TSMC’s 65-nanometer GP plus process technology.

Verification on the PHY on this process extends Chipidea strategy to be the first in the market to offer silicon proven USB-PHY in the most advanced technology notes.

In July, Chipidea also announced the industries first flexible mixed signal IP platform architecture, a highly innovative approach to integrating multiple blocks of analog functionality into a single chip to streamline electronic system design.

Leveraging Chipidea’s extensive silicon proven portfolio of analog IP, the FLEMIA platform offers an unprecedented level of analog circuit integration and configurability for electronic communication and consumer applications. This platoform leverages Chipidea’s renowned expertise in leading-edge power management, audio and USB IP and allows customers to choose the specific functionality needed to address system demands.

Now, there were several noteworthy MIPS based product introductions from our customers during the quarter. Broadcom extended its leadership in the networking silicon market with the industry’s first MIPS based 65-nanometer gigabit Ethernet switches. Additionally, Broadcom announced the industry’s most advanced 65-nanometer solution for next generation cable satellite and IP set-top boxes. The VCM 7405 digital set-top box and a chip enables the equipment manufacturers to address the growing demand for feature-rich network, personal video recorder set-top boxes with advanced user interface while easily transitioning to DDR2 technology.

The PMC-Sierra announced two highly integrated multi service processors targeted at high performance, cost sensitive embedded applications. These processors are the first additions to PMC-Sierra’s new MSP8100 family of SoCs based on the MIPS 34K core designed for a wide range of applications such as networked appliances, storage systems and security solutions.

In September, Cavium Networks introduced its MIPS 64-based Octeon plus based accelerators for appliance, blade server and storage systems. The new Octeon XL, NIC Pro 2 accelerator card is for secured network services and compression acceleration in appliances, blade servers and storage systems.

So to summarize, the last three months have been perhaps the most exciting in many years with the Chipidea acquisition and its revenue growth and strategic implications, and the Microchip announcement with its implications for the entire MIPS community and our long-term position. As we move to our transition phase with the Chipidea integration and revenue growth, we can then continue to progress towards our goals of enhanced margins. We appreciate your continued support and now I will turn it back to Merv.

Merv Kato

We will now open up the call for questions.

Operator

Our first question comes from Anthony Stoss with Craig-Hallum, you may ask your questions.

Tony Stoss - Craig-Hallum

Merv, can you help us at least on the stock comp kind of going forward what to expect from that stock comp expense? And also, John, if you could talk about the pricing environment and give us a sense of the HDMI Launch from the Chipidea guys? Thanks.

John Burgoin

I am assuming you are asking about the SFAS 123 stock comp. We had about $2.3 million in the exporter and we expect that we would probably see the same amount going forward or probably dropping off a little next quarter. The reason we had some additional charges this year is just the timing of when we have our annual stockholders meeting when the board members receive their grant and we had one in August. So there was additional charge as a result of that there.

Merv Kato

I think that we would continue to see approximately $1.8 million to $2.1 million per quarter.

John Bourgoin

Tony, I assume you are talking about the increasing environment for licensing. Right now, I would say that there is some areas of top competitive activity that is going on. Both, we are being very aggressive and where our competitors are being very aggressive. So the business overall and the licensing is a little on the soft side. And when you see that, I think that you see some pretty aggressive activities. So in general, that is how I describe it. I think guys are out to cut deals now.

The good news for us is that we have the most competitive products in the world. We have got the fastest product, we got the best microcontroller product and we have actually the only multi threaded products out there. Plus, we have some other really neat stuff that will be coming up and we will be ready to talk about it before too long. With regard to your question, our HDMI, we are really not ready to talk about that yet. That is not an introduced product and you will hear more about that from us in the next couple of months.

Tony Stoss - Craig-Hallum

If I may jump in, another question from Merv, can you take us through the deferred revenue aspect of Chipidea because this seem new, I think before you guys, respecting probably above 40% higher that what we should expect for the December quarter in terms of our revenue recognition?

