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Q3 2016 Tessera Technologies, Inc. Earnings Call
November 1, 2016, 21:00:00 UTC
CORPORATE PARTICIPANTS
Tom Lacey
, Tessera Technologies, Inc., CEO
Robert Andersen
, Tessera Technologies, Inc., EVP, CFO
Matt Steinberg
, The Piacente Group, IR
CONFERENCE
CALL PARTICIPANTS
Krish Sankar
, BofA Merrill Lynch, Analyst
Gary Mobley
, The Benchmark Company, Analyst
Nacy
Galinkov
, Analyst
Richard Shannon
, Craig-Hallum Capital Group, Analyst
Geoff Hulme
, Hulme Family Investments, Analyst
PRESENTATION
Operator
: Good afternoon. My name is
Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera Technologies third-quarter earnings conference call. (Operator Instructions). Matt Steinberg, you may begin your call.
Matt Steinberg
: Thank you, Nicole. Good afternoon and welcome to Tessera Technologies third-quarter 2016 financial results conference call. This
call is also being webcast live over the Internet.
Please be advised that during the course of todays call management will make forward-looking
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 materially from those projected.
You are cautioned not to place
undue reliance on forward-looking statements, which speak only to the date of todays call, November 1, 2016. More information about the factors that may cause results to differ from the projections made in those forward-looking statements
can be found in Tesseras filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2015, and the 10-Q for the quarter ended September 30, 2016, especially in the sections
titled risk factors.
The Company disclaims any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances
that occur after todays date. Management may also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures, and reconciliation of GAAP to non-GAAP financial results, please see
the Third Quarter Financial Results News Release issued earlier today.
Now, I would like to introduce Tesseras Chief Executive Officer, Tom Lacey.
Tom?
Tom Lacey
: Thank you for joining us on the call today. Robert and I are pleased to report another strong quarter and were very excited
about the developments at the Company.
Let me begin with some highlights for Q3. We once again delivered another strong quarter of financial performance.
Our Q3 revenue was $62.4 million, slightly above the midpoint of our guidance range. We achieved a non-GAAP operating margin of 65% and we exceeded earnings-per-share guidance.
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On September 20, we announced a transformational transaction with the execution of a merger agreement with DTS,
Inc., whereby Tessera will acquire DTS for a total equity value of approximately $850 million. I will provide an update on this transaction later in the call.
During the quarter, our normally robust stock buybacks were less than our recent historical repurchase rate, in large part due to the pending DTS
announcement. During Q3, we purchased approximately $6 million of our stock and we paid our regular quarterly dividend of $0.20 per share, for approximately $10 million return to shareholders. Q3 represents our seventh consecutive quarter whereby
our fully diluted share count has decreased from the previous quarter. Robert will provide more detail later in the call with respect to our overall capital allocation program.
Next, let me provide an update on developments with our FotoNation, Invensas, and IP licensing efforts during the third quarter. Let me start with FotoNation.
We continue to see computer vision and imaging as critical technologies for a variety of devices, from smartphones to drones to activity cameras to cars. And we are well positioned to capitalize on these attractive markets.
In what we view as a significant event, we secured a design win with one of the worlds leading Asia-based SOC providers for our imaging processing unit,
which is expected to be in silicon in the next few quarters and into high-volume phones in late 2017 or 2018.
Additionally during the quarter, we
announced a design win with another leading Chinese cell phone manufacturer, OnePlus, a subsidiary of OPPO, the number four largest cell phone producer in the world. OnePlus has adopted FotoNations high dynamic range, face beautification, and
panorama technologies for its latest smartphone. We are very proud to expand our relationship with this top five cell phone worldwide producer.
Given our
ongoing customer and ecosystem engagement, we remain steadfast that biometric authentication will become an important capability in future generations of smartphones and other devices. During the quarter, we announced the introduction of both
advanced iris and face recognition biometric-grade authentication solutions for cell phones. These new NIR-based solutions deliver authentication in the most challenging outdoor light and shade conditions, including liveliness detection even when
the subject is wearing glasses.
FotoNations face recognition solution uses existing front-view selfie cameras to rapidly identify the subject in
various light conditions and poses. These iris and face recognition technologies can deliver a more secure authentication and prevent false positives far better than existing fingerprint technologies.
Turning to the automotive market, we continue to develop advanced intelligent vision solutions for automotive applications. Specifically, we continue to have
strong engagement with Texas Instruments on our driver monitoring system. This technology enables the car to authenticate the driver and can tell where the driver is looking. Amongst other things, this will enable the car to take action if the
driver is falling asleep, texting, or somehow otherwise distracted.
