Good afternoon. My name is April and I will be your conference operator today. At this time, I would like to welcome everyone to the Tessera Technologies Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to our host, Mr. Don Markley. You may now begin your conference.

Thank you, April. Good afternoon and welcome to Tessera Technologies second 2015 financial results conference call. This call is also, being webcast live over the Internet. Please be advised that during the course of today’s call, management will make forward-looking statements regarding the future events, including the future financial performance of the company. These forward-looking statements are made pursuant to the Safe Harbor provision 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 today’s conference call, August 3, 2015. More information about factors that may cause results to differ from the projections made in these forward-looking statements can be found in Tessera’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2014 and the 10-Q for the quarter ended March 31, 2015, 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 today’s date. Management may also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the second quarter financial results news release issued earlier today. I would like to Tessera’s Chief Executive Officer, Tom Lacey. Tom?

Hey, Don. Thank you. Whether live or via the webcast recording, thank you for joining us on the call today. Robert and I are very pleased to provide an update on our second quarter 2015 results, a midyear update on our key growth initiatives as well as our guidance for the third quarter of 2015. As you will hear today, we remain very positive on the developments at the company and we are optimistic about our future. Q2 is another excellent quarter on multiple fronts, as there were several important developments during the quarter, including, we again exceeded expectations on virtually all financial metrics and delivered our sixth consecutive profitable quarter on both a GAAP and non-GAAP basis. Our financial management continues to be strong. A mantra inside the company if it’s truly becoming part of our culture is spend every dollar as if it’s your own and it’s working. All facets of the company are focused on ROI consideration. Our operating margin on a non-GAAP basis was a healthy 64% for the quarter. Our recurring revenue grew 77% in Q2 2015 versus Q2 2014. Our capital allocation program continues as announced. During the quarter, we paid our new quarterly dividends of $0.20 a share for the second time. Recall the previous dividend was $0.10 a share. Also, during the quarter, we bought back 645,000 shares of our stock at an average cost of $38.73 per share and total cost of approximately $25 million. Our investments in R&D and technical collaboration with our customers progressed well throughout the quarter and continue to bode well for our future growth. Worth noting, during the quarter, we formed the Tessera Advisory Board and recruited our first two members, one with deep knowledge of the imaging markets and one with extensive experience in the…

Thank you, Tom. Before I review the numbers, let me make some comments on the broader market and its impact on our business. The headwinds experienced by much of the semiconductor market over the past few months have been widely reported. The DRAM industry, which includes some of our largest customers, is facing particular challenges. As a company, we naturally have a keen interest in the success of our customers and their continued growth. However, I believe it is important for investors to understand that I have noted previously in public forums that the contracts we have in place with our DRAM customers are more fixed in nature, typically with minimum payments each quarter and depending on the contract with potential upside based on unit shipments. I should also note that each of the contracts with our DRAM customer is multiyear. It stands to reason that these contractual arrangements create a solid foundation for our revenue forecast. Now, let me provide some of the details on the quarter’s results, a few which Tom referenced in his comments. Total revenue for the quarter was $64.2 million, of which $63.2 million or more than 98% was recurring revenue. Compared with the second quarter of 2014, recurring revenue grew by $27.4 million or 77% due mainly to new customer license agreements and recurring base settlements made over the past year and a half. GAAP operating expenses for the quarter were $27.4 million, a reduction of $8.9 million from the second quarter of 2014 due principally to reduced spending on litigation, lower legal spend with an R&D and the absence of restructuring and impairment charges in last year’s numbers. On a sequential basis, operating expenses were down just slightly, a 1% decrease from the first quarter. Litigation expenses for the quarter were $3.5 million,…

Thanks, Robert. Great quarter. That concludes our prepared remarks. Now, we will open the call to our attendees for questions. Over to you April, for Q&A.

[Operator Instructions] And your first question comes from Richard Shannon.

Hi, Tom and Robert. How are you guys doing?

Great.

Very well, thanks.