John Bourgoin

Sure. For Chipidea, most of their revenue is generated from projects under development. The ration of these projects is usually from one to three quarters and they are invoicing based on a maximum basis. So for instance, there is usually a payment due at signing of the contract and then there are either two or three other milestones in which they would invoice. So for instance, at that time of signing the contract, there would be an invoice prepared and payment received. And that would then be considered deferred revenue until earned as they are going through the project on a percentage of completion bases.

So it depends on the cycle that they are in and their projects and where they are. They do have a significant number of projects in process at the same time. So we are always going to have some deferred revenue. It really is a timing issue in terms of those particular maximums and where the project happens to be at the end of each quarter.

Tony Stoss - Craig-Hallum

If I am reading you guys, correctly, just also in the five-week run rate for some Chipidea, will put us pretty cost to $27 million, combined Chipidea and MIPS for the December quarter in terms of revenues?

John Bourgoin

If you just took a simple extrapolation based on the revenue reported, but remember that there is a big hunk of revenue that came out of that number for deferral reasons. So it is not that simple.

Tony Stoss - Craig-Hallum

Can you shed a little bit more light? I think that that is where we are driving at?

John Bourgoin

Yes. I think Merv addressed that in the text about $1.5 million out of that number.

Merv Kato

Tony, as we were not able to really provide the specific revenue number for Chipidea, we are still getting our arms around the business and understanding the implications of recognizing revenue for the analog business that is under US GAAP. So as we go through the quarter, we will get a better understanding of that and being able to provide a more specific number on a going forward basis beginning of the next quarter.

John Bourgoin

The real way to think about it is there are the deferral rules for GAAP compared with the practices that Chipidea has had in place so they are just different and because we have purchased accounting issues in here as well, it will take a while to run those through the P&L so that we get back to what I would consider a run rate that is representative of what the real business looks like and we will have more guidance for that and more clarity on that, certainly by the time of the next conference call, but it is very complicated. It is far more complicated than you might think.

Merv Kato

So just keep in mind though, we will be able to recognize the full value of each of their contracts. It is more of a timing issue and therefore as because they do have a significant part of their revenue generated from projects under development that it is a matter of cycling through there and over time, and once again, we are talking relatively short durations of one to three quarters that it is more of a timing issue.

Tony Stoss - Craig-Hallum

Anyway you could provide us with the bookings and everything for Chipidea or backlog per se?

John Bourgoin

We could, but those kinds of things can mislead you, so give us a chance to get our arms around the whole thing and just believe me, this has been quite an intense activity to reach to the data we have to today’s date and over the next month or two, we will have the whole thing put together in a way that it is going to make a lot more sense to everybody I think.

Tony Stoss - Craig-Hallum

Okay, thanks.

Operator

Our next question comes from Raj Seth.

Raj Seth - Cowen & Company

Just a follow up a little bit, so I am clear, I understand the uncertainty and Chipidea, its contribution, but if you did, I think you said $19.9 million this quarter in the core business, again, I am sure, it is somewhere in the text, but I was a little confused, what do you think the core business does in revenues in the subsequent December quarter?

John Bourgoin

Yes, I did in my text that I expected it to grow about 5%.

Raj Seth - Cowen & Company

Okay, 5% sequentially. And then, Merv, there is $335,000.00 charge in the reconciliation from GAAP to pro forma that you say was in operating expense, is it possible for you to split that between the various out back’s foreign items?

Merv Kato

We should have that posted to our website on reconciliation of GAAP to non-GAAP.

Raj Seth - Cowen & Company

So the detail for that little chunk is on the website, you are saying?

Merv Kato

Yes.

Raj Seth - Cowen & Company

Okay, thanks. And John, you mentioned and forgive me if you went into some detail, I have been on and off, I have got another one, you mentioned it was a softer licensing environment. Can you talk a little bit more about what you think is driving that and perhaps comment on whether or not you have seen any change. You operate in sort of the same world that some of EDA guys do, there has obviously been a pretty big change in cadence as licensing model and that you had a little issue, there may not be anything there, but lots of people are asking questions about whether the environment has changed at the edge of that, any perspective there would be appreciated thanks.

