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MIPS Technologies, Inc. (NASDAQ:MIPS)

F4Q12 Earnings Call

August 15, 2012 4:45 PM ET

Executives

Jen Bernier – Director, Communications

Sandeep Vij – President and CEO

Bill Slater – VP, CFO and Treasurer

Analysts

Gary Mobley – Benchmark

Vikas Tandon – Bastogne Capital

Charlie Anderson – Dougherty & Company

Anthony Stoss – Craig-Hallum

Operator

Thank you for standing by. All lines in today’s call will be in a listen-only mode until the question-and-answer session. (Operator Instructions) Today’s call is being recorded. If you have any objections, you may disconnect at this time.

And I’d now like to introduce Communications Director, Jen Bernier. You may begin.

Jen Bernier

Thank you. Welcome to the MIPS Technologies fourth quarter and fiscal 2012 earnings conference call. My name is Jen Bernier and I’m the Communications Director for MIPS. Leading the call today are Sandeep Vij, Chief Executive Officer; and Bill Slater, Chief Financial Officer. After they discuss the business highlights and detailed financial results, we will open the call for Q&A. If you do not have a copy of the earnings release, it is available on our website at www.mips.com.

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 first quarter of fiscal 2013. 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 Factors 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 will be referring to fourth quarter and fiscal 2012 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. MIPS Technologies uses non-GAAP measures when evaluating its financial results as well as for internal planning and budgeting purposes. The non-GAAP results discussed today exclude stock compensation and non-recurring charges incurred during the period. Please refer to the earnings press release or the Investor Relations page of our website for a reconciliation of GAAP to non-GAAP.

As a reminder, the playback number for this conference call is 203-369-1251 and the access code is MIPS. The recorded call will be available for 30 days after this call. An audio replay will also be posted on the Investor Relations page of our website at www.mips.com.

With that said, I will now turn the call over to Sandeep Vij.

Sandeep Vij

Thank you, Jen. Hello, everyone. Thank you for joining us today. We’re pleased to share that Q4 was a record quarter for MIPS. We signed one of the largest licensing agreements in MIPS Technologies’ history. This license agreement with Broadcom, MIPS’ largest customer, demonstrates the value of our patent portfolio. This license is the first tangible result of our strategic efforts around patent monetization and we continue to consider all of our options in this area. This effort to monetize our patents is a natural extension of our business: licensing processors, architectures and now patents.

On the processor front, in the fourth quarter, we publicly announced our new Aptiv generation of products. MIPS’ sales, marketing and technical experts traveled throughout the world to present the new cores to customers and prospects and have developed a pipeline of identified opportunities. In the current quarter, we will start to see the general availability and revenue from the higher end cores. Now, I would like to provide some updates on activity in our target market segments.

In mobile, we are pleased to have recently announced with our licensee, Ingenic, together with Karbonn, a well-known maker of mobile devices in India, the second Android 4.1 Jelly Bean tablet in the world, following only the launch of Google’s own Nexus 7 tablet. The Karbonn tablet is the lowest cost Android 4.1 tablet making this achievement a great example of the cost and power efficiency of MIPS as well as yet another example of just how fast MIPS and our customers can move when it comes to being one of the first in the market with devices based on new versions of Android. In this case, second only to Google itself.

We saw other new MIPS-based tablets with the Ingenic chipset enter the market in the quarter including the T7 and T7+ tablets from Philips. These were the first non-ARM tablets to be certified by Google. And the new tablet from China-based manufacturer, Ramos, is expected to be available soon in markets such as India, Latin America and Europe. The Ramos tablets leverage a MIPS-based chip from Actions Semiconductor, a public company in China.

We had one new mobile license this quarter which was a new license with Nationz Technologies which was previously part of telecommunications powerhouse ZTE. As we announced, Nationz is using MIPS for mobile payment products used in cellular phones. More than one million of its MIPS-based devices have already shipped.

We continue to make progress in our efforts with Google this quarter. Google released an official native development kit or NDK for Android 4.0 with full MIPS support. Google also announced a platform developer’s kit or PDK that provides early access to Android releases for quicker porting. MIPS was invited by Google to participate in this program giving us access to the new Jelly Bean release ahead of open source.

We also continued our Android application development and porting programs this quarter and have direct working relationships with application and tool chain developers such as Gameloft, Rovio, Halfbrick, Opera, Marmalade, Xamarin, and Unity among others. These relationships are key for Android initiatives for products such as mobile devices and high-end home entertainment products.