Finally, as we announced earlier today, we recently completed the purchase of certain
assets from Pelican Imaging Corporation for $9.25 million. Pelican is a pre-revenue developer of multi-aperture imaging technologies. We received all of their approximate 200 US patents and applications, all developed software and hardware
technologies, and hired a small team of talented engineers.
This acquisition will accelerate opportunities in mobile imaging with respect to multi-camera
systems and provide basis for differentiating work in the AR/VR space and depth-based automotive applications. The technology enables DSLR-like focus capabilities by utilizing depth information available due to multiple cameras. We are confident we
will be able to apply our hardware RTL capabilities to produce the most powerful and battery-efficient solutions for important and large markets.
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Within Invensas, were making good progress on further developing, optimizing, and commercializing our
foundational wafer bond technologies, ZiBond and direct bond interface, or DBI. Presently, our ZiBond technology is recognized as the wafer-to-wafer bonding solution of choice for backside illuminated image sensors by Sony into more than 1 billion
cell phones and counting. Similarly, DBI hybrid bonding technology has now been scaled into high-volume production and is poised to widely proliferate into the next generation of backside illuminated image sensors.
By incorporating DBI into such image sensors, expensive through silicon vias can be eliminated, lowering manufacturing costs and enhancing image sensor
performance.
On the commercialization front, we are in discussions with multiple customers to license these enabling technologies for image sensors.
With regard to expanding into new applications, such as MEMS and RF devices, DRAM, 2.5-D logic, and 3D-IC assemblies, weve been focused on bringing up
internal wafer preparation and bonding capabilities, as well as our supply chain, to support our technology development and commercialization efforts.
To
that end, in September we announced a license agreement with Fraunhofer Munich, a renowned research institute with world-class MEMS manufacturing capabilities, which we can leverage to optimize ZiBond and DBI bonding processes on high-volume
production-compatible tools. This follows the agreement we announced with Fraunhofer Dresden late last year to demonstrate our DBI technology on their state-of-the-art 300-millimeter production line and build on complementary collaborative efforts
we have underway with other supply-chain partners.
In addition, we are actively engaged in technology demonstrations and license negotiations with
several customers for non-image sensor applications. The progress to date is encouraging and we look forward to providing updates on these developments in the future.
Finally, we have observed steady progress on our die-to-wafer DBI development efforts, which will be important for 3-D DRAM and heterogeneous 2.5-D and 3-D IC
products. We are confident that such an approach will readily address manufacturability challenges and performance limitations currently experienced when using current bonding techniques, such as flip chip and thermal compression bonding. Thus,
die-to-wafer development represents a significant opportunity for Invensas and our customers.
Next, Ill give an update on our licensing activities.
We continue to work on our greenfield licensing efforts. The greenfield term refers to potential customers that have not previously been directly licensed to Tessera intellectual property. We are at a variety of stages with many potential customers.
As announced in May, as a last resort we initiated legal proceedings against one of those companies, Broadcom. Ill provide an update on Broadcom
later. We are currently engaged with many potential customers in multiple application spaces. These engagements can be lengthy, spanning from initial discussions, technology demonstrations, successful licensing, or, if needed, initiation of
litigation.
Now Ill give an update on our legal matters, where I will provide case-by-case details. Let me begin with Broadcom. At a high level,
the cases remain on track and are proceeding as expected. Now, onto the details. In our Broadcom ITC proceedings, the parties have been engaged in the discovery process and a claim construction hearing is scheduled for December 1, 2016. The ITC
trial remains scheduled for March 2017.
In our Delaware actions, the parties have also been engaging in discovery. The court heard Broadcoms
motions to transfer venue to California and those motions are currently under submission.
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The court also established a case schedule in one of the cases, setting a claim construction hearing in August
2017, the close of discovery in December 2017, and trial in October 2018.
In Germany, Broadcom and its distributors answered our infringement complaints
and, as is typical in German proceedings, Broadcoms German affiliate filed a nullity action against the patent at issue in those proceedings. Trial in our German infringement matters remains scheduled for February 2017.
In the Netherlands, Broadcom and the other respondents answer to the complaint is due November 9, 2016. The Dutch trial was rescheduled to November 2017
due to a conflict with the ITC trial.
Finally, Broadcom has filed petitions for inter partes review, or IPR, against three of our patents, which is
fairly standard practice in these types of cases. The patent office has not instituted the petitions and no hearing dates have been set. Our preliminary responses will be due in January 2017. We dont expect these IPRs to impact the ITC
schedule or the European proceedings.
