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Tessera Technologies Inc. (NASDAQ:TSRA)

Q1 2008 Earnings call

May 1, 2008 4:30 pm ET

Executives

Moriah Shilton - Investor Relation

Bruce McWilliams - Chairman, President and Chief Executive Officer

Charlie Webster - Chief Financial Officer

Scot Griffin - Senior Vice President and General Council

Analysts

Brett Hodess - Merrill Lynch

Jesse Pichel - Piper Jaffray & Co.

Raj Seth - Cowen and Company

Steve Zane - Lehman Brothers

Kevin Vassily - Pacific Crest Securities

Bennett Notman - Davenport & Co.

C.J. Muse. - Lehman Brothers

Hans Mosesmann - Raymond James & Associates

Eric Solomon -

Operator

Good afternoon, my name is Dihana and I will be your conference operator today. At this time I would like to welcome everyone to the Tessesra's First Quarter 2008 Earnings Conference Call. All line has been placed on mute to prevent any background noise. After the speakers remark there will be a question-and-answer session. (Operator Instructions). Thank you. Mrs. Shilton you may begin your conference.

Moriah Shilton - Investor Relation

Thank you, Dihana, and good afternoon, everyone. Thank you for joining us for the Tessera Technologies first quarter 2008 earnings conference call. This call is being broadcast live over the internet. A webcast replay will be available at tessera.com for 90 days after the call.

In addition, a telephone replay of this call will be made available for 48 hours beginning approximately two hours after the completion of this call. To listen to the replay in the US, please dial 800-642-1687, and internationally, dial 706-645-9291. The access code is 43493004.

I will now read a short safe harbor statement. During the course of this conference call, management may make projections or other forward-looking statements, which 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 release.

A detailed discussion of the material factors that may cause results to differ from the statements made can be found, for example, in the Risk Factors sections of Tessera's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31.2007.

On the call today from management are Bruce McWilliams, Tessera's Chairman, President and Chief Executive Officer, Charlie Webster, Chief Financial Officer. and Scot Griffin Senior Vice President and General Council.

During this call today, management will discuss certain non-GAAP financial measures for comparison purposes only, and they will be using non-GAAP numbers in their prepared remarks. 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, acquired intangible amortization charges, charges required in process research and development and non cash tax expense.

Management believes the non-GAAP amounts provide a more meaningful comparison measure of quarter-over-quarter and year-over-year financial performance. Please refer to the company's first quarter 2008 earnings press release and to the company's website for reconciliation of non-GAAP measures to GAAP.

After management's opening remarks, we will open the call to your questions. So that management is able to respond to as many of you as possible, please restrict yourself to an opening and a follow-on question. Please re-enter the queue if you have additional questions.

And with that, I'll turn the call over to Bruce.

Bruce McWilliams - Chairman, President and Chief Executive Officer

Thank you, Moriah. Today's consumer demand demands greater functionality and even smaller devices. Tessera develops, integrates and licenses technologies that help companies meet the demand for smaller, faster, and more feature-rich electronic products. We provide a broad range of miniaturization solutions from advanced packaging and interconnect to consumer imaging, which are widely adopted in high- growth markets, including consumer, computing and wireless communications.

Our total revenue for the first quarter of 2008 was $59.4 million up 27% compare to last years first quarter and 12% compare to the previous quarter. Royalties and license fees of 50.2million increased 34% compare to last years first quarter and 10% over the prior quarter.

Revenue for the quarter was driven by DRAM and wireless unit growth that came in higher than expected and greater than anticipated license-related revenue. We continue to expand our product offerings in consumer imaging, from image sensor packaging and wafer level optics to algorithms for auto focus, zoom, red-eye reduction and face tracking. We believe these complementary technologies are ideal for the next generation of digital cameras, especially those used in wireless, laptops, toys, security and automotive applications.

Now let me take you through our business. Our chip scale packaging business remains strong. Increasing amounts of memory per unit in both computing and consumer devices is driving broader usage of CSP in a wide range of applications. This generates sustained unit growth across our diverse customer base. We believe our research and development and packaging and interconnect positions us well to participate in important industry trends. For example, our MicroPILR technology enables finder pitch interconnect and addresses the demand for higher IO packages with reduced form factor.

We continue to drive manufacturing infrastructure high-yield, low-cost supply of package substrates and printed wiring boards that leverage the benefits of our MicroPILR technology. The amount of content and data transfer speed with each new generation of electronic devices continues to rise, bringing with it increased heat. Effective management of this heat is a critical challenge. The solving of it presents a substantial business opportunity.

