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MIPS Technologies, Inc. (NASDAQ:MIPS)

Q3 2008 Earnings Call Transcript

April 30, 2008 4:45 pm ET

Executives

Mark Tyndall – VP of Business Development & Corporate Relations

Maury Austin – CFO

John Bourgoin – President and CEO

Analysts

Gary Mobley – Piper Jaffray

Tayyib Shah – Longbow Research

Anthony Stoss – Craig-Hallum Capital

Raj Seth – Cowen & Co.

Operator

Good afternoon and welcome to the MIPS third quarter fiscal 2008 financial results call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'd like turn it over to Mr. Mark Tyndall, Vice President of Business Development and Corporate Relations. Sir, you may begin.

Mark Tyndall

Thank you, and welcome to the MIPS third quarter fiscal 2008 earnings call. Leading the call today is John Bourgoin, our Chief Executive Officer and Maury Austin, our Chief Financial Officer.

Maury will cover the financial results for the third quarter and the financial guidance, followed by John covering the business aspects, after which we will open the call for Q&A. If you do not have a copy the earnings release, it is available on our Web site at www.mips.com, and an audio replay will also be posted there following the call.

Before we begin, I'd like to remind you that 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 fourth quarter of fiscal 2008. Listeners are cautioned not to place undue reliance on this forward-looking information. Many important factors could cause the results to differ materially from those contained in such projections or forward-looking statements.

We refer you to the risk factor section of the documents that we file from time to time with the Securities and Exchange Commission for factors that would cause the results to differ materially from our forward-looking statements.

In our financial discussions today, we'll be referring to third quarter fiscal 2008 GAAP and non-GAAP results. MIPS management believes that non-GAAP information is useful because it can enhance the understanding of the company's ongoing economic performance, and MIPS uses non-GAAP measures when evaluating its financial results, as well as for internal planning and budgeting purposes.

The non-GAAP results exclude FAS 123-R, stock option expense, certain cost on expenses related to the Chipidea acquisition and restructuring costs incurred during the quarter. Please refer to the earnings press release or the Investor Relations page of the Web site for reconciliation of GAAP to non-GAAP.

At this point I'd now like to turn the call over to Maury.

Maury Austin

Thanks Mark, and I also welcome you all to the call. For me, interacting with our investor base is one of the most enjoyable parts of my job, and I look forward to meeting with many of you in the coming quarters.

Now, to recap our financials, MIPS Technologies had a total revenue of $27.3 million in the third quarter of fiscal 2008, an increase of 3% from the$26.5 million in the prior quarter, and an increase of 43% from the $19.1 million reported in the same quarter a year ago.

Total third quarter revenue from the processor business was $18.1 million, and revenue from the analog business was $9.2 million. Overall, revenue fell shortly slight of our expectations. During the quarter we combined the processor and analog sales team into one worldwide sales force. This combining of the sales teams and the contracting processes in the resultant line curves had a dampening effect on our ability to close certain deals during the quarter. John will talk a bit more about the state of the selling process during his section.

Royalty revenue in the second quarter was $12.6 million, a slight increase from the $12.5 million reported in the prior quarter, and increase of 17% from the $10.7 million reported in the same quarter a year ago. Royalty revenue from the processor business was $12.3 million.

Our processor licensees reported shipments of 115 million units, or approximately 7% higher than the 107 million units shipped in the prior quarter, and an increase of 31% over the 87 million units shipped in the same quarter a year ago.

Contract and license revenue was $14.8 million, an increase of 6% from the $13.9 million reported from the prior quarter, and increase of 77% from the $8.3 million reported in the same quarter a year ago.

License revenue from the processor business was $5.8 million with six new license agreements signed during the quarter. Contract revenue from the analog business was $9 million generated from existing contracts along with a portion of the 26 new contracts signed during the quarter.

Our third quarter gross margin was $17.9 million an $800,000 improvement over the second quarter results of $17.1 million. Our blended gross margin for the two units combined was 66% for the quarter. With the addition of the analog business group, we now have an opportunity to migrate their business model from primarily an engineering design service and license based business model to a model more similar to the processor group incorporating more IP license fees over time. And included in the Q3 cost of sales was $2.3 million charge representing intangible asset amortization related to the Chipidea acquisition.

Total operating expense in the third quarter of fiscal 2008 was $23.2 million and a decrease of $1.2 million over the second quarter. The third quarter operating expenses included approximately $1.8 million in FAS 123-R stock option expense, $2 million in the intangible asset amortization and a charge of $1.3 million associated with the processor business restructuring. MIPS ending head count was 513 employees, down 25 employees from the prior quarter as a result of our cost reduction efforts.