In our Toshiba contract case, the court heard parties motions for summary judgment on an issue of contract
interpretation, and those motions are under submission. The close of fact discovery was yesterday, and next, the parties will proceed to expert discovery. Trial is scheduled for June 2017.
In the TSMC OVT matter that we inherited when we acquired Ziptronix, the court scheduled the settlement conference for February 21, 2017.
Finally, we successfully settled the insurance coverage case that I mentioned last quarter with our insurance carrier, St. Paul, agreeing to make a cash
payment of $5 million to us, which we received in the third quarter. From an accounting perspective, $5 million will not be treated as revenue, but instead will be applied as an offset against third-quarter litigation expenses.
Next, Ill provide an update on the DTS acquisition. For any of you who might be new to Tessera and the DTS acquisition, I encourage you to visit the
investors section of our website, where we have posted extensive materials relating to this acquisition that describe the strategic and financial benefits of the transaction, detailed Q&A, and a conference call playback.
Im pleased to report that the acquisition remains on track. We received HSR early termination from the FTC. In addition, DTS commenced the mailing of
their proxy statement on October 24, and their stockholder meeting is set for December 1, 2016. The related financing activities remain on track and we expect to close the transaction in early December.
Upon closing of the transaction, we will announce a new Company name to better reflect our combined capabilities and a new ticker symbol under which we will
trade.
We are working closely with DTS on integration-related activities. We have fully aligned ourselves with DTS on the importance of successful
integration. My team and I continue to be extremely impressed with the DTS team, their professionalism, excitement over the transaction, and the diversity and depth of their business.
Our overall integration approach is to minimize any disruptions to business, drive focused collaboration between our respective functions, communicate clearly
to every stakeholder, and ultimately ensure every employee has crystal-clear roles and responsibilities. Removing uncertainty and ambiguity sorry, removing uncertainty and ambiguity are keys to a successful integration. We have already made a
number of important organizational decisions and have a detailed schedule in place to address all important remaining matters. The integration teamwork between the two companies is simply excellent.
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We are taking the right steps and have the right people involved to successfully integrate our two companies, and
I am confident that we will have minimal disruption as we operate the combined company from day one, due to the excellent and proactive integration planning activities.
I will now gladly turn the call over to Robert, who will address our Q3 financials, our fiscal fourth-quarter 2016 guidance, and other financial matters.
Robert?
Robert Andersen
: Thank you, Tom.
Tom
Lacey
: You thought Id never get there.
Robert Andersen
: I was wondering. Ive heard some of that before. I just want to say thank
you to everyone on the call for your patience as we had to call in a couple times, so we appreciate that.
So as Tom noted, we generated financial results
that demonstrated the strong earnings power of our business and we continued to make progress on our strategic goals for the year.
Let me provide some
additional details on our financial performance in the quarter. Total revenue for the third quarter was $62.4 million, above the midpoint of the Companys guidance range and was 100% recurring revenue. Compared with the third quarter of
2015, recurring revenue decreased by $4 million, or 6%, primarily due to the timing of contractual arrangements for certain customers and, as previously mentioned, a certain FotoNation customer reaching a unit-based cap on a prior contract.
It is important to note that this FotoNation customer recently began shipping products under a contract that is no longer subject to this cap and with a
higher per-unit royalty rate. Given that FotoNation currently reports revenue one quarter in arrears, we anticipate that the full impact of the higher per-unit agreement will be seen beginning in 2017.
GAAP operating expenses for the quarter were $27.8 million, compared with $27.6 million for the third quarter of 2015. R&D expense for the quarter
increased slightly from the third quarter of 2015, but was lower by $1.7 million from the second quarter of 2016. While we have been increasing R&D expenses primarily as a result of increased headcount, both through the acquisition of Ziptronix
and strategic hiring, we lowered expenses on a sequential basis to decrease spending within Invensas and as a result of a one-time credit of $0.6 million related to a value-added tax refund.
SG&A expense for the third quarter was $12.5 million, an increase of $1.6 million from the prior year. The increase was primarily attributable to an
increase of $1.5 million in outside services related to our planned acquisition of DTS. Net of deal expenses, we were fundamentally flat in SG&A expenses year over year.
Litigation expense for the third quarter was $0.6 million, a decrease of $2.4 million from the prior year, primarily due to a credit of the litigation expense
of $5 million from an insurance settlement, which reimbursed certain litigation costs incurred in prior years. Excluding this credit, litigation expense wouldve been $5.6 million for the third quarter, an increase of $2.6 million from the
third quarter of 2015 and up $0.3 million from the second quarter of 2016. The sequential increase from the second quarter was primarily due to increased activity in the Broadcom matters.