At the end of March, we expanded our development work in thermal management with our acquisition of selected technologies from Kronos Incorporated for micro cooling applications.

Actions we are taking to defend our intellectual property include wireless ITC action, DRAM ITC action, arbitration with Amkor and assembly subcontract ITC complaint. Through successful resolution of these efforts, we believe we will be able to capture the bulk of the remaining CSP market that uses Tessera's technologies, of which today, we have roughly 55% share. The seven-day Amkor arbitration hearing was completed on April 8th. The parties will submit closing briefs to the arbitration panel on May 23rd and present closing arguments to them on June 10th, after which the panel will issue a written opinion regarding their findings. The arbitration panel has not informed us when to expect their opinion.

We soon hope to have a new trial date for our ITC wireless action, which was stayed by an Administrative Law Judge on the second day of trial in February. In March, based on strong arguments, we succeeded in our appeal to overturn the stay, which the ITC Commission unanimously ordered the judge to recommence the trial as quickly as practicable. The Commission has released its confidential ruling that gives strong reasons for why the stay was overturned and why the trial needs to proceed. We look forward to returning to the ITC to argue the merits of our case just as we have done successfully before. Our DRAM ITC action remains on schedule for September 22nd, 2008. This action is moving briskly and in line with our expectations.

The U.S. patent and trademark office continues to re-examine the patents we are asserting in the ITC. These reexaminations were at the request by defendants and our enforcement actions as a delay tactic. We are responding to the PTO as it issues new actions, but we expect the re-examination process to take two to three more years to complete, and with appeals, perhaps much longer. Our patents are presumed to be valid and enforceable while the reexamination process is ongoing and we remain convinced of the strength of our patents.

Finally, on April 22nd, we filed a new complaint with the ITC against assembly subcontractors, including SPIL, STATS ChipPAC, ASE and ChipMOS. The ITC is expected to decide to initiate an investigation under the complaint within 30 days of our initial request. With our acquisition of FotoNation in February, we have assembled a robust imaging solution on an integrated, cost-effective, easy-to-use platform. Our offering have expanded beyond optics to imaging. We are now calling this our consumer imaging business. The addressable market for our technology is substantial. Camera modules are expected to grow to 1.8 billion units by 2011 according to Gartner Dataquest. This growth is fueled by higher camera penetration into low-end mobile handsets, whose volume is growing rapidly in emerging markets. Greater use of camera modules in laptops, digital still cameras, automotive and security applications will also contribute to the growth.

In image sensor packaging, we launched Shellcase Micro Via Package or MVP in March. By enabling lower-cost processes and more die per wafer, our customers can reduce costs by up to 25% with this technology over prior generations.

Shellcase MVP uses existing processes and tools enabling companies to use today's infrastructure to quickly adopt this next generation technology.

On April 29th we announced Nemotek has also licensed Shellcase MVP. Shellcase continue to gain market share in this fast growing image sensor market. We estimate our current share is approximately 40% up roughly 25% from two years ago as CSP replaces chip on board and our value proposition grows with increasing pixel count.

In camera lens technology we continued to lead the industry in wafer level optics design and manufacturing which we believe will provide significant costs size and manufacturing improvements over conventional camera module technology. The benefits are one of the reasons leading handset manufactures are forecasting wafer lvel camera technology will be used to manufacture the majority of camera modules in the not too distant future.

We have made strong progress in our development efforts and anticipate signing additional licenses this year. As we progress to widespread adoption of our wafer level camera technology. There is a noted trend to higher resolution format cameras and wireless devices. At the same time however the market for low-end handsets with VGA cameras remain robust due to strong sales in the emerging markets. Together with the use of a secondary VGA camera and high and low handsets for video and self generated content.

We expect our VGA product will be an initial production in the fourth quarter, we expect to be producing the first functioning two mega pixel mobile phone camera prototypes this summer. We also announced two breakthrough products the first is optimal Ultra Fast Lens or UFL this technology addresses poor low light performance of today's mobile phone cameras. Optimal UFL increases the amount of light by 250% without degrading the depth of field or other performance factors and without significant additional cost.

Second, optimal zoom is the industries first optical zoom solution with no moving parts offering 3x zoom capability with superior image quality when compared to the most advanced digital zoom technologies in use today. Because optimal zoom requires no moving parts it reduces power consumption, lowers cost and improves the reliability and is significantly smaller when compared to existing mechanical solutions.

We licensed our optimal focus technology to Toshiba in December of last year and expect to announce additional licensees in the next few months. We anticipate this technology will be deployed in wireless handsets becoming available in the second half of 2008.

