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MIPS Technologies, Inc. (NASDAQ:MIPS)

F1Q08 Earnings Call

January 31, 2008 4:45 pm ET

Executives

Mervin S. Kato - Vice President & Chief Financial Officer

John Bourgoin - Chief Executive Officer & President

Analysts

Anthony Stoss – Craig-Hallum Capital Group LLC

Raj Seth – Cowen & Company

Rob Ammann – RK Capital

Hasnin Kareem – Pacific Edge

Salomon Kamalodine – B. Riley and Company

Operator

Good afternoon and welcome to the MIPS Technologies first quarter and fiscal year 2008 financial results call. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Mr. Merv Kato, Chief Financial Officer. Sir, you may begin.

Mervin S. Kato

Welcome to the MIPS Technologies first quarter fiscal 2008 earnings conference call. I’m 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 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 to the risk factor section of documents that we file from time to time with the Securities & Exchange Commission for 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 a 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 www.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 year end 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 up front to the selling stockholders and approximately $27 million was placed into 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 Chipidea’s 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 GAAP and non-GAAP results. The non-GAAP results excludes FAS 123R stock option expense and certain costs and expenses related to the Chipidea acquisition. Please refer to the earnings press release or 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 related embedded cores as the processor business and the Chipidea analog and mixed-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 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 for a prior period calculation error by one of our licensees. Our licensees reported 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 onto expenses - total GAAP operating expenses in the first quarter of fiscal 2008 was $30.4 million including $2.4 million in FAS 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 plus $648,000 in compensation expense related to the amortization of a hold-back escrow for the founders of Chipidea. In addition we had expenses of $1.2 million in post-acquisition integration costs primarily related to accounting fees for consulting services, tax, audit and IRPS 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 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 expenses of $4.4 million and G&A expenses of $4.4 million.

Other income and 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 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 compared 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 on a GAAP basis. Excluding the costs 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 in the prior quarter and net income 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 loan. Accounts receivable increased by approximately $16.6 million compared with the last quarter primarily due to the addition of the Chipidea accounts receivable balance. 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 experiencing relatively robust real growth in excess of 15%. However, the complexities of the transition to GAAP compatible reporting 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 that 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 10Q filing for the quarter ended September 30th, 2007 is due tomorrow, November 9th. 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 14th. After we hear from John Bourgoin about the business highlights for Q1 we would be glad to answer questions.

John Bourgoin

Well without a doubt the most exciting milestone for MIPS in many years was the acquisition of Chipidea in August. Developers of system on chip solutions are faced with increasing complexity and development costs and they need to benefit from the shared cost of R&D model of intellectual property providers for IP that they need beyond their own differentiating design work. Now 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 that someone else has 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 if companies 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 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 the two of the most technically challenging areas for SOC developers. No other IP company offers this combination. Strategically we believe this more will prove to be instrumental in 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 in locations around the world where universities support such programs. No one else has this. Chipidea’s revenue gross since inception ten years ago provides clear evidence that this kind of IP is valuable, is in demand, that there’s a strong market and that the Chipidea team itself is exceptional. That’s why we’re excited about the acquisition.

Today we’re announcing our first combined revenue numbers including the period since August 27th for the analog business group. Our teams have been working closely to identify and reconcile the differences between the practices used by Chipidea and 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 projected it in our public presentations to date.

Our product organizations including product development, product marketing and other areas specific 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 sales organization and traditional general and administrative functions we have an aggressive integration program under way. 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 the next generation SOC designs.

Revenue numbers for the MIPS processor business were slightly down from our guidance at the last conference call but were still our best September quarter in seven years and very close to our all-time high. It’s my view that the license market for microprocessors is a little softer right now than it has been in prior quarters and we’re being conservative with this portion of our guidance for the December quarter. We believe royalties should rebound significantly during the quarter though.

Although the spending picture is complicated in the September quarter by several issues including the acquisition costs and some residual costs associated with the restatement work which finished 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’re 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 and the effects of the reconciliation adjustments play out.