Amortization expense for the quarter increased by $0.9 million from the third quarter of 2015, but was flat sequentially. The year-over-year increase was
primarily due to the amortization of intangibles recorded from our Ziptronix acquisition in August of 2015, as well as IT acquisitions over the past year.
GAAP net income for the quarter was $23.8 million, or $0.48 per share on a diluted basis. Earnings per share exceeded the high end of our Q3 guidance range of
$0.39 to $0.41, mainly as a result of the St. Paul insurance settlement and lower than planned spending.
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Non-GAAP net income for the third quarter of 2016 was $28.6 million, or $0.57 per diluted share. The EPS number
was $0.04 above the high end of our guidance range of $0.51 to $0.53, due to lower than planned spending.
Non-GAAP expenses were $21.6 million for the
third quarter, down from the second-quarter expense of $22.9 million, due primarily to the lower R&D spend. Weve included a detailed reconciliation between our GAAP and non-GAAP net income in both our earnings release and on our website
for your reference.
Moving to the balance sheet, we finished the quarter with $396.3 million in cash, cash equivalents, and investments, an increase of
$24.5 million from the prior quarter. Cash generation in the quarter more than offset the $6 million of common stock repurchases under our share repurchase program and the $9.7 million quarterly dividend.
As Tom noted earlier, common stock repurchases in the quarter pursuant to our stock repurchase program totaled approximately 184,000 shares for an aggregate
amount of $6 million, reducing our quarterly weighted diluted average diluted shares outstanding to 49.3 million, down about 4% year to date and down 6% from a year ago. As of September 30, we had approximately 158.2 million remaining under
the current share repurchase program.
On October 26, 2016, the Board of Directors approved a regular quarterly dividend of $0.20 per share common stock
payable on November 23, 2016, to shareholders of record on November 9, 2016.
As a combined company, we plan to continue the payment of the dividend on a
quarterly basis; however, we plan to focus on debt paydown, rather than stock repurchases, for the first year following the transaction.
Turning
specifically to the DTS transaction, closing is now expected in early December and, as Tom noted, is still subject to the approval of the DTS stockholders and other customary closing conditions.
Financing for the transaction remains on track. We have committed financing through RBC Capital Markets and BMO Capital Markets and are currently marketing a
term loan B. The process is going very well and we expect to wrap up commitments for the financing within the next week.
In order to provide clarity, let
me provide some details on the impact of purchase accounting, the treatment of which is what we expected when we evaluated the deal. Similar to FotoNation, DTS currently recognizes much of this revenue based on the receipt of customer loyalty
reports for the prior quarter, less recognized revenue a quarter in arrears. Under purchase accounting, we expect the DTS revenue after the close in December 2016, and for Q1 of 2017 it will be deemed to have already occurred and will not flow
through the income statement, despite the receipt of cash for that revenue.
Turning now to guidance for the fourth quarter with regard to revenue, for
the fourth quarter of 2016 we expect total revenue to be between $70 million and $74 million. We expect GAAP earnings per share of between $0.44 and $0.49 and non-GAAP earnings per share between $0.60 and $0.65. The guidance ranges exclude any
DTS-related revenue and costs, except for approximately $2.2 million of professional fees that will be incurred by Tessera on a GAAP basis regardless of whether the deal closes in the quarter.
On the topic of announcing annual results, which we typically provide at the beginning of February, we anticipate the closing process for the 2016 fiscal year
will take more time, due to the magnitude of the DTS acquisition and its timing near the end of this year. As a result, we expect to announce our Q4 and full-year 2016 earnings in mid to late February.
With that, let me turn the call back to you, Tom.
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Tom Lacey
: Robert, nice job, as always. That concludes our prepared remarks. Im glad we were able to
get through that, and now well turn it over to the operator for questions. Nicole, over to you.
QUESTIONS AND ANSWERS
Operator
: (Operator Instructions). Krish Sankar, Merrill Lynch.
Krish Sankar
: Hi, thanks for taking my question. I have a few of them. First one, Tom or Robert, when you look at the Q4 guidance, should we assume the
FotoNation, the legacy Tessera semiconductor business, both are going to grow or is one going to grow at the expense of the other, and what about episodic revenues in Q4?
Tom Lacey
: So were not in terms of giving the guidance for Q4, we dont distinguish between the two, well call them, operating
units or the two different businesses which you noted, the IP business and the FotoNation business, nor do we break out recurring and episodic in our guidance. So we just give an overall guidance figure.
