Tessera Technologies' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Jul.26.12 | About: Tessera Technologies, (TSRA)

Tessera Technologies (NASDAQ:TSRA)

Q2 2012 Earnings Call

July 26, 2012 5:00 p.m. ET

Executives

Moriah Shilton - IR

Robert Young - President and CEO

Mike Anthofer - CFO

Barney Cassidy - General Counsel

Rich Chernicoff - President, Tessera Intellectual Property Corp.

Bob Roohparvar - President, DigitalOptics Corporation.

Analysts

Jonathan Skeels - Davenport & Co.

Eugene Robin - Cove Street Capital

Eric [Neetch] - Barclays

Jeff Karansky - DRZ

Operator

Good afternoon. At this time, I would like to welcome everyone to the Tessera Technologies second quarter 2012 earnings conference call. [Operator instructions.] Thank you. I would now like to turn the conference over to Ms. Moriah Shilton. Madam, you may begin.

Moriah Shilton

Thanks, operator, and good afternoon everyone. Thank you for joining us for the call today. This call is also being broadcast live over the Internet. 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 are 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, 2011 and its quarterly reports on Form 10-Q for the quarter ended March 31, 2012, especially in the sections entitled 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 Robert Young, president and chief executive officer; Mike Anthofer, chief financial officer; Barney Cassidy, general counsel; Rich Chernicoff, president of Tessera Intellectual Property Corp.; and Bob Roohparvar, president of DigitalOptics Corporation.

During this call today, management may 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 compensation expense, acquired intangibles, amortization charges, charges for acquired in-process research and development, impairment charges on long-lived assets and goodwill, and related tax effects.

After management’s brief opening remarks, we will open the call to your questions. And I will now turn the call over to Mike.

Robert Young

Thank you all for joining us on the call today. I’d like to take a few minutes to discuss both our business segments before opening the call for your questions. First, on the intellectual property segment, we generated $92 million in intellectual property revenue in the first half of 2012. We are executing well and are focused on securing long term running royalty license agreements with current and potential customers for our patent portfolios.

In the second quarter, Invensas Corporation expanded its technology portfolio with the introduction of two new technologies: the dual in-line memory module in a package, and the bond via array (NASDAQ:BVA). We are working toward commercial adoption of these technologies now.

Recently, the International Chamber of Commerce ruled in favor of Tessera, Inc. in its dispute with Amkor Technology. We intend to seek an amount in excess of $125 million from Amkor based on our preliminary review of this interim award.

For our digital optics segment, in the first half of 2012 we made significant progress toward our goal of becoming a vertically integrated, original design manufacturer of next-generation integrated camera modules. We anticipate shipping our MEMS autofocus technology in the fourth quarter of this year to a primary integrator partner for use in a specific platform of a tier one customer.

In parallel, we are building our own lens manufacturing facility in Taiwan, which will allow us to better control the supply chain and to deliver to our customers a complete camera module solution. Long term, growth for digital optics will come from the sale of our next-generation camera modules to the $9 billion market for mobile phone cameras.

Now before I turn the call over to the operator for questions from you, I want to discuss the change in our guidance policy that we announced today. In 2013, we expect to see significant changes in our business, as our digital optics business starts to generate high volume manufacturing of integrated camera modules for mobile phones, and we believe it will generate meaningful sales.

As with most new businesses, there is a greater uncertainty initially into the predictability of revenue. This uncertainty will not enable us to provide sufficient visibility to investors regarding near term financial expectations and performance. Therefore, commencing with the first quarter of 2013, we plan to no longer provide financial guidance.

Now I’d like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] And your first question will come from the line of Jonathan Skeels with Davenport. Please go ahead with your question.

Jonathan Skeels - Davenport & Co.

A few on the digital optics business. Earlier this year you laid out certain milestones for investors to monitor the progress of optics, and the first one was I think the MEMS foundry supply chain, and camera module assembly capabilities, which you accomplished. Second was a design win by the first half of the year. This didn’t happen. I’m just wondering if you can update us on why it didn’t happen, and where this design win currently stands.

