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TSRA > SEC Filings for TSRA > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for TESSERA TECHNOLOGIES INC


10-May-2013

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, 2012 found in the Form 10-K.
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, our ability to optimize stockholder return with respect to the DigitalOptics business, our ability to identify and effect third-party investments, joint ventures or a possible sale of our DigitalOptics business, the effect of cost-saving measures, 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, our plans for quarterly and special dividends and stock repurchases, 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, DOC, the DOC logo, the mems|cam logo, FaceTools, 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.
The Intellectual Property segment, managed by Tessera Intellectual Property Corp., generates revenue from manufacturers and other implementers that use our technology. The segment includes Tessera, Inc. and Invensas. Tessera, Inc. pioneered chip-scale packaging solutions, which it licenses to the semiconductor industry. Invensas develops and acquires interconnect


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solutions and intellectual property in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies.
DOC operates the DigitalOptics segment. DOC designs and manufactures imaging systems for smartphones, generating revenue through product sales and software license fees and royalties. DOC's expertise in optics, camera modules, MEMS, and image processing enable it to deliver products that expand the boundaries of smartphone photography. DOC also offers customized micro-optic lenses, which may include DOEs, ROEs and/or IMOS.
In March 2013, we determined the DigitalOptics business was to be restructured and announced our plans to close the Zhuhai Facility and the consolidation of our manufacturing capabilities to Taiwan. By closing the Zhuhai Facility, our long-term strategy is to no longer supply the whole camera module but we will manufacture whole camera modules in limited quantities in the near term. Our primary focus will be on developing the mems|cam actuator, the imaging software and user applications, and on manufacturing and supplying only the lens barrel. The high volume camera module production will be outsourced to a third party. In April 2013, we announced that we are exploring the possibility of seeking third-party investments, joint ventures or a possible sale of our DigitalOptics business, so as to reduce the capital resources required from us while optimizing stockholder return on investment.
In November 2012, we announced our plans to focus on our core MEMS autofocus product opportunity and our intention to pursue a possible sale of, or other strategic alternatives for, our facility in Charlotte North Carolina that develops and manufactures our micro-optic products, which we believe are not central to our core opportunity.

Our segments were determined based upon the manner in which our management viewed and evaluated our operations for the period reported. Intellectual Property Segment
Research and development by our Tessera, Inc. subsidiary led to significant innovations in semiconductor packaging technology. Semiconductor packaging creates the mechanical and electrical connection between semiconductor chips and systems such as computers and communication equipment, often via connection to printed circuit boards. We patented these innovations, often referred to as chip-scale packaging, which were widely adopted in the industry. The wave of adoption was initially led by Intel Corporation, and over time, many semiconductor companies and outsourced assembly and test companies adopted the technology and entered into license agreements with Tessera, Inc. We have developed significant capabilities in licensing, technical analysis, reverse engineering, license administration and litigation as we have sought reasonable royalties from companies that adopted our technologies.

In 2012, we gained initial original equipment manufacturer (OEM) adoption of xFD "DIMM-in-a-Package™" memory technology - one of the technologies Invensas launched in 2011. xFD is a patented semiconductor packaging technology that reduces packaging costs, improves the performance of memory packages containing multiple face down die, and more importantly, enables system manufacturers to use a lower cost printed circuit board. In January 2013, we announced our first xFD licensee and we continue to work with system manufacturers, memory chip manufacturers and assembly and test companies to expand the adoption of xFD technology.
DigitalOptics Segment
DigitalOptics offers imaging systems for smartphones that include DOC's MEMS autofocus camera modules, lens barrels and embedded image processing software. Through its innovative products and technologies, DOC helps smartphone vendors deliver improved camera performance and functionality to consumers. mems|cam Products:
DOC's mems|cam family of products includes autofocus camera modules and lens barrels for smartphones. By leveraging DOC's proprietary MEMS designs and processes, DOC's mems|cam products provide superior focusing speed, lower power usage, and greater precision advantages over incumbent autofocus technologies such as mechanical voicecoil motors (VCMs). Embedded Image Processing Solutions:
DOC's software solutions for mobile imaging include its FaceTools™, face beautification, red-eye removal, HDR, panorama, and image stabilization products.


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FaceTools, which provide face-oriented imaging technology such as face tracking/detection, smile/blink detection, red-eye removal, 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.