Krish Sankar
: All right. And a while ago, you guys said how there was no DRAM renewals this year. Im just kind of curious. Is there any DRAM
renewals coming up over the next 12 months?
Tom Lacey
: At the moment, were just giving Q4 guidance. When we give guidance for the year, for
2017, which we expect to do, as I noted, in our February call, well give any color on renewals, if any occur, for 2017 at that time.
Krish
Sankar
: Got you. And then, I had a question on the DTS. Once the acquisition is closed, what kind of tax rate do the combined entity have?
Tom
Lacey
: Our tax rates our effective tax rates are not all that different at the moment. So ours is in the low 30%s, as is theirs. So I think combining tax rates is fairly straightforward at the moment. I would target us in the low 30%s.
Krish Sankar
: Got it. All right, thanks, guys.
Operator
: Gary Mobley, Benchmark.
Gary Mobley
: I
had a question about the materiality of purchase accounting rules relating to DTSs royalties. Could you refresh your memory? What is the mix in DTSs revenue with a contribution from royalty revenue? And can you give us a sense of the
magnitude as we roll into the first three months of that acquisition how much of a haircut should we think about from DTSs revenue? I think the quarterly revenue for the company has been running somewhere between $45 million and $50 million.
Are we talking about half or the majority of the revenue?
Tom Lacey
: They have a bit of mix. I think its fair to say that the majority of
the revenue is royalty related. They do have some, I guess, minimum guaranteed contracts as well, but it will be a big portion of it. I would say the majority.
Gary Mobley
: Okay. And you said that this issue was contemplated when you announced the acquisition and discussed the merits of it and the EPS
accretion expected from it. And I dont know that you gave specifics on the EPS accretion from the acquisition, but I think many of us sort of honed in the number, about $0.80 of EPS accretion. Is that a still reasonable number in light of this
purchase accounting headwind out of the gate?
Tom Lacey
: So, yes, I think Ive heard the $0.80 number. We didnt give anything exact
because were obviously not giving 2017. I didnt go into the purchase accounting when we did the announcement of the acquisition, but its something that we had certainly considered and would continue to review it, but will certainly
be an issue.
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I think the way I tend to think about it is we cant control purchase accounting. The deal was still very,
very accretive for the year; however, I think it is going to have an impact at least in the first quarter. Obviously, we still continue to collect the cash for that revenue. And I think thats probably the main driver for the business and how
we looked at it.
So its unfortunate thats how purchase accounting works, but I just wanted to make sure that people were thinking about it
the right way. Not every business has a royalty basis under which they are recognizing revenue a quarter in arrears, so its something to take into consideration. Were certainly used to it from the FotoNation side.
Gary Mobley
: Sure. Okay. Thats helpful. With respect to Pelican, Im assuming this is not a material acquisition. Can you maybe speak about
any potential revenue contribution from the acquisition; when you might expect revenue, if we are talking pre-revenue here; how many employees you are bringing over; and any additional OpEx associated with it?
Tom Lacey
: Yes, so its four additional people. Its a small design team here in Silicon Valley. Im super excited to get these guys;
these are absolute imaging experts who have been working on this technology for quite some time.
As I mentioned on the prepared call prior script maybe
two or three times, depending on how many times youve heard it, Gary, was what we see as an advantage here is we can take some of this technology and put it into RTL, which ultimately puts it in silicon. So I would say revenue would probably
be out a year, I think, for most cases. There are some things we may be able to do on a software basis, but the way were planning on it, were planning on some additional R&D during 2017 as we get further into this. Literally, their
first day was today, but as we get further into this, we will be able to give you more clarity on when we can expect to see material revenue from it.
Gary Mobley
: Okay. All right. Thats it for me. Thanks, guys.
Operator
: [Nacy Galinkov].
Nacy Galinkov
: I was
hoping you could go back to the beginning of the script and just maybe do it one more time.
Tom Lacey
: Id love to. I have it memorized now.
Nacy Galinkov
: So Tom, last quarter and I think this quarter, too, you brought up iris biometrics and the potential for design wins I think by
mid-2017. So, can you go a little bit deeper into why you are so confident around the ability to bring some revenue in that initiative and how you see the competitive landscape for you and if you are going into an opportunity, why or why arent
you coming away with the win? Sort of really where do you stand competitively.
Tom Lacey
: Good series of questions. The reason we mention it is
because, number one, with all the focus around security and the importance of security, oddly enough my phone right now is being into the store. Theyve got the fingerprint sensors working. I wish I had this biometrics stuff on my own
phone.
But, seriously, it has more its more secure, so the technology is more secure, I think first and foremost. Thats the reason.