Moving down the P&L, our Q3 other income and expense was $800,000 expense which represented a $500,000 improvement, compared with Q2, primarily as a result of foreign exchange gains. There was $700,000 loan fee amortization charge included in that Q3 other expense line expense line item.

We recorded $1.8 million tax credit with tax provision during Q3, which was largely comprise of our usual foreign withholding taxes generated from sales to countries that withhold tax on certain revenue items, offset by the recognition of a deferred asset relating to the losses created by Chipidea in Portugal. In just a side note, we are in the process of implementing a revised worldwide tax strategy subsequent to the acquisition of Chipidea.

During this quarter we began the process to take the U.S. IRS section 338(g) "check the box tax selection." This selection is expected to provide cash based tax savings moving forward, but may have the effect of an unfavorable charge in the U.S. GAAP tax rate provision, while that charge would be a non-cash charge, predicting the exact timing of that charge will be difficult.

If you are familiar with acquisition tax accounting, FAS 109 and other complex tax rules, this will probably make sense to you. Our GAAP net loss for the third quarter of fiscal 2008 was $4.3 million or $.10 per basic and diluted share, compared with a net loss $12.1 million or $.28 a share in the prior quarter, and net income of $1.2 million or $.03 per share in the same quarter a year ago.

On a pro forma basis, excluding the effect of equity-based compensation expense, certain costs-related fee acquisition of Chipidea and the restructuring, non-GAAP net income in the third quarter of fiscal 2008 was $2.4 million or $.05 per diluted share, compared with a non-GAAP net loss of $2.9 million or $.07 per basic share in the prior quarter, and non-GAAP net income of $3.5 million or $.08 per diluted share in the quarter a year ago.

Now, turning to the balance sheet, our cash and short-term investments were approximately $15.2 million at the end of Q3, essentially unchanged from the prior quarter. Btu during the quarter, we did repay $1 million of our revolving debt facility per the amortization schedule, and we are working with our banking partners to refinance that line of credit and expect to have some news on that topic in the near future.

Another area of focus and opportunity for MIPS is in our accounts receivable area, we focused on this area during the quarter and has decreased total AR by approximately $3.8 million, compared with the last quarter.

Now looking forward into Q4 fiscal '08, there is some evidence to be optimistic and there's some areas for concern. Some of our licensees had issued cautiously optimistic shipment outlooks. Our newly integrated sales team will have another quarter under their belts which should result in a more effective selling process.

On the other hand, as our licensees continue to ship greater unit volumes, we expect our royalty ASPs to drop a bit going into Q4. But, most importantly, I'd like to improve the company's bearing average and our ability to provide forward-looking guidance that the company achieves. This is always unchallenged in an uncertain economy. But even with those challenges, we plan to continue to grow the profitability of the business.

We expect total revenue for the fourth quarter to increase up to 5% over our Q3 results. Our revenue is then expected to be between $27.3 million and $29 million during Q4. As previously mentioned, we will continue to improve our gross margins. I would expect to improve gross margin by $300,000 to $1.9 million at the revenue levels mentioned above and that covers the range.

We will continue to manage our operating expenses down in Q4 by approximately $0.4 million to $0.8 million from Q3 levels. Based on this revenue and spending projections, we expect Q4 pro forma operating margin to be in the range of 10% to 16%, a continued improvement over the 7% we achieved in Q3. This Q4 pro forma operating margin is lower than the 20% we had previously guided to over the last few quarters, but is consistent with our current revenue projections based on a slightly softer than anticipated market.

We remain committed to controlling our costs and driving our top line to achieve that 20% goal and better in the coming few quarters. And finally, we expect our Q4 tax provision to be less than $100,000, as our estimated withholding taxes will largely be offset by additional recognition of accumulated deferred tax assets. After we hear from John about the business highlights in Q3, we will open up the question to answer any questions you may have. John?

John Bourgoin

Thank you, Maury. Thank you for joining our call today. First of all, I'm very happy to welcome Maury Austin to his first conference call as the CFO here at MIPS. Maury joined us about six weeks ago, as I think many of you know, and he's already contributing at a high level. So, I look forward to introducing him in person to many of you during the next couple of months.