Finally, to our acquisition of FotoNation we obtained sophisticated digital still camera imaging technologies such as the red eye reduction, face tracker and feature recognition. We believe FotoNation having already proven itself in the digital still camera market will be the natural choice for the wireless device camera market. Consumers increasingly want to use their handsets for capturing high-quality images. In response, leading handset manufacturers want to incorporate these high-end features into their wireless devices. We believe Tessera will drive this transition with our consumer imaging technology, which provides a robust solution on an integrated, cost-effective, easy-to-use platform. I would now like to turn the call over to Charlie for discussion of our first quarter 2008 financials and second quarter 2008 guidance.

Charlie Webster - Chief Financial Officer

Thank you, Bruce. Before I review our detailed financials for the quarter, please note that Tessera's non-GAAP results do not include stock-based compensation, charges from the amortization of acquired intangibles, acquired in-process R&D and non-cash tax expense.

Also, starting in 2008, past production payments will only include settlement payments from new license agreements; and the adjustments from current licensees, such as the results of royalty audits, will be included in royalty and license fees. To help you better understand our results we have included a detailed reconciliation between our GAAP and non-GAAP numbers in both our earnings release and on our website.

Now turning to the first quarter results let me take you through the details. First quarter total revenue was 59.4 million up 27% year-over-year including royalties and license fees of 50.2 million up 34% year-over-year. Product and service revenue was 9.1 million. Royalty and license revenue fully met our expectations on solid unit growth in our address full markets and included a favorable royalty adjustment from one of our current licensees.

In the fourth quarter of 2007 DRAM units grew 5% sequentially bringing full year 2007 unit growth to 50% over 2006. The wireless industry December quarter was stronger with sequential unit growth of roughly 15%. Products and service revenue was higher than we expected due to strong shipments of microoptics to the photolithography, photonics, and communications industries.

Now let me review expenses. Total GAAP expenses, which, as a reminder, include cost of revenues and litigation, were $54 million. Stock-based compensation expense was $4.5 million. Amortization of acquired intangibles was $2.3 million. In addition, during the quarter we also recorded a one time charge of 2.5 million for in-process R&D associated with the acquisition of FotoNation. Subtracting these items total non-GAAP operating expense was 44.7 million.

Litigation expense for the quarter was 20.2 million above our guidance range for several reasons. During the period we had two major cases in the final stages of preparation for trail. Our wireless ITC case and Amkor. Expenses in the wireless ITC case were higher due both to extensive free trail activities required by the ITC and due to the stay and our considerable subsequent efforts to overturn it.

Excluding litigation total non-GAAP operating expense was below our guidance range of 25 to 25.5 million on slightly lower than expected costs related to the acquisition of FotoNation.

The break out of non-GAAP expenses is as follows. Cost of revenue was 3.6 million, R&D was 8.8 million, SG&A was 12 million excluding litigation expense. Other income was approximately 2.8 million cash taxes were 1.4 million lower than expected due to quarterly shifts in actual cash payments. Non-cash taxes were 4.6 million.

With these results Q1 '08 GAAP EPS was $0.05 and non-GAAP EPS was $0.33 each on a fully diluted weighted average share count of 48.7 million and 49.4 million shares respectively. Please note our share count was down over the period primarily as we were active in our stock purchase program.

Although limited by periods in which our trading window was closed we repurchased approximately 630,000 shares under our stock repurchase program for a total cost of roughly $10 million.

Operating cash flow for the period was 8.5 million lower than the last several quarters principally on lower net income. On March 31st we held 256.2 million in cash and investments and no debt. Total cash investments is down from the prior quarter due to the acquisition of FotoNation.

And now let me turn to guidance. Our guidance for the second quarter royalty and license fees is between $47 million and $49 million. Total revenue for the second quarter is expected to be within the range of 54 million to 56 million. Both of these ranges are 1 million higher than we originally forecast on the 31st of January. Although there are continued concerns in the memory industry about over supply and pricing declines we believe DRAM unit growth will remain in line or slightly above our expectations earlier this year with sequential growth of 3% for the second quarter and approximately 20% for the year.

The drivers in unit growth are capacity expansions by DRAM vendor's migration to lower process nodes yielding more DRAM chips per wafer and continued broad demand for PC's and desktops particularly in areas outside of the US such as Europe Asia-Pacific and other emerging markets.

