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TSRA > SEC Filings for TSRA > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for TESSERA TECHNOLOGIES INC

Form 10-Q for TESSERA TECHNOLOGIES INC


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited financial statements and notes thereto for the fiscal year ended December 31, 2011 found in our Annual Report on Form 10-K, filed on February 17, 2012.

This Quarterly Report contains forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates," "could," "would," "may," "intends," "targets" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report. The identification of certain statements as "forward-looking" is not intended to mean that other statements not specifically identified are not forward-looking. All statements other than statements about historical facts are statements that could be deemed forward-looking statements, including, but not limited to, statements that relate to our future revenues, product development, demand, acceptance and market share, growth rate, competitiveness, gross margins, levels of research, development and other related costs, expenditures, the outcome or effects of and expenses related to litigation and administrative proceedings related to our patents, our intent to enforce our intellectual property, our ability to license our intellectual property, our ability to become a leading supplier of camera modules in the mobile phone market, tax expenses, cash flows, our ability to liquidate and recover the carrying value of our investments, our management's plans and objectives for our current and future operations, management's plans for repurchasing our common stock pursuant to the authorization of our Board of Directors, the levels of customer spending or research and development activities, general economic conditions, and the sufficiency of financial resources to support future operations and capital expenditures.

Although forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading "Risk Factors" within Part II, Item 1A of this Quarterly Report and other documents we file from time to time with the Securities and Exchange Commission (the "SEC"), such as our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

Corporate Information

Our principal executive offices are located at 3025 Orchard Parkway, San Jose, California 95134. Our telephone number is (408) 321-6000. We maintain a website at www.tessera.com. The reference to our website address does not constitute incorporation by reference of the information contained on this website.

Tessera, the Tessera logo, µBGA, OptiML, DigitalOptics Corporation, the DigitalOptics Corporation logo, Invensas, the Invensas logo and SHELLCASE are trademarks or registered trademarks of the Company or its affiliated companies in the United States ("U.S.") and other countries. All other company, brand and product names may be trademarks or registered trademarks of their respective companies.

In this Quarterly Report, the "Company," "we," "us" and "our" refer to Tessera Technologies, Inc., which operates its business through its subsidiaries. Unless specified otherwise, the financial results in this Quarterly Report are those of the Company and its subsidiaries on a consolidated basis.

Business Overview

Tessera Technologies, Inc. is a holding company with operating subsidiaries in two segments: Intellectual Property and DigitalOptics.

Our Intellectual Property segment is managed by Tessera Intellectual Property Corp., including managing the patent and licensing portfolios of our subsidiaries, Tessera, Inc. and Invensas Corporation ("Invensas"). Our Intellectual Property business, comprised of reverse engineering, licensing, account administration and litigation teams, generates revenue from manufacturers that use its patented ideas. Included in the Intellectual Property segment are a number of advanced technology research and development programs.

Our DigitalOptics segment is operated by DigitalOptics Corporation and its subsidiaries ("DOC"). DOC delivers innovation in imaging and optics with products and capabilities that enable expanded functionality in increasingly smaller devices. DOC's miniaturized camera module solutions provide cost-effective, high-quality camera features, including Micro Electro Mechanical Systems ("MEMS")-based auto-focus, extended depth of field ("EDoF"), zoom, image enhancement and optical image stabilization. These technologies can be applied to mobile phones and other consumer electronic products. DOC also offers customized micro-optic lenses from diffractive and refractive optical elements to integrated micro-optical subassemblies.


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Our segments were determined based upon the manner in which our management viewed and evaluated our operations for the period reported. As our business grows and evolves, our management may change their views of our business operations. Segment information in Note 14 - "Segment and Geographic Information" in the Notes to Condensed Consolidated Financial Statements is incorporated herein by reference and is presented per the authoritative guidance for segment reporting. At the end of 2011, we renamed our segments in and have recast our segment results to reflect the inclusion of our silent air cooling program in our DigitalOptics segment. Prior to that time, that program was included in our Intellectual Property segment.