Robert Young

Sure. We have engaged with a partner to deliver the MEMS product in a specific platform for a tier one manufacturer. And we are on track to do that and to ship in the fourth quarter as we’ve said. The process that occurs with these vendors is actually one that doesn’t lend itself very well to the term design win. We probably shouldn’t have used that term. It’s a semiconductor term.

Usually you’re talking about selling a chip, and someone decides they’re going to put that chip in their next product. Here, you have someone who wants your offering, and you provide it to them, and then there’s an integration process by which you get it fully integrated into the offering. So some people could call what we got a design win. We’re actually going to just move away from that terminology. And what we have is we are fully engaged with someone that is on a track to deliver the MEMS in the fourth quarter.

Jonathan Skeels - Davenport & Co.

Okay, so you are integrated in, or is that still in the process?

Robert Young

We’re in the process of being integrated in. And we expect that that will be completed in a time that will allow us to deliver that product in the fourth quarter.

Jonathan Skeels - Davenport & Co.

Will you provide any update on where that stands before the fourth quarter? Or should we just expect to wait and see revenues?

Robert Young

We will probably not announce something until you see the revenues.

Jonathan Skeels - Davenport & Co.

Next, just on the Flextronics facility, do you still plan to be able to ship high volume in the beginning of first quarter of 2013? Is that still the plan on that side?

Bob Roohparvar

When we acquired Vistapoint Technology, it gives us the ability to ramp our MEMS autofocus breakthrough technology and it will set the stage for us to be able to begin the manufacturing process. So as you know, we acquired it, and they do not have the MEMS autofocus assembly capability. As we speak, we are facilitating and putting the equipment in in order to be able to provide that kind of manufacture ramp. So we are making significant progress in converting this factory into a MEMS factory.

Jonathan Skeels - Davenport & Co.

Is there a specific timeframe in terms of when you’ll know if you’re fully on track, I guess, to ship high volume camera modules?

Robert Young

It will certainly be in the first half of ’13.

Jonathan Skeels - Davenport & Co.

And then maybe just one more on the Flextronics facility and digital optics. Previously you talked about the business turning profitable I think late in 2013. Is that still the profitability target?

Robert Young

Yes.

Jonathan Skeels - Davenport & Co.

Can you kind of walk through maybe the biggest risks to achieving that target, as it now stands?

Robert Young

This, to some extent, is associated with our decision to quit giving guidance in 2013. Having been an old venture capitalist, the hardest thing to predict is the initiation and ramping of revenue in a new business area. When you’re giving deltas off of known customers, known production, known demand, etc., it’s something that is much, much easier to do.

But as you probably also know, even very successful startup companies have a lot of uncertainty in both the initiation and the ramping of revenue. And so we feel very good about where we are. There’s a lot of excitement in what we’re showing to the handset manufacturers, and so we’re very confident that we’re on the right track. But the prediction of some of the things that you would like to be able to do, in volumes and obviously the consequent revenues, is very hard to do.

Jonathan Skeels - Davenport & Co.

Can you explain maybe the rationale for building a lens manufacturing facility? And then just on the $30 million of cost, or the investment necessary there, is that going to be incurred primarily in the second half of the year?

Bob Roohparvar

I think this is a very, very good question. Lens is really truly a carrier of our technology. In order for us to protect both our design, we are putting a tremendous amount of effort in protecting our IP and the position, and that’s why I think that would be an essential part of this integration. And also the time to market is extremely important. We will be working with a number of partners very, very closely.

As you all know, all the tier one customers they need to have two sources, dual source capability, and in terms of lenses, we would like to be either primary or secondary. In terms of building the camera module, we also want to be the primary or secondary. And this way we can minimize the risk of putting investment, but as tremendous demand we anticipate coming our way, then based on demand we can go ahead and spend the amount of capital we need in order to satisfy the demand.

Jonathan Skeels - Davenport & Co.

Do you need the lens manufacturing facility to be up and running in order to ramp the module production from the Flextronics facility in ’13?