MIPS (inaudible) in revenue results for the March quarter that we were up just under 4% or roughly $1 million quarter on quarter. We continue to see a large pipeline of opportunities in both processors and analog, but as I noted at the last conference call, the rate of closing those opportunities is clearly down. Despite that, I believe our pipeline for this quarter is strong enough for me to predict that we'll experience license revenue growth during the quarter and hence we have guided upward.

I recall, we have three major elements which compose our revenues, processor licenses, analog licenses and royalties. And the royalties of course are essentially all from the processor group today. Our processor license revenues were up about 9% relative to last quarter, but those numbers are still weak relative to the historical. Analog license revenues were down about 5% as we work to overcome a slow start. In a transitional quarter, we integrated our sales force into a single operation.

The third leg of our revenue is processor royalties did show a small increase to $12.3 million driven by a solid 7% growth to a record 115 million units. Helping build that total were four additional payers of royalty this quarter, bringing our total number of royalty players to 47. That royalty level is the highest royalty we've announced in seven years.

An analysis of our royalty shows that digital TV continues to be our strongest segment at roughly 40% of the total, and with decent growth characteristics on the order of 10% in recent years. Broadband access products are also very strong at roughly 30% of our royalties, and they also show good long-term growth in the neighborhood of 15% a year.

Our new products are nicely suited to the needs of these markets and I believe we can expect continued success. For example, the 24K core, which reached nearly 1 million units in shipments during the quarter for the first time with nine companies shipping this product. Another fast growing market for MIPS is digital consumer growing at over 20% in the last year relative to the prior year. Now digital consumer, as we define it, is consumer products other than digital TV and video games. So, it includes DVD, personal media players and similar products.

MIPS also made significant progress during the quarter in trimming its expenses, where we did the ongoing processor business group spending with a head count reduction of about 28 people. And we expect to see most of the benefit of that reduction this quarter.

Expense reduction was enabled by a transition to a different mix of develop activities, which we deem more appropriate to support our future needs, and it gives us the opportunity to return to more attractive operating margins consistent with our historical levels. Our analog team also held its spending levels well during the quarter, though with flat licensing numbers and expenses we didn't get the improved leverage we hoped for yet.

In terms of major product introduction, Q3 was a banner technology quarter for MIPS. We unveiled two new critical technologies for our customers, HDMI or High-Definition Multimedia Interface solutions and the MIPS 1004K, which is the multiprocessing solution. HDMI has emerged as the dominant digital interface in a wide array of consumer electronics and it‘s today's de facto standard for creating high bandwidth, streamline connections between digital video devices.

In February, as part of the advanced Chipidea connectivity IP portfolio, MIPS unveiled the industry's first 65 nanometer HDMI IP solution. Uniquely optimized for low power, portable transmit applications such as camcorders, portable media players, game consoles and cell phones, as well as digital home receiver applications such as high-def digital TVs and display units, AV receivers and set-top boxes.

With Chipidea's expertise and market leadership and high performance analog and connectivity solutions, including USB and HDMI, MIPS now offers the most comprehensive connectivity IP solutions at the most advanced geometries. Adding HDMI to our IP portfolio will be able to transition or semi-transition of this function from an external interface IC to integration on to the SoC with a optimized solution targeting portable and cellular devices.

Our first HDMI licensees are signed, and we have an extraordinary level of interest in this product. Also part of our ICMI launch was the announcement of a strategic alliance with long time MIPS customer and HDMI innovator NXP Semiconductors. The agreement allows us to develop and offer HDMI receive IP solutions.

Now, the other very exciting announcement for us during the quarter was the MIPS, actually did that after the end of the quarter was the MIPS 1004K coherent processing system. This is the industry's first embedded multi-threaded, multi processor licensable core. The 1004K delivers the best performance efficiency and configurability in a multi processing system. Up to four single or multithreaded processors can be configured with this product.

It has generated a level of interest particularly with our traditional digital TV and consumer customers that we haven't seen since the 24K introduction four years ago. Of particular interest to our customers is the fact that the 1004K is designed to work with our multi-thread 34K product. This enables a range of flexibility, performance, power control and efficiency not seen before in the industry.

Our multi-core debut marks another performance milestone for the company following last year's launch of the high performance MIPS 32 74K core which is the industry's first single threaded processor core to achieve frequencies greater than one gigahertz. Now, with the addition of the 1004K, MIPS has an unmatched range products now serving essentially every embedded product requirement. We offer the highest single threaded performance with the 74K, the highest total performance with the 1004K, the best efficiency for this systems and at the other end of the spectrum, the lowest cost for mainstream processor with our M4K microcontroller solutions.

