Xperi Holding Corporation
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good morning, ladies and gentlemen. My name is Monsirat and I will be your Conference Operator today. At this time, I would like to welcome everyone to the Tessera Technologies’ Third Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Following the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) I’d now like to turn this call over to today’s host, Ms. Moriah Shilton. Ma’am, the floor is yours.

[Moriah Shilton:]

Thank you, Monsirat, and good morning 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 speak 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, 2012, and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, 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 for management are Tom Lacey, Interim Chief Executive Officer; and John Allen, Acting Chief Financial Officer. During this 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 or loss, and earnings per share or loss do not include the following

[Tom Lacey:]

Moriah, thanks a lot. Hey, good morning to all. During the quarter we had the opportunity to speak to many stockholders and potential investors and we thank you for your support and interest in Tessera and for joining us on our third quarter results conference call today whether it’s live, I know many will listen via recording. I’m pleased to provide an update on our progress against the key milestones and priorities highlighted during last quarter’s conference call, which will include an update on our intellectual property and our DigitalOptics service, we refer to the DOC businesses. We are making excellent progress against virtually all key milestones and priorities. As a reminder, our short-term priorities remain relicensing DRAM companies, rationalizing our DOC strategy and stabilizing the organization. As I mentioned, we have implemented a partner-first approach to intellectual properties licensing discussions where we aim to have a value-for-value exchange negotiations at the right organizational level with our partners and customers. We are currently engaged in negotiations at the corporate levels with both Samsung and Micron and are making solid progress on each. We have had a number of in-depth discussions, meetings and calls with each it remains our intent and goal that we reach agreement with each of these important customers by year-end. If we are unable to reach agreement by year-end litigation, of course, remains an option as I mentioned previously it is our intent to use litigation as a tool not as a strategy, a tool to be used when we can’t reach an agreement through negotiations. Even if we have to resort to litigation we continue to remain open to settlements with our counter parties. This in fact was evidenced last week as we were able to avoid a costly trial and reach a settlement with Sony. This negotiated settlement occurred at very high levels within our respective companies just prior to start again of a costly and multi-week trial. The parties have agreed to settle all matters including the audit case, the patent litigation case, the interparties review one of our patents and we will receive a cash payment as well of a number of patents from Sony. We are making solid progress towards our DOC milestone thus far in the second half of 2013. During the quarter, we achieved our first two milestones when we signed Lite-On as our high volume camera module manufacturing partner. And we secured our initial high volume purchase order for mems/cam modules from OPPO, a major Chinese smartphone maker. Additionally, we are announcing today the receipt of a second much larger purchase order from OPPO, further evidence that we continue to make progress towards another important milestone of producing a functional high volume robust mems autofocus actuator. We expect to be able to report further on this milestone once we ship higher volumes plan for Q4 and beyond. Next, we must continue to make progress on yields necessary to reach our milestone and producing positive contributions margin in Q4. As I have outlined in our last conference call, we engaged in performing an in-depth analysis of our DOC intellectual property portfolio. Very pleased to report that during the quarter we completed our initial analysis have in fact determined that there is a need significant value in the portfolio. Independent of our review 1790 Analytics, a patent analytics company recently highly ranked the DOC portfolio in its most recent annual 2013 patent power score card. The patent power score cards are based on quantitative benchmarking of the patent portfolios of more than 5,000 leading commercial enterprises, academic institutions, non-profit organizations and government agencies worldwide. This benchmark then takes into account not only the size of the organizations patent portfolios but also the quality of those portfolios as reflected in characteristics such as growth, impact, originality and general applicability. Our DOC portfolio debuted as number one in the category of the semiconductor manufacturing technology ahead of companies such as Samsung, SanDisk, Foxconn and Intel. Earning number 7 on the same list our Tessera Technologies Inc. portfolios which ranked ahead of the likes of Marvell, Micron and Broadcom rounding out the top 10. Quite an independent impressive reflection of our patent portfolios. As previous announced remain in active process of exploring strategic financial partnership opportunities for our DOC business at this point of the process we are unable to state definitively what the outcome will be but thus far it is fair to say that there remain strong interests amongst multiple companies for either parts of the business such as our IP portfolio or for the entire DOC organization. The Board and I have a set a goal of either substantially narrowing the list of potential suitors, we are actually selecting the partner or partners by the end of the year. Lastly on DOC, we stated on the last conference call, our intent to operate the business at near cash flow breakeven for the second half of the year including margin from our EIE licensing business revenue and expected proceeds from asset sales. This goal in fact has been made more difficult with the second purchase order we announced to-date from OPPO at significantly higher volumes as we got the purchase additional building materials and additional CapEx to support the increased quarter volume. Although, the near cash flow breakeven target will require additional sources of cash to support the increased expenses, we still see a path to achieving second half year cash flow breakeven even as we continue to focus on cost control and selling non-core assets including the sale