While home entertainment shipments, in general, continue to be sluggish, we saw new products entering the market including the HiDTV Pro-Fusion for smart TV from Sigma Designs. This SoC leverages a one gigahertz MIPS-based CPU for applications processing alongside another high performance MIPS-based platform CPU. Sigma recently reported that this SoC has been selected for use in a wide range of smart TV products from major European TV manufacturers. Based on reports from several customers, networking continues to be challenging especially on the enterprise side. We are seeing some positive signals, however, with Broadcom reporting strong growth in broadband access as well as continued expansion of its XLP customer base which is the MIPS-based former NetLogic product line.

In the quarter, Cavium began shipping its new MIPS-based OCTEON Fusion product for small-cell base stations and announced a design partnership to proliferate these products in Taiwan. Cavium also recently announced that the Fusion platform will power the 4G/LTE small-cell deployment for SK Telecom, the largest mobile service provider in Korea. Broad mass market adoption is expected to begin this year.

Also in networking, Mediatek announced that one of its MIPS-based Wi-Fi chips is shipping inside new cloud routers from D-Link. Mediatek also introduced new MIPS-based 802.11ac home networking products, which it expects to put into mass production by the end of the year. This quarter, NETGEAR also introduced new 802.11ac routers which leverage MIPS-based routing chips from Broadcom.

In the embedded market, we recently announced that Vango, a supplier of solutions for China’s power grid market will use MIPS’ popular M14K cores to provide 32-bit microcontroller functionality for smart meter and smart grid SoCs. Vango’s MIPS-based chips are expected to start shipping next year. While it is a start-up, Vango appears to have a compelling opportunity through its close relationship with the State Grid Corporation of China or SGCC, the world’s largest utility.

Across our target market segments, MIPS continue to address the need for a combination of high-performance, low-power and low-cost. Our new Aptiv generation of products puts MIPS back in a highly competitive position. And as I mentioned, we are continuing to consider all of our options in patent monetization.

Now, Bill will provide more about the details of the quarter. Bill?

Bill Slater

Thanks, Sandeep. For the fourth quarter ended June 30, total revenues were $38.4 million compared to revenue of $15.3 million in the prior quarter and $17.6 million in the same period of the prior year. Royalty revenue in the fourth quarter was $10.6 million compared to royalty revenue of $11.1 million in the prior quarter and $11.8 million in the same period of the prior year. Our licensees reported shipments of 177 million units during their March quarter or 3% higher than their previous quarter and 7% higher than the same period of fiscal 2011.

The sequential decline in royalty revenue was due to a decrease in the average royalty rate per unit from $0.064 in the prior quarter to $0.06 in Q4. The decrease in royalty per unit was primarily driven by certain customers hitting lower price tiers based upon timing and volume.

49 MIPS licensees reported royalties in Q4. License revenues were $27.8 million in the fourth quarter of fiscal 2012 compared to license revenue of $4.3 million in our third quarter and $5.8 million in the same period of the prior year. We closed 5 license deals this quarter including our first standalone patent license deal, which was the driver of our increase in license revenue for the quarter and year as compared to prior periods. The impact of the Broadcom license in our fiscal fourth quarter was $26.3 million.

Total costs and expenses in our fourth quarter increased to $20.1 million from $17.1 million in the prior quarter, primarily as a result of increased incentive compensation as the company met certain financial targets in fiscal 2012. There was approximately $1.8 million in stock compensation included in our fourth quarter operating expenses.

Our GAAP net income for the quarter was $17.2 million or $0.31 per share, compared with a net loss of $2.5 million or $0.05 per share in the prior quarter and net income of $700,000 or $0.01 per share in the same quarter a year ago.

On a non-GAAP basis, net income in the fourth quarter was $19.2 million or $0.35 per share compared to the non-GAAP net loss of $800,000 or $0.01 per share in the prior quarter and a non-GAAP net income of $2.3 million or $0.04 per share in the fourth quarter a year ago.

For the fiscal year ended June 30, total revenues were $86.2 million, an increase of $4.2 million or 5% compared with our fiscal 2011 results. For the year our licensees shipped 708 million units representing a year-to-year unit growth rate of 8%. Royalty revenue decreased to $47.8 million in fiscal 2012 from $53.7 million in the prior year as a result of our royalty per unit decreasing from $0.082 in fiscal 2011 to $0.068 in fiscal 2012. License revenue increased from $28.4 million in fiscal 2011 to $38.4 million in fiscal 2012 principally as a result of the Broadcom license in our fourth quarter partially offset by lower deal volume in fiscal 2012.