In wireless looking at the second quarter, we expect normal seasonal softness but again for the full year we expect handset unit growth sales to be 10% over 2007 supported by stronger demand in the international markets. In our products and services segment we are projecting roughly 7 million in revenues for the second quarter. Micro-optics revenues should be flattish quarter-over-quarter. Our revenue will be lower in this line item principally as we have made a strategic decision to de-emphasis government funded R&D and to phase out our activity here over the coming year. This will have no impact on it and will enable us to focus R&D more fully on key growth areas including packing interconnect and consumer imaging.

On a non-GAAP basis total expenses excluding litigation are targeted at 27.5 to 28.5 million. With respect to litigation starting this quarter we will not guide litigation expense. At the conclusion of this coming quarter however and on an ongoing basis we will continue to provide litigation spend detail for the quarter. Our reasons for this change to guidance policy are first because litigations spend at a time of such increased legal activity is highly variable and difficult to predict. And second because we believe that expense guidance conveys certain information about our approach and expectations.

I want to emphasize that ligation expense has historically had an excellent ROI for the company and we believe it is likely to do so again.

In the second quarter we expect stock based compensation to be approximately 5.5 million and deal amortization charges to be roughly 2.6 million. Cash taxes should be in the range of 2.5 to 3 million.

Now let me turn the call back over to Bruce.

Bruce McWilliams - Chairman, President and Chief Executive Officer

Thank you, Charlie. I want to thank you all for your continued interest in Tessera. We are very pleased with our strong first quarter results. We remain confident about our long term growth and our return on the investment from our research and development activities as well as our efforts to defend our intellectual property. We recognize short term there maybe variables that can impact our legal activities.

However, we are back on track in the ITC and remain bullish about our ability to prevail. Through successful resolution of our ITC actions and the arbitration's with Amkor we believe we will capture the bulk of the CSP market that uses Tessera's technology. This will drive very strong long term growth in our core business.

We have assembled a broad platform of imaging technologies with the most recent addition being the sophisticated digital still camera imaging technologies such as red eye reduction and face tracking. With this robust integrated cost effective and easy to use platform we are uniquely positioned to be the solution of choice for the next generation of digital cameras in markets including wireless automotive and security. As a result we believe we will exceed 100 million in consumer imaging revenue by 2010 and firmly believe long term we can grow this business to be a size as large if not larger than our current core business.

We are excited about the growth opportunities that lie ahead for us in all of our businesses and I look forward to sharing our success with you in the future. I would now like to turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brett Hodess.

Brett Hodess

First quickly can you repeat what the litigation was in the quarter? I didn't quite catch it?

Charlie Webster

Sure Brett. It was 24.2 million.

Brett Hodess

24.2 million, okay. A couple of questions. First, on the licensing for the consumer imaging business, you mentioned that you thought and would get some more licenses this quarter. Do you get -- are you figuring in the license fees when you give the revenue guidance? Is that a piece of that? And in the second half of the year, you mentioned that you start to script production in the fourth quarter. Would you actually start to get revenues off that in the fourth quarter? Or would that be delayed until first quarter -- would there be a similar lag of a quarter or so?

Bruce McWilliams

Hey Brett, Bruce. There are some optics licensing deals in Q2. It's a smaller portion of our revenue. But, and often these things have some milestones associated with them, so it's not all recognized at one time. And fourth-quarter production is really pilot production. And as always, our revenues are one quarter in arrears.

Brett Hodess

Okay. And then the other question, on the legal front, if you could -- is there any indication when the stayed ITC wireless case -- when they will have a date for you for that to go back to trial?

Scot Griffin

This is Scot Griffin. No, there's not at this point in time. The parties have conferred with Judge Essex's chambers and the staff counsel also have weighed in. So we have all sort of made our request as to the timing, and we're just waiting for the judge to report back to us.

Brett Hodess

Well and he hasn't given you any timeframe at which they will report back?

Scot Griffin

No, he has not.

Brett Hodess

Okay. Thank you.

Operator

Your next question comes from the line of Jesse Pichel.

Jesse Pichel

Good afternoon. Was the royalty adjustment mentioned result of an audit? And minus that adjustment, would the royalties still have grown?

Charlie Webster

Hi, Jesse. This is Charlie. Yes, our TCC or CSP royalties were -- fully met our expectations. That is to say, they grew quarter over quarter. And the royalty adjustment is one of actually a broad category of adjustments that occur to us fairly frequently. We get customers sometimes ticking revenues down; sometimes they come up. It depends on their calculations. The key thing for us is, again, TCC royalties were very strong end of the fourth quarter. They look strong again seasonally into the second quarter and our confidence is pretty high as the year progresses.