Face Beautification, which allows users to automatically enhance portraits (still and video) with features such as skin toning, face slimming, eye brightening, and teeth whitening.

HDR, or High Dynamic Range which enables users to capture quality images even in the presence of a wide range of lighting conditions (e.g., bright lights or sun).

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

Image Stabilization, which corrects for motion blur and shake induced during video capture.

Micro-Optics:
DOC uses the latest semiconductor manufacturing techniques to deliver its micro-optic lenses, including DOEs, ROEs and IMOS. The products are manufactured in DOC's state-of-the-art ISO-registered facility in Charlotte, North Carolina. On November 14, 2012, we announced we intended to pursue a possible sale of, or other strategic alternatives for, this facility, as we believe that it is not central to DOC's core product opportunity in the MEMS autofocus area.

Results of Operations
Acquisitions
We have grown our business partly through acquisitions. In June 2012, we completed the Zhuhai Transaction, which involved the acquisition of certain assets of Vista Point Technologies, a Tier One qualified camera module manufacturing business, from Flextronics International Ltd. for consideration of $29.0 million, net of $11.9 million cash acquired. Approximately $7.6 million of the consideration has been placed in escrow at the initial closing, of which, approximately $4.1 million is subject to delivery of certain additional assets by Flextronics International Ltd. no later than March 31, 2013 and approximately $2.8 million of which was released in connection with the delivery of certain additional assets in the fourth quarter of 2012. As of the date of this filing, the $4.1 million in assets mentioned above have not been delivered, the related $4.1 million remains in escrow and we are currently negotiating settlement to resolve this matter. We are unable to predict whether or not we will be required to accept late delivery of the assets, which the Company has impaired due to the closing of the Zhuhai Facility, as described below.
In March 2013, we determined the DigitalOptics business was to be restructured and announced our planned closure of the Zhuhai Facility and the consolidation of our manufacturing capabilities to Taiwan. By closing the Zhuhai Facility, our long-term strategy is to no longer supply the whole camera module but we will manufacture whole camera modules in limited quantities in the near term. Our primary focus will be on developing the mems|cam actuator, the imaging software and user applications, and on manufacturing and supplying only the lens barrel. The high volume camera module production will be outsourced to a third party. As a result of this restructuring, certain assets acquired in the Zhuhai Transaction were considered impaired or written off entirely. For further discussion of affected assets, see Note 4 - "Composition of Certain Financial Statement Captions," Note 8 - "Goodwill and Identified Intangible Assets" and Note 16 - "Restructuring, Impairment of Long-Lived Assets and Other Charges" in the Notes to Condensed Consolidated Financial Statements. 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 revenues 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


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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, 2012. This expiration has caused a substantial adverse impact to our royalty revenue as compared to periods prior to such expiration. If we are not able to enter into a new license agreement with Micron Technology, Inc., it will continue to have a substantial adverse impact on our royalty revenue. We are in litigation with PTI, a material customer in 2012, and PTI has ceased making payments, which has caused a substantial adverse impact to our royalty revenue as compared to prior periods. See under the subheading "Contingencies" in Note 13 - "Commitments and Contingencies" of the Notes to Condensed Consolidated Financial Statements. If we are not able to replace the revenue from PTI or if we receive an adverse determination in the litigation with PTI, it will continue to have a substantial adverse impact on our royalty revenue.

In the past, we 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. For example, on February 20, 2013 the International Court of Arbitration of the International Chamber of Commerce issued an award in favor of Tessera, Inc. in its dispute with Amkor. Tessera, Inc. cannot predict the precise amount or the timing of Amkor's payment. We believe that the dispute with Amkor and similar future proceedings may result in fluctuations in our revenue and expenses.
The following table presents our historical operating results for the periods indicated as a percentage of revenues:

                                                                   Three Months Ended
                                                            March 31, 2013     March 31, 2012
Revenues:
Royalty and license fees                                           86  %               93  %
Past production payments                                            5                   -
Product and service revenues                                        9                   7
Total revenues                                                    100                 100
Operating expenses:
Cost of revenues                                                   26                  12
Research, development and other related costs                      83                  50
Selling, general and administrative                                81                  53
Litigation expense                                                 45                   8
Restructuring, impairment of long-lived assets and other
charges                                                            51                   -
Impairment of goodwill                                             21                   -
Total operating expenses                                          307                 123
Operating loss                                                   (207 )               (23 )
Other income and expense, net                                       1                   2
Loss before taxes                                                (206 )               (21 )
Benefit from income taxes                                         (63 )                (4 )
Net loss                                                         (143 )%              (17 )%