Good. Congratulations on a good quarter and thank you for taking my questions. I apologize somewhere in the transmission here, I had a bad line and I missed a couple of your prepared comments, Tom was hoping I get you to repeat one or two of them. Basically, I missed a lot of the comments you made regarding the status of BVA and specifically around customer qualifications and things like that. I wonder if you could kind of summarize the quick comments there please?

Yes, Richard. That was a fairly lengthy part of the conference call and a hazard to repeat it, but what we can do is we can send you the actual script if you want, that piece of the script is that – it’s fine right? But at a high level, it’s gone quite well. We are continuing to make solid progress with a leading OSAT, working with several smaller OSATs as well. The initial targets are that implies smartphone market and also secondarily some other markets, including MEMS based focus as well, but solid quarter for BBA for sure. We also went as far as to try to size, Richard, what that could mean if we were able to get 15% to 20% of the PoP market, which is about 700 million units today, by Prismark going to $1.2 billion by 2018. That would be worth double-digit millions – low double-digit millions of revenue to us if we were able to capture 12%, 15% to 20% of the smartphone market.

Okay, great. That is helpful as well. Okay. A quick question on xFD, it sounds like you are making some progress there and you are hoping to get some testing that’s out by the end of year, and I think you mentioned something about discussions with 8% of the DRAM industry. Did I catch that correctly?

So, two different points, yes, so on xFD, what we mentioned, we have not done this before, we were able – not accomplished before, we are able to actively build functional die – using functional die, a DDR4 die on xFD. And then a separate point we made is and I will call it that the rest of the unlicensed DRAM, there is about 8% of that market. There is an opportunity for licensing that remaining part of the market as you are well aware were under license, with the big three, the remaining 8%. So, those are two different points we make.

Got it, okay. I think that’s maybe where my line went out there. I appreciate your squaring me away on that one, Tom. A couple of other questions. You mentioned FotoNation second quarter numbers were very close to sound alike slightly down from the record first quarter. How should we expect the trend throughout the rest of the year and was the decline there was due to follow-through on unit sales from your customers or some other dynamic?

Yes. It’s really some other – it’s really some other dynamic. What we start to fare about is we have got a lot of traction in China principally in the smartphone area. We named a couple of OEMs and [Technical Difficulty] some of those shipments started this quarter and some will start in the second half of the year. We would expect that business to continue to grow. We reiterated that statement we made before that we expect to achieve $100 million in revenue in that business over the next several years. So, we would expect second half to be candidly up over the first half.

Okay. I guess just two more quick questions from me. First of all, I know that Qualcomm you have mentioned as a key target for at least a couple of your technologies. You have obviously going to be going through some restructuring here, it sounds like lowering their cost base significantly. Has this affected any of the partnership activities you have had going on with them?

No.

No?

No. Okay, good. Good to hear.

Okay, good to hear. Last question from me regarding the guidance for the third quarter, we were trying to fit in the revenues and the earnings numbers here and it seems like somewhere between OpEx and below that line, it seems like the costs are a lot lower like a few million dollars. Robert, can you help us out understanding where the moving parts here on the OpEx are below that to help us to fit those numbers together?

Are you referring to the Q2 results or the Q3 results?

Q3 guidance?

Q3 guidance, yes, by our calculation we need to have one.

Compared to last quarter it seems like the OpEx – if that’s the moving part, it would have to be down a few million dollars. I just want to make sure that’s the place where it’s coming from and if so where is that coming out of?

No, I think in terms of OpEx I would expect the litigation line to be relatively flat and in terms of the remaining parts of the OpEx, it’s probably sequentially up, just slightly. We have some hires in R&D at the end of the quarter that I expect to be fully loaded in the number during Q3. But if you are thinking broadly about the numbers, we finished at $64 million and I am guiding to $64 million to $66 million and we finished at $0.49 per share and I am guiding to $0.46 to $0.48. What I noted in the numbers is there was about $0.03 of sort of one-time benefits during Q2 that I wouldn’t expect to repeat during the following quarters so that’s kind of averages.