And were seeing interest in it from a variety of industries and a number of customers, a pretty broad set of customers that are looking at this. Thats why were confident its going to happen, right? You are seeing some
indications of it in some early cell phones today.
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And what weve managed to do is actually put it in a cell phone form factor, right? Were able to go
out to customers with an we can show you, too, go out and show people its actually functioning in a smartphone. We think thats been proven to be very powerful, and were obviously engaged with a number of folks that we think
are important in this space and were certainly goaled our guys are goaled, internal goals are to get those design wins and were progressing through that process.
I think some of the things from a competitive perspective that are going in our favor, this liveliness detection is a big deal. What it means is, Matt, in
some phones with this feature, they hold up your picture, it can authenticate your phone when its actually, obviously, not you. So being able to do that, to know that its not a picture, but its actually a person, thats what
they call liveliness detection, is a huge competitive advantage.
The other competitive advantage we have, and this is through years and years of being
kind of face experts and eye experts, if you will, is we can do it in different lighting conditions. So its one thing to do it in a well-lit internal room; its a different thing to do it out in the sun, right?
So these are some of the things were seeing, and I think the other place were seeing, as I mentioned, is in the sorry for the long answer,
but is in the DMS side, right? So youre going to see more in-car cameras for driver monitoring systems. Whether a child or an adult is texting, whether they are falling asleep, where they are looking, ultimately this will find its way
tracking eyes and doing things like eye gaze and some other technology, and we have a high degree of interest in that space as well.
So from a
competitive perspective, it seems like were in a good position, but its up to us to deliver the revenue, as you rightfully call.
Nacy
Galinkov
: Got it. And maybe just tagging onto that, in terms of the imaging deal you announced today, does any of that factor in or can that be applied to your biometrics and use that as the differentiator? And then, maybe the last question
along those lines is how you are feeling about your, I guess, engineering horsepower in the imaging space and whether you see any competition as a whole?
Tom Lacey
: So engineering horsepower, as you know, youve been following us a long time, weve continued to invest in that along the way. So
we subsequently increased the investment, the number of people on the team. Pelican is another example of that, right? Were bringing in some heavy hitters in a specific area.
With respect to how does it play with biometrics, it doesnt necessarily add anything that we dont already have on biometrics. It does deliver a
big play in what we call multi-camera apertures, which enable depth depth focus and gives you more DSLR-like focusing capabilities on a handheld device, as an example. And there are some other product ideas, which I dont want to talk
about at this point, that were already working on we think to do with multiple form factors, including cell phone.
Overall, were very pretty
excited about the acquisitions. The people, the technology that we got with it, and certainly the patent portfolio is quite strong in what we think is a pretty emerging important and emerging area.
Nacy Galinkov
: Great. Thank you.
Operator
:
(Operator Instructions). Richard Shannon, Craig-Hallum.
Richard Shannon
: Hi, Tom and Robert. Thanks for taking my questions. Ill have to
apologize for jumping on the phone call late with a bunch of earnings here today, although it appears I didnt miss as much as maybe I normally would have.
Tom Lacey
: Your timing was perfect, I think.
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Richard Shannon
: Okay. Good. So a few questions here, hopefully Im not repeating stuff you had in
your prepared remarks, but let me just follow up on the topic of Pelican Imaging, two quick sub-questions there. I didnt have a chance to read your press release, but Im vaguely familiar with Pelican, and it sounds like the capability
there is, generally speaking, similar in nature to what Apple brought onto their latest iPhone generation with multi-aperture cameras. Is that in general the idea of or the area of technology were talking about here?
Tom Lacey
: Yes and beyond. They have that technology and beyond, but yes.
Richard Shannon
: Okay. And in one of the more recent questions that you responded to, Tom, you mentioned something about incorporating the technology
into RTL, which I think is something you are doing related to some of your FotoNation technology. Is that something youd put together in the same RTL package or they would be disparate offerings?
Tom Lacey
: We can do it both ways. It depends on the level of integration. But we could do an IPU that captures that functionality or almost like a la
carte, so we can do it either way.
Richard Shannon
: Got it. That makes sense. Lets see here, maybe a question on FotoNation, and I think I
jumped on just as there were some comments coming in on this topic here. But it sounds like the new contract is being recognized a quarter in arrears. But curious relative to, I think, earlier this year you recorded a record quarter in FotoNation.
With the new contract with the higher ASPs, is it possible to see a record quarter coming in the first or possibly second quarter, depending on the ramp of units from your customers with the new ASPs?
Tom Lacey
: Wed expect that. Yes.