of our Charlotte building, recall during the quarter, when we sold the Charlotte business for approximately $15 million. Switching gears, we continue to make progress in stabilizing the organization. Our flatter streamline executive staff and organization is working well and the overall team work and communication has dramatically improved. Overall, our employees are more focused on the right priorities as it evidenced by our improving operational performance and results. From a financial perspective, we remain on track for reported corporate overhead to be at an annual run rate of approximately $29 million exiting the year, this compares to $47 million just one year ago. Similarly in the DOC segment, we also remain on track for a significant operating improvement and we expect to exit the year with DOC operating expenses excluding cost of revenues and restructuring impairment and other charges to be at an annual run rate of approximately $53 million. This compares to $88 million exiting 2012. Lastly, in part due to our renewed focus and processes regarding our litigation spend, as John will report, our quarter-on-quarter litigation spending is down substantially and will continue to be monitored very carefully and methodically balancing settlement discussions strategy with a need to litigate. Next I will provide more details on our intellectual property business where our business model is as an invention plus licensing approach. We have established a practice of engaging in partnerships with our customers, which we believe will drive greater value to our stockholders as we strive to reach fair value for IP and our customers receive greater value from our innovations through these partnerships. As I mentioned earlier in the script, the main focus of this segment currently is to secure resolution by the end of the year and our negotiations with Samsung and Micron, I look forward to providing updates when developments warrant. In our Invensas subsidiary, in the near term, we continue to build xFD demand with OEM and ODM companies through our ongoing broader licensing discussions with major DRAM manufacturers are working to ensure the anticipated demand could be met. In the third quarter, we announced that ADATA, a leading memory module maker agreed to supply xFD base modules to the server market. In addition, we continued to work with Hermes, a leading semiconductor manufacturing and services company headquartered in Taiwan, who complete their high volume manufacturing line for xFD components in the first quarter of 2014. Our medium term initiative, Mobile, continues to strengthen in the third quarter, we surpassed 500 patent assets in the mobile market and our BVA technology won the Frost & Sullivan customer value award in the mobile category. Also in the quarter, Universal Instruments, the key manufacturing partner demonstrated a high volume equipment set, the manufacturing processes for BVA at SEMICON Taiwan. We continued to work with OSATs and mobile customers to drive adoption and do license opportunities from 2014 onwards. 3D-IC, our longer term Invensas initiative continues to develop as well as executing targeted patent acquisition strategy. We continue to create novel 2.5D silicon interposer and 3D-IC solutions through our relationship with ALLVIA and others. We have also surpassed the 500 patent assets in the 3D-IC portion of our Invensas portfolio and are pleased to see an acceleration of 3D volume readiness and product announcement for major players during the quarter. We believe this longer term investment will pay off nicely for our stockholders in the future as there are substantial investment and evidence that 3D-IC technology will be an important technology in the future of computing. Additional growth opportunities in the IP segment including examining our intellectual property portfolios as Tessera Inc. and Invensas to determine if we can license our existing assets in adjacent markets and if we can and should sell current assets not part of our current growth strategy. We started the legwork in the third quarter and continue in the fourth quarter of laying ground work for these potentials. Turning to our litigation activities. Again, recently on October 28, we announced that we settled with Sony, who will make a payment to our Tessera Inc. subsidiary in the fourth quarter and will transfer a number of patent assets to one of our subsidiaries. Next I will provide a high level summary of our other litigation activities in much more again is available in our 10-Q filing. In 2014, we have four cases with trial dates. The assessment arbitration, PTI, Renesas and the remaining parties in the AMD Consolidated cases. In the PTI case, there has been an increase activity lately in terms of discovery, expert reports and summary judgment. We believe PTIs purported termination of its agreement in June 2012 was improper and that we are owed significant back royalties. This case is set for trial in April of 2014. In the Renesas case, there is also an increased activity lately in terms of discovery and extra reports. The case is set for trial on May 2014. In AMD Consolidated cases in Northern District of California five defendants have already settled, AMD, ATI, Spansion, SPIL, STATS ChipPAC and Freescale and four defendants remain as ASE, ChipMOS, ST Micro and Qualcomm. This case is currently scheduled for trial in August of 2014. In the Amkor arbitration, we are looking forward to the ICC issuing a final damages award after their partial award on July 5, 2012 ruling on the validity and infringement and finding that Amkor owes significant royalties. In October, the tribunal issued a new interim order on which Amkor made the decision in their most recent quarterly conference call to update its estimate of the possible range of damages to now be from $60 million to $115 million excluding interest. The parties continue to engage in further damages briefing and damages discovery and that process will end in the next few months. We still cannot give a definitive date and when the ICCs final damage award will issue but we do remain confident of receiving a significant award. As we have recently demonstrated with Sony, we are stepping up our efforts to engage in settlement discussions in any event we can reach fair value for fair value. We will strive to reach settlements. Please understand that the legal and commercial regions John and I are unable to provide much additional details on these cases beyond the summary I just provided. I will turn the call over to John now for an update on our Q3 financials and Q4 guidance and afterwards, I will give a brief update on patent reform before turning the call over to the operator for any of your questions. John?