John Bourgoin

It is hard to say. I mean, at any given time, we are only talking intensively and trying to close maybe 12 or 14 deals. It is normal for about 25% of the deals to not close for one reason or another, either they slip out of a quarter of they are just delayed for one reason or another. So what we are seeing is at the margin, a couple of more deals, it seemed to just move out a little bit and when I look at our pipeline this quarter, there are a lot of deals in the quarter, but I would say, we are incrementally a little bit less confident in the number of the deals that were closed and you are asking me what is driving that? What is driving my direct perception is contact with my own sales guys and contact with my own customers and when I ask the six or seven questions that tell me how aggressive the customer feels about his program and how likely it will be that they will close during the quarter, the answers feel softer to me.

So it is harder, I do not know that I can take some macro economic perspective or the stocks or anything like that or the housing decline and tie that directly to what we are seeing, it may just simply be that the guys we are talking to are feeling a little less confident than they would normally feel.

It is not black and white, it is certainly not like it was five or six years ago or anything like that. It just feels a little bit softer to me and of course, we had a little bit more trouble with deals at the end of the September quarter and there is some hangover from that I think as well.

Raj Seth - Cowen & Company

Okay, thanks. One last one if I might, Chipidea currently as I recall has only a small percentage of the deals they do that are royalty based, perhaps it is too early, but can you talk again, I think you may have discussed this in a previous call, why is it that you are so confident that you can move these guys to a more royalty biased model and how long do you think that is going to take.

John Bougoin

We will have to do it. Certainly, our position is that we ought to be able to do that because I think the Chipidea products are migrating towards higher valued items. As I think we have mentioned a couple of times, this HDMI coming down the path, we talked a little bit about this platform that Chipidea has out there. These are much higher valued pieces of IP than the company has been selling in the past, and I think they will set a new level of value for the customers that we expect to see turn into some royalties.

Now, as you know one of our philosophies in the processor side is that one of the ways we are able to provide fairly low cost licenses is because we get to participate in the upside associated with the business, so in effect, MIPS takes the risk with the customer on the business through the royalty arrangement and minimizes the amount of money paid up front so that the companies can get in with less risk and that has been part of our model for a long time and I would expect that as we begin to introduce higher valued analog pieces of IP we will see the same kinds of dynamics take place there as well.

Raj Seth - Cowen & Company

Have you began to have any of these conversations or is it just too early.

John Bourgoin

It is too early.

Raj Seth - Cowen & Company

Okay, thanks very much.

John Bourgoin

We must have answered every possible question.

Operator

We have a question from Rob Amam with RK Capital. You may ask your question.

Rob Amam - RK Capital

The 50% growth that you would expect of the analog business, off of what base is that, and I know what you can recognize is different under accounting rules, but what are you thinking of as the base when you talk about that 15% growth?

John Bourgoin

I am not sure I understand your question. Yes, I used the term 15% growth, but what I am talking about there is I am talking about the revenue of the underlying business which is to say the revenue using the standards that Chipidea has been using for declaring a revenue. Now the tricky part here from the standpoint of what report on GAAP standards is, we have a lot of deferrals and we have some purchase accounting rules that get in the way of all of us being able to see what that is when we look at GAAP. So that is what I am saying with the 15% quarter on quarter number there is I think the business is very robust and that for a given weight to make the measurement one quarter to the next, that is the kind of growth we will see.

Rob Amam - RK Capital

Okay, so if you are talking IFRF, they would see 15% sequential growth?

John Bourgoin

That is what we think, yes.

Rob Amam - RK Capital

And that is full quarter over full quarter because of course, you only had it for a stub this year.

John Bourgoin

That is correct, yes.