Okay. Maybe that’s what I missed then. Okay, great. I think that’s all my questions. I will jump out of line. Thank you, guys.

Thank you, Richard.

See you, Richard.

And your next question comes from the line of Gary Mobley from Benchmark.

Hi, guys. Thanks for taking my questions. Regarding your revenue guidance for Q3, just taking the midpoint, would you expect that to be all recurring revenue or is there any episodic component to that?

I think given that we have had very little – we have just a de minimis number of open litigation matters, whether it would be logical to expect that our episodic revenue in Q3 in terms of forecast would be very minimal since I don’t know when these cases will settle and it wouldn’t make sense to forecast that.

Okay.

So, I would expect you have small number for sure.

Okay. Well, then I guess that makes your full year ‘15 recurring revenue guidance $235 million looks even more conservative. And I guess the assumption is that Q4 revenue dips about 12% sequentially. And I know there might be some seasonal component to that, but maybe if you can just help reconcile sort of the conservative appearance?

Well, I think I have tended to guide the $235 million as a baseline. I would certainly like to exceed that. So, again, I think given that we are midyear here, I don’t want to be in a position of raising it just yet, but I do like to think that it’s somewhat conservative, yes.

Okay, alright. Thank you. And Tom, you mentioned some assumption on BVA perhaps achieving 15% share in the 2018 timeframe translating to potentially low tens of millions of potential revenue for the company. I am just wondering why you are signaling 15% share, is that a function of being engaged with one specific potential customer that has roughly 15% share or is that just what you think your technology is applicable to in the PoP market?

Gary, good question. What we have heard from many investors as we continue to invest in BVA is try to get some idea of what size of the opportunity is. So, I wouldn’t read any specific customer into that. As I said in the prepared statements, there is a lot of activity around BVA – or BVA I guess, but we are around BVA. And in the event, we are successful in achieving 20% share, it could be as I stated. That by no means is our goal, but more aggressive than that, but we are just trying to give investors idea of what the size of BVA will be. So, that was just straight math. It wasn’t – don’t read into a one – we have secured somebody of that percentage and that’s all we are going to get, if it’s just more trying to get people an idea of what this could mean to the company.

It seems reasonable. I think of that just as our estimate at this point.

Yes.

Okay, alright. And as far as legal expense goes, I think your annual target range is roughly about $10 million to $25 million in legal expenses, would you – based on your guide, it looks you might be at the midpoint to that range, is that – am I viewing that correctly?

I think that’s correct. That’s sort of indicated last quarter is that the midpoint of the range seemed a reasonable estimate for this year.

Okay, alright. That’s it for me. Thanks guys.

Thanks, Gary.

Thanks, Gary.

[Operator Instructions] And your next question comes from Krish Sankar from Bank of America.

Hey, Tom and Robert. Sorry, I just jumped in. So, if some of my questions have been answered, I apologize. First and foremost, on the guidance, did you guys break it between recurring and episodic?

Just a moment ago, it’s – we don’t guide to the difference between those two, but it stands to reason probably have very little episodic since we have de minimis caseload, and I wouldn’t normally guide to episodic loans, I had clear visibility to it in advance.

Got it. Alright. And then when I look at beyond 2015, let’s assuming, our recurring revenue does grow above the $235 million baseline you gave, what would be the key driver of that recurring revenue? Would it still be all the DRAM contracts you signed or would it come more from FotoNations or it would be new customers?

I think it can be a number of different factors. I estimate that it will be a combination of several things. I would like to see new Greenfield customers as part of that. Certainly, BVA can come into play there and some of the new advanced packaging technologies. And certainly, we would expect given the sort of dimensions we have given to FotoNation that would continue to be part of our growth story for next year.

Got it. And within the $235 million recurring revenue for this year, would FotoNation be up year-over-year compared to last year?

We haven’t given specifics to the numbers and...

What was the question?