Our strong leadership in USB and now HDMI complement our data conversion products, our power management offerings and our wireless solutions to create one of the most attractive and broadest portfolios available for SOC manufacturers. Earlier this month, at the Embedded Systems Conference, we showcased a number of customer solutions for the digital entertainment home networking and microcontroller arenas, including microchip 32-bit PIC32 MCU family based on the M4K, and featuring IP cores for full speed USB 2.0 On-the-Go functionality from Chipidea announced with microchip in February.

There are 11 different PIC32-M4K devices, four of which including the USB core. Microchip has initiated a very unique and interesting and successful design challenge, which I would encourage you to look up on www.myPIC32.com.

Cavium Networks showed its OCTEON multi-core MIPS64 processor family with 1 to 16 cores. Cavium's processor are used by multiple Tier I networking wireless and storage vendors and shows the continued adoption of the MIPS architecture in these applications.

Their processor are supported by more than 100 MIPS Ecosystem partners. Long time MIPS licensee, PMC-Sierra showed a number of MIPS based products with reference boards in software development kits including turnkey network attached solutions and digital home gateway enabled by PMC-Sierra's multi-threaded 34K cores. Through our FS2 product line, MIPS also announced the first Hot Spot Analyzer or HSA for Fast Linux Kernel Profiling.

HSA let software engineers pinpoint performance issues that were nearly impossible to identify before. Digital entertainment, next generation connectivity and advanced broadband solutions continue to take center stage with our customers. Tzero announced that the consumer technology giant Hitachi has selected its MIPS-based ultra wideband or UWB technology to enable wireless HD video for its highly touted, much anticipated ultra thin HD TV series.

Broadcom and Coship Electronics have collaborated to deliver first commercial hi-def set box top solution for China just in time for the Beijing Olympics. This is the first high-def personal video recording set top box system on a chip solution for China using the MIPS- based Broadcom 7403.

Through MIPS leading position with Wi-Fi IT vendors with a market share of approximately 60% and with convergence of GSM and VoIP for low cost cellular hand sets projected to be right now 250 million units by 2010 market researches. We now have a tremendous opportunity to participate in this market.

Early participation is already in motion with the collaboration announced last month by Infineon, a cellular IT leader, and Atheros a leader in Wi-Fi ICs and a MIPS licensee. On Monday in Portugal, we announced MIPS first European University Program with the University of Porto, a prestige Portuguese engineering school. The partnership will provide a foundation for educational research for the Masters, and Doctoral programs of the school's Electrical and Computer Engineering Department.

As part of our multi-year agreement, MIPS will offer a hands-on design initiative for engineering students and help prepare them for careers in semiconductor design where a large number of companies are already leveraging MIPS IP in a wide array of embedded design.

In the near future, we plan to broaden these types of programs to other regions around the world. Additionally, the current quarter ending June 30 will mark the tenth year as a public company. A lot has changed in those 10 years. Out initial product offerings were exclusively ISO licenses. Now we have four major families of cores with robust configuration options for a wide array of markets and applications.

We have a substantial and highly sustainable revenue stream of royalties. We've added four new major product lines with our analog team. So, in short, we are well positioned to proved the most advanced solutions to our SOC customers, helping them lower their cost, get to the market faster and with higher confidence.

I appreciate your support over this period and I look forward to an improving set of financial results during the next few quarters. And with that I'll turn it back to the operator for questions, and I appreciate your attention.

Maury Austin

Operator, we'll take questions.

Question-and-Answer Session

Operator

(Operator instructions) First question comes from Gary Mobley. Your line is open, state your afflation, please.

Gary Mobley – Piper Jaffray

Hi, Gary with Piper Jaffrey. (inaudible) comp on question for you and I apologize for this. But relating to the revenue shortfall in the Chipidea business, any of it have to deal with revenue recognition issues that have plagued the numbers recently? And then with respect to the sales force integration, it's my understanding that Chipidea had a very lean force in the past, any idea towards (inaudible) analog IP with the processor sales guys? So, I am just curious how the combination ends up equaling less than what Chipidea had previously accomplished?

