Tessera Technologies' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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Tessera Technologies, Inc. (TSRA) Q4 2012 Earnings Call February 7, 2013 5:00 PM ET


Moriah Shilton - Senior Director, Investor Relations

Robert Young - President & CEO

Rick Neely - EVP & CFO


Krish Sankar - Bank of America


Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera Technologies’ Fourth Quarter 2012 Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Moriah Shilton, you may begin your conference call.

Moriah Shilton

Thank you, Mike, and good afternoon, everyone. Thank you for joining us for the call today. This call is also being broadcast live over the Internet. I will now read a short Safe Harbor statement.

During the course of this conference call, management will make a number of forward-looking statements, which are statements regarding future events, including the future financial performance of the company. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those projected. You are cautioned not to place undue reliance on the forward-looking statements, which speaks only as of the date of this call.

More information about factors that may cause results to differ from the projections made in these forward-looking statements can be found in Tessera’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2011, and its quarterly report on Form 10-Q for the quarter ended September 30, 2012, especially in the sections entitled Risk Factors.

The company disclaims any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after this call.

On the call today from management are Robert Young, President and Chief Executive Officer; Rick Neely, Chief Financial Officer; Barney Cassidy, President of Tessera Intellectual Property Corp. and General Counsel and John Thode, President of Digital Optics Corporation.

During the call today, management may discuss certain non-GAAP financial measures for comparison purposes only. The non-GAAP amounts of cost of revenues, research and development, selling, general and administrative expenses, net income and earnings or loss per share do not include the following: stock-based compensation expense, acquired intangibles amortization charges, charges for acquired in-process R&D, impairment charges on long-lived assets and goodwill and related tax effects. After management’s brief opening remarks, we will open the call to your questions.

And I will now turn the call over to Bob.

Robert Young

Thank you for joining us on the call today. I would like to take few minutes to discuss our corporate and business unit highlights before opening the call for your questions.

One of the main highlights of course is the announcement we made today, we’ve appointed John Thode, as President of DigitalOptics Corporation. We believe John’s consumer mobile product industry experience and expertise along with a strong telecommunication industry relationships positioned him perfectly to lead our DigitalOptics efforts and I look forward to working with him.

Turning to a review of the year and recent events, our fourth quarter 2012 results were in line with our expectations and for the full-year of 2012, we were within our targeted long-term Intellectual Property average annual run rate goal. In 2012, we strengthen our board of directors with the appointment of two new board members distinguished industry veterans, Rick Hill and Tim Stultz and this expanded our board to eight.

We also made significant changes to our management team. In addition to John Thode, we appointed Barney Cassidy last month as President of our Intellectual Property segment. These actions [brought] upon two key changes we made last year. In August of 2012, we hired Rick Neely as our CFO and in December, we hired Jim Chapman as the Senior Vice President of Sales and Marketing for DigitalOptics.

Also in November, we announced that we made a strategic position to focus our DigitalOptics segment on efforts on our core MEMS camera module business and accordingly implemented significant cost cutting measures. We're also announcing today that we're undertaking G&A cost reduction efforts. These efforts are part of our commitment to the long-term growth in stockholder value. Our confidence in our prospects overall is reflected in the initiation of quarterly dividend that we announced in the first quarter of 2012.

Now for a brief discussion of our business segments. In our Intellectual Property segment, the fourth quarter revenue was $43 million and included a $24.7 million in past production payments. In January, we announced SK Hynix Inc. as the first DRAM maker to take a license to our Invensas Corporation portfolio, which expands our revenue base. The successful conclusion of the SK Hynix deal gives us confidence that we're well positioned to maintain our targeted long-term Intellectual Property average annual run rate revenue.

Turning to our DigitalOptics segment, 2012 was a year of investment and progress as we pursue the significant opportunity in the 4.5 million smartphone and camera module market. One of our most recent milestones was a fourth quarter shipment of sample quantities of our MEMS auto-focus camera modules to three smartphone OEMs.

In 2012, we invested significantly in plant, facility and capital expenditures to implement our manufacturing strategy. Capital expenditures in 2013 however will drop significantly as we have already made most of the capital investment that we need. We will add capital to create additional production lines as we see the right process yields, factory performance and customer orders above our current capacity.

Now although, we are not providing financial guidance for either business segment in 2013, we have provided select high level business model expectations in our prepared remarks, the conservative guidelines that can track our progress.

Our 2012 GAAP operating loss in the DigitalOptics business was $88 million and we expect this loss to decrease in 2013. We had previously targeted the fourth quarter of 2013 as a goal for operating breakeven in the DOC business but the unpredictability of this revenue ramp along with the associated yields and costs had led us to defer this target.

The board and management will continue to review and manage our investment in DigitalOptics for the maximum benefits of our shareholders.

And now, I would now like to turn the call over to the operator for your questions. Operator?

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Krish Sankar from Bank of America. Your line is open.

Krish Sankar - Bank of America

How does (inaudible) then guys find that relicensing agreement with Hynix over the next eight years. Just trying to get a sense of, suppose you get initial license fee for that would it be a Q1 event or would it be a Q2 event?