Rob Amam - RK Capital

Okay, so on a full quarter pro forma basis and your IFRS that we are seeing, you hope for 15% growth.

John Bourgoin

Yes.

Rob Amam - RK Capital

And the full quarter revenues under IFRS or Chipidea? What if that was not this quarter?

John Bourgoin

We did not announce those.

Rob Amam - RK Capital

Okay, but the stub here that you would have recognized this quarter would have been what, $4 million plus, is that right?

John Bourgoin

For the thirty-some days between August 27 and September 30, it is slightly more than one month.

Rob Amam - RK Capital

$2.4 million which is what you had plus a $2 million adjustment that we are taking out for purchase accounting rules and other reasons.

John Bourgoin

That is correct.

Rob Amam - RK Capital

Okay, that is all I have. Thank you.

Operator

Our next question comes from Hasnin Kareem with Pacific Edge; you may ask your questions.

Hasnin Kareem – Pacific Edge

Just a follow up on that question, I think originally when the announcement for acquisition was made; the accretion expectation was the June quarter of next year. Is that still the case or when are you expecting it?

John Bourgoin

Yes, that is so correct.

Hasnin Kareem – Pacific Edge

When you put out your Q, will you have I guess both the accounting situation resolved and will you be able to give some sort of guidance on the Q at least, regarding how we should think about opex for that division as well as revenues for that division.

Merv Kato

We do not put any guidance into the Q filings at all. We will leave out a lot of details around the activities associated with the acquisition and the transactions, the revenues for the quarter.

John Bourgoin

Yes, there are quite a few moving parts here Hasnin including the length of time, the different programs have for different product groups inside Chipidea. The starting time is exactly, what the ending times are, how those have been treated in the past and are getting a sense of the degree that which these things tend to be accurately estimated by the guys in Lisbon, which I think by the way is probably pretty good but we need to gain quite a bit of experience here, ourselves in terms so that we can understand this and give correct guidance.

I think our concern here is that while we could throw some numbers out that might turn out to be pretty accurate, our basis for giving the numbers is not strong enough yet and the last thing we want to do is damage your confidence in us because the numbers turn out to be not fully thought through.

Hasnin Kareem – Pacific Edge

Okay, and then I guess on the accounts receivables side, there is a massive difference in how they categorize accounts receivable versus how you guys do it? Is there a better way of thinking about it, I mean, is AR something that they collect within 90 days or is there some other piece that the function of revenue recognition there?

Merv Kato

You are talking about accounts receivables; there is really not anything that is impacted as a result of revenue recognition. They do have different credit policies and terms and therefore a number of these accounts are provided with longer time to pay their invoices and that is what we are seeing, pretty much in terms of the activities even since the August 27^th date.

Hasnin Kareem – Pacific Edge

Okay, is that something that is going to change in the next six months or how do you expect that to –

Merv Kato

I think what it is here is a gradual transition. Part of this is that with existing customers, once you start giving a certain amount of time to pay. It is pretty hard to change that. Definitely you can do that with new customers. And so, keep in mind also that the invoice is based on milestone payments, so tiny ways of when these invoices are generated in payment is probably a little bit extended because of that fact that it is a kind of payment as you go as opposed to, you are aware on the process or business. Many of our deals we were able to fully deliver the cores upfront and we did have probably a little bit more leverage in terms of collecting on a more-timely basis.

Hasnin Kareem – Pacific Edge

Okay, and then on the royalty side done, in your guidance, you mentioned that royalties will likely grow faster than 5% while as like some of the similar policies down probably quarter on quarter, could you talk about, I guess the 24K in there or is that the seasonal shift?

John Bourgoin

No, it is more of a seasonal shift. I mean the 24K is going to become an increasing factor over the next year. It is still relatively small but it will grow over the next year. The biggest issue right now is seasonality.

Hasnin Kareem – Pacific Edge

Okay, great that is it thanks.

Operator

Our next question comes from Rob Amam with RK Capital. You may ask your questions.