Jesse Pichel

And typically Q2 is weak quarters for you seasonally, and yet you are guiding up. And I'm wondering have you received all of or a good portion of your royalty reports for Q2, which gives you confidence in your guidance? Or if not, what are you basing that upward revision on?

Charlie Webster

Again, we do have more visibility than most firms in that we recognize revenue in arrears. And by the time of this call, we have a portion of shipment reports from our customers. So our confidence is pretty firm on that level. Again, we also see unit-based growth across a diverse array of markets. And many of them are non U.S in terms of our both PCs, notebooks, and handset growth, is all driven principally outside the U.S., and we see stronger growth dynamics there.

Jesse Pichel

Could you disclose any 10% customers in the quarter?

Charlie Webster

We had two and at this point, we don't give them out by name, but you will see them in our Q, which will be out on the 9 of May.

Jesse Pichel

And Shellcase, we were expecting Shellcase to ramp significantly in the second half '08 relative to the first half. And I'm wondering, do you still expect that to occur?

Bruce McWilliams

Jesse, maybe I'll take that. It's Bruce. Shellcase is an important piece of our business in that it fits in nicely with our wafer-level camera and other things. It's substantially up from where we bought it, but I don't think that by itself, will be that material. It's more an important piece of our revenue. And so I don't think that's going to drive a significant portion of our growth in the second half of the year.

Jesse Pichel

And my last question for modeling purposes, has the DDR2 portion of your royalty and licensing fees exceeded the royalties and licensing fees for your core NOR and DSP business at this point?

Charlie Webster

We have not provided that degree of visibility, Jesse, but DDR2 is definitely slowing a little bit and we are seeing the early traction of DDR3.

Jesse Pichel

I am sorry, not DDR2 and 3, yes. The DDR business relative to the NOR and DSP business is the DDR business greater?

Bruce McWilliams

Yeah, I think it's definitely bigger.

Charlie Webster

Yes. It's definitely a larger portion than non-DRAM which -- non-DRAM includes NOR as well as other logic chips like DSP and baseband chips.

Jesse Pichel

Great. That's helpful. Thank you very much.

Charlie Webster

One last comment there, Jesse that that of course is the subject of the ITC Wireless case and should we be successful as we hope and expect our share there could climb very substantially and with it for royalties.

Jesse Pichel

And could you just lastly discuss how much is left on your buyback and what's your strategy there at this level?

Charlie Webster

Yeah, I mean, the buyback authorization was $100 million, so we have a considerable amount of headroom. I would say we are continuously looking at the best uses of our shareholder capital and we will keep reviewing it. I would say we are very excited about our consumer optics business. We have made, as you know, four acquisitions and I think we are confident that we can continue to find new opportunities of that nature going forward, so we will just have to see.

Jesse Pichel

Thank you very much.

Charlie Webster

Thanks.

Operator

Your next question comes from the line of Raj Seth.

Raj Seth

Thank you. Just a couple of quick ones. You mentioned Charlie I think your expectation for the year was 10% growth in the wireless business, 20 for DRAM. You also mentioned that increasing penetration of CSP into a lot of the target application. In general, do you have a way to think about how much of excess of the growth of the unit poles to which were attach you would expect to grow based on the increased penetration into some of that markets?

Charlie Webster

I think with respect to the core CSP business, I think the two proxies of DRAM grow to 20%, about half of total growth is in licenses and wireless growing at 10%. Those are pretty good guide posts. On the handset unit growth, what we are seeing of course is more dynamism, more rapid growth in emerging markets those are typically lower CSP intensive. So I wouldn’t say it's a huge kicker to growth there in the near future, I think the imaging business has an opportunity to add considerably there because our suite of products is positioned and I think I will turn this one over to Bruce but a range of price points ranging from showcase image sensor packaging to run design to algorithm to improve the image quality and as attach rates for camera modules in the wireless devices continue to climb, we see a compounded annual growth rate in camera modules in wireless devices of more than 20%. So that’s a strong market that we are pushing into.

Raj Seth

And then I know you have it historically broken out your revenues by product segment, but any guidance you can give on roughly how much today comes from an accumulative sense obviously about half -- I mean historically half the service revenues, but how much from the consumer optics business today is built into the numbers?

Charlie Webster

We haven't given that guidance, but I think Bruce mentioned in the last call that last year the consumer optics business was in the order of 30 to 40 million in total revenues.

Bruce McWilliams

Right. I think this year it will in the $50 million range with a bigger growth in the tail-end.

Raj Seth

Great. And one last one for Scot. Scot, do you necessarily go back before judge Essex in the ITC or is that also up in the air?