Intellectual Property Segment

Our intellectual property segment owns patents principally in the fields of semiconductor packaging and semiconductor circuitry. Many of these patents were purchased from third parties and a significant number of these patents are the result of internal research and development investments. The intellectual property business has licensed these patented ideas to manufacturers that use these ideas, typically on a running per unit royalty basis. Our intellectual property business is also pursuing legal damages for infringement of its patents by manufacturers that we believe use our patented ideas but did not license the right to use our patented ideas.

DigitalOptics Segment

DigitalOptics offers four main categories of products or solutions: actuator technologies, image enhancement solutions, wafer-level optics, and conventional camera modules. DOC's solutions help meet growing consumer demand for smaller size, lower cost and greater functionality in mobile phones and other consumer electronic products.

Actuator technologies:

DOC's silicon solutions improve image quality and enhance, extend and simplify picture taking for mobile and portable camera devices. One example is DOC's MEMS solutions, which offer superior auto-focus and shutter capabilities in a low power, small form factor solution for continuous focus video, saving time and money. MEMS Auto-Focus ("AF") actuator uses MEMS technology to precisely position and move a lens inside the camera optics to focus. Positioning precision and repeatability capabilities are achieved through DOC's unique and proprietary MEMS silicon designs.

Image Enhancement Solutions:

DOC licenses software solutions for digital and video photography image enhancement. Examples include:

• Face Tools, which provide face-oriented imaging technology such as face tracking/detection, smile/blink detection, face recognition and face beautification. When combined with our hardware acceleration technology, the performance of these applications for both video and still images is enhanced.

• Portrait Enhancement, which brings professional photo capabilities to all camera or video-enabled products without requiring separate, post-editing software. It works in real time, with either still images or video.

• Panorama, which enables users to easily and automatically create panoramic images in a single step, without using a PC or editing software.

• Video Tools, which combine image enhancement software and hardware acceleration to provide real-time video image stabilization and face beautification.

Wafer Level Optics:

DOC uses the latest semiconductor manufacturing techniques to develop and deliver its micro-optic lenses, including Diffractive Optical Elements ("DOEs"), Refractive Optical Elements ("ROEs") and Integrated Micro-Optical Subassemblies ("IMOS"). DOC uses wafer-level processing to fabricate the DOEs and/or ROEs on one or two sides of the wafer, resulting in high-precision, high-efficiency, cost effective products. The products are manufactured in DOC's state-of-the-art ISO-registered facility.

Camera Modules:

DOC produces camera modules at its camera module assembly facility located in Zhuhai, China.


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Results of Operations

Acquisitions

We have grown our business partly through acquisitions. On June 28, 2012, DOC acquired from Flextronics International Ltd. ("Flextronics") all the outstanding equity interests in DigitalOptics Corporation Technology Zhuhai Co., Ltd. (formerly known as Vista Point Electronic Technologies (Zhuhai) Co. Ltd.), a company organized under the laws of the People's Republic of China (the "Zhuhai Entity"), and acquired certain other assets from Flextronics related to its camera module business (collectively, the "Zhuhai Transaction"). The costs incurred related to the Zhuhai Transaction during the three and nine months ended September 30, 2012 have been included in the following discussion. As a result of the Zhuhai Transaction, we anticipate that we will need to make substantial additional capital expenditures and employ additional working capital in order to succeed in our business plans for the DigitalOptics segment. We also anticipate that we will incur greater operating expenses in future periods, due to the manufacturing operations and additional personnel acquired with the Zhuhai Entity.

Revenues

Our revenues are generated from royalty and license fees, past production payments, and product and service revenues. Royalty and license fees include revenues from license fees and royalty payments generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenues prior to obtaining these reports from the licensees, we recognize royalty revenue on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenues depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of the element and the nature of our deliverables and obligations. In addition, our royalty revenues will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; and (e) the impact of economic downturns.

From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. For example, our license agreement with Micron Technology, Inc. expired in May 2012. Micron Technology, Inc. accounted for 10% or more of total revenues for the year ended December 31, 2011 and has since entered into a definitive sponsor agreement to acquire and support Elpida Memory, Inc., a leading dynamic random access memory ("DRAM") manufacturer, which is expected to close in the first half of 2013 subject to numerous closing conditions and approvals. While our revenues for the third quarter of 2012 include a payment from Micron Technology, Inc. for the stub period prior to the expiration of the license agreement, if we fail to replace the expired Micron Technology, Inc. license agreement, it will have a negative impact on our revenue and our results of operations.