[John Allen:]

Thanks Tom. Total revenues from continuing operations for the third quarter of 2013 was $37.3 million. Intellectual property total revenue was $32.3 million and included $9.5 million in episodic revenue in the third quarter of 2013. Compared to the second quarter, intellectual property revenue was down $10.5 million primarily due to decreased episodic revenue. In comparison to the prior year, intellectual property revenue was down $25.5 million primarily due to the absence of royalty revenue in this year’s quarter for Micron and PTI. DigitalOptics total revenue from continuing operations for the third quarter of 2013 was $4.9 million compared to $3.7 million in the second quarter of 2013. The increase was due primarily to sequentially higher revenues from our image enhancement technologies including a one-time fee recognized in the quarter. In comparison to the prior year, third quarter 2013 DOC revenue from continuing operations was up $2.4 million, the increase was due primarily to higher revenues from our image enhancement technologies. DigitalOptics revenue from discontinued operations was $1.2 million in the third quarter of 2013 – related to products and services sold from our Charlotte facility. Total GAAP operating expenses from continuing operations in the third quarter of 2013 was $56.2 million as follows; cost of revenues was $850,000, operating fees $20.9 million, SG&A $17.4 million, litigation expense $12.7 million and restructuring impairment along with the assets and other charges was $4.4 million was about $1 million of this expense line representing cash expenditures. We took a $3.4 million impairment charge related to our Charlotte plant building and clean room which was not anticipated when we gave third quarter guidance. Our GAAP operating expenses include amortization of acquired intangibles of $5.2 million and stock-based compensation expense of $2.7 million. Third quarter total GAAP operating expenses from continuing operations were lower by $12.8 million quarter-over-quarter primarily due to lower SG&A expense or it went down to 17.4 from 24.6 in the prior quarter as well as our litigation expense where it is down 12.7 compared to 17.4 and finally lower stock-based compensation 2.4 when compared to 4.9. SG&A was lower than our guidance due to significantly less patent acquisition analysis and business development activities, some of which maybe pushed out into the fourth quarter, litigation was lower, do in part to our renewed focus and process regarding our litigation spends. Stock-based compensation expense was favorably impacted by cancellations from headcount reductions during the year. We are pleased with the overall progress on spending reductions and we believe that conscious efforts to closely manage day-to-day spending decisions made by employees contributed to this reduction. Other income [direct] expense was $418,000. The GAAP tax provision from continuing operations was $40.5 million for the third quarter of 2013. The provision for income taxes was primarily due to an increased evaluation allowance on federal deferred taxes as a result of our determination that it was more likely than not that the deferred tax assets cannot be realized. We recorded this valuation allowance against substantially all of our federals deferred tax assets. As we conclude, the deferred tax assets will no longer fully realizable due to current uncertainties regarding the timing of future profits. GAAP net loss from continuing operations for the third quarter of 2013 was $59 million or $1.9 per basic share. Now turning to discontinued operations, for the third quarter, discontinued operations included revenue of $1.2 million, GAAP operating expenses included $2.6 million, net gain from the sale of Micro-Optics assets offset by impairment and restructuring charges resulting in total GAAP operating expenses of $860,000. The third quarter tax provision for discontinued operations was $12.3 million which is due to the allocation of the total tax provision between continuing and discontinued operations. The GAAP net loss from discontinued operations for the third quarter of 2013 was $11.9 million or $0.22 net loss per basic share. This results in a total GAAP net loss for the third quarter of $71 million or $1.31 per basic share. Talking now about the quarterly non-GAAP results, the non-GAAP operating