Scot Griffin

That’s our assumption based on everything that we have heard thus far, I suppose it's a possibility that we might go in front of another judge, but for now we are assuming judge Essex.

Raj Seth

Great. Thanks very much.

Operator

Your next question comes from the line of Arnab Chanda.

Steve Zane

Hi. This is Steve Zane for Arnab. I have a question on the acquisition of the pens from Kronos. That seems to be a little bit different from what you guys were doing recently. Can you give us a little more color on why you guys made the acquisition and when you guys will see revenues?

Bruce McWilliams

Yes. The FotoNation the OEMs like Nokia and so forth, they want to put more and more features into their cameras, things like face tracker, red eye reduction and it turns out if you bundle all of these things together like zoom and our optimal focus, the net gate count is less because say if you have a need a frame buffer or one of these things for both of them, they are not in separate parts, so it's more cost-effective plus we believe people want a single place to come to get the complete solution. Furthermore, we are interested in driving a higher total royalty per camera by delivering more value. So we looked at all of the different place and the space and FotoNation has a I believe something like 90% of the penetration for the red eye removal and digital still cameras and a lot of penetration in face tracker. So in our view that’s a very challenging market. The quality has to be very good to prevail in that market. So we saw them as a natural choice and we also believe they have very strong IP in this area.

Steven Zane

Sorry. I was actually asking about Kronos, your micro-cooling technology?

Bruce McWilliams

You are asking about -- Kronos, I thought you said FotoNation. Yeah, Kronos, this is a new technology that allows you to move air around by ionize the air and then electrostatically move it with alternative fields so you can cool every bit as good as with the fan but with no moving parts, we believe the cost will be equal or lower so reduce noise and we think longer term even more effective and I think cooling is one of the biggest challenges in the electronics industry as they want to pack things in smaller and smaller footprint. So we had been working in research in this area. We again surveyed everything out there. We decided this was the best solution for the future. We acquired that technology, the patents and few people and we are investing in that area.

Steve Zane

Okay. Any timeline on getting revenues from this area?

Bruce McWilliams

I think these things usually take a couple of years. We have a small early prototype but you got to get it adopted into the OEMs qualified infrastructure, but I think you could start to see it within maybe 18 months to two years.

Steve Zane

Okay. Are there any other areas that you guys are looking to acquire? I mean, it still seems like you are pretty loaded with cash and other than a share repurchase, it doesn’t make sense especially in this environment to actually keep all on the balance sheet?

Bruce McWilliams

Well, we are constantly looking to have a group that does nothing but this, but again we are very selective. We generally don’t like large acquisitions, we like things that are emerging, so they likely have fundamental IP and things that are synergistic with what we know how to do. Cooling was a natural choice because it relates closely to packaging and likewise FotoNation we would have never made that acquisition in the very beginning but as we got into these things like Eyesquad, it was a natural add-on. So we continuously look. We think actually this kind of model makes a lot of sense for us because it's unlikely that organically you can continue to have revolutionary breakthroughs and IP business relies on those kinds of breakthroughs and we would like to look throughout the world for the best new things and that are synergistic of where we didn’t.

Steve Zane

Great thank you.

Operator

Your next question comes from the line of Kevin Vassily.

Kevin Vassily

Thank you for taking my question. First, wanted to ask about the reexamination process right now. What, if anything, do you guys expect in the near-term in terms of kind of further actions or announcements out of the PTO? Particularly in regard to the 490 patent, which I think got that action -- closing action not too far back?

Scot Griffin

Okay this is Scott. With respect to the 409 action, we are in the eighth step of a 26-step process. The examiners are considering what to do in view of the comments that they receive from both Tessera and SPIL to the action closing prosecution. There are two options that the examiners have. First, they can decide to reopen prosecution and go back and look at the arguments, and this is precisely what we have requested them to do. Alternatively, they could certify this for appeal, which would allow Tessera to go ahead and file an appeal in front of the Board of Patent Appeals and Interferences. While we are hopeful that we will be able to get the prosecution reopened, it is our assumption, just in terms of preparing for everything, that we will be appealing this to the Board of Patent Appeals and Interferences. Now the problem that we have is that there's no deadline for the examiner to come out with their comments as to what they're going to do. Basically at this point in time, I can't -- we can't not say or predict what they're going to say and when they are going to say it. All we can say is that we are prepared in either event and if we have to appeal, we look forward to doing that.

Kevin Vassily

Okay. A couple of follow-ones on that. So, if they decide not to reopen prosecution, is there something specific that they would necessarily say to signal that? Or does it kind of float out there and you have to push the kind of appeal agenda to these guys?