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


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                                                     Three Months Ended
                                                                           Increase        %
                               March 31, 2013        March 31, 2012       (Decrease)    Change
Royalty and license fees     $   26,715     86 %   $   43,264     93 %   $  (16,549 )    (38 )%
Past production payments          1,500      5              -      -          1,500      n/a
Product and service revenues      2,909      9          3,409      7           (500 )    (15 )%
Total revenues               $   31,124    100 %   $   46,673    100 %   $  (15,549 )    (33 )%

Total revenue for the three months ended March 31, 2013 and 2012 was $31.1 million and $46.7 million, respectively. 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 communications industries and the timing of property and equipment being placed in service. We anticipate our cost of revenues will decline as our product revenue declines in accordance with our strategy for our DigitalOptics business, which includes the closure of the Zhuhai Facility.
Cost of revenues for the three months ended March 31, 2013 was $7.9 million, as compared to $5.8 million for the three months ended March 31, 2012, an increase of $2.1 million, or 36%. The increase was primarily due to increases in depreciation of $1.1 million and in material costs of $0.8 million. The increases as compared to the same periods in 2012 were 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, product "tear downs" and reverse engineering, 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 March 31, 2013 were $25.9 million, as compared to $23.4 million for the three months ended March 31, 2012, an increase of $2.5 million, or 11%. The increase was primarily due to increases in personnel related expenses of $1.4 million and in material costs of $0.8 million, offset by a decrease in stock-based compensation of $0.6 million.
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 expenses for the three months ended March 31, 2013 were $25.3 million, as compared to $24.6 million for the three months ended March 31, 2012, an increase of $0.7 million, or 3%. The increase was primarily attributable to increases in depreciation of $0.9 million and in personnel related expenses of $1.4 million, offset by a decrease in stock-based compensation expense of $0.8 million. We anticipate that our selling, general and administrative expenses will decline from current levels in the latter half of 2013 as we implement our cost savings strategies.


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Litigation Expense
Litigation expense for the three months ended March 31, 2013 was $14.1 million, as compared to $3.5 million for the three months ended March 31, 2012, an increase of $10.6 million, or 303%. The increase was primarily attributable to the timing of case activities in our docket of legal proceedings.
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.
Restructuring, Impairment of Long-Lived Assets and Other Charges In March 2013, we announced further restructuring of our DigitalOptics segment to focus our efforts on our core MEMS camera module business, and a reduction in corporate overhead. In connection with this effort, we are reducing our workforce and ceasing operations at the Zhuhai Facility. In connection with these actions, we incurred total charges, excluding impairment of goodwill, of $15.8 million in the three months ended March 31, 2013 and expect to incur approximately $5.8 million of additional expenses in the second quarter of 2013. See Note 16 - "Restructuring, Impairment of Long-Lived Assets and Other Charges" of the Notes to Condensed Consolidated Financial Statements for additional details.

Impairment of Goodwill
In March 2013, we recorded an impairment charge of goodwill of $6.7 million due
to the closure of the Zhuhai Facility. See Note 8 - "Goodwill and Identified
Intangible Assets" of the Notes to Condensed Consolidated Financial Statements
for additional details.
Stock-based Compensation Expense
The following table sets forth our stock-based compensation expense for the
three months ended March 31, 2013 and 2012 (in thousands):

                                                       Three Months Ended
                                               March 31, 2013     March 31, 2012
Cost of revenues                              $       54         $            150
Research, development and other related costs      1,089                    1,712
Selling, general and administrative                1,404                    2,194
Total stock-based compensation expense        $    2,547         $          4,056

Stock-based compensation expense categorized by various equity components for the three months ended March 31, 2013 and 2012 is summarized in the table below (in thousands):

                                                Three Months Ended
                                        March 31, 2013     March 31, 2012
Employee stock options                 $       2,036      $          2,762
Restricted stock awards and units                (26 )                 790
Employee stock purchase plan                     537                   504
Total stock-based compensation expense $       2,547      $          4,056

Stock-based compensation awards included employee stock options, restricted stock awards and units and employee stock purchases. Stock-based compensation expense for the three months ended March 31, 2013 and 2012 was $2.5 million and $4.1 million, respectively. The overall decrease from the three months ended . . .

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