John Bourgoin

Yes, Gary, certainly a piece of had it has to do with (inaudible). I don't think those were big surprise to it because we knew what we are getting into there, but certainly some of the deals had some issues [ph] associated with them, and as we get better at fine-tuning our deals and making sure we get that all right. That'll will be less true in the future. With regard to the sales guy, obviously our sales force now is 2.5 or 3 times as big as it was before, and that's a good thing. The bad thing is it takes out – most estimates are it takes six months for the guys to get fully up to speed with the products and to get familiar with the systems. I think we probably under estimated the degree of difficulty of that a little bit, and it took us a little bit time to get going. Now, we did end up with 25 and 30 contracts. So, it wasn't a terrible quarter in terms of the contracts. We had a few more last quarter and we had some things that I think we probably could've gotten had we been a little more efficient, I would expect to get those going forward. But I don't see any fundamental issues here. I think we just got off to a bit of a slow start.

Gary Mobley – Piper Jaffray

Sure, and just give me an apples-to-apples comparison. How did the previous Chipidea sales folks fare for the quarter?

John Bourgoin

Interesting enough, their results were similar to our results although in one or two cases, we had the older or the legacy Chipidea sales guys focus on obvious Chipidea accounts or analog accounts. So, there was a case or two where they did well because of the way we assigned the accounts.

Gary Mobley – Piper Jaffray

Okay. Thanks guys.

Maury Austin

Gary this is Maury. Yes just to echo what John said, there was actually no Rev Rec issues that came up in Q3 on the ABG side that was new. There were some – I would characterize them as contracting issues where the ABG license agreements and statements of work are different than the PBG ones, so that process took a bit longer, but from a Rev Rec stand point there wasn't any big surprises.

Gary Mobley – Piper Jaffray

Okay. Thanks, guys.

Operator

Next question will come from Tayyib Shah. Your line is open, state your affiliation, please.

Tayyib Shah – Longbow Research

Hi, Longbow Research. John, what was the Chipidea revenue under IFRs rules, do you have the number handy?

John Bourgoin

No. I don't. We are completely focused on U.S. GAAP at this point.

Tayyib Shah – Longbow Research

Okay. So, you talked about the transition within the Chipidea business model. How long is that transition going to last and when should we expect Chipidea revenues to start growing at that trajectory rate they were going previously?

John Bourgoin

Well, look they were growing – last year their growth rate was something in excess of 50%., and that's absolutely terrific and really a terrific credit to the Chipidea team. Chipidea is now of a size we are growing at 50% a year is not likely to recur any time soon. However, I do expect resumed growth this quarter be disappointed if we don't get it, and as the sales force gets more in tune with the products, I expect to see greater efficiencies there. So, we will have to see what the numbers are this quarter but I certainly expect improvement and I certainly expect to begin to get the leverage that ought to be there. I'm quite confident that our sales force and our sales management are very, very strong group of individuals, and there is a lot of products in the analog and the are very different than microprocessor products and some of the information systems that changed, we've changed them because we felt that was going to be the best way to run the company in the long term. So, we simply had to get through the issues and I'm not going to suggest you that we are 100% through them yet. As I said, the general feeling is it takes six months for sales people to get fully up to speed. So, I think we'll do better this quarter but I think we‘ll have a chance to do even better the quarter after that.

Tayyib Shah – Longbow Research

Okay. And just to clarify for you second quarter outlook, you are expecting Chipidea to grow and processor contractor revenue to grow as well. What's the outlook for royalties with the ESP decline that you are expecting?

Maury Austin

Somewhere around flat to up 1% or 2%.

Tayyib Shah – Longbow Research

Okay. And John, what is to change either internally or externally in terms of the macro out look, where your processor contract business starts to approach the historical revenue run rate?

John Bourgoin

Well, I think there's a lot of anxiety in the marketplace. Everyday you pick up the paper and you read about it. Certainly, if you look at the FIA, seasonally adjusted revenues in front of our most important markets like consumer you see four or five, six months that are seasonably lower than expected. So, it would certainly help if those numbers cranked up because I think those numbers bear directly on the confidence level of our customers and their willingness to launch new projects. As you know, microprocessors tend to be at the front of decisions about starting projects, so if there is hesitancy around starting a project or concern that may be this project is starting too early or needs to be modified or upgraded to meet a different market target, all those concerns reflect directly in our ability to close deals in a given quarter. And historically, when we are seeing slow downs, and closing deals, it's usually not related to competitive issues. It's usually related to concern about moving forward with what is after all a fairly expensive project most SOC projects are ten or tens of millions of dollars, and they represent pretty major commitments to our customers. So, they get a lot of scrutiny and if you have Board Members or senior management members who have concerns about what's going on in the marketplace. They are going to on the average tend to be a little more conservative. So, that is the biggest single thing that can help us. Having said that, (inaudible) introduction from an internal prospective what we can do. If you look at the introduction of the 1004K, we just completed what we call a pipeline review, which is a review of all the opportunities we have. And frankly, I was delighted to look at the number of opportunities we have for the 1004 K. As I said in the text, this is the best, this is the highest level of interest we have had in a product since we introduced the 24K little over four years ago. So, that's the thing we can do internally, we make sure we expose our customers to that technology and then add the HTMI capability on top of that we have come from the analog group. I think the offerings we have are arguably the most attractive we've ever had. They are certainly the most comprehensive and I think that'll also help give us a little bit of a nudge.