Moving onto products, last week in Tokyo we unveiled a new strategic initiative for MIPS as we enter the 32-bit microcontroller market and confirming speculation rampant for the past year this week Microchip the acknowledged leader in 8- and 16-bit microcontrollers announced that it has standardized its new 32-bit PIC32 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 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 ecosystem is driven by the number of potential customers those third parties see. Microchip has 60,000 customers today. Yes, 60,000. 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 as those customers seek to enhance the features or the performance of their products. That’s 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’ve seen tremendous interest globally in this product since its announcement in May especially with key customers in the digital entertainment markets running heavyweight operating systems like Windows CE and thriving broadcasting, broadband and networking markets. In July we announced that Infineon became the second major semiconductor company to license the 74K. Earlier we had announced the Broadcom had licensed the product.

A mixed 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 leader Microsystems licensed the 24KEC 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 8-shot 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 DTB markets for MIPS holds a significant leadership position.

Genesis Microchip a leading provider of image and video processing systems enabling superior picture quality in 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.

In networking news the [CONOS Communications] introduced its MIPS-based effusive VX180VDSL2 gateway processor. It delivers 2.7 gigahertz of processing power, VoIP, multi-mode DSL and security. Targeted applications include customer premises equipment, home networking, SOHO 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 Infonetics Research predicts the annual broadband CPE revenue will reach $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 churn among existing customers.

And earlier this week MIPS announced its Sigma Designs licensed for 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 of the FI on this process extends Chipidea’s strategy to be the first in the market to offer silicon-proven USB FI in the most advanced technology nodes. In July Chipidea also announced the industry’s 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 platform 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 BCM7405 digital set-top box on a chip enables equipment manufacturers to address the growing demand for feature-rich network personal video recorders set-top boxes with advanced user interface while easily transitioning to DDR2 technology. BMC Sierra announced two highly integrated multi-surface processors targeted at high performance, cost sensitive embedded applications. These processors are the first additions to BMC Sierra’s new MSP80100 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 secure 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 through our transition with the Chipidea integration and revenue growth and continue to progress towards our goals of enhanced margins, we appreciate your continued support.

Now, I’ll turn it back to Merv.

Mervin S. Kato

We will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. At this time we are ready for the question and answer portion. (Operator Instructions) Our first question comes from Anthony Stoss with Craig-Hallum. You may ask your question.

Anthony Stoss – Craig-Hallum Capital Group LLC

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

Mervin S. Kato

I’m assuming you’re asking about the FAS123 stock comp?

Anthony Stoss – Craig-Hallum Capital Group LLC

Yes.

Mervin S. Kato

We had about $2.3 million in the quarter and we expect that we will probably see about that same amount going forward probably dropping off a little bit 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. I think we would continue to see approximately $1.8 to $2.1 million per quarter.

Anthony Stoss – Craig-Hallum Capital Group LLC

Okay.

John Bourgoin

Yeah, Tony, I assume you’re talking about the general pricing environment for licensing?

Anthony Stoss – Craig-Hallum Capital Group LLC

Yes.

John Bourgoin

Yeah. Right now I’d say there’s some areas of top competitive activity going on both where we’re being very aggressive and where our competitors are being very aggressive so it’s – Business overall in licensing is a little on the soft side and when you see that I think you see some pretty aggressive activities. So, in general, that’s how I’d describe it. I think guys are out to cut good deals now. The good news for us is we have the most competitive products in the world. We’ve got the fastest product, we’ve got I think the best microcontroller product and we have actually the only multi-threaded products out there plus we have some other really neat stuff coming out that we’ll be ready to talk about before too long.

With regard to your question on HDMI we’re really not ready to talk about that yet. That’s not an introduced product and you’ll hear about that from us in the next couple of months.

Anthony Stoss – Craig-Hallum Capital Group LLC

If I may jump in another question for Merv. Can you take us through the deferred revenue aspect of Chipidea? Because this seems new, I think before you guys were expecting run rates probably about 40% higher than what we should expect for the December quarter in terms of revenue recognition.