expenses from continuing operations in the third quarter were $43.9 million as follows; cost of revenues was $26,000, R&D $18.7 million, SG&A $12.6 million and litigation expense was $12.7 million. Third quarter total non-GAAP operating expenses were lower by $9 million compared to the previous quarter primarily due to the lower SG&A expense of $5.1 million and a decrease in litigation expense of $4.7 million, both due to the reasons I discussed earlier. Non-GAAP results exclude discontinued operations, restructuring and other relative costs, stock-based compensation, charges for acquired in-process research and development, acquired intangibles’ amortization, impairment charges on long-lived assets and goodwill and related tax effects. We have included a detail of our reconciliation between our GAAP and non-GAAP net income or loss in both our earnings release and on our website for your convenient reference. There were no tax adjustments in the third quarter of 2013 for non-GAAP items. Non-GAAP net loss from continued operations for the third quarter of 2013 was $46.8 million or $0.87 per basic share, remember this includes the tax provision of $40.5 million discussed earlier. Now, I will move to the discussion of our balance sheet. We ended the third quarter of 2013 with $376.8 million in cash, cash equivalents and investments, a decrease of $3.7 million from the prior quarter. This decrease is due to the cash use in operations of $92.9 million, $5.5 million in dividend payments, $5 million in share repurchases and $1.7 million for the purchases of property and equipment. These uses were offset by $14.9 million in proceeds from the sale of significant portion of the assets of our Micro-Optics business based in Charlotte, North Carolina and by $13.4 million in proceeds from stock option exercises and our employees stock option -- stock purchase plan. I’ll now provide an update on our capital allocation activities including dividends and share repurchases. On September 19, 2013, $5.5 million was paid to stockholders of record as of August 29, 2013 for the quarterly $0.10 per share of common stock cash dividends. On October 14, 2013, the Board declared a cash dividend of $0.10 per share of common stock for the third quarter payable on December 12, 2013 for the stockholders of record at the close of business on November 21, 2013. During the third quarter of 2013, we repurchased 259,000 shares pursuant to our stock repurchase program with aggregate amount of $5 million. As a reminder, back in May of 2013, we announced we expect to execute at least $16 million of stock repurchases through our stock repurchase program over the next four quarters. As of September 30, 2013, we had repurchased total of approximately 904,000 shares of common stock since the inception of our stock repurchase program at an average price of $17.16 per share for a total cost of $15.5 million. Our Board has authorized a total of $150 million under the plan which includes the $50 million increase approved by the Board this month. Now, we’ll move to guidance for the fourth quarter of 2013, for the full year, hopefully we expect the following; total revenue from continuing operations is expected to range from $56 million to $60 million. Intellectual property revenue is expected to range between $48 million and $50 million, DOC revenue is expected to range between $8 million and $10 million for the fourth quarter which includes initial revenue from mems/cam product sales and a one-time license fee related to a legacy DOC license agreement. Fourth quarter 2013 GAAP operating expenses from continuing operations are expected to range between $59 million and $63 million which includes cost of sales expected to be sequentially higher as we ramp production of our mems/camera modules, R&D to be higher than the third quarter due to the ramp in production of our mems/camera modules as some of the production costs will be recorded in R&D. SG&A is expected to be higher due to increased patent acquisition analysis and the business development activities some of which maybe pushed into fourth quarter from the prior quarter. We expect litigation expenses to be slightly higher compared to the prior quarter. We also had amortization of intangibles estimated at $5.4 million and stock-based compensation expense of $4 million. I’d now like to turn the call back to Tom.