Bob Roohparvar

That’s not the case. We are working with partners, but they are supporting us. In terms of building lenses for us, as you know, at 8 megapixels and higher, they need to have 5 element lenses. It is not only the lenses, it’s also assembling and putting this thing in a barrel is not a science. It’s a great project. It’s actively aligning the center of all these elements within a fraction of a micron. And understand, one micron is for sure a challenge that I think we have made tremendous progress on that as well. So that’s why we said we need to be able to protect our technology and IP at patents as we have in this area. But we work with partners, you’re right.

Operator

Our next question is from Eugene Robin with Cove Street Capital. Please go ahead with your question.

Eugene Robin - Cove Street Capital

Just again to recap all the obvious issues, you will make an announcement when you have revenues to report for digital optics, but not before, and you’re hopeful by year end you’ll recognize the difficulties, and it could always slip. Is that a correct statement?

Robert Young

There could be some announcements. I don’t know that we would say that there will be no announcements for digital optics. I mean, something could happen that we feel is newsworthy, and put out a news release. Certainly things like that could happen. What we would probably not do is of all the activities that go on, and the process of getting a product into a shipment, to track everybody along that, all the way along. Because activities are happening every day on that kind of thing. So no, we could have announcements, but in terms of tracking certain things that we’ve already told you we’re in the process of doing, that’s what we’re not planning to do.

Eugene Robin - Cove Street Capital

And the $30 million reference spend, is that to get the factory MEMS production ready? And let’s say you land what you would like to land, is there additional spend behind that that’s just subject to the order for 2013?

Mike Anthofer

The $30 million of spend will occur in the next several quarters. I can’t say they would all happen in the second half of the year, but over the next several quarters. It is to enable us the capability to have lens manufacturing. We already have the design center in place, and so this would associate with our ability to produce lenses. And we have already acquired the Zhuhai facility, which has capability for the camera module piece. And that consideration in total is just over $28 million in total. The total consideration. So with respect to additional capital required, it will be contingent, or dependent, on volumes as we grow this business over the next several years.

Eugene Robin - Cove Street Capital

And just maybe the technical question. When you talked about building the module around the lens, and you mentioned protecting IP, is there also an issue with literally, protection, which has been one of the MEMS issues of it breaking, or being dropped. And is part of what you’re trying to do as well build the appropriate and quality protection that your own internal thing?

Bob Roohparvar

I guess we are protecting our technology through a number of means. We try to put the IP and historic patent portfolio to create a barrier for others to get into this field, number one. Number two, we are trying to replace incumbent technology and I believe we are on the way to do so. Number three, you’re absolutely right. We are going to be protecting our lens design, the active alignment, which is part of the subassembly of the lens, and how it gets connected to the MEMS module.

So these are the important aspects. We’re not sitting and freely talking about it with respect to what are the things that we’re trying to accomplish. But the bottom line is the fact that there’s tremendous [pull] for this technology. We have designed our very own, fully integrated camera module using our MEMS and lens design, and we have been sampling it to all the tier one customers and there’s tremendous pull.

We have limited supply chain in place as we speak. The foundries, they have to go and build the capacity that we need, that we anticipate. It’s going to take them some time to do that. But we have past the hurdle of qualifying multiple fabs in this. So there is a lot of work which is being done behind the scenes, and we feel extremely comfortable with the progress that we have made so far.

Robert Young

I just want to add one thing. There was another aspect to your question about whether or not this was physical protection. No. It’s a very robust part. It has exceeded everybody’s expectations, not just passing drop tests, but throw tests and everything else. And so no, it has nothing to do with physical protection.

Eugene Robin - Cove Street Capital

And lastly, could you just maybe look ahead over the next three to six months and sum up any additional major lawsuits, court cases, judgments? Any expected dates that appear likely to occur within the next three to six months on all IP fronts?

Rich Chernicoff

I wish we could do that. Our crystal ball doesn’t work that well. You can read our litigation docket summary in the 10-Q. The nature of all those cases means that on any given day… I sit next door to Rene Brown, our senior VP of litigation. She’s great. She is busy day in and day out with any number of activities in any number of these cases. There’s no way to give you a distilled version of that to predict what will become important over the next N days or months or weeks.

