Executives
Kristine Moses – Moses Communications
Lester Crudele – President, CEO
Sujan Jain – Executive Vice President, Chief Financial Officer
Transmeta Corporation (TMTA) Q2 2008 Earnings Call August 6, 2008 5:00 PM ET
Operator
Welcome to the Transmeta Corporation second quarter 2008 conference call. (Operator Instructions) At this time for opening remarks I'd like to turn the conference over to Kristine Moses of Moses Communications.
Christine Moses
Thank you all for joining us today. Today's call is being recorded and will be available for playback beginning one hour after the completion of the call. To access the replay, please dial 719-457-0820 with the pass code 4504365. In addition to this call being available by phone replay it is being broadcast live via the investor relations page of Transmeta's web site at www.transmeta.com.
Earlier today we issued a press release and filed it with the SEC. The press release is also available on Transmeta's web site. With me today is Les Crudele, Transmeta's President and CEO and Sujan Jain, Transmeta's Executive Vice President and Chief Financial Officer.
I want to remind you that in the course of today's conference call we will make forward-looking statements regarding future events or the future financial performance of the company. These forward-looking statements are only predictions or estimates and may differ materially from the company's actual results of future events.
All such forward-looking statements are based on management's current expectations but involve inherent risks and uncertainties. Such forward-looking statements speak only as of the date of today's press release and conference call. The company will not necessarily provide updates of its forward-looking projections and forecasts.
We encourage investors to review Transmeta's regular filings with the Securities and Exchange Commission, specifically its annual report on Form 10-K as well as its reports on Form10-Q and 8-K which identify and describe important risk factors relevant to Transmeta's business and financial results. I will now turn the call over to Les for introductory remarks.
Lester Crudele
Before I turn the call over to Sujan for the financial details of the second quarter I would like to share with you how excited we are about our recent licensing agreement with NVIDIA Corporation. Earlier today we issued a press release announcing that we have entered into an agreement with NVIDIA granting them a non exclusive fully paid up license to our LongRun and LongRun2 car managements' technologies and other intellectual property for use in connection with NVIDIA products.
In accordance with the agreement we expect to receive a one time non refundable license feel of $25 million. We're very pleased to add NVIDIA to our list of licensees. We believe this licensing agreement could create significant value for our stockholders.
Later in the call after Sujan goes through the financial details of the quarter I will discuss our recent activities and achievements which in addition to the NVIDIA announcement include: One, we continue to be actively engaged in our process to explore a full range of strategic alternatives including working with our independent advisors to explore a variety of options for enhancing shareholder value.
Two, we received royalty payments for additional products using the LongRun2 that are in the sampling stage. Three, we continue our development of IP components and tools to help facilitate the adoption and implementation of LongRun2 technologies, and potential semi-conductor licensees, and four, we entered into a settlement agreement and release with Riley Investment Management and its affiliates resolving all proxy matters and other issues relating to Transmeta.
Now I will hand the call over to Sujan to review the second quarter financial details.
Sujan Jain
This afternoon I'm going to provide more details on the second quarter 2008 financial results that we reported earlier today. After that I will turn the call over to Les for his comments on the business and then we'll open up the call for questions.
Revenue for the second quarter of 2008 was $366,000 all of which was derived from licensing activities. This compared with revenue of $661,000 in the first quarter of 2008 which included $240,000 of license revenue and $168,000 of services revenue and $253,000 of product revenue. The $356,000 of license revenue in the second quarter came from royalties on production shipments as well as some projects in the sampling stage. Our gross profits for the second quarter was $766,000.
Total operating expenses for the second quarter of 2008 were $1.9 million compared with $3.1 million in the first quarter of 2008. Second quarter operating expenses include $5.9 million of income from the settlement and licensing agreement with Intel, $455,000 of net restructuring charges, non-cash charges of $908,000 for amortization of intangible assets and $1.3 million for non-cash stock compensation charges.
The breakdown of second quarter operating expenses, the numbers included $2.3 million in R&D and $4.1 million in SG&A. Our R&D expenses of $2.3 million compares with $2.9 million in the previous quarter. The sequential decrease of [inaudible] decrease in stock based compensation charges. SG&A expenses of $4.1 million compared to a $12.3 million in the previous quarter.
Our lease of approximately 326,000 square foot of office space expired in June 2008 on the full building in Santa Clara that we have occupied for the last ten years. In June we retrained approximately 340,000 square feet of that office space. Subsequently we signed a one year extension for the remaining 22,500 square feet of office at less than half of the original rental rate for the space.
In the second quarter we accrued at total of $585,000 in restoration charges related to expired leases. $460,000 of the restoration charges was reported in restructuring charges and the remaining $125,000 in SG&A expenses.
In the second quarter of 2008 we recorded interest income of $1.8 million which included $1.1 million of imputed interest income from our settlement and licensing agreement with Intel. Net income in the quarter was $214,000 or $0.02 per share. This compares with a net loss of $41,000 or $0.00 per share in the first quarter of 2008.