Tayyib Shah – Longbow Research

Thank you. And final question for Maury, that revolving credit facility, does that have to be fully repaid at the end of August? And any color you can provide in terms of when you expect to have alternate financing in place will be very helpful?

Maury Austin

The first answer is, yes. Late August and the only color is we started to the refinance process about four weeks ago with the intent to just replace the debt with debt, and not equity. And we've been working on that pretty diligently the last two to three weeks, and we are hoping that within the next month or two, we'll have some announcement on that topic.

Tayyib Shah – Longbow Research

Can you rule out that you won't be issuing any new equity?

Maury Austin

Can't rule it out, but that's not the goal.

Tayyib Shah – Longbow Research

Okay. Thank you.

Operator

Next question will come from Anthony Stoss. Your line is open, sir.

Anthony Stoss – Craig-Hallum Capital

There are a bunch of questions for you, guys. Could you give us the average size of your contract license revenue in the quarter, and also was there any deals that happened to slip?

John Bourgoin

Go ahead, Maury.

Maury Austin

$28 million divided by $6 million on that processor side in terms of average size. And on the ABG side, it's a little bit different. There was more than 200 contracts that contributed to the $9 million in revenue during the quarter, a combination of contract that we started the quarter with, and then some of the 26 contracts that we signed during the quarter also contributed to the revenue on that side.

John Bourgoin

And your second question was what?

Anthony Stoss – Craig-Hallum Capital

If any deals slipped on the processor side?

John Bourgoin

Yes and they often do. Frankly, I have gotten fatigued mentioning that because it happens essentially every quarter.

Anthony Stoss – Craig-Hallum Capital

Okay. Your ASP is down $0.11 per unit, you mentioned that you expect it trend down again this quarter. Can you give us a little bit more detail on why that's happening and where you expect it to go?

John Bourgoin

Well, yes I think in general, there's two fundamental reasons happening. One is our focus is towards, the last several years has been more towards consumer markets. If you remember 8 or 10 years ago, a lot of our business was actually at networking where we had varied ISP, then a little bit later on we had high-end products that went into printers, and those had royalties between $.50 and $1 in many cases. So, those were extremely high royalties. Today, if you look at the royalties, you'll see an awful lot of royalties that are well below that, and certainly consistent with the $.11 or so that we have for an average right now. So part of it is a market shift and frankly you'll see that come on even stronger as the microchip numbers began to really impact the averages You'll see the number of units begin to go up rather quickly. So, microchip with its multiple products and what we think is a very fast start, over the next couple of years will and I think on ongoing basis begin to impact our ASPs but that will be much more than offset by a dramatic increase in the number of units. So, that is thing one. Thing two is, as some our bigger suppliers hit really, really high volumes, as you know 115 million units a quarter means that a lot of guys are shipping a lot of MIPS products right now. Some of those guys are getting price breaks almost invariably when we negotiate with customers, if they hit really, really high revenue numbers, or really high unit numbers. They are looking for us to give them a little bit of a break and typically as part of a negotiation process, they'll get that. So, both those things impact us. They are both I think evidence of actual success. So, that's what causes it.

Anthony Stoss – Craig-Hallum Capital

Okay. Where there any product delays or with Chipidea, did they hit all their target dates for new product launches?

John Bourgoin

Yes, they did. They did a great job. Their got their HDMI stuff out on time, and the CNP product, the 1004K is also out on time, both coming out on time. It was announced on time, and it's due to come out on time.

Anthony Stoss – Craig-Hallum Capital

Okay. Were there any 10% customers in the quarter?

John Bourgoin

Broadcom.

Anthony Stoss – Craig-Hallum Capital

Okay. Who are your top three, if you don't mind sharing that with us?