Richard
Shannon
: Okay. Thats kind of what I thought. Two other quick questions for me. Your guidance range for revenues in the fourth quarter is a little bit wider than normal. Can you give us a sense of the reason for that wider range?
Tom Lacey
: No, I think actually, probably, we give a very narrow range on revenue guidance. So I wanted it a little bit this quarter. Theres some
puts and takes that I just wanted to make sure we had enough room to cover, but Im certainly comfortable with that range, and even in the middle of it. Im well aware thats typically where it gets taken. But the range just is wider
because theres some potential puts and takes in the numbers.
Richard Shannon
: Okay. Maybe Ill follow up with that off-line. My last
quick question, Tom, I dont know if you had any sort of update on BVA. In the last couple quarters, you talked about ASE and Jabil that youve done some work with. Can you talk about any progress there?
Tom Lacey
: Yes, so the work with ASC continued and was completed, which was quite good.
You are familiar with this. Im not going to go into a deep dive on it, but we continue to promote the versatility of this particular technology in what
Ill call a manufacturing-ready vertical interconnect technology, and most recently, Richard, we found that it fits in SIP applications. So we intend to vet out these opportunities and, if and when appropriate, transfer them to the assemblers;
thats ASC and [tongsing], right, that weve already enabled with BVA technology.
So well give you updates as it goes, but I
dont want to jinx it, but there is some encouraging early feedback, given we are in an election season, from earlier precincts reporting. So stay tuned on that.
Richard Shannon
: Okay. Sounds good. Thats all my questions, guys. Thank you very much.
11
Operator
: Geoff Hulme, Hulme Family Investments.
Geoff Hulme
: Hi, Robert and Tom. Thanks for taking my question. A couple of questions on FotoNation. Congrats on the design win. I was just curious,
can you say was that [MediaTek]? And I was curious if they were using another technology or how the technology decision was made, kind of how the bake-off went down and why you think you won, and then I have a follow-up.
Tom Lacey
: Its a major Asia-based SoC provider, so theres probably more than one, in which we cant name it, but, anyway, we think
its significant. Thats why we led with it. Its kind of a big deal.
And its similar to the process weve gone through in
earning design wins here as weve done in other pretty major players, as often you are up against it can be an internal design team and, in some cases, third parties, and its pretty heavily vetted from a technical perspective. In our
case, this hybrid architecture, the performance and the battery usage were always key factors. And I think an SoC provider enabling and providing in what we call an IPU architecture, but our imaging architecture really enables maybe cell phone
providers who arent as skilled or dont have large internal design teams to produce very productive, very competitive products, if you will, by incorporating our silicon. Were pretty excited about it; we think its a big deal.
Geoff Hulme
: Okay. It sounds great. And then related to a previous question, is there a way to give just a basic range about what percentage of
the FotoNation unit volume was repriced with the new contract?
Tom Lacey
: I dont know that we can give you anything particularly exact. What
we have said is its an important customer and therefore it was worthwhile to mention because it was significant. So, I cant give you the specifics (multiple speakers)
Robert Andersen
: It matters. Obviously, it matters.
Geoff Hulme
: So just to review, so the shipping starts now and then we see the revenue impact in 2017?
Robert Andersen
: You got it.
Tom Lacey
: Yes, we
expect the revenue impact to be much more significant beginning in 2017, so you are correct. Its similar to what Ive mentioned in terms of how we take revenue with FotoNation similar to DTS as a quarter in arrears.
Geoff Hulme
: Okay. And are we allowed a DTS question or wait until you close?
Tom Lacey
: You can bring it in (multiple speakers). If we can answer it, we will.
Geoff Hulme
: So I was reviewing their documents. Do they it seems like they get unit-based royalties, not so much and not subject to cliff-type
renewals. Is that how do they whats the timeline for their contracts in general?
Tom Lacey
: Similar to ours, its all
over the map.
Geoff Hulme
: Its all over the map.
Tom Lacey
: What well do is let us get into that level of detail when we actually are operating the business. SEC rules are such that we are
really able to talk about integrating activities at this time, but good question.
Geoff Hulme
: No problem. And Robert, nice to see the share count
in the 40s.
Robert Andersen
: It is, isnt it? Thank you, Geoff. It looks good to me, too.
12
Operator
: There are no further questions at this time. I turn the call back over to management.
Tom Lacey
: Nicole, thank you, and in closing, were super pleased with the operating results and the direction of the Company. Were
continuing to perform well, and I am mentally proud of, candidly, the internal team and how they are operating under a variety of increased responsibilities, especially as we look at the integration plan with DTS overall. Thanks, again, for your
interest. Sorry for the mix-up on the drop in/drop off on the phone call and thanks for joining us.