Our cash, cash equivalents and short term investments at June 30, 2008 totaled $141.8 million. Cash received from operating activities in the second quarter was $17.3 million including a payment of $3.5 million of accrued compensation. We continue to be debt free.
After the announcement of licensing agreement we announced today with NVIDIA, we expect to receive a payment of $25 million in the third quarter for the non exclusive fully paid up license for intellectual property and technologies. In the third quarter we expect to recognize $5.9 million of operating income and $1.2 million on imputed interest income from the settlement and licensing agreement with Intel. We expect to be profitable on a GAAP net income basis in the third quarter of 2009 and continue to expect to be profitable for fiscal year 2008.
With that, I will now turn the call over to Les.
Lester Crudele
As I mentioned earlier, we are very pleased that we have entered into a licensing agreement with NVIDIA. It's a broader license than our typical LongRun2 license and it includes both patents and additional technology. As with all deals of this nature, it has taken us some time to complete. While this deal is not necessarily indicative of the types of licensing deals we expect to sign in the future, we do believe it exemplifies the importance of our technology.
We are pleased to have NVIDIA recognize the value of our technology as well as its contribution potential to their future product development. As you know, we have evolved our business model to focus on IP licensing. We have built a strong IP portfolio over the past decade and it is our goal to license those assets while realizing the value of our intellectual property.
Earlier this year we initiated a process to actively explore a full range of strategic alternatives for realizing financial value for our shareholders. The assistance of our independent advisors including [Piper Gaffrey] we have continued to be engaged in discussions with other companies about potential ways to increase value for all of our shareholders. We are committed to successfully pursuing that process.
As we have said before, strategic planning does not lend itself to schedule periodic updates; therefore, we do not expect to make further public comments with respect to our process until we have completed our evaluations and necessary discussions. If and when there are any material developments, we will make the appropriate public announcements at that time.
On the royalty front, we continue to receive royalty payments from NEC Electronics on production shipments and products that use our LongRun2 technologies. In addition, as we mentioned last quarter, we have a second licensee that has started sampling products that use our LongRun2 technology. Our licensees continue to have products in the sampling stage.
We'd like to remind you that not all new products make it past the sampling stage or into high volume production. We recognize royalty revenue one quarter after our licensees ship their products.
These new products continue to the production phase, we would expect to see production shipments begin in the second half of this year. As is typical with new products, it takes a few quarters for production to ramp to its normalized volume. The production is dependant on its success in the marketplace as well as the type of application the shipment is targeting.
We expect licensing revenue in the third quarter to include production royalty revenue from our first licensee and an additional sample royalty revenue. In an effort to tailor our LongRun2 technologies to established markets, we have been focused on making our technology more modular, and validating the IP blocks we are developing so we're better able to serve the established marketplace.
Our focus has been on developing two fab evaluation vehicles that working together, will allow us to evaluate how our technology works in a particular process. We reported earlier on the first of the two chips which was focused on individual transistor characteristics. The second quarter, we taped out the second LongRun2 fab evaluation vehicle which contained the supporting IP blocks we are developing.
Most of these chips were fabricated at one of the world's largest foundries. We have recently received the second test vehicle from the fab and have been able to probe the individual die. Initial analysis is encouraging and the die are now being packaged in preparation for detailed analysis. We are pleased with the progress we are making to tailor our technology to this potential customer base.
Finally, I am pleased that we have achieved and announced a settlement agreement with Riley Investment Management and its affiliates. In accordance with that agreement we have increased the total number of directors on our Board from seven to nine. In addition, our Board of Directors elected [J. Michael Gullard] to the Board and appointed him to the compensation committee. Mike has already attended Board meetings and has contributed to the Board dialogue.
We also plan to include Brian Riley in our proxy materials as a nominee for election to the Board of Directors at our 2008 annual meeting which we have set for September 18, 2008. We look forward to working with both [Mr. Gullard] and Mr. Riley.
With regard to the [Rem] shareholder litigation, the court has dismissed the case with prejudice and has ordered each party to pay its own associated costs. We believe the settlement agreement best serves the interest of Transmeta and all its shareholders.
In summary, we are very pleased with our new licensing agreement with NVIDIA and the significant value it creates for our shareholders. Our efforts to broaden our customer base and continuing to make progress on the IP blocks as necessary to expand our target market to semi conductor companies.
We look forward to working with [Mr. Gullard] and Mr. Riley as we continue to evaluate strategic options for the company and how best to maximize our assets for all our shareholders.
Operator, we are ready to open up the call for questions.
Question-and-Answer Session
Operator
Mr. Crudelle, I'll turn it back to your for any additional or closing comments.
Lester Crudele
I want to thank all our shareholders for their continued support. Thank you for dialing in today.
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