Tessera, Inc. is in litigation with Powertech Technology Inc. ("PTI"), a customer representing 10% or more of our revenue in 2011, as described in Part II, Item 1 - Legal Proceedings . In June 2012, PTI notified Tessera, Inc. of its purported termination of its license agreement with Tessera, Inc. and that PTI will make a final payment under the license agreement in July 2012. If we are not able to replace the revenue from PTI or if we receive an adverse determination in the litigation with PTI, it could have a substantial adverse impact on our royalty revenue in the near term.

In the past, we or our subsidiaries have engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights. We believe that similar future proceedings may result in fluctuations in our revenue and expenses.


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The following table sets forth our operating results for the periods indicated as a percentage of revenues:

                                                      Three Months Ended                              Nine Months Ended
                                            September 30,            September 30,          September 30,            September 30,
                                                2012                     2011                   2012                     2011
Revenues:
Royalty and license fees                                83 %                     93 %                   89 %                     93 %
Past production payments (1)                            -                        -                      -                        -
Product and service revenues                            17                        7                     11                        7
Total revenues                                         100                      100                    100                      100
Operating expenses:
Cost of revenues                                        23                        9                     16                        8
Research, development and other related
costs                                                   34                       32                     40                       28
Selling, general and administrative                     33                       34                     40                       32
Litigation expense                                      13                       15                     11                       11
Restructuring charges                                   -                         5                     -                         3
Impairment of goodwill                                  -                        84                     -                        25
Total operating expenses                               103                      179                    107                      107
Operating loss                                         (3)                     (79)                    (7)                      (7)
Other income and expense, net                            5                        1                      3                        1
Income (loss) before taxes                               2                      (78 )                   (4 )                     (6 )
Provision for (benefit from) income
taxes                                                    3                       (3 )                    1                        5

Net loss                                                (2 )%                   (75 )%                  (5 )%                   (11 )%

(1) Past production payments consist of royalty payments for the use of our technology or intellectual property in the past by new licensees that make such payments as part of a settlement of a patent infringement dispute.

The following table sets forth our revenues by type (in thousands, except for percentages):

                                                                      Three Months Ended
                                            September 30,            September 30,            Increase           %
                                                2012                      2011               (Decrease)        Change
Royalty and license fees                 $  60,114        83 %    $   55,271       93  %    $      4,843             9 %
Past production payments                        79        -               -         -                 79           n/a
Product and service revenues                12,497        17           4,071         7             8,426           207

Total revenues                           $  72,690       100 %    $   59,342       100 %    $     13,348            22 %


                                                                       Nine Months Ended
                                            September 30,            September 30,            Increase           %
                                                2012                      2011               (Decrease)        Change
Royalty and license fees                 $ 161,563        89 %    $  182,931       93  %    $    (21,368 )         (12 )%
Past production payments                        79        -               -         -                 79           n/a
Product and service revenues                19,145        11          14,914         7             4,231            28

Total revenues $ 180,787 100 % $ 197,845 100 % $ (17,058 ) (9 )%

Total revenue for the three and nine months ended September 30, 2012 was $72.7 million and $180.8 million, respectively, compared to $59.3 million and $197.8 million for the same periods in the prior year. See "Segment Operating Results" below for an explanation of the changes in revenue as compared between the reporting periods.

Cost of Revenues

Cost of revenues primarily consists of materials and supplies, direct compensation, amortization of intangible assets related to acquired technologies, and depreciation expense. Amortization of certain acquired intangible assets and depreciation expense of property and equipment are generally classified as a component of cost of revenues from research, development and other related costs when an in-process development project reaches commercialization. Excluding amortization of acquired intangible assets, cost of revenues relates primarily to product and service revenues. For each associated period, cost of revenues as a percentage of total revenues varies based on the rate of adoption of our technologies, the product and service revenues component of total revenues, the mix of product sales to semiconductor, optics and


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communications industries and the timing of property and equipment being placed in service. We anticipate our cost of revenues will increase as our product mix includes more products and services while we grow our DigitalOptics business through the manufacturing operations we acquired in June 2012 through the Zhuhai Transaction.