[Tom Lacey:]

John, well done. Before Q&A, let me give a brief update on patent reform. Before I get into specifics, I’d like to make a few points on this somewhat complicated matter. We believe in and strong support from patent system, the U.S. patent system candidly as made our innovative industry as envy of the world. Tessera’s business is invention plus licensing business, model embraced by company companies such as Dolby and universities like Stanford, Cal and others. That license their technology for others to commercialize rather than build product themselves. Point three, however, there are any entities out there making frivolous patent assertions and seeking cost of litigation settlements. We believe those are the entities the SEC and Congress are seeking to reign in. Just candidly, not our business model. Now on to the present activity surrounding the potential changes in patent legislation coming out in Washington DC, in particular and most recently House Judiciary, Chairman, Bob Goodlatte patent litigation bill that was announced on October 23. First, let me say, we applaud efforts to ensure Americas patent ecosystems which remained strong and welcome some of the reforms being proposed including enhanced disclosure of real party’s interest, balanced fee shifting and heightened pleading standards. Although, we opposed other reforms as drafted as to leading companies such as 3M, GE and Johnson & Johnson amongst others including the mandatory state language and the expansion of the covert business patent program. We also remained concerned with proposed changes to the Americas Invent Act, the estoppel standard for post grant review. That said, we expect Goodlatte’s bill and other proposed patent reforms will be debated and changed over the coming months as they move through the legislative process and compete with other initiatives such as the Affordable Healthcare Act. We remain actively involved in a debate most directly and through industry groups and to help guide discussion in various IT policy recommendations. I suspect this will be a topic continued interest and that we will be commenting on in the future. Now, what I’d like to do turn the call back over to the operator for Q&A with John and I. Monsirat? Operator, are you there?

[Operator:]

(Operator Instructions) Your first question comes from the line of Krish Sankar with Bank of America-Merrill Lynch.

[Krish Sankar:]

Thanks. It’s Krish. Hey, Tom and John, how are you guys doing?

[Tom Lacey:]

Great, Krish.

[John Allen:]

Good morning.

[Krish Sankar:]

Good morning. Few questions here first and foremost, Tom in your prepared comments you alluded to hopefully getting some resolution that Samsung and Micron by end of the year. Just kind of curious that, is there any confidence level you can put around it, do you feel relatively confident now versus three months ago that you can get a new deal with Samsung and Micron by end of the year?

[Tom Lacey:]

As I said Krish that it certainly, it maintains seems to be super high priority for us. And it is getting tremendous amount of attention. We are engaged in exactly the right levels that has always been the case. As you are aware of and active discussions continue and yes, I’m confident that we are going to reach resolution on those. As I mentioned resolution can be hopefully reaching agreement on a fair value for licensing and that’s really the goal of all three companies us and each of the companies you mentioned. In the event, we can’t reach fair value then litigation remains a tool.