Mervin S. Kato

For Chipidea most of their revenues generated from projects under development. The duration of these projects are usually from one to three quarters and they are invoicing based on a milestone basis. For instance, there’s usually a payment due at signing of the contract and then there’s either two or three other milestones in which they would invoice. For instance, at the time of signing the contract there would be an invoice prepared and payment received and that would then be considered a deferred revenue until earned as they’re going through the project on a percentage of completion basis. It depends on the cycle they’re in in their projects and where they are. They do have a significant number of projects in process at the same time so it’s going to be – We’re always going to have some deferred revenue. It’s really a timing issue in terms of those particular milestones and where the project happens to be at the end of each quarter.

Anthony Stoss – Craig-Hallum Capital Group LLC

So if I’m reading you guys correctly, just also on the five-week run rate from Chipidea would put us pretty close 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 there’s a big hunk of revenue that came out of the number for deferral reasons. So it’s not that simple.

Anthony Stoss – Craig-Hallum Capital Group LLC

Can you shed a little more light? I think that’s what we’re driving at.

John Bourgoin

I think Merv addressed that in the text, about a million and a half dollars out of that number, right?

Mervin S. Kato

Yes. So, Tony, I think as we weren’t able to provide a 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 under US GAAP and 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 the next quarter.

John Bourgoin

The real way to think about it is there’s the deferral rules for GAAP compared with the practices that Chipidea has had in place 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’ll have more guidance for that, more clarity on that certainly by the time of the next conference call, but it’s very complicated. It’s far more complicated than you might think.

Mervin S. Kato

Just keep in mind though we’ll be able to recognize the full value of each of their contracts, it’s more of a timing issue and therefore because they do have a significant part of their revenue generated from projects under development that it’s a matter of cycling through their and over time – Once again we’re talking relatively short durations of one to three quarters, it’s more of a timing issue.

Anthony Stoss – Craig-Hallum Capital Group LLC

Any way you could provide us with a bookings number then 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. 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’ll have the whole thing put together in a way that’s going to make a lot more sense to everybody I think.

Operator

Our next question comes from Raj Seth.

Raj Seth – Cowen & Company

Just to follow up a little bit so I’m clear, I understand the uncertainty and Chipidea contribution, but if you did, I think you said $19.9 million this quarter in the core business, again I’m sure it’s 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

I said in my text that I expected it to grow about 5%.

Raj Seth – Cowen & Company

5% sequentially?

John Bourgoin

Yeah.

Raj Seth – Cowen & Company

Merv, there’s a $335,000 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 [inaudible 00:04:15] to line items?

Mervin S. 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’re saying?

Mervin S. Kato

Uh huh.

Raj Seth – Cowen & Company

John, you mentioned – and forgive me if you went into some detail, I’ve been on an off, I’ve 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’ve seen any change. You operate in sort of the same world that some of the EDA guys in, there’s obviously been a pretty big change in Cadence’s licensing model, Mentor 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 a bit. Any perspective there would be appreciated. Thanks.

John Bourgoin

It’s hard to say. At any given time we’re only talking intensively and trying to close maybe 12 or 14 deals it’s normal for about 25% of the deals to not close for one reason or another, either they slip out of the corridor or they’re just delayed for one reason or another. What we’re seeing is at the margin a couple of more deals that seem to just move out a little bit and when I look at our pipeline this quarter, there’s a lot of deals in the quarter but I would say we’re incrementally a little bit less confident in the number of deals we’ll close. You’re asking me what’s driving that? What’s 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’ll be that he’ll close during the quarter, the answers feel softer to me. I don’t know that I can take some macro-economic perspective or the SOCs or anything like that or the housing decline and tie that directly to what we’re seeing. It may just simply be that the guys we’re talking to are feeling a little less confident than they would normally feel. It isn’t black and white, it’s 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’s some hangover from that I think as well.

Raj Seth – Cowen & Company

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’s too early, but can you talk again – I think you may have discussed this in a previous call, why is that you’re so confident that you can move these guys to a more royalty-biased model and how long do you think that’s going to take?