Total annual costs and expenses increased to $69.3 million from $61.6 million primarily as a result of increased research and development efforts associated with the launch of the next generation products and ecosystem development. Non-GAAP net income per share was $0.40 compared to $0.43 per share in the prior year. We ended Q4 with cash and investments of $110.9 million, an increase of $1.5 million during the year. In addition we collected the Broadcom license fee in July.

As we move forward, we expect that our core licensing business, exclusive of any patent license transactions, will improve during the first fiscal quarter, as our new high-end cores become commercially available. In terms of guidance, we want to point out to you that we’re going to begin a transition. Effective with this conference call, we will no longer be providing guidance on revenue and earnings per share. The reason for our transition to providing no guidance is due to the lumpiness of traditional licensing revenue opportunities coupled with the unpredictable timing and size of patent license agreements.

Now I would like to open up the call for any questions. Operator, can you please poll the audience for questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We do have a question from Gary Mobley with Benchmark. Sir, your line is open.

Gary Mobley – Benchmark

Hi, guys.

Sandeep Vij

Hi, Gary.

Gary Mobley – Benchmark

Bill, your very last comment opens up my first question, and that is I’m assuming that you’re going to continue to find additional patent license deals with existing licensees, and I guess that’s a hedge for those licensees, that’s a benefit for those licensees. Now should we think about a patent license deal that you strike with any other licensees besides Broadcom as scaling with the amount of royalties they generate for MIPS, or scaling with the amount of profits or revenue in general that they generate?

Bill Slater

So, let me say first of all, I think we’ve indicated that there’s a possibility of additional patent license transactions. The terms of any transactions we decide to do in the future will be based upon our discussions, and they may be with existing customers or with people who are not MIPS’ customers.

Gary Mobley – Benchmark

Okay. And if I back out the license revenue contribution from Broadcom in the quarter, it appears as though you only generated $1.5 million in license revenue from the 5 aforementioned license deals you mentioned. Why so little? And should we think about those 4 or 5 license deals as being deferred and thrown over the wall into the first quarter of 2013?

Bill Slater

So I think in advance of coming out with our new cores, there was a scarcity of larger deals. The deals that we did sign were typically smaller deals, single-use cores and as I pointed out, we do expect the licensing environment in our first quarter to be better than the licensing environment was in our fourth quarter.

Gary Mobley – Benchmark

Okay. If I’m not mistaken, there are 3 Aptiv cores, and will all three of those be generally available and hence recognizable for revenue in the first quarter?

Bill Slater

We expect at least – well, we expect at least 2 of the 3 families to be available in the first quarter. The third family may – will probably be available early in the second quarter.

Gary Mobley – Benchmark

Okay. Last question for me, I think you were asked this question every conference call, but when will the royalty rate per unit stop sliding? Is it – are your main royalty payers MStar and Broadcom going to continue to hit volume thresholds that keeps knocking that royalty rate per unit down?

Bill Slater

So there’s some limited – there’s a few more thresholds that we will hit over the next two or three years with some of the top royalty payers. I think the other issue is a great proportion of our royalty agreements are based upon the price of an SoC, and as those prices decline, we see royalty rates decline. And that is – that is a pretty hard thing to estimate what that impact is, but that’s certainly impacting our overall rates.

Gary Mobley – Benchmark

Thanks, guys.

Operator

Our next question is from Vikas Tandon with Bastogne Capital. Your line is open.

Vikas Tandon – Bastogne Capital

Hey, guys. Thanks for taking the question. Just a couple of quick questions. First of all, on the balance sheet. You showed the cash and equivalents of $76 million. The short-term investments of just under $35 million. The accounts receivable of $27 million, how much of that is Broadcom, and has that money come in?

Bill Slater

Yeah, $26.5 million of that is Broadcom and that money has been paid.

Vikas Tandon – Bastogne Capital

So pro forma, you guys would be a little over $137 million of cash pro forma for Broadcom?

Bill Slater

Right.

Vikas Tandon – Bastogne Capital

Any thought to – obviously that’s a lot of cash. You guys seem to basically be cash flow breakeven or cash flow positive. Any thought to returning some of that cash to shareholders, either through a buyback or a dividend or something along those lines?

Bill Slater

Yeah. I think those are discussions we frequently have with the Board. Right now there’s no determination.

Vikas Tandon – Bastogne Capital

Okay. And then just, because I have to, just on the patent side. Congrats on the deal with Broadcom. I know you’ve been talking mainly on the call about future licensing deals for the patents. Is the idea of selling the patents completely off the table? And are you going to go the route of kind of one-off license deals? Or is selling the patents as a whole still something you guys are exploring?