[Krish Sankar:]

Got it.

[Tom Lacey:]

Yes. We are confident.

[Krish Sankar:]

All right. That's good to know. The second one is, I think I asked this last quarter too, is there any way you can give us some color on the recurring revenue in Q4 directionally or if you can quantify it, is it going to be better versus Q3, flat down?

[Tom Lacey:]

John, go ahead.

[John Allen:]

Hi, Krish. This is John. What we said in previous quarters is, we do not plan to break up the revenue guidance between recurring and episodic. We did give the range overall, between 56 and 60 and we broke that up between the IP business and the DOC business. That’s as far as we want to go with the guidance at this point but we certainly will give more color and detail when we announce our Q4 results.

[Krish Sankar:]

Okay. Let me ask it this way. The recent fire at Hines, did it have any impact on your Q4 numbers or your Q4 guidance?

[John Allen:]

The fire itself did not have any appreciable impact on our guidance.

[Krish Sankar:]

Got it. Okay. All right. And then on the DigitalOptics side, first and foremost, did you guys ship any mems|camera module units in Q3 or any kind of camera module?

[Tom Lacey:]

Pre-production, not for revenue but pre-production stuff, yes, we did – on track.

[Krish Sankar:]

Got you. And then in your Q4 – embedded in your Q4 guidance, are you looking at like 200,000 to 300,000 units for Q4 for revenue or --?

[Tom Lacey:]

Yes. Good point. One of the – for those aren’t familiar with Krish with the milestones we laid out, one of our milestones, we laid out was shipping – shipping multiple hundred thousand units in calendar fourth quarter and we remain on track to that. Whether it may happen and I don’t know, what happens in early productions is, you ramp heavily, week upon, week upon, week and as we get through into December and the back half of December, the weekly volume shipments go decline each week. So if we do better we can end up pulling a little bit of volume in there. And if we slip for whatever reason, we might push off some volume now. Again, we remain on track to shipping multiple hundred thousand units during the calendar fourth quarter and as John mentioned for the first time there is actually mems/cam revenue in the fourth quarter.

[Krish Sankar:]

Okay. Is there anyway you can qualify what the opportunity for you in calendar 2014 would be, would it be 1 million to 2 million units, [2 to 4 type]?

[Tom Lacey:]

Very, very substantial volumes. And there are a -- as we have chronicled, they are a large player in the market. So yes, it could be millions and millions of units with these guys.

[Krish Sankar:]

Okay. Fair enough. And then a final question for John, is the 100 million to 150 million buyback authorization, is there a timeline on that?

[John Allen:]

Krish, that has a specific timeline in that. In discussions with the Board, decision was to give a bit more latitude and ability to make larger buybacks if that is appropriate. And it has been before we expect to have a 75 in place part of that but there would also be an opportunity for the – opportunistic buys if the executive team concluded that was the best opportunity of the company. We do think there is a tremendous upside to the company’s stock and we can take advantage of that through buyback to current prices that something we may seriously consider.

[Tom Lacey:]

Well, I’ll just add one thing on that Krish. The reason we expanded, increase the ceiling on it because we do intend as John mentioned under right circumstances, we do intend to be an active participant there. As we have in the last quarter and a half right but when we go above and beyond the episodic buybacks that we previously announced.

[Krish Sankar:]

Got it. Got it. Thanks a lot guys and good luck.

[John Allen:]

Thank you.

[Tom Lacey:]

Thank you, Krish. Thanks a lot.

[Operator:]

(Operator Instructions) There seems to be no questions at this time.

[Tom Lacey:]

Hey. Well, thanks. This is the final comment again, thanks again for your interest in Tessera. We are in fact very pleased with our progress in many areas of the company. And we look forward to reporting on continued progress against our priorities and milestones. We will be in New York City in December at the 2013 Midtown Cap Summit. And I do hope to see some of you there. Thanks again.

[Operator:]

Thank you for your participation. This does conclude today’s conference call. You may now disconnect.