Scot Griffin

What would happen if they decide to make the action final is they would issue a right of appeal notice; and that would give us typically 30 days to a month in which to file an appeal to the Board of patent appeals and interferences.

Kevin Vassily

Okay. And at that point, you are able -- you have the right to have that appeal heard if they give you that notice? Is that right?

Scot Griffin

That’s correct

Kevin Vassily

Okay. Do you have any way of expediting the appeal process?

Scot Griffin

This is where we kind of get into some peculiarities of the re-exam process. The only time -- there's really no deadlines that are placed on the examiners or on the board. Of the few appeals -- of the few re-exams, inter-party re-exams have gone through appeal you can't determine anything in terms of what the timeframe is and whether you can expedite it or not. So I guess that's a very long way of saying I don't think we have an opportunity to expedite the process. I think that's the answer.

Kevin Vassily

Okay. Question actually for Charlie on the legal side. Since you're not going to give guidance anymore going forward, but will talk about it kind of after the fact, is there any way you can maybe put some boundaries on certain things for us? Like for instance, you mentioned in Q1 you have two simultaneous trials being prepared for, Amkor and the ITC. Is it fair to say for Q2 then that the bulk of costs associated with arbitration are behind you? You've got some interval costs associated with the briefs you need to file and in there. But just for our kind of purposes, is that a fair way to think about the Amkor piece?

Scot Griffin

This is Scot, and that's correct. That's a fair assessment of the arbitration.

Kevin Vassily

Okay.

Bruce McWilliams

Kevin, the only thing I would add is, as I mentioned in my comments, it's a combination of concerns that we have about the litigation guide. Happy to break it out for you and we will retrospectively. But not only is there a lot going on, a lot that we cannot control. For example we don't know exactly when the trial is going to be reset and so forth.

Kevin Vassily

Right.

Bruce McWilliams

And secondly, putting numbers out there is frankly -- we don't believe the long term interest of our shareholders. We think the long term ROI to the dollars are terrific and that’s what we are focused on.

Analyst

Right okay. That’s all my questions thank you.

Charlie Webster

Thanks.

Operator

Your next question comes from the line of Bennett Notman.

Bennett Notman

Looks like receivables ticked up a little bit in the quarter. Could you just talk of about what might be going on there?

Charlie Webster

Hi Bennet. I am sorry you're cracking a little bit could you say again?

Bennett Notman

It appears that receivables ticked up a little bit in the quarter and I was just wondering what was driving that.

Charlie Webster

No particular important underlying there. Our receivables and working capital is excellent. Our DSO's are in the 30 to 45 range. We obviously had a higher business over the quarter so we had $59 million worth of revenues that’s probably the biggest factor.

Bennett Notman

Okay and then what was the CapEx number in the quarter if you gave that?

Charlie Webster

CapEx in the $2 to $3 million range per quarter. It’s ticking up a little bit for us with our activities in digital optics and the wafer level optics business.

Bennett Notman

All right great. That was it thank you.

Charlie Webster

Okay thanks.

Operator

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

C.J. Muse

You can hear me?

Charlie Webster

Yes.

C.J. Muse

Good thank you for your taking my question. I guess to follow up on a previous question were you gave guidance for digital optics and thank you for that. I guess I am trying to get a better view for the overall non DRAM and wireless business. So if you were to strip up both of those royalty streams what kind of revenues could we look for from the rest of your business in 2008? Can you give us kind of a ballpark range?

Charlie Webster

So to clarify C.J. you are saying take DRAM out of the mix and use CSP wireless plus consumer imaging?

C.J. Muse

No take DRAM and wireless out so if we get the emerging digital optics plus the legacy digital optics plus service.

Charlie Webster

Yeah. So basically roughly all of our new business which we are calling imaging technologies is in the neighborhood of 50 million. We haven't given annual guidance but you could kind of its at least going to be something in the neighborhood of double what our first two quarters are. So you get the sense that about 20% or something of our revenues is our new stuff. And I think you will see over time that becoming more and more dominant. But I do expect to see a lot of growth in our core business as well but it somewhat a function of how we do on our ability to defend our IP.

C.J. Muse

Maybe I could ask another way. When you look at the product and service line item in 2007 lets say how much of that was related to wireless and DRAM versus digital optics? I guess how should we think about that in '08?