Rob Amam - RK Capital

Just a quick question on the cost of contract revenue, that $3.3 million and the P&L in the quarter, I know that had some charges that run through it. Can you give me what the pro forma cost of contract revenue number would be, extra charges that ran through where there is amortization, and tangibles or other items?

John Bourgoin

Yes, we can do that. There was about eight hundred thousand flowing through the cost of contract revenue.

Rob Amam - RK Capital

Just 834K with the amortization and with tangibles, there wasn’t anything else?

John Bourgoin

That is correct.

Rob Amam - RK Capital

The $2.5 million pro forma, though from a GAAP perspective, you have got a negative gross margin on the analog business from a GAAP or IFRS, decent margin I suppose.

John Bourgoin

Yes, but keep in mind that the deferrals do not defer the cost. So, it is not a representative picture.

Rob Amam - RK Capital

Right, from a casual perspective it is going to look entirely different.

John Bourgoin

Yes.

Rob Amam - RK Capital

Okay, thank you.

John Bourgoin

Okay.

Operator

Salomon Kamalodine with B. Riley & Company, you may ask your question.

Salomon Kamalodine - B. Riley & Co.

Just to follow up on the balance sheet and the fact that the business looks a lot more working capital intensive following the acquisition or can you just talk a little bit about what is in your prepaid expenses line and talk about some of the accrued liability that have been booked in the quarter?

Merv Kato

Sal, you know what, since we are still in the process of wrapping up our filing on the 10-Q, I would defer it until we get a chance to finalize that and be able to give you a better perspective.

Salomon Kamalodine - B. Riley & Co.

Okay, and then can you just talk about the seasonality in the analog business, obviously it has been growing at a nice phase, and that probably has offsets and some of the seasonality in that business but would it be wrong for us to take the implied quarterly revenue run rate from this five weeks and annualize that to get sort of a run rate for that business?

John Bourgoin

Well, I sure would not do that. There are so many strange things in this first five-week number that trying to extrapolate that or any substantial length of time or even looking at it as representative for the September period I think would be a fool’s errand to be honest with you. This would do it, there are too many strange things going on there. But as I said earlier, we will be able to give you some guidelines. I think it all clarifies that over the next three months.

Salomon Kamalodine - B. Riley & Co.

Okay, thanks.

John Bourgoin

I wish it were a little bit easier to explain this but it has proven to be very, very complicated.

Operator

Our next question comes from Anthony Stoss with Craig-Hallum.

Tony Stoss - Craig-Hallum

I guess maybe we could ask it this way. Without giving us the Chipidea quarterly number was Chipidea’s revenue up sequentially from the June quarter, can you give us a sense? 10%, 5%, 15%?

John Bourgoin

Well, how much was it up? We are taking a look right now.

Tony Stoss - Craig-Hallum

Okay.

John Bourgoin

It is up slightly, less than 10%.

Tony Stoss - Craig-Hallum

Okay, thank you.

John Bourgoin

Yeah I guess Tony, one other comment, the September includes the month of August in Europe where nobody is around, so, that is traditionally a slower quarter for European business which, of course they are in the middle of Europe and that is part of their deal too. So, if that is, I think worth mentioning at least as an adjunct to the less than 10% of the number.

Tony Stoss - Craig-Hallum

Okay, because one of the things I am getting at is, we do have some information that was I think provided by Chipidea on their website or whatever before that indicated their June revenues were about $10.5 million.

John Bourgoin

Yeah, I think that is correct.

Tony Stoss - Craig-Hallum

Okay, alright thank you.

John Bourgoin

I remember that is IFRS.

Tony Stoss - Craig-Hallum

Thank you.

Merv Kato

Okay, if there are no more questions we thank you for joining us today in accord to talking to you and visiting with you during the quarter. Please contact us at mips.com if you would like to arrange something.

John Bourgoin

Okay thanks a lot everybody.

Operator

That concludes today’s conference. Participants on the phone lines may disconnect at this time.

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