Operator
: This concludes todays call.
You may now disconnect.
Forward Looking Statements
This transcript or any statements incorporated by reference herein, including, for example, the expected date of closing of the transaction and the potential
benefits of the transaction, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are based on Tesseras current expectations, estimates and projections about its business and industry, managements beliefs and certain assumptions made by Tessera and DTS, all of which are
subject to change. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as will, may, anticipate, believe, could,
would, might, potentially, estimate, continue, plan, expect, intend, and similar expressions or the negative of these terms or other comparable
terminology that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. All forward-looking statements address matters that involve risks and uncertainties, many of which are beyond our control, and are
not guarantees of future results. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and, therefore, you should not place undue reliance on any such
statements and caution must be exercised in relying on forward-looking statements. We believe that these factors include, but are not limited to, the following: 1) uncertainty as to whether Tessera will be able to enter into or consummate the
proposed transaction; 2) failure to realize the anticipated benefits of the proposed transaction, including as a result of delay in completing the transaction or integrating the businesses of Tessera and DTS; 3) uncertainty as to the long-term value
of DTS; 4) unpredictability and severity of natural disasters; 5) the resolution of intellectual property claims; 6) pricing trends, including Tesseras and DTSs ability to achieve economies of scale; 7) Tesseras ability to
implement its business strategy; 8) retention of key executives; 9) intense competition from a number of sources; 10) future regulations and policies affecting Tesseras and DTSs businesses; 11) general economic and market conditions; 12)
the integration of businesses Tessera may acquire or new business ventures Tessera may start; 13) the evolving legal, regulatory and tax regimes under which we operate; 14) the expected amount and timing of cost savings and operating synergies; 15)
failure to receive the approval of the stockholders of DTS; 16) recent and proposed changes to U.S. patent laws, rules, and regulations; 17) continued involvement in material legal proceedings; 18) issues with Tesseras ability to integrate
acquired technologies and 19) other developments in the markets Tessera and DTS operate, as well as managements response to any of the aforementioned factors. The foregoing review of important factors should not be construed as exhaustive and
should be read in conjunction with the other cautionary statements that are included herein and elsewhere, including the Risk Factors included in our most recent reports on Form 10-K and Form 10-Q and other documents of Tessera and DTS on file with
the Securities and Exchange Commission (the SEC). Tesseras and DTSs respective SEC filings are available publicly on the SECs website at www.sec.gov. Any forward-looking statements made or incorporated by reference in
this transcript are qualified in their entirety by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Tessera or DTS will be realized or, even if substantially realized, that they will
have the expected consequences to, or effects on, Tessera or DTS or their respective businesses or operations. Except to the extent required by applicable law, Tessera and DTS undertake no obligation to update publicly or revise any forward-looking
statement, whether as a result of new information, future developments or otherwise.
13
Additional Information and Where to Find It
In connection with the proposed transaction, DTS has filed a definitive proxy statement with the SEC, which was mailed to DTS stockholders on or about October
24, 2016. Additionally, DTS will file other relevant materials with the SEC in connection with the proposed acquisition of DTS by Tessera pursuant to the terms of an Agreement and Plan of Merger by and among Tessera, DTS and the other parties
thereto. The materials to be filed by DTS with the SEC may be obtained free of charge at the SECs web site at www.sec.gov. Investors and security holders of DTS are urged to read DTSs proxy statement and the other relevant materials when
they become available before making any voting or investment decision with respect to the proposed transaction because they will contain important information about the transaction and the parties to the transaction. DTS, Tessera and their
respective directors, executive officers and other members of their management and employees, under SEC rules, may be deemed to be participants in the solicitation of proxies of DTS stockholders in connection with the proposed transaction. Investors
and security holders may obtain more detailed information regarding the names, affiliations and interests of certain of DTSs executive officers and directors in the solicitation by reading DTSs proxy statement for its 2016 annual meeting
of stockholders and the proxy statement and other relevant materials filed with the SEC in connection with the transaction when they become available. Investors and security holders may obtain more detailed information regarding the names,
affiliations and interests of certain of Tesseras executive officers and directors in the solicitation by reading Tesseras proxy statement for its 2016 annual meeting of stockholders. Information concerning the interests of DTSs
participants in the solicitation, which may, in some cases, be different than those of DTSs stockholders generally, will be set forth in the proxy statement relating to the transaction when it becomes available. Additional information
regarding DTS directors and executive officers is also included in DTSs proxy statement for its 2016 annual meeting of stockholders.
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