John Bourgoin

We’ll 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. I think we’ve mentioned a couple of times there’s 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’ll 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’re able to provide fairly low-cost licenses is because we get to participate in the upside associated with the business. 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 companies can get in less with risk and that’s been part of our model for a long time and I would expect that as we begin to introduce higher value to analog pieces of IP we’ll see the same kinds of dynamics take place there as well.

Raj Seth – Cowen & Company

Have you begun to have any of these conversations or is it just too early?

John Bourgoin

It’s too early.

Operator

(Operator Instructions) We have a question from Rob Ammann with RK Capital. You may ask your question.

Rob Ammann – RK Capital

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

John Bourgoin

I’m not sure I understand your question. I used the term 15% growth. What I’m talking about there is I’m talking about the underlying business which is to say the revenue using the standards that Chipidea has been using for declaring their revenue. Now, the tricky part here from the standpoint of what we report at 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. What I’m saying with the 15% quarter-on-quarter number there is I think the business is very robust and that for a given way to make the measurement one quarter to the next, that’s the kind of growth we’ll see.

Rob Ammann – RK Capital

You’re talking under IFRS they would see 15% sequential growth?

John Bourgoin

That’s what we think, yeah.

Rob Ammann – RK Capital

And that’s full quarter over full quarter, because of course you only had it for a stump this year.

John Bourgoin

Correct. Yes.

Rob Ammann – RK Capital

So on a full quarter pro forma basis under IFRS you hope for 15% growth.

John Bourgoin

Yes.

Rob Ammann – RK Capital

And the full quarter revenues under IFRS for Chipidea would have been what this quarter?

John Bourgoin

We didn’t announce those.

Rob Ammann – RK Capital

The stump here that you have recognized this quarter would have been what, $4 million plus? Is that right?

John Bourgoin

Yeah, for the 30 some days between August 27th and September 30th. It’s slightly more than one month.

Rob Ammann – RK Capital

$2.4 million which is what you had plus the $2 million adjustment that we’re taking out for purchase accounting rules and other reasons?

John Bourgoin

That’s correct.

Operator

Our next question comes from Hasnin Kareem with Pacific Edge. You may ask your question.

Hasnin Kareem – Pacific Edge

Just a follow up on a 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’s still correct.

Hasnin Kareem – Pacific Edge

When you put out your Q will you have both the accounting situations resolved and will you be able to give some sort of guidance on the Q at least regarding how we should think about outbacks for that division as well as the revenue for that division?

Mervin S. Kato

We don’t put guidance into the Q filings at all.

Hasnin Kareem – Pacific Edge

I guess we’ll –

Mervin S. Kato

A lot of details around the activities associated with the acquisition and the transactions, the revenues for the quarter.

John Bourgoin

There’s quite a few moving parts here, Hasnin, including the length of time that different programs have for different power groups inside Chipidea, the starting times exactly, what the ending times are, how those have been treated in the past and our getting a sense of the degree to 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 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 our 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

On the accounts receivable side, there is I guess the math is different on how they categorize accounts receivable versus how you guys do it. Is there a better way of thinking about it? Is AR something they collect within 90 days or is there some other piece of, function of revenue recognition there?

Mervin S. Kato

You’re talking about accounts receivable. There’s 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 a longer time to pay their invoices and that’s what we’re seeing pretty much in terms of the activities even since the August 27th date.

Hasnin Kareem – Pacific Edge

Is that something that’s going to change in the next six months or how do you expect that –

Mervin S. Kato

I think what we’ll see is a gradual transition. Part of it is that with existing customers once you start giving a certain amount of time to pay, it’s pretty hard to change that. We definitely could do that with new customers. Keep in mind also that they invoice based on milestone payments so it’s timing wise of when these invoices are generated and payment is probably a little bit extended because of that fact that it’s kind of on a payment as you go as opposed to as you’re aware on the processor business, many of our deals we’re able to fully deliver the cores up front and we do have probably a little bit more leverage in terms of collecting on a more timely basis.

Hasnin Kareem – Pacific Edge

On the royalty side, John in our guidance you mentioned that relative to the likely growth [inaudible 00:06:04] 5% [inaudible 00:06:07] quarter-on-quarter, would you talk about I guess 24K in there or is that the seasonal shift?