Operator

[Operator instructions.] And you have a follow up question from Jonathan Skeels with Davenport. Please go ahead with your follow up.

Jonathan Skeels - Davenport & Co.

Can you walk through expected margins on the camera module business? Maybe both gross and operating that you plan to achieve as you start shipping modules?

Bob Roohparvar

It is very, very difficult to sit down and predict the margin. As I said, we have a very impressive technology that in terms of size, in terms of the X and Y, in terms of the Z-height, in terms of the power, in terms of the noise, in terms of the heat, in terms of how fast we can autofocus. We are going to replace the incumbent technology, and the margin, and the revenue that we have generated is something that we try to protect at this point, because we need to go and build a business first.

Jonathan Skeels - Davenport & Co.

And then with the investment in the lens facility - maybe this is a question for Mike - does the company expect to be free cash flow positive for the full year?

Mike Anthofer

I’m not going to comment on the forward guidance at this point. I’m not going to do that.

Jonathan Skeels - Davenport & Co.

And then maybe just one on the intellectual property side. Can you talk about what the next steps are to remedy the Powertech situation? There’s just an ongoing litigation there. Is that what ultimately will solve that issue?

Rich Chernicoff

You have it exactly right. That is ongoing litigation. We very much would like PTI to continue to perform its obligations under its agreement. We’re doing our part. They’re a license to our technology. And we’d like them to perform their obligations. Unfortunately, we need a judge to help them do that.

Jonathan Skeels - Davenport & Co.

And then maybe just on Micron, I’m sure you can’t say much, but is there ongoing discussion with them? And then I guess under the old Micron license, revenues will continue to show up on Tessera’s income statement through August, right? Do I have the correct timeframe?

Rich Chernicoff

You have it exactly right. We report on a quarter lag, so the royalties that accrue through the end of the license term in May of this year will show up reported in the Q3 numbers, because of the quarter lag. And unfortunately, confidentiality obligations prevent me from commenting on what we’re dealing with.

Operator

[Operator instructions.] And you have a question from the line of Eric [Neetch] with Barclays. Please go ahead with your question.

Eric [Neetch] - Barclays

I just wanted to get an update on the relationship with Elpida and Micron, and what’s going on there with the license.

Rich Chernicoff

We’ve filed a notice of claim in Elpida’s bankruptcy. We’ve thought about multiple scenarios for how Elpida ends up resolving. And we will continue to see plans under each of those scenarios. Quite honestly, what we’re most hopeful for is a healthy DRAM market for our customers.

Operator

Your next question is from Jeff Karansky with DRZ, Inc. Please go ahead with your question.

Jeff Karansky - DRZ

On the guidance, are you guys going to be providing any sort of guidance with respect to the IP segment as we head into next year? Or is that also something that’s not on the table?

Robert Young

No, we do not intend to give guidance for any aspect of our business going into next year.

Jeff Karansky - DRZ

And the reason for that is that visibility’s not going to be the same, or what?

Robert Young

Well, as I said, the revenue that we expect from the digital optics side of our business should be a substantial piece of the overall corporate performance. And so to single out one segment, which will be a smaller and smaller percentage of what we do, we don’t think it’s very meaningful to people. It’s the total corporate performance which is important relative to the stock and analysts’ analysis of the stock and the performance of it, etc. And so with a growing portion of what we do being uncertain, we’re just not going to give guidance. We will talk about general industry environment and things that we see. We just won’t talk about the performance expectations for the corporation overall.

Jeff Karansky - DRZ

And then just quickly on the Ankor situation, remind me, when do you think something should be resolved there in terms of an award.

Rich Chernicoff

We’re not going to predict that date. The tribunal has its own schedule, and they’ll operate on their own schedule. It’s not really within our control. I wish I could give you a date, but I can’t give you one with any degree of certainty.

Operator

And at this time, there are no further questions. I’d like to turn it over to management for closing remarks.

Robert Young

Thank you all for joining us on the call today. We appreciate your interest and support, and we are very excited about our future and long term growth. And we look forward to sharing our continued success with you all throughout 2012. Thank you very much.

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