John Bourgoin

Yes, we don't usually give the top three. We just give the 10% guys. So, I think you probably have a pretty good sense of the bigger guys that we've licensed, as you know we've licensed Toshiba and NEC and NXP and Broadcom.

Anthony Stoss – Craig-Hallum Capital

Okay. Have you (inaudible) overall view on Chipidea going forward I think, and from time to time you mentioned 25%. What is your new view or how should we look at Chipidea?

John Bourgoin

Our view hasn't changed. I think the Chipidea team and the analog opportunity are excellent. I think, as we get our sales team fully up to speed, I would expect to see us resume growth. It will of course be better or worse some years and others depending on the state of the market. But I haven't seen any reason to change my perspective of that market at his point.

Anthony Stoss – Craig-Hallum Capital

Okay. One last question for you, you've given your shortfall in revenues again this quarter, your reduction in operating expenses next quarter would seem a little bit tame. Any reason why you wouldn't open the throttle a little bit more and take down expenses again?

John Bourgoin

Well, we had to decide where it makes sense to take down expenses and to make sure that we are doing things that are consistent with our future goals. Obviously we want to be generating cash, we want to be profitable, we want to generate the kinds of operating margins that are necessary, and frankly as Maury said, we want to be hitting our revenue numbers. His and my issue is getting better credibility with you guys in terms of meeting the numbers that we say we are going to hit and we are focused on that. So, I think we've got, I think we are sized about right now, that doesn't mean we can't take out more. We are going through a planning process right now in which we will look extensively at where we may have opportunities to further cut costs. We do that every year. Almost invariably we find areas to do that. Usually it's done in a rather non-obvious way, I guess because we either move people to other spots so we avoid hiring and prices that perhaps we had planned. I'm sure we will go through that exercise again this year and make what every decisions are appropriate given our plans for next year, and I expect that we will come up with a conservative set of plans that we expect to meet next year.

Anthony Stoss – Craig-Hallum Capital

Okay. Thank you.

John Bourgoin

Thanks, Tony.

Operator

(Operator instructions) Next question comes from Raj Seth, your line is up, sir.

Raj Seth – Cowen & Co.

Hi, just a quick follow up on the core processor licensing business. John, do you think that there's any share loss there because I don't recall the exact number, but it seem to me and maybe it's just a function of the end markets but ARMs is doing materially better year to year than you are. And the dynamics that you talked about getting processors at the beginning of a cycle, at the beginning of a long chip cycle etcetera, which seems to impact them as well, but they are reporting better numbers than you?

John Bourgoin

Raj, if you look at, they've had three consecutive down quarters based for licenses, for processors it's based on their numbers from yesterday. We had a very bad down quarter in December, this quarter was up quite a bit. I think to answer your question, it depends on what particular period you are look looking at whether we are up or down. When I look at us compared with ARM for the last several years, I don't see a share loss or a share gain. What I see is us bouncing around a normalized level with them. Some quarters we do better than they do, some quarters they do better than we do. In terms of key account penetration, where we think we need to win to be strong in a given market, I think we are doing fine. Obviously, we haven't penetrated the cell phone market in any material way which is a key overall embedded market and certainly a very, very important market for them. But we certainly have our share of wins in key places and we don't see a problem there.

Raj Seth – Cowen & Co.

Okay. And on the new, what is it, 1004 K product, can you talk a little about relative pricing versus some of your other offerings? Is it a material step up in pricing to license that?

John Bourgoin

It's like all of our new products. When it comes out, it's priced higher. Overtime it descends downward. So, we have a range of prices on our products, so with the 74K and 1004K at the high end, and the M4K and 4K class at the low end, the 24K and frankly now the 34K tend to be in the middle. So, yes, as customers go for that product, that will help sustain the ASP, but you have to keep in mind that they may be buying other products as well and those other products are cheaper than they used to be. So, it's like selling components in the semiconductor industry. Yes, prices go down 20% or 30% every year, but somehow the ASPs stay about constant and they stay constant because you continuously introduce new product like we have done with the 1004 K.

Raj Seth – Cowen & Co.

And how long typically are the evaluation cycles for a new product like that? How long would you think it takes to begin converting this high level of interest to (inaudible) I know you can't be real specific. But how long does it take for people to figure out if it's something that works for them?