John Bourgoin

No it’s more of a seasonal shift. 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 though is seasonality.

Operator

(Operator Instructions) Our next question comes from Rob Ammann with RK Capital. You may ask your question.

Rob Ammann – RK Capital

Just a quick question on the cost of contract revenue, the $3.3 million on the P&L in the quarter, I know that had some charges that ran through it. Can you give me what the pro forma cost of contract revenue number would be [inaudible 00:07:04] the charges that ran through whether it’s amortization of intangibles or other items?

Mervin S. Kato

Yeah, we can do that. There was about $800,000 flowing through the cost of contract revenue.

Rob Ammann – RK Capital

Just 834K with the amortization of intangibles, there wasn’t anything else?

Mervin S. Kato

That’s correct.

Rob Ammann – RK Capital

The $2.5 million pro forma, okay. From a GAAP perspective, you’ve got a negative gross margin on the analog business, from a GAAP perspective. Of course under IFRS you’d still have a decent margin I suppose.

John Bourgoin

Yeah, but keep in mind that the deferrals don’t defer the costs.

Rob Ammann – RK Capital

Right. Right.

John Bourgoin

So it’s not a representative picture.

Rob Ammann – RK Capital

Right. From a cash flow perspective it’s going to look entirely different.

John Bourgoin

Yeah.

Operator

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

Salomon Kamalodine – B. Riley and Company

Just to follow up on the balance sheet and the fact that the business looks like a lot more working capital intensive following the acquisition. Merv, can you just talk a little bit about what’s in the pre-bid expenses line and talk about some of the accrued liabilities that have been booked in the quarter?

Mervin S. Kato

Sal, you know what, since we’re still in the process of wrapping up our filing on the 10Q, I would defer until we get a chance to finalize that deal to give you a better perspective.

Salomon Kamalodine – B. Riley and Company

Okay. Then can you just talk about the seasonality in the analog business? Obviously it’s been growing at a nice clip and that’s probably has offset some of the seasonality in that business, but would it be wrong for us to take the implied quarterly revenue run rate from these five weeks and annualize that to get sort of a run rate for that business?

John Bourgoin

Well I sure wouldn’t do that. There’s so many strange things in this first five-week number that trying to extrapolate that for 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. I just wouldn’t do it. There’s too many strange things going on there. But, as I said earlier, we’ll be able to give you some guidance I think that helps clarify that over the next three months. I wish it were a little bet easier to explain this but it’s proven to be very, very complicated.

Operator

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

Anthony Stoss – Craig-Hallum Capital Group LLC

Maybe we could ask it this way. Without giving us the Chipidea quarterly number, was Chipidea’s revenue up sequentially from their June quarter?

Mervin S. Kato

Yes.

Anthony Stoss – Craig-Hallum Capital Group LLC

Can you give us a sense? 10%? 5? 15?

John Bourgoin

How much was it up?

Mervin S. Kato

We’re taking a look right now. It was up slightly, less than 10%.

Anthony Stoss – Craig-Hallum Capital Group LLC

Less than 10%.

John Bourgoin

I guess, Tony, one other comment, the September quarter 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’re in the middle of Europe, but that’s part of their deal too. So, that’s I think worth mentioning at least as an adjunct to the less than 10% up number.

Anthony Stoss – Craig-Hallum Capital Group LLC

Okay. Because one of the things I’m getting at, 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.

Mervin S. Kato

Yeah, I think that’s correct.

John Bourgoin

And remember that’s IFRS.

Operator

(Operator Instructions)

Mervin S. Kato

If there are no more questions, we thank you for joining us today.

Operator

I don’t show any questions.

Mervin S. Kato

We look forward to talking to you and visiting with you during the quarter. Please contact us at IR@MIPS.com if you would like to arrange something.

John Bourgoin

Thanks a lot everybody.

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Source: MIPS Technologies F1Q08 (Quarter End 12/31/07) Earnings Call Transcript
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