Cost of revenues for the three months ended September 30, 2012 was $16.7 million, as compared to $5.6 million for the three months ended September 30, 2011, an increase of $11.1 million, or 199%. Cost of revenues for the nine months ended September 30, 2012 was $28.1 million, as compared to $16.5 million for the nine months ended September 30, 2011, an increase of $11.6 million, or 71%. The increases as compared to the same periods in 2011 resulted from increases in equipment, materials and supplies, depreciation and amortization of acquired intangible assets, and personnel related expenses, of which relate primarily to the increased product revenues driven by the operations acquired in the Zhuhai Transaction.

Research, Development and Other Related Costs

Research, development and other related costs consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, amortization of intangible assets, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale, circuitry design, 3D architecture, wafer-level packaging technology, high-density substrate, thermal management technology, image sensor packaging, image enhancement technology, including MEMS-based products, and micro-optic lens solutions such as diffractive and refractive optical elements to integrated micro-optical subassemblies. All research, development and other related costs are expensed as incurred.

Research, development and other related costs for the three months ended September 30, 2012 were $24.6 million, as compared to $18.7 million for the three months ended September 30, 2011, an increase of $5.9 million, or 32%. The increase was primarily due to increases in personnel related expenses of $2.2 million, in material costs of $2.0 million, in consulting fees of $0.4 million and in amortization of intangible assets of $0.5 million, offset by a decrease in stock-based compensation expense of $0.4 million. Research, development and other related costs for the nine months ended September 30, 2012 were $72.9 million, as compared to $56.1 million for the nine months ended September 30, 2011, an increase of $16.8 million, or 30%. The increase was primarily due to increases in personnel related expenses of $5.0 million, in material costs of $4.8 million, in consulting fees of $2.5 million and in amortization of intangible assets of $1.7 million, offset by a decrease in stock-based compensation expense of $1.6 million.

We believe that a significant level of research and development expenses will be required for us to remain competitive in the future.

Selling, General and Administrative

Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance and accounting personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items.

Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2012 were $24.0 million, as compared to $20.4 million for the three months ended September 30, 2011, an increase of $3.6 million, or 18%. The increase was primarily attributable to increases in outside services and legal fees of $1.6 million, in amortization of intangible assets of $1.3 million, in personnel related expenses of $0.7 million and in facility and insurance expense of $0.3 million, offset by a decrease in stock-based compensation expense of $1.1 million. SG&A expenses for the nine months ended September 30, 2012 were $73.1 million, as compared to $62.7 million for the nine months ended September 30, 2011, an increase of $10.4 million, or 17%. The increase was primarily attributable to increases in outside service and legal fees of $7.8 million which were related to our acquisition activities, in amortization of intangible assets of $3.9 million and in personnel related expenses of $2.1 million, offset by a decrease in stock-based compensation expense of $5.6 million.

Litigation Expense

Litigation expense for the three months ended September 30, 2012 was $9.7 million, as compared to $9.1 million for the three months ended September 30, 2011, an increase of $0.6 million, or 7%. Litigation expense for the nine months ended September 30, 2012 was $19.9 million, as compared to $22.3 million for the nine months ended September 30, 2011, a decrease of $2.4 million, or 11%. The decrease in the year to date costs was primarily attributable to the decrease in case activities in our docket of legal proceedings. The case management orders in a number of proceedings have delayed the timing of costs that will be incurred in those proceedings until the end of 2012, 2013 and 2014.

We expect that litigation expense will continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly in some periods, because of our ongoing litigation, as described in Part II, Item 1 - Legal Proceedings, and because of litigation initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.

Upon expiration of the current terms of our customers' licenses, if those licenses are not renewed, litigation may become a necessary element of a campaign to secure payment of reasonable royalties for the use of our patented technology. If we initiate such litigation, our future litigation expenses would significantly increase.


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Impairment of Goodwill

In 2011, we recorded an impairment charge of goodwill of $49.7 million due primarily to the low market price of our common stock, which resulted in our market capitalization being significantly lower than the book value of equity for an extended period of time. Refer to Note 8 - "Goodwill and Identified Intangible Assets" of the Notes to Condensed Consolidated Financial Statements for additional details.

Stock-based Compensation Expense
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