Sandeep Vij

Yeah. I think what we’ve said is that we continue to consider all our options in this area. I mean, we’re happy the Broadcom deal definitely demonstrates the value of the patent portfolio. Broadcom is our largest customer, we’ve had a very long engagement with them. Based on that you can assume they’ve got a very detailed knowledge of our patent portfolio. We’re very happy that they took that license and all options remain open.

Vikas Tandon – Bastogne Capital

Okay. Perfect. Well, thanks a lot, congrats on the quarter.

Sandeep Vij

Thanks.

Operator

(Operator Instructions) Charlie Anderson with Dougherty & Company. Your line is open.

Charlie Anderson – Dougherty & Company

Good afternoon. Thanks for taking my questions. I totally get, not giving the license line guidance, I understand that’s going to be very hard to estimate. But I wonder if you had any color on royalties and expenses? It seems like you may have a little bit more visibility there. Just kind of directionally, sort of flat, up, down, that sort of thing?

Bill Slater

Yeah. I think royalties are going to be sort of flattish from where they are. It’s always hard to tell; we don’t get in all the reports from our customers until the end of the quarter. So, sometimes we are surprised on the royalty side of things. Pretty difficult environment right now seeing things fluctuate. I’m sorry, you asked about royalties and what else?

Charlie Anderson – Dougherty & Company

And operating expenses?

Bill Slater

Operating expenses, sure. So, on the operating expense side, again we will see operating expenses decline from fourth quarter levels and probably be closer to what they were in the third quarter.

Charlie Anderson – Dougherty & Company

So, the difference I’m seeing between Q3 and Q4 was primarily that sort of performance-based comp?

Bill Slater

Right, exactly. So, we think we’ll be running at roughly plus or minus the same level we did in Q3.

Charlie Anderson – Dougherty & Company

Got it. And there was the $1 million that you did in the quarter, obviously a lot of things going on there. I wonder, what point do you look to sort of revisit the expense level if you’re continuing to run at sort of the rate you’ve ran the last year or so on license? Or is your expectation that you’ll do meaningfully higher than you’ve done in the last year or so on the license line and you’re not going to have to worry about that?

Bill Slater

So, I think we’re just launching a new set of cores, and we ramped up our R&D over the last several quarters to get those cores out. We’ve also developed an excellent relationship with Google, and there’s been an investment there, and that’s been important to the company. I think we’ll revisit as we do every quarter what we feel we need to invest. And G&A and sales and marketing have been relatively flat. The investment has all been in R&D, and that’s an ongoing process of looking at R&D and deciding when we lever it up or when we lever it down.

Charlie Anderson – Dougherty & Company

Right. And then just lastly on the Broadcom deal, obviously you sort of threw a data point out there into the market for other potential patent licensees to see. I wonder, sort of, what’s been sort of the feedback you’ve gotten from others since you did that deal? Or is it a situation where more people want to do a deal now because they kind of know what it’s going to be? Just any color there would be helpful.

Bill Slater

I think people have definitely sat up and taken notice. That would probably be the way I’d characterize it right now.

Charlie Anderson – Dougherty & Company

Okay. Thanks so much.

Operator

Our final question is from Anthony Stoss with Craig-Hallum, your line is open.

Anthony Stoss – Craig-Hallum

Hi, guys. And thanks for taking my question. See, in the past I believe you’ve talked about a lot of options coming in that you guys – on the patent monetization side that you guys have to sift through and decide which direction you want to take. I’m trying to or hopefully you can help us all understand, are we nearing a decision at some point? Any help you can give on the timing? Also while this has kind of been in flux, do you think this is – it’s had a negative impact on your ability to sign license deals, as evidenced by a little bit of a shortfall here, ex Broadcom on the license side in the quarter?

Sandeep Vij

I mean, the patent monetization side is something that we have been researching, we’ve been contemplating, we’ve been strategizing for some time. I think you’ve now seen the first manifestation of that, which is good. It kind of indicates our efforts in this area. This is an additional data point, a very important one, that we’re using to determine our future course of action, but we have nothing to announce at this time.

Secondly, I think with regard to the new cores, really the key item there is getting our new cores out. We’ve announced in this last quarter, we’ve got an excellent reception, both in terms of the press, the analyst community and the customer base. There’s a pipeline that has built up and is building up, and I think that’s kind of the catalyst for increasing licensing activity.

Anthony Stoss – Craig-Hallum

Okay. Thanks.

Sandeep Vij

Thanks, Tony.

Operator

There are no more questions on the phone.

Jen Bernier

Okay. Well, thanks very much for joining us today.

Operator

Thank you. That concludes today’s call. You may disconnect at this time.

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