Specifically, on FotoNation and so that was on the numbers. So, we haven’t broken that out specifically, but I think it’s fair to say that they are part of the growth story for this year. We are only halfway through. So, I think Tom noted earlier that we expect them to continue to grow in the second half and they have already had – that part of the business has already had a very strong first half. So, we are excited about the business for sure.

Got it. And then just a final question, stats of Toshiba the two still outstanding litigations you guys have at this point?

It’s UTAC, Taiwan and...

UTAC and Toshiba?

Toshiba, which we recently filed yes. And we tried to give some – again we have confidentiality reasons and other reasons, we can’t – we tried to do on our prepared statement pressures to give some relative size of what those things could be.

Got it. Thank you very much guys. Thank you.

Thanks, Krish.

Thank you.

And your next question comes from the line of Matthew Galinko from Sidoti.

Just mostly on M&A, how would you sort of describe the funnel at this point? Are there any opportunities that are sort of going deeper into it or is everything getting screened out early on valuation or are there other factors that have prevented things from getting to the finish line?

Hi, Matt, it’s Tom. So, we are – as I mentioned on the prepared statements, we are very judicious in how we are going to use shareholder capital and they have got to meet several important criteria. We look for businesses that are offering strong potential for profitable growth that could be more valuable as part of Tessera than they are as standalone. An acquisition either needs to be an area quarter where investors of FotoNation are adjacent to our businesses, where we can push kind of our core strength, technology development and licensing expertise, while ideally expanding our addressable markets. So, it’s a fairly broad statement, but on one the hand, what’s that?

And I think with regard to your part of the question on the pipeline, we have certainly seen a lot of activity in that area in terms of evaluating companies and that this has ranged from small tuck-ins – exactly to more to larger pieces. I don’t know if I can characterize a much more beyond that?

Alright, fair enough. Thank you.

Anything else Matt or are we good?

Your next question comes from the line of James Lee of Potrero Capital.

Thanks. Just to follow-up on the answer to one of the questions regarding 2016 and I appreciate that you are not giving the specific guidance until the next call. Fractionally, are you guys expecting to grow your recurring revenue in 2016 versus 2015?

Well, I think we will provide that when we give the numbers that would certainly be our goal.

Okay. So, that is your objective to grow it?

Of course.

Okay. And then on FotoNation, you guys ticked up about this $100 million target, I think I’d say $23 million last year. Maybe you can talk about the path to the $100 million, do need to – how many more design wins you need to get to the $100 million or can you get to the $100 million based on your existing customer base and potentially your average unit price uplift?

Yes, it’s both. And we have to continue to progress with our existing customers in getting ASPs and add customers like we did. We have added several this year – this first part of the year, which we talked about it on the call.

How much cash do you guys expect to generate this year?

That’s a good question. I mean, we have been generating, I think over the course of the last quarter, it will vary depending on the quarter, but I think we are well north of $100 million per year.

Okay, that’s it. Thank you.

Thanks, James.

And your next question comes from the line of Richard Shannon from Craig-Hallum.

He is back.

Hi, I am back. Just one question for me guys. In your FotoNation business, of the largest mobile OEMs that also happened to be your licensees at the start of this year, do you expect them all to remain licensees exiting the year as well?

We would – certainly, our goal, yes, absolutely, our goal.

I think there is every indication that will be the case.

Yes. Okay, that’s all for me guys. Thank you.

Thanks, Richard.

Thanks, Richard.

[Operator Instructions] And I will now turn the call back over to management.

Thank you, April. So, thanks again for your interest in Tessera. We really appreciate you spending the time to learn more about our company. In summary, we are very pleased with the results and outlook. Our solid foundation continues to provide an excellent financial platform from which we continue to grow the company. I hope we were able to convey to you that we are as optimistic as ever about the growth prospects of our company. Thanks for joining us. We look forward to speaking with you again during our third quarter update. And just one last thing, I am going to get killed for this, but I am going to do it anyway, for those of you who know Brandi, The Piacente Group, please congratulate her. Thanks, again.