Robert Young

Q1 event.

Krish Sankar - Bank of America

Got you, and then the royalties start flowing in from Q2 onwards, right?

Unidentified Company Representative

Yes, the running royalties will be recognized in Q2.

Krish Sankar - Bank of America

And then onto the DOC business, I saw the prepared remarks when you guys gave some color on like the gross margin trend. I just had a couple of questions around it number one, when you talk about low gross margins get into 20% to 25% and then 30 to 35, what kind of a revenue run rate or what kind of volumes are you talking about to get to those 20% and 30% gross margin numbers?

Robert Young

Yeah, Krish that's actually one of the things, we haven't fully baked a model because it depends on many factors of how fast you ramp royalty also and things like that, to the estimates of the medium-term of 20% to 25% are really around where you would expect to be is the (inaudible) company out, how much revenue that is what it takes the inventory [EBITDA-ish] range, we can't say exactly what it is but there is different way to get there.

But I don't think it gives you a lot of help that's where you would be, the longer term ones are several years old when we have quite a few programs into the software inside them when you combined it with the hardware side, it can provide a clear performance to the camera module, announced programs are in place and moving but they are few years from provision to achieve those [inventory] margins. The other thing you get by the way is, with higher volumes of course your factory costs will come down.

Krish Sankar - Bank of America

And when you guys say medium term what is the timeframe for that, is it like 2014 to 2016 or is there any such timeframe.

Rick Neely

In the next several years it would be medium term. Meaning as you know there's, as Bob Young just said, if you read through the filing documents that a good portion of incentive compensation based on spending that group out and you can have reasonable margin to get there. So I think you could put those together. And that's for 2015.

Krish Sankar - Bank of America

And just like another big picture question, I guess you guys called as to go-to-year for the DOC business. I'm trying to get a sense of let's say a year from now when you sit and look back in calendar year ’13, what are the metrics you would look at to evaluate how successful you were in the DOC business. Is there any tangible metrics a year from now or would it be like what we still have some more run rate to do. The reason I'm asking is that I saw the announcement where you guys are basically taking away the profitability of the breakeven target end of the fourth quarter to moving it to the future. So I'm just trying to get a sense of a year from now what should you look back and say the go-to-year was a successful one for Tessera’s DOC business or maybe not we need some more runway?

Robert Young

Well there are many things that go into analysis of the status of the business and what would be the appropriate way of proceed. It’s not necessarily just a run rate. If you had a substantial run rate and margins were already good because yields would improve that would be very positive of course. You could have a situation where that wasn't necessarily the case but you would actually have firm orders for large numbers of modules going forward that you knew you could build, but what happens sometime in the future but you knew the business was there as evidenced by these contracts.

So a multi faceted kind of analysis that we have to look at. The point of what we are saying is that we understand that this business has got to develop this year and we are focused on that and we will not as I said at the Needham Conference, we are not going to be standing here a year from today well if that’s what I am saying, we are looking forward to shipping some camera modules, okay. So this is something that we play out this year. I mean we are making a large investment, it’s a large attractive vulnerable market and we believe that the investment is well worth it for the shareholders and this is simply the year that it will play out and so exactly what the criteria are for determining what direction you take the division could be a variety of things, there's not a specific measurement or number.

Krish Sankar - Bank of America

And then just a final question on the DOC business it seems like you guys are going to be spending about $10 million to $15 million CapEx this year probably and some $9 million still lower from last year. When I look at the business longer term, let's say when you are running in your 25% or 35% gross margin and the DOC business is well developed. What kind of a CapEx should you look at that time? All I'm trying to get is, is this a capital intensive business where it’s going to be a 10% to 15% of sales goes into CapEx or is it going to be more like mid-single digit.

Robert Young

That's an excellent question and we have been addressing that internally Chris. Depending on how we go to the market, initially, we're building our own factories to get the technology finalized, process is clean, yield is up and then we're going to pursue with probably a mix strategy of both building some of our own factories for the key components that usually [lie] in second sources, probably potentially working with partners for other pieces of it and potentially again working more staff or in to the equation. So depend on which way we go, some are more capital intensive than others. I believe that our current size is and given the industry out there, that’s it’s best defined, other people’s money to help leverage it and focus your capital on the areas where your technology needs it. I think that’s going to be our main focus. That’s not a great answer in terms of specificity, but our goal is not to become a $0.90 of capital for $1 of revenue type company. That's definitely not our goal.


(Operator Instructions) And there are no further questions at this time. I’ll turn the call back over to the presenters.

Robert Young

Well, thank you all for joining our call today. We appreciate your interest and support. We will be at two investor conferences in New York in March. The Wedbush Securities Conference and the Piper Jaffray Technology, Media and Telecommunications Conference. We will be available at those conferences for investor meetings. So I think you know that we're very excited about our future and our long-term growth prospects and look forward to sharing our continued success with you. Thank you very much.


This concludes today’s conference call. You may now disconnect.

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