John Bourgoin

Actually, that's a really good question, Raj because a product like 1004 K or for that matter 34 K that has multiple cores and multiple-threads is a significantly more complex product for customers to evaluate. They typically have to do with multiple applications or with at least with multiple processes running at the same time to really get a clear and present sense of what kind of benefit they are going to get from it. And this is not something where you go in and you start and close a deal in three months. It's typically more than six months, I would say. So, that's not a trivial deal. Now some of our customers have been looking at this for awhile. But these things don't happen as quickly as they used to. Even the 74 K, in terms of its high performance, we are now beginning to see a little bit of increased momentum behind that. That's a simpler product. It is the single-threaded product. And frankly, we just had our first customer take a product out with the 74K, but last quarter we did see more interest in that as well. That one we would expect to be a little bit shorter.

Raj Seth – Cowen & Co.

If I heard you correctly, no material impact that one would expect sometime next fiscal year?

John Bourgoin

I think that's mostly correct. Yes, you may see us announce something this coming quarter, but it won't be a lot of products.

Raj Seth – Cowen & Co.

I know it's early. But I wonder if you might take a stab at next year. I mean there's a lot of moving parts with sales force integration, obviously it's a tough environment. But if this environment stays roughly the way it is, how might we think about anticipated revenue growth into next year. Any guidance you can give there?

John Bourgoin

Boy, it's, we are trying to figure that out ourselves right now. As I mentioned a few moment ago, we are going through a planning process and we have our entire team looking at that. And looking for every clue we can find as to what we think is likely to happen. It would be really speculative for me to make a comment on that. I wish I could give you guidance, but as you can tell from (inaudible) numbers. We are probably predicting one quarter, I'll let alone four or five.

Raj Seth – Cowen & Co.

Okay. Thank you.

Operator

(Operator instructions). And our next question will come from Tayyib Shah. Your line is open, sir.

Tayyib Shah – Longbow Research

Hi, follow up for Maury. The Chipidea business looks like you had a negative gross margin this quarter. When do you think this business turns positive in terms of gross margin? And do you think may be exiting this year we'll be able to hit 20% operating margin on that business?

Maury Austin

Well, just to clarify the initial question. There was $2.3 million amortization number that's basically on Chipidea's books. So, on a pro forma basis, they were approaching 30% gross margin, did that make sense to you?

Tayyib Shah – Longbow Research

Okay. So, once you take out the amortization, they are already at a positive operating margin.

Maury Austin

They are at a positive gross margin and they are after a positive operating margin.

Tayyib Shah – Longbow Research

Okay.

Maury Austin

The strategic plan and the thing that made that acquisition possible was overtime growing their operating margin by again increasing the IP content in their sale. By doing that you increase gross margin and increase operating margin. So, we will exit this year with north of 30% gross margin for that business. And obviously plan to improve it throughout next year.

Tayyib Shah – Longbow Research

Okay. That's helpful. And the HDMI business that you talked about. John, can you give us an idea of which market segment you are seeing the most interest from for HDMI product?

John Bourgoin

Sure. I'll tell you what I'm going to do. I'm gong to ask Mark to comment about that because he has spent a lot of time in the field talking to customers about HDMI.

Mark Tyndall

Hi, Tayyib, Mark here. Basically our product was a 65-nanometer product focused on the transmit applications, particularly portable and cell phone applications. That's the area where we are getting the most momentum today. And I think John mentioned also during the last quarter, we actually signed licenses as well for HDMI within analog business group.

Tayyib Shah – Longbow Research

Okay. So, is that revenue going to be in the second quarter?

Mark Tyndall

As you know, the analog business group recognizes revenue on a percentage of completion basis. So, depending on what point in the quarter that we sign, will determine how much was in the quarter and how much is recognized going forward.

Tayyib Shah – Longbow Research

Okay. And any color you can provide in terms of when you think HDMI would become a meaningful contributor to revenues would be helpful?

Mark Tyndall

Basically, we have a lot of traction there at the moment and I would say going forward, we will sign multiple HDMI licenses in any particular quarter going forward. So, in the next fiscal year certainly it'll be a good contributor to the analog business group.

Tayyib Shah – Longbow Research

Thank you.

John Bourgoin

Thank you, Tayyib.

Operator

(Operator instructions) At this time, I show we have no further questions.

John Bourgoin

Okay. Well, thank you for joining us today. As you know, we'll be available to answer questions if you would like to e-mail us or call us, be happy to do that. And I hope to see many of you during the quarter with our new CFO. So, a good day.

Operator

At this time, that would conclude today's conference. You may now disconnect and thank you for your attendance.

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Source: MIPS Technologies, Inc. Q3 2008 Earnings Call Transcript
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