Charlie Webster

Yeah really in products and services line C.J. you have two things. One is the sale of micro-optics and the second has been our government funded R&D. Government funded R&D has been declining and we see it doing so even more steeply actually into the forward quarters. So the guide I gave you for Q2 of about $7 million is mostly micro-optics and that’s a good rough sense for that business probably moving on into the year. That help you.

C.J. Muse

That’s helpful. And I guess secondly you told us the cash tax. Give us a GAAP tax rate?

Charlie Webster

The GAAP tax rate for the period was 73% it was obviously higher than our normal level of about 43 to 45 on a couple of factors. First was of course lower net income. Secondly we had an IP R&D charge in process R&D and third we have some expenses that are non-deductible in our off shore activities. As I have said before those are absolutely expected and expected to turn around predictably as this year progress and we think that the off shore activities will be a source of real tax efficiency for us.

C.J. Muse

And going forward for the rest of 2008 how should we think about the GAAP tax rate?

Charlie Webster

You know again little hard to call for the rest of '08 at this point. Same main drivers of how much activity and expense we have offshore versus onshore. I would say probably into Q2, the tax rate is probably going to be still fairly high. Though I continue to focus folks on the cash tax rate, which, this quarter was only $1.4 million. It will be on the order 3 next quarter and probably stays in that range for the next several quarters.

C.J. Muse

Okay and last question for me, what was the royalty adjustment amount?

Bruce McWilliams

We didn't break that out, C.J., but we did emphasize that TCC, CSP current existing royalties were really strong over the period. Our products and services was strong. And actually our licenses and royalties from FotoNation were at the higher end of our expectations. So that should help you a bit.

C.J. Muse

Got it. Thank you.

Bruce McWilliams

Thanks.

Operator

Your next question comes from the line of Hans Mosesmann

Hans Mosesmann

Charlie, on that last question, can you look at it this way or answer it such that without the adjustment in Q1 for that royalty, that one time, will the licensing and royalty be up in Q2?

Charlie Webster

No. I mean, it's, historically, Q2 has been a flattish to up 1 or 2% we see a similar dynamic here. Maybe a little bit more strength thanks to DRAM.

Hans Mosesmann

Okay, so flattish flat to normal?

Charlie Webster

Yeah.

Hans Mosesmann

Okay, then one last question because I think everybody has done a pretty good job of asking most of the questions. The 20% DRAM unit growth for '08 that is based on what kind of a bit unit growth for DRAMs or the DRAM industry if you have that data?

Charlie Webster

Yeah, we don't actually track bit growth. I did in my prior life. The key issue for us is units rather than bits. Bit growth historically has been in the 36%, rate. But again, that's not the most important metric for us. It really is units. The biggest issue for 2008 is the strong capacity that's being brought online over the last several years. We see it continuing. We're starting to see some slowdown in CapEx, but that's going to take some while before that slows units that are still coming out of assembly lines very quickly. So our confidence in the unit-based growth rate here in '08 is strong. And even when we look out into '09, as Bruce mentioned in his comments, we see increasing memory intensively per device, such that DRAM longer-term unit growth is probably in the 15 to even 20% range.

Hans Mosesmann

Very well, thank you.

Charlie Webster

Thanks.

Operator

And now final question comes from the line of Eric Solomon.

Eric Solomon

Thanks for taking my question today. Most of the questions that I had have already been answered. But I did want to get a bit more color about the competitive environment for the wafer level cameras. I noticed that Uptina had also made a product announcement, maybe another company as well. What do you feel your competitive position is against those companies?

Bruce McWilliam

We are in active discussions with most all of these companies. Generally we're getting good reception from them. I believe we have, first of all, the strongest IP position in this area, and from what I can see, we are the furthest along in both yields and I believe we have the lowest cost solution.

Eric Solomon

Okay, thanks that helpful. And just one kind of housekeeping thing. With the cash on your balance sheet, is there anything I should know there about auction rates? Is that an issue for you?

Charlie Webster

Yeah, hi this Charlie. We have about $24 million worth of auction rate securities. We continue to watch them carefully. But we are fairly comfortable right now. They are all AAA credits. They are senior debt and they keep paying interest. So we are distinguishing between liquidity, which is low and credit, which we think is high, and feel comfortable at the present time.

Eric Solomon

Great. Thanks very much.

Charlie Webster

Thanks.

Operator

And this concludes our Q&A session would now like to turn the conference back to our presenters for closing remarks.

Bruce McWilliams

Thank you, again, for your support and we look forward to talking to you again next quarter. Thank you.

Operator

Thank you for participating in today's teleconference. This concludes today's call. You may disconnect at this time.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Tessera Technologies Inc. Q1 2